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Small Business Reorganization Act and Subchapter V
On Aug. 23, 2019, the Small Business Reorganization Act of 2019 (SBRA) was signed into law and created a new Chapter 11 Subchapter V. The law became effective on Feb. 19, 2020. The general purpose of Subchapter V was to streamline the Chapter 11 bankruptcy process for small businesses and individuals engaged in business to administer their bankruptcy estate in an efficient and less costly manner.
The debt ceiling for a small business to be eligible to file under Subchapter V was initially set at $2,725,625, but that amount was increased temporarily to $7.5 million under the Coronavirus Aid, Relief and Economic Security act of 2020 (the CARES Act). This debt ceiling increase expands access to bankruptcy relief to thousands of small businesses.
Debtor Eligibility and Election of Subchapter V Treatment
Eligibility for Subchapter V relief involves several criteria. First, debt must be incurred in connection with commercial or business activities. Second, the debt ceiling of $7.5 million must be satisfied. Third, not less than 50% of that debt must arise from commercial or business activities. And finally, a debtor whose primary activity is to own or operate more than one real property is now eligible for Subchapter V.
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