The Restructuring Report

As most readers know, Subchapter V of Chapter 11 is the small business reorganization provisions enacted in the Small Business Reorganization Act (SBRA) of 2019. SBRA made major changes to how small business cases are handled in an effort to streamline the process, reduce administrative expenses and result in more confirmed Chapter 11 plans. Prior to SBRA and even continuing after enactment of SBRA, small businesses could elect treatment as a small business debtor under Chapter 11. While these provisions still exist today, in reality there were many disadvantages in making such an election and as a result few elections were ever made.

We now have sufficient experience with Subchapter Vs to judge if the law is a success. But first, we should ground Subchapter Vs in the context of all Chapter 11 cases. Statistics in this regard are hard to come by, because the Administrative Office of U.S. Courts gathers statistics based on each petition filed. The problem with that is a large enterprise may have dozens or hundreds of affiliate filings, but in reality, is one enterprise. One law professor has tried to analyze the statistics to control for that problem and concluded that Subchapter V cases make up about 44% of all enterprises filing Chapter 11. In any event, we know that the use of Subchapter V in Chapter 11 cases is increasing. Debtors electing Subchapter V treatment reached a record number of filings last fiscal year and are on track to exceed that record this fiscal year.

We also have statistics available to understand what is happening with Subchapter V cases, in terms of outcomes, and compared to small business cases that are not Subchapter V cases. And it appears that Subchapter V cases are resulting in arguably better outcomes than small business Chapter 11s that pre-dated Subchapter V or where the Subchapter V election was not made.

Statistics on outcomes in Subchapter V and small business Chapter 11 cases are gathered and analyzed by the Executive Office of the U.S. Trustee. The EO has looked at small business case results for cases filed prior to and since enactment of SBRA and Subchapter V cases filed since SBRA’s enactment by fiscal years commencing in 2020 to 2024 (through April 30 of this year). The U.S. Trustee program reports that almost 8,000 Subchapter V cases have been filed in this period. Of those cases, about 7% of the cases were still pending, 51% resulted in a confirmed Chapter 11 plan, 12% were converted to another chapter, and 30% were dismissed. By contrast, cases filed under the non-Subchapter V small business provisions resulted in 31% of the cases having a confirmed plan, 15% of such cases being converted to another chapter under the Bankruptcy Code and a whopping 54% of cases resulting in dismissal.

In addition to case outcomes, median times to confirmation or dismissal were examined. Subchapter V cases were pending a median of 6.5 months from filing to confirmation of the plan. By contrast, non-Subchapter V small business cases were pending a median of about 10.5 months from filing to confirmation. The only area where small business cases were better than Subchapter V cases was in the median time to dismissal, but not by much. Subchapter V cases resulting in dismissal were pending for a median of 4.6 months; by contrast non-Subchapter V small business cases were pending for four months from case filing to dismissal.

In our own experience, Subchapter V has been a useful tool resulting in successful outcomes many times. And other commentators and practitioners believe SBRA has been successful as well, although there have been a number of legal and practical issues that had to be worked out to make the cases more workable or to answer legal questions raised by the law. As a result, industry groups like the American Bankruptcy Institute have issued reports calling for extensions of the provisions of Subchapter V and for modest improvements to the law. This final report discussed in this blog post was presented at the annual Spring meeting of the ABI this past April.

Recent events may adversely impact the number of Subchapter V cases. As of June 21, 2024, the cap on total debt of $7.5 million has reverted to the pre-pandemic level, adjusted for inflation. Thus, cases filed on and after that date can have no more than $3,024,725 in total debt. A bipartisan bill to increase the limit back to $7.5 million for two more years was introduced in the Senate prior to reversion of the debt limit. The bill is currently on hold in the Senate and prospects for passage in this election year are uncertain at best.