The expiration of a popular US law on Friday has tightened bankruptcy rules for mid-sized and small businesses, limiting their access to a streamlined and cost-effective alternative to traditional Chapter 11 filings. 

The Small Business Reorganization Act 

According to Reuters, the Small Business Reorganization Act of 2019 introduced Subchapter V to the US Bankruptcy Code to help small businesses manage debt without losing ownership and avoid costly procedural requirements.

Subchapter V became a favored option for distressed small businesses due to its lower costs and expedited process. However, a part of the law expired Friday after Congress failed to renew it, closing the door to businesses with debt between $2.7 million and $7.5 million.

Ivan Reich, a bankruptcy attorney at Nason Yeager Law Firm, expressed concern that this change would negatively impact many small businesses. Subchapter V offered advantages such as eliminating the need for a court-appointed creditors' committee and avoiding quarterly fees to the US Department of Justice's bankruptcy watchdog. 

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Prohibitively Expensive For Small Businesses

Joe Luzinski, restructuring advisor at Development Specialists Inc., told Reuters that while Chapter 11 is useful, it can be prohibitively expensive for small businesses when disputes arise.

The Coronavirus Aid, Relief, and Economic Security Act had temporarily increased the debt threshold to $7.5 million, but this provision has now expired, returning the limit to $2.7 million. 

Senator Dick Durbin's attempt to extend the higher limit for an additional two years was thwarted by Senator Rand Paul, resulting in stricter bankruptcy rules for small businesses. 

Durbin expressed disappointment that a Senator blocked his bill from advancing but said he would still try to restore the $7.5 million debt limit for small business bankruptcies to prevent closures and protect jobs.

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