Congress recently — and unanimously — passed a bipartisan bankruptcy bill that will help more small businesses keep their doors open and preserve jobs. The bill is beneficial to creditors, too.
The Bankruptcy Threshold Adjustment Act, H.R. 7730, expands the availability of a more satisfying alternative to closing a small business and leaving used equipment and unpaid debt in its wake, harming landlords, other creditors and employees and their families. The bill will be sent to the White House for the president’s signature.
The act would establish a higher debt cap test for eligibility of a small business to reorganize under the Small Business Reorganization Act, subchapter V of chapter 11 of the Bankruptcy Code. Commonly called a “sub-V” reorganization, this type of debt restructuring is faster and cheaper than a normal Chapter 11 reorganization, which is complex and expensive.
Now, small businesses are not eligible for sub-V relief if their noncontingent, liquidated debts exceed $3,424,000. The act would restore the cap to $7.5 million, as it was during the pandemic and through June 2024, when it sunsetted. The restored cap will allow more businesses to survive. Without a sub-V, struggling small businesses cannot readily restructure their debts, so they simply close their doors, leaving creditors with unpaid, uncollectible debt. The act also simplifies the eligibility for Chapter 13 wage earners’ adjustment cases by making the debt-cap calculation easier for consumer debtors.
One oft-overlooked advantage of a sub-V bankruptcy from the creditors’ perspective is that they get paid something rather than nothing, which is usually the outcome of a failed, shuttered business. Landlords fare particularly well in sub-Vs because the bankruptcy code has special protections for them, plus they have considerable leverage in a small business reorganization.
Many small businesses operate out of leased space, so staying put is essential to their success. But to stay put, the small business must pay the landlord in full. Past-due rent and other charges must be paid “promptly” — usually within a few months, and going forward, the rent must be paid on time beginning with the first rent installment due after the filing. In effect, the small business must “pay to play, pay to stay,” which is the opposite of what landlords experience absent the bankruptcy. Other creditors with no or insufficient collateral for their debts must be paid the disposable income (profits) resulting from operations.
The Tampa Bay area’s Rep. Laurel Lee is an original co-lead and cosponsor of the act and rightly so: The No. 1 federal judicial district (out of 90) in the nation for sub-V filings is the Middle District of Florida. Its Tampa Division — covering Hillsborough, Pinellas, Pasco, Polk, Manatee, Sarasota, Hardee, Hernando and Sarasota counties — has consistently been the top spot for sub-V filings within the district.
The bill “strengthens a key tool that helps small businesses reorganize and stay open,” Lee said during the House Judiciary Committee’s discussion of the bill. She recognized that in “Florida, where small businesses are the foundation of our economy, this matters. These businesses need a fair opportunity to reorganize, remain competitive, and continue serving their community. This is a targeted, common-sense fix that supports small businesses’ stability.”
Well said, Representative Lee.
Catherine Peek McEwen has been a United States Bankruptcy Judge for the Middle District of Florida for more than 21 years.
