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  • Writer's pictureAmi Kassar

AmiSight 4/4: Higher Debt Limit for Small Business Bankruptcies Set to Expire Soon

As subchapter V, a provision in the bankruptcy code that offers small businesses a faster and cheaper route to debt restructuring, sets to expire soon, a surge of bankruptcies is being filed to beat the deadline.  

In “Small-Business Bankruptcies Surge Ahead of Potential Law Change,” the Wall Street Journal looks at the provision that went into effect in 2020 as part of the Small Business Reorganization Act, allowing companies with less than $7.5 million in debt to file for bankruptcy. Originally, the threshold was $2.7 million in debt, but Congress authorized the temporary increase in response to the economic distress caused by the COVID-19 pandemic.

The higher cap on these filings is due to sunset on June 21, when the limit could go back to the lower number, adjusted for inflation, unless Congress takes action. Aware of the narrowing window, as many as 213 small businesses filed for chapter 11 bankruptcy in the U.S. in February, a 78% increase compared with the same month a year ago, according to bankruptcy data provider Epiq.

Advocates who argue the debt limit should stay at $7.5 million highlight the expedited process and greater control retained by business owners, while critics argue that it disproportionately benefits businesses at the expense of creditors, prompting calls for reforms to restore fairness in bankruptcy proceedings.

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