Restructuring under Chapter 11 of the U.S. Bankruptcy Code may be easier and cheaper for small business owners if President Donald Trump enacts new legislation passed by both houses of Congress in September.
In legislation co-sponsored by Sen. John Cornyn, the U.S. Senate on Monday unanimously passed the Bankruptcy Threshold Adjustment Act, which increases the debt limit from $3.4 million to $7.5 million for small businesses seeking to reorganize under a special part of Chapter 11 for businesses called Subsection V.
Subchapter V allows small businesses to restructure their debt more quickly while offering greater flexibility in negotiating with creditors. The US House of Representatives passed identical legislation in early September. Texas Rep. Lance Gooden co-sponsored that bill.
The legislation has widespread support from bankruptcy law experts, small business advocacy groups and even judges who oversee these types of cases.
“Most attorneys and judges would consider this legislation to be a very good thing,” said Chief Bankruptcy Judge Stacey Jernigan of the Northern District of Texas. “Today, small businesses can have much more debt than the approximately $3.4 million limit that has been in place. Raising the limit, as proposed, allows more businesses to take advantage of this more efficient reorganization option. This could be good for both businesses and their creditors.”
Chief Judge Jernigan said the legislation will give small businesses a “more affordable and efficient way to try to work out their problems in a court-supervised bankruptcy case, rather than simply going out of business in many cases.”
Legal experts point out that small businesses filing for Chapter 11 restructuring is a sign of a strong economy, while Chapter 7 liquidation is considered a symptom of a weaker economy. They also predict an increase in small business applications after the legislation becomes law.
The bankruptcy courts of the Northern District of Texas, which includes Dallas and Fort Worth, and the Southern District of Texas, which includes Houston, are statistically among the busiest bankruptcy courts in the U.S.
“We’re already very busy,” Chief Judge Jernigan said. “Texas, of course, has a thriving business climate. When people start businesses, a certain percentage are going to fail. We’re probably going to stay busy dealing with these situations no matter what. I think small businesses will take advantage of it no matter what. I think most of us in this area of the law view this as a middle option between closing a business and a full-blown Chapter 11, which can be expensive, lengthy, contentious, and, for some businesses, not worth the costs. potential benefits”.
Thomas Berghman, a partner at Munsch Hardt, said Subchapter V cases have been “very successful” because small businesses can reorganize “without the owners having to come up with a substantial amount of new money.” He said business owners have often already “invested substantial personal funds.”
“The problem is that the current debt limit doesn’t match the reality of what small businesses are like today,” Berghman said. “Many businesses that are considered ‘small’ have debts that exceed the current limit of approximately $3.4 million due to bank debt, MCA transactions, tax obligations and the like. But they are currently unable to take advantage of Subchapter V.”
The new higher debt limit, he said, “may also encourage companies to file for bankruptcy sooner, while there is more value to preserve.”