Congress breathes fresh life into Subchapter V debt ceiling increase

With the economy softening, Congress is taking steps to permanently increase the Chapter 11 debt ceiling for small businesses to qualify under the expedited Subchapter V process. For creditors, that could mean managing more Subchapter V payment plans for businesses with as much as $7.5 million in debt.

The debt ceiling was first increased from $2.7 million to $7.5 million in March 2020 with the CARES Act, in response to the COVID-19 pandemic. That increase expired in March 2022 but was once again increased to $7.5 million in June 2022. That last temporary increase expired in June 2024. The limit has been roughly $3 million since then, automatically increasing with inflation as it was designed when the Small Business Reorganization Act first passed.

Last year, Congress held a hearing in the House Judiciary Committee on a number of minor bankruptcy issues including whether or not to restore the $7.5 million debt ceiling. Witnesses at the hearing included bankruptcy judges, bankruptcy attorneys and bankruptcy law professors, all of whom testified in support of the Subchapter V process generally. However, they acknowledged that the process was relatively new and untested, having only gone into effect in 2019.

The topic stalled for a year, but with the economy softening, the Senate passed S. 3977, the Bankruptcy Threshold Adjustment Act, on August 3rd before leaving for the August recess. When the House returned from its break, the Judiciary Committee reported out their own version of the bill, H.R. 7730, sending it to the House floor. H.R. 7730 passed the House this week, setting up a stalemate between the House and Senate to determine which version of the bill to eventually send to the President’s desk. The difference is purely cosmetic; which individual Senator or Member of Congress is attached to the final bill signed into law by the President.

Both versions of the bill would reinstate the $7.5 debt ceiling but also end automatic inflation adjustments moving forward. This potentially works in favor of creditors, as the new limit would lose economic significance over the years, requiring Congress to pass new legislation for any future increases. That provides NACM and other advocates an opportunity to collect more information about whether the Subchapter V process is working as intended, educate Congress, and request changes to make it work better for all parties.

While the House and Senate still need to decide who gets the honor of having their name on a bill signed into law, PACE expects the legislation to pass before the end of the year. Both chambers passed their respective versions unanimously, demonstrating at a minimum that there is no significant opposition to the debt ceiling increase. The new limit would go into effect immediately after enactment but only applies to cases filed after that date.