By: Donald L Swanson
The continuing effort in Congress to extend Subchapter V’s $7.5 million debt limit recently hit a snag. The result: the $7.5 million debt limit for Subchapter V eligibility expired on June 21, 2024, and the Subchapter V debt limit is now reduced to an inflation-adjusted $3,024,725.[i]
The snag exists, I’m told, despite near-unanimity within both houses of Congress that the $7.5 million debt limit should be extended. Rumor has it that the snag comes from a single U.S. Senator and is for reasons that are unknown or uncertain.
How can this happen? Here are four different answers that combine to create the snag.
One Answer—No Political Constituency
One answer is this: bankruptcy has no political constituency. There is, for example, no lobbying organization called, (i) National Association of Bankruptcy Debtors, or (ii) Future Bankruptcy Debtors of America.
There are, however, contrary interests with substantial lobbying capacity and effectiveness. Such interests are often against any proposed legislation containing the word “bankruptcy”—even when that bankruptcy legislation is good for everyone.
Subchapter V is one of those good-for-everyone laws. That’s because the reorganization of a struggling business allows employees to keep their jobs, allows vendors to continue supplying the debtor with goods and services, allows customers to continue buying debtor’s goods and services, allows taxing authorities at all levels to continue collecting taxes from debtor, allows creditors to get more than they would receive in debtor’s liquidation, etc.
But without a political constituency, even the best-possible bills can languish and die.
Second Answer—No Financial Catastrophe
A result of no political constituency is this: Congress enacts meaningful bankruptcy laws only amid a national financial catastrophe. That’s because, during a financial catastrophe, everyone is a potential bankruptcy debtor. And that puts pressure on Congress to act.
For the $7.5 million debt limit, there is no financial catastrophe in existence right now.
The $7.5 million debt limit for Subchapter V eligibility is, in itself, a prime example of the during-a-catastrophe phenomenon: (i) Subchapter V was enacted by Congress on August 23, 2019, with a $2.75 million debt limit for eligibility, (ii) Subchapter V became effective on February 19, 2020;[ii] (iii) the Covid Pandemic hit the public consciousness hard in January and February of 2020, and (iv) Congress increased the debt limit for Subchapter V to $7.5 million on March 27, 2020.[iii] The increased debt limit to $7.5 million has been a much-needed lifeline for many family businesses.
Here is a historical chronology that also illustrates the during-a-catastrophe point.
1788—the U.S. Constitution is ratified, providing ”The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”[iv]
1800—Congress enacts its first bankruptcy law to get prominent citizens out of debtors’ prisons, such as Robert Morris (one of the primary financiers of the American Revolution and a good friend of George Washington).[v] This law was scheduled to sunset in five years, but it only lasts three.[vi]
1841—Congress enacts its second bankruptcy law, due to the financial Panic of 1839. But Congress repeals the new law in 1843. Both the enactment and the repeal of this bankruptcy law reflect differences between Northern and Southern interests, which differences ultimately result in the Civil War.[vii]
1867—Following the financial Panic of 1857 and due to financial distresses upon Northern merchants caused by the Civil War, Congress enacts its third bankruptcy law, the Bankruptcy Act of 1867—but Congress repeals it in 1878.[viii]
1986—Congress enacts Chapter 12 so family farms could reorganize. This law is a direct result of the 1980s Farm Crisis and the failure of other Bankruptcy Code provisions to provide meaningful reorganization relief for farmers.
Without an existing financial catastrophe, there is no pressure on Congress to act.
Third Answer—Bias Against Formerly-Successful Entrepreneurs
Politicians of all types and stripes love to talk about small businesses being important to our economy and about doing everything possible to help small businesses. They really do.
But when the element of financial failure is introduced into the mix, politicians change their views. And the reality is this: they don’t like formerly-successful entrepreneurs.
As an attorney practicing bankruptcy law longer than I care to admit, I’ve been saying the following for decades (pre-Subchapter V) about formerly-successful entrepreneurs:
- “You’d think a prosperous nation thriving on a market economy would make generous provision for those who risk everything but are then judged harshly by the market. But we don’t. What we do, instead, is treat them harshly . . . with disrespect . . . and punishment. Our bankruptcy laws pile on and kick them while they’re down. Seriously! That’s what our bankruptcy laws do.”[ix]
- “Our bankruptcy laws may provide well for, (i) large businesses with lots of passive owners, and (ii) consumers. But our bankruptcy laws are particularly disdainful of failed family businesses and their owners—and especially those who were once successful.”[x]
Such comments arise from decades of advising family businesses to avoid filing Chapter 11—as if such a filing were a plague. That’s because pre-Subchapter V bankruptcy laws are, largely, unworkable for struggling family businesses and their owners. Such bankruptcy laws tended to be, for many such businesses, nothing more than hospice care, with the added disadvantage of potential liabilities for insider preferences and constructively-fraudulent transfers and from dischargeability litigation.
Subchapter V changed all that. It gave failing family businesses and their owners at least a fighting chance of staying in business.
Congress allowing the $7.5 million debt limit to sunset, and returning Subchapter V to a $3 million debt limit, feels like a return to the old Congressional bias against formerly-successful entrepreneurs. And the continuing delay in extending that $7.5 million debt limit feels like a confirmation of that bias’s return.
Fourth Answer—Nobody Likes Bankruptcy
Let’s acknowledge a basic reality: nobody likes bankruptcy.
Bankruptcy is like oncology . . . but with a big difference.
Nobody likes cancer. And nobody likes to see an oncologist. But when a person faces a cancer diagnosis, that person needs to schedules an appointment with an oncologist, follow through with the appointment, and do what the oncologist advises. Moreover, that person is glad for such a thing as the science and practice of oncology medicine and for oncology experts available to help.
In the same fashion, nobody likes a financial crisis. And nobody likes to see a bankruptcy attorney. But when a person faces a financial crisis, that person needs to schedule an appointment with a bankruptcy attorney, follow through with the appointment, and do what the bankruptcy attorney advises. Moreover, that person is glad for such a thing as the law and practice of bankruptcy and for bankruptcy experts available to help.
Almost no one sees cancer, and the need for an oncologist, as a moral failing. That’s the difference between cancer and a personal financial crisis. A person’s failure to pay all debts when due is commonly viewed as a blotch on that person’s character, regardless of what the circumstances might be. After all, promissory notes contain the words, “I promise to pay,” and a failure to do what is promised is commonly viewed as the very essence of a moral shortfall. As King Solomon wrote in the Book of Ecclesiastes, “It is better not to promise anything than to promise something and not do it.”[xi]
And so it is that people in our society, generally, have a negative view of the very idea of bankruptcy. And it is from such a view that our politicians start with a general hesitance about providing any type of bankruptcy relief—let alone, effective bankruptcy relief. Many years ago, I tried to talk with a politician about a pending bankruptcy bill. Despite my many calls and emails to the politician’s office over many months about the bankruptcy subject, no one from the politician’s staff would even respond (beyond acknowledging on one occasion that my email had been received).
On the other hand, this nobody-likes-it reality does have a corresponding benefit: bankruptcy issues in Congress tend to be nonpartisan and apolitical. It’s hard, for example, for political partisans to get worked up over such issues as adequate protection, relief from the automatic stay or absolute priority rule. That’s why the initial enactment of Subchapter V and the increase of its debt limit to $7.5 million and the temporary extensions thereof could all occur during a time of intense political partisanship—and with nearly-unanimous approving votes in both houses. And that’s why Subchapter V’s initial enactment and subsequent extensions of its $7.5 million debt limit could be signed by two different presidents from two different political parties.
Conclusion
Congress created a new law for family businesses (Subchapter V) and set the debt limit for Subchapter V eligibility at $2.75 million.
The Covid Pandemic came along, and Congress immediately decided that the $2.75 million limit might not be sufficient to meet the needs of family businesses. And so Congress increased that debt limit to $7.5 million. But Congress had unease about that increase and decided to make the increase temporary.
Congress extended that debt limit increase on a couple occasions. But on this last go-around, Congress failed to act. And so, the Subchapter V debt limit is now at an inflation-adjusted $3,024,725.
Congress’s failure to increase the debt limit is striking because there is broad agreement among the bankruptcy community that Subchapter V is working well and that the $7.5 million debt limit is an essential component of that law for family businesses in our market economy.
In fact, Congress’s failure to extend the $7.5 million debt limit and allowing that limit to revert back to $3 million is shocking. And there is a sense that Congress may be reverting to its long-standing bias against formerly-successful entrepreneurs.
[i] Subchapter V Small Business Reorganizations, U.S. Trustee Program, U.S. Department of Justice.
[ii] Id.
[iii] Id.
[iv] This provision of the United States Constitution is in Article I, Section 8, Clause 4.
[v] See, e.g., “Robert Morris, Financier of the American Revolution,” at 490-530 (Simon & Schuster, 2010).
[vi] Bradley Hansen, Bankruptcy Law in the United States, Economic History Association.
[vii] Id.
[viii] Id.
[ix] Donald L. Swanson, “Congress Needs to Help Family Businesses in Financial Stress—Not Punish Them!” Published April 25, 2019.
[x] Id.
[xi] Ecclesiastes 5:5 (NCV).
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