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About 44% of Chapter 11s are Subchapter V Cases

posted by Bob Lawless

As many readers will know, Congress created subchapter V to streamline the chapter 11 process and to make it work better for small businesses. It became effective in March 2020, just as the pandemic hit, and was available to businesses with less than $2,500,000 in debts. Congress raised the debt limit to $7,500,000 to make it available to more businesses, and that higher debt limit will sunset on June 21, 2024, unless Congress acts. By all accounts, subchapter V is working as designed, helping small-business owners to continue their businesses. Both the National Bankruptcy Conference and the American Bankruptcy Institute's Task Force on Subchapter V have recommended that Congress make the $7,500,000 debt cap permanent. 

How much does it matter? How many chapter 11 filers use subchapter V? The answer to those questions is more difficult than it should be.  The readily available bankruptcy statistics from the U.S. Courts do not report subchapter V cases, although they should. To answer those questions, I downloaded the integrated bankruptcy petition database from the Federal Judicial Center, which contains every bankruptcy petition filed.

And the answer is . . . in 2023, forty-five percent of chapter 11 debtors used subchapter V. That was 1,854 of the 4,121 chapter 11 cases in 2023. Unfortunately, the database does not have the subchapter V variable for years before 2023. Well it does, but the variable is not reliable for years before 2023. The rest of the post, "below the fold," explains the rest of my math.

Anyone who goes and looks at the official court statistics is going to leave a comment that I must have grossly miscounted because the official statistics say there were about 7,400 chapter 11 cases in 2023. The problem is that figure counts every subsidiary of every large corporation that filed chapter 11. In other words and for example, all of the 130 affiliated companies that filed with FTX counted as a separate chapter 11 case although it was really only one economic unit in distress. The FJC database includes a variable identifying the lead case if a chapter 11 is jointly administered with other cases. The variable is blank for the lead case, making it easy to count only lead cases. That leaves me with what percentage of businesses use subchapter V, not what percentage of forms have the subchapter V checked. And, yes, that also means the count for chapter 11 cases is grossly inflated by the presence of subsidiary filings. See here for an old post and here for a somewhat less older post on the topic.

My calculation also eliminates all filings that were a reopening of an old case, an intradistrict or interdistrict transfer, or came from an deconsolidation (there are very few of these). All of those end up in the database and count as a "case." Thus, the figure is reporting the percentage of original filings by businesses that file chapter 11 and elect into subchapter V.

Comments

I'm actually surprised that the percentage isn't higher. I would have guessed 60% or so, but perhaps even with a lower-cost design subchapter V is still a pricier solution than a lot of failed small operations can contemplate.

Before it went into effect, my estimate was 42%, see https://www.creditslips.org/creditslips/2019/09/how-many-new-small-business-chapter-11s.html. Of course, that was with a lower, $2.75 million threshold. I actually ran the numbers at a higher debt threshold, and the numbers don't go up that much.

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