Recent changes in bankruptcy laws have led to significant adjustments in debt thresholds for individuals and small businesses seeking relief under Subchapter V and Chapter 13 of the U.S. Bankruptcy Code. These adjustments, which took effect in mid-2024, have reduced the amount of debt that individuals and businesses can carry while remaining eligible for these specific types of bankruptcy filings.
Previously, temporary provisions had been enacted to increase debt limits under the Bankruptcy Threshold Adjustment and Technical Corrections Act. These provisions were designed to provide greater access to bankruptcy relief for struggling businesses and individuals by expanding eligibility criteria. However, these temporary measures expired in June 2024, causing debt limits to revert to their previous, lower amounts.
For individuals considering Chapter 13 bankruptcy—a form of personal bankruptcy that allows debtors to create structured repayment plans, the debt threshold has been significantly reduced. Before the expiration of the temporary provisions, the Chapter 13 debt limit was set at $2,750,000 for combined secured and unsecured debts. Now, eligibility is based on a two-part debt test, limiting unsecured debt to $465,275 and secured debt to $1,395,875. This change has impacted many individuals seeking bankruptcy protection, as fewer people now qualify for Chapter 13 relief.
Similarly, small businesses filing under Subchapter V, a streamlined version of Chapter 11 bankruptcy, now face lower debt limits. The previous $7.5 million cap on noncontingent, liquidated debt has reverted to $3,024,725. This reduction means that many small businesses with higher debt levels may no longer qualify for Subchapter V and could be forced to pursue more complex and costly Chapter 11 proceedings.
The reversion of these debt thresholds has raised concerns among financial experts and legal professionals. Many argue that the higher limits provided necessary relief to individuals and small businesses struggling in a challenging economic environment. With inflation, supply chain disruptions, and high interest rates continuing to strain finances, the reduced eligibility for Chapter 13 and Subchapter V could leave many debtors without viable options.
Attorneys and bankruptcy professionals are advising clients to carefully evaluate their financial situations and explore alternative debt relief strategies if they are no longer eligible for Chapter 13 or Subchapter V. Some are urging Congress to consider new legislation to reinstate higher debt thresholds, citing the ongoing economic difficulties faced by many businesses and consumers.
For now, debtors must navigate these changes and adjust their bankruptcy strategies accordingly. As economic conditions evolve, further adjustments to bankruptcy laws may be considered to ensure that debt relief remains accessible to those who need it most.