What Is HR 1153 and How Does It Affect Bankruptcy?

Recent changes to the U.S. Bankruptcy Code have lasting implications for certain groups seeking financial reorganization. These modifications focus on providing tailored solutions for the unique financial structures of family-run agricultural operations and small enterprises. Understanding these shifts is important for those navigating financial distress, as the available options can significantly alter their path to reorganization.

Permanent Status for Chapter 12 Bankruptcy

Chapter 12 of the U.S. Bankruptcy Code is a specialized form of reorganization designed for family farmers and family fishermen with regular annual income. It allows these debtors to restructure their finances while continuing to operate their business. This chapter acknowledges the cyclical nature of these industries, providing a framework that is more flexible than other options, such as Chapter 11.

For many years, Chapter 12 was a temporary provision within federal law. First enacted as part of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, it included a sunset provision requiring periodic reauthorization. This temporary status created uncertainty for agricultural producers and lenders.

This cycle ended in 2005 when legislation made Chapter 12 a permanent part of the Bankruptcy Code, removing the legislative uncertainty that had surrounded it for decades. Granting it permanent status provides long-term stability for family farmers and fishermen. They can now make long-range financial plans with the assurance that this tailored reorganization tool is a lasting feature of the financial safety net.

Increased Debt Limit for Subchapter V Bankruptcy

Subchapter V was added to Chapter 11 through the Small Business Reorganization Act of 2019 to provide a more streamlined and cost-effective path for small businesses. It was designed to be faster and less administratively burdensome than a traditional Chapter 11 case. When enacted, eligibility was limited to businesses with non-contingent, liquidated debts of approximately $2.7 million.

In response to economic disruptions, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020 temporarily increased the Subchapter V debt limit to $7.5 million. This change expanded the pool of small businesses that could use this simplified process. The higher threshold was extended multiple times by subsequent legislation.

However, the increase to $7.5 million was not made permanent, and the final extension expired on June 21, 2024. As a result, the debt limit for Subchapter V eligibility has reverted to its original, lower level, which is adjusted for inflation. For cases filed after the expiration date, the applicable debt limit is now approximately $3 million.

Information and Documentation for Filing

Preparing for a bankruptcy filing requires collecting financial records to complete the official forms and schedules. These documents provide the court with a comprehensive overview of the debtor’s financial situation.

Chapter 12 Filers

A family farmer or fisherman preparing for Chapter 12 must assemble specific documentation. They need proof that at least 50% of their gross income came from the farming or fishing operation, based on specific prior tax years. They must also compile a detailed inventory of all assets, such as land, equipment, and livestock, and a complete list of all creditors with the amount owed.

Subchapter V Filers

A small business debtor filing under Subchapter V must gather documents to prove eligibility and show its financial affairs. This includes the business’s most recent balance sheet, statement of operations, cash-flow statements, and most recently filed federal income tax return. The debtor must also calculate its total non-contingent liquidated debts to ensure it falls below the current eligibility threshold.

The Filing Process for Affected Chapters

Once financial information is gathered, the debtor files the completed petition, schedules, and other required documents with the U.S. Bankruptcy Court. This is filed in the district where the debtor resides or the business has its principal place of business. The filer must pay the required case filing and administrative fees, which total $278 for a Chapter 12.

Immediately upon filing, an “automatic stay” goes into effect. This stay prohibits most creditors from continuing collection activities, such as lawsuits or wage garnishments, without court permission. The bankruptcy clerk provides formal notice of the case and the automatic stay to all creditors listed in the debtor’s schedules.

Following the filing, the U.S. Trustee Program appoints an impartial trustee to administer the case. The trustee’s role is to oversee the process, review the debtor’s filings, and facilitate the development of a repayment plan. The trustee then convenes the “meeting of creditors,” where the debtor must appear under oath to answer questions from the trustee and creditors about their financial affairs.