In February of 2020, the Small Business Reorganization Act of 2019 ("SBRA") became effective and added a new subchapter ("Subchapter V") to title 11 of the United States Code (the "Bankruptcy Code"). Subchapter V, which is incorporated into chapter 11 of the Bankruptcy Code, was established to create an efficient process for small business debtors to "reorganize quickly, inexpensively, and efficiently." To proceed under Subchapter V, a debtor must meet the definition of a debtor under section 1182(1) of the Bankruptcy Code and must elect its application pursuant to section 103(i) of the Bankruptcy Code. Under Subchapter V, an individual qualifies as a debtor if they are a "person" with less than $2,725,625 in aggregate debt, engaged in commercial or business activities, with at least than 50% of their total debts arising from such activities.
Since its addition to the Bankruptcy Code, courts are divided when interpreting the eligibility requirements under Subchapter V. Specifically, interpretations differ when determining (1) what being “engaged in commercial or business activities means and whether a debtor must “currently” be engaged in commercial or business activities; (2) what constitutes a “commercial or business activit[y]”; and (3) whether a debtor’s debts must be related to their current business activities. See 11 U.S.C. § 1182(1)(A); In re Blue, 630 B.R. at 189, 191; In re Vertical Mac Constr., LLC, No. 6:21-bk-01520-LVV, 2021 Bankr. LEXIS 2285 at *5–6 (Bankr. M.D. Fla. July 23, 2021).
This memorandum addresses (1) whether a debtor must be currently engaged in commercial or business activities to qualify for subchapter V; and (2) whether a debtor’s scheduled business debts must be related to their current business activities. Part I focuses on court’s plain meaning analysis of the phrase “engaged in commercial or business activities” and its application to the facts of a case. Part II analyzes the policy considerations courts employ when determining whether a debtor’s scheduled business debts must be related to their current business activities.