On August 3, 2026, the U.S. Senate unanimously passed S. 3977, the “Bankruptcy Threshold Adjustment Act of 2026.” On September 16, 2026, the House of Representatives followed suit by passing, through voice vote, its companion legislation (H.R. 7730). The House bill, together with S. 3977, would permanently raise the Subchapter V debt limit back to $7.5 million for small businesses and individuals electing to file for bankruptcy under Subchapter V of Chapter 11. The Act now heads to the President’s desk for signature.
The Small Business Reorganization Act established the new Subchapter V of Chapter 11 in February 2020 for eligible small businesses and small business owners, with an original debt limit of $2,725,625. In response to the COVID-19 pandemic, the CARES Act of 2020 and various extensions temporarily increased the Subchapter V debt limit to $7.5 million. This increased eligibility limit expired in June 2024 and returned to its original level, which is currently $3,424,000 based on annual adjustments. Subchapter V offers a lifeline for struggling small businesses and individuals that found themselves unable to benefit from the standard Chapter 11 process, including due to the cost and administrative burden in Chapter 11. Subchapter V eliminated many of those barriers to create a faster, more effective, and more affordable option for eligible debtors.
However, with the debt limit floating around $3 million for the past two years, many small businesses with debts between $3 million and $7.5 million found themselves excluded from Subchapter V. As a result, these debtors were required to manage through a traditional Chapter 11 case or declined to file altogether, despite needing the relief Chapter 11 could provide.
The legislative progress comes on the heels of record filings. Subchapter V elections increased to 302 filings in August 2026, up 63% from August 2025, according to data provided by Epiq AACER. That number would have been substantially higher had the $7.5 million debt limit been in effect.
According to the Co-Chair of Bernstein Shur’s Business, Insolvency & Restructuring Group, Adam Prescott, “Many small businesses and individuals with legitimate restructuring needs found themselves excluded from streamlined bankruptcy options because existing debt limits no longer align with modern financing and asset values, including for many of Maine’s small businesses and family-owned companies.” Congress’s action represents a significant step toward ensuring that bankruptcy law reflects today’s economic realities and offers opportunities for businesses to remain open, retain jobs, and provide valuable goods and services in the community.
One important aspect of the Act to watch, according to Prescott, is how current Chapter 11 debtors respond if they would be eligible for Subchapter V under the new $7.5 million debt limit but were ineligible when they originally filed. The Act is not retroactive, so debtors will face an interesting strategic choice regarding whether to attempt to change the election to Subchapter V or dismiss and refile as Subchapter V debtors. How debtors and courts respond during this transition period will be critical to the Act’s early success, as many recent small-business debtors who required access to Subchapter V will be caught in this situation.
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Subchapter V bankruptcies are more streamlined and cost-effective than traditional Chapter 11 bankruptcies. With no creditors’ committee and a focus on a quick exit, businesses are likely to spend less on attorneys and other costs than in a “regular” Chapter 11 case. Whatever approach a business pursues under the Bankruptcy Code, the decision to declare bankruptcy is never easy.
If you are a small business owner in New England considering your reorganization options, please reach out to Adam Prescott, Co-Chair of our Business Restructuring & Insolvency Group, at [email protected] or (207) 228-7145 for more information about Subchapter V and whether it is the right option for your business.