On August 3, 2026, the U.S. Senate passed S. 3977, the Bankruptcy Threshold Adjustment Act of 2026, which would permanently increase the debt limit for businesses seeking to reorganize under Subchapter V of Chapter 11 from $3.4 million to $7.5 million.
The bill still needs to pass the House of Representatives and be signed into law before the higher limit takes effect. Until then, the current Subchapter V debt limit remains in place.
For small businesses carrying more than $3.4 million in debt, however, the proposed increase could be significant. The difference between $3.4 million and $7.5 million could determine whether Subchapter V is available as a potential path for reorganizing the business.
How the Subchapter V Debt Limit Changed
Subchapter V was created in 2020 through the Small Business Reorganization Act to give qualifying small businesses a more streamlined way to reorganize their debts under Chapter 11. When Subchapter V was first introduced, the debt limit was approximately $2.7 million.
During the COVID-19 pandemic, Congress temporarily increased the debt limit to $7.5 million, allowing more small businesses to qualify. That higher limit expired in June 2024, bringing the threshold back down to approximately $3.4 million.
S. 3977 would permanently raise the limit back to $7.5 million.
Why Raising the Debt Limit Matters
The current debt limit can create a difficult situation for businesses that have grown beyond the size traditionally associated with small business bankruptcy but still may not have the resources to make a traditional Chapter 11 case practical.
A business with $3 million in debt may qualify for Subchapter V, while a business with $5 million in debt may not, even if both are relatively small businesses that could benefit from reorganization.
For businesses in this range, traditional Chapter 11 may be an option, but its cost and complexity can make it difficult for some smaller companies to pursue. Raising the Subchapter V limit to $7.5 million would potentially give more businesses access to the reorganization bankruptcy designed for qualifying small businesses.
The higher limit would not automatically make every business with less than $7.5 million in debt eligible. Other requirements still apply, and eligibility depends on the company's individual circumstances.
What Should Business Owners Do Now?
Business owners should not assume the $7.5 million limit is already in effect. S. 3977 is not yet law.
However, businesses carrying approximately $3.4 million and $7.5 million in debt may want to begin evaluating their options now. Depending on the circumstances, those options could include negotiating with creditors, pursuing a traditional Chapter 11 case, or evaluating whether waiting for the proposed increase could make Subchapter V an option.
Waiting may make sense for some businesses, but not for every business. Companies facing collection actions, lawsuits, foreclosure, or other financial pressures may need to consider their options based on the law currently in effect. If S. 3977 becomes law, the higher debt limit could give more small businesses another potential path to reorganize their debts and continue operating.
If your business is struggling with significant debt, The Lane Law Firm can help you evaluate whether business bankruptcy may be an option. Contact us to schedule a case evaluation and discuss your situation.
