Congress has taken a significant step to expand access to bankruptcy relief for small businesses by permanently increasing the debt eligibility limit for Subchapter V of chapter 11. The legislation, known as the Bankruptcy Threshold Adjustment Act (H.R. 7730), raises the Subchapter V debt ceiling from approximately $3.4 million to $7.5 million.

Once signed by the President, H.R. 7730 will end several years of uncertainty surrounding Subchapter V eligibility, which is a powerful tool for small business owners to reorganize under chapter 11 and maintain ownership in their business. The legislation is a welcome boon for thousands of small businesses struggling with debt, rising borrowing costs, and economic pressures.

The Evolution of the Subchapter V Debt Limit

Congress enacted Subchapter V as part of the Small Business Reorganization Act and became effective in February 2020. The statute was designed to provide small businesses with a streamlined, less expensive alternative to a traditional chapter 11 case. At its inception, eligibility was limited to debtors with no more than approximately $2.7 million in noncontingent, liquidated debt.

Recognizing that many small businesses faced unprecedented financial challenges during the COVID-19 pandemic, Congress temporarily increased the debt limit to $7.5 million through the CARES Act. However, that increase was subject to sunset provisions and lapsed in 2024, causing the threshold to fall back to roughly $3 million. Inflation adjustments ultimately increased the Subchapter V ceiling to approximately $3.4 million as of April 2025.

These past few years of debt ceiling changes perpetuated uncertainty for debtors and practitioners. But H.R. 7730 eliminates this uncertainty by permanently restoring the $7.5 million threshold and tying future increases to inflation.

Why Subchapter V Matters

The significance of the debt limit increase becomes clear when examining the advantages that Subchapter V offers compared to a traditional chapter 11 proceeding.

Subchapter V does not apply the absolute priority rule (i.e., all unsecured creditors must be paid in full before equity interests receive anything under the plan), which means that owners of the small business may retain their ownership interest in the business while restructuring the company’s debt with a three-to-five-year reduced payment plan. Moreover, Subchapter V permits confirmation of a plan without creditor acceptance so long as the plan satisfies the statute’s “fair and equitable” requirements (i.e., all of the debtor’s projected disposable income for the first three to five years of the plan is applied to creditor payments or the property distributed over such time period is not less than the projected disposable income).

Unlike traditional chapter 11 cases, Subchapter V generally does not require the appointment of an official creditors’ committee, eliminating a potentially significant administrative expense for the debtor. Debtors also are not required to prepare a disclosure statement, further reducing costs and delays.

Additionally, only the debtor may propose a plan of reorganization, and the debtor must do so within 90 days of filing. The process is intended to move quickly, preserving value and reducing professional fees.

These features make Subchapter V a particularly attractive option for closely held businesses that lack the resources to navigate a lengthy and expensive chapter 11 proceeding.

Thoughtful and Creative Solutions Abound in Subchapter V Cases

The permanent increase to $7.5 million reflects the reality that modern small businesses frequently carry debt levels that exceed the previous $3.4 million threshold. But in many instances, small businesses have debt that exceeds the $7.5 million ceiling. Before such businesses rule out Subchapter V, however, owners should recognize that there are several creative strategies that could be used to navigate eligibility challenges.

First, the $7.5 million threshold only counts for “noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . .” Accordingly, if there is an argument that a portion of the debt is contingent (e.g., payable only upon a future event, negotiate certain postpetition conditions to make all or some of the debt contingent) and/or unliquidated (e.g., subject to objection or otherwise cannot be readily determined, anticipated litigation judgment not yet entered), an owner may permissibly exclude such debt from the ceiling calculation.

A second important provision to consider is that the debt ceiling “exclud[es] debts owed to 1 or more affiliates or insiders.” Therefore, under appropriate circumstances, business owners could potentially address the company’s debt owed to them and/or consider how, as part of a broader strategy, affiliates and/or subsidiaries of the small business that are co-borrowers or guarantors could utilize Subchapter V.

Looking Ahead

With the imminent passage of H.R. 7730, financially distressed businesses with up to $7.5 million of debt should begin engaging bankruptcy lawyers and financial advisors to access out-of-court and in-court restructuring options. Taking advantage of a faster and cheaper restructuring process while retaining ownership of the business via Subchapter V is an unmatched opportunity. Indeed, Subchapter V is a streamlined restructuring avenue that can reduce costs, accelerate reorganizations, and improve the likelihood of preserving enterprise value. And for creditors, employees, and local communities, it offers an unmatched opportunity to avoid liquidation and job losses.

After years of temporary extensions and shifting eligibility standards, the permanent increase in the Subchapter V debt limit may prove to be one of the most consequential bankruptcy developments for small businesses since the creation of Subchapter V itself.

Authors

Jeff Cope, CTP, CEPA

Sr. Managing Director

JACO Advisory Group

T: 614-582-1797

Jacope@jacoadvisorygroup.com

Jeff Cope has over 30 years of strategic planning, business development, and business transformation leadership experience. Having worked his entire career to implement organizational turnaround and growth for mid-market, closely held, and family-owned businesses, Jeff has a unique understanding of how these enterprises operate and the challenges they face. His experience covers a multitude of industries, with an in-depth understanding of industrial and manufacturing sectors. Jeff is a Certified Turnaround Professional (CTP) by the Turnaround Management Association.

Kyle Arendsen

Senior Associate

Cincinnati

T: +1 513 361 1292

kyle.arendsen@squirepb.com

Kyle Arendsen is a member of the firm’s Restructuring & Insolvency Group and focuses his practice on companies and creditors in all aspects of corporate restructurings, including in chapter 11 cases, out-of-court restructurings and cross-border insolvencies. His restructuring matters encompass a wide variety of industries, including aviation, mining, manufacturing, oil and natural gas, healthcare and pharmaceutical. Kyle is a recognized thought leader, and frequent speaker and author, on restructuring and insolvency matters.