Banking Brief: Financial Services Insights

Businesses and individuals with significantly higher debt levels may soon gain broader access to streamlined bankruptcy reorganization options. H.R. 7730, the Bankruptcy Threshold Adjustment Act of 2026, recently passed in the House and Senate and is expected to soon be signed into law. It is poised to permanently increase debt eligibility thresholds for Subchapter V small-business reorganizations and Chapter 13 consumer reorganizations.

For lenders, trade creditors, landlords, equipment lessors, and other businesses that regularly encounter financially troubled entities, the changes could be consequential. While intended to provide distressed debtors with more accessible restructuring options, creditors may face reduced leverage, accelerated case timelines, and increased pressure to evaluate workout and collection strategies sooner. As a result, it is important for creditors to understand the expanded eligibility rules and practice implications.

What Expanded Subchapter V Eligibility Means for Creditors

For business creditors, one of the most significant aspects of H.R. 7730 is the permanent increase in Subchapter V eligibility to $7.5 million in debt. By more than doubling the current threshold, Congress is expanding access to Subchapter V's streamlined Chapter 11 process to a much larger group of small- and mid-sized businesses.

Subchapter V was created to address concerns that traditional Chapter 11 cases were often too expensive and complex for small businesses. When it went into effect in February 2020, the debt cap was $2.75 million and set to be adjusted every three years based on inflation. In March 2020, the CARES Act temporarily increased the debt limit to $7.5 million in response to the COVID-19 pandemic.  Through the passage of H.R. 7730, the permanent increase to $7.5 million means that businesses with substantial real estate loans, high-dollar equipment financing commitments, SBA-backed debt, merchant cash advance obligations, trade debt, and other contractual liabilities may now qualify for Subchapter V when they previously would have been required to proceed through a traditional Chapter 11 case.

Lenders and financial institutions generally view traditional Chapter 11 as providing greater procedural protections, including the possibility of competing plans and increased leverage through committee participation. Subchapter V often reduces those opportunities and makes it easier for debtors to confirm a reorganization plan over creditor objections. It creates a streamlined, lower-cost version of Chapter 11 with reduced expenses and complexity by eliminating requirements such as onerous disclosure statements and creditors’ committees.  It also is much faster than Chapter 11, allowing a small business to reorganize in months, instead of years.

Secured creditors may encounter more attempts to restructure long-term loan obligations through Subchapter V plans, while unsecured creditors could face increased pressure to negotiate resolutions earlier in the case due to the streamlined nature of the proceeding.

Expanded Chapter 13 Eligibility for Individual Debtors

The Act’s creation of a single $2.75 million aggregate (both secured and unsecured) debt cap for Chapter 13 eligibility may also affect creditor recovery strategies. Under current law, some debtors with large debt loads could be forced into an individual Chapter 11. The new combined limit will likely allow more of these debtors to remain in Chapter 13, which can provide debtors with additional opportunities to cure defaults, stretch payments over time, and retain assets that might otherwise be liquidated. This change may be particularly relevant for creditors dealing with small business owners who personally guaranteed business obligations, commercial borrowers with significant deficiency exposure, and homeowners carrying substantial mortgage debt.

How Creditors Can Prepare for the New Bankruptcy Eligibility Thresholds

Creditors should expect eligibility analysis to become a more important component of pre-bankruptcy workouts and bankruptcy case assessments. Lenders, trade creditors, equipment lessors, and the like may need to reevaluate enforcement and collection strategies when a distressed borrower appears likely to fall within the expanded thresholds.

The legislation's effective date is also critical. The amendments would apply only to cases filed on or after enactment, potentially influencing debtor filing decisions and the timing of creditor collection efforts.

Ultimately, H.R. 7730 may reshape the bankruptcy landscape by expanding access to Subchapter V and Chapter 13 reorganization proceedings. For creditors, the changes underscore the importance of early financial analysis, thoughtful workout strategies, and prompt evaluation of bankruptcy risks when dealing with distressed borrowers. Businesses that understand these expanded eligibility thresholds will be better positioned to protect their interests and respond effectively when financial distress arises.