Small Business Bankruptcies Hit a Decade High: Why Subchapter V Filings Jumped 67% and What the $7.5 Million Debt Limit Fight Means for You

You did not start your business to think about bankruptcy. You started it to solve a problem, serve a customer, or finally be your own boss. Yet right now the number of small businesses filing for bankruptcy is at its highest level in nearly a decade, and the filing type designed specifically to keep small businesses alive — Subchapter V — is surging faster than any other chapter.

If you carry business debt, personally guarantee a lease, or rely on one or two large customers, this is not distant macro news. It is a weather report for the financial environment you are operating in. Understanding why filings are rising, what the Subchapter V tool actually does, and why Congress is fighting over who gets to use it will help you read the early warnings in your own books — while you still have options.

Why Filings Are Climbing Again​

The headline numbers tell a clear story even before you dig into the reasons.

Experian reported 497,000 new businesses launched in December 2025 alone — 53% above pre-pandemic averages — and an average of 446,000 formations per month since mid-2020. Entrepreneurship is not slowing down. But business bankruptcies are climbing alongside it.

In the 12 months ending December 2025, business bankruptcy filings rose 7.1% to 24,737 cases, continuing a steady post-pandemic climb. The third quarter of 2025 alone saw 24,039 total bankruptcy filings of all types — the highest quarterly total since 2016. And January 2026 opened with Subchapter V filings up roughly 67% to 68% year-over-year, with 255 Subchapter V cases filed in that single month.

Three forces are converging:

1. Pandemic-era debt is maturing. Many small businesses took on Economic Injury Disaster Loans, Paycheck Protection Program obligations that converted, landlord deferrals, and vendor catch-up balances in 2020-2022. Those obligations did not disappear. They were stretched, and now the stretcher is running out.

2. Cash flow is tighter than revenue suggests. Experian's analysis found that businesses that eventually filed were 3 to 4 times more likely to apply for new credit in the months before filing, carried notably larger outstanding balances, and showed rising delinquency and credit utilization long before a petition was ever filed. In other words, the filings you see today were visible in borrowing behavior six to twelve months earlier.

3. The smallest businesses absorb shocks worst. Filings concentrate among businesses with fewer than five employees, less than ten years in operation, and under $1 million in annual revenue. A single lost customer, a delayed payment, or an interest rate increase that a larger company absorbs as a bad quarter can push a micro-business past the point of informal workout.

This is not a story about reckless owners. It is a story about thin buffers meeting a higher-cost environment.

What Subchapter V Is — and Why Small Businesses Use It More Than Traditional Chapter 11​

Before 2020, a small business that needed to reorganize — to keep operating while it restructured its debts — faced the same Chapter 11 process as a large corporation. That meant a creditors' committee, a lengthy disclosure statement, months of negotiation, and legal fees that could easily reach $50,000 to $100,000 before a plan was even voted on. For a five-person company, the cure cost more than the disease.

Congress created Subchapter V of Chapter 11 through the Small Business Reorganization Act of 2019 to fix that. It went into effect in February 2020 and has since become the most common reorganization path for small businesses. Filings have more than doubled since 2020 and now account for a growing share of all Chapter 11 cases.

Here is what makes it different:

It is faster and cheaper by design​

• No creditors' committee. In traditional Chapter 11, a committee of major creditors is appointed and paid for by the debtor. Subchapter V eliminates that committee unless the court orders one for cause.
• No disclosure statement. Traditional Chapter 11 requires a separate, court-approved disclosure statement explaining the plan. Subchapter V rolls the required disclosures into the plan itself.
• A trustee who facilitates, not liquidates. A Subchapter V trustee is appointed in every case, but the role is to help the debtor and creditors reach a consensual plan, not to take over the business.
• You propose the plan quickly. A Subchapter V debtor must file a plan within 90 days of the filing, compared to months of exclusivity extensions in traditional Chapter 11.

In practice, fees in Subchapter V cases tend to land on the lower end of Chapter 11 costs, and timelines often run 60 to 90 days to a filed plan rather than a year or more.

You can keep your equity without paying creditors in full​

This is the structural change that matters most to owners. In traditional Chapter 11, the "absolute priority rule" means owners cannot retain their equity unless unsecured creditors are paid in full or vote to accept less. In Subchapter V, an owner can retain equity even over a dissenting creditor's objection, so long as the plan commits all projected disposable income — the income that remains after necessary business and living expenses — to payments for three to five years and otherwise satisfies confirmation requirements.

For a viable business whose balance sheet, not whose operations, is the problem — think a restaurant that survived the pandemic but carries a landlord arrearage, or a contractor who bonded one bad job — that distinction is the difference between a reorganization you can confirm and one you cannot.

It is available only below a debt cap — and that cap is the fight​

To elect Subchapter V, a business must be engaged in commercial activity, have at least 50% of its debt arising from that activity, and have noncontingent, liquidated secured and unsecured debt below the statutory limit.

That limit is where the current policy fight lives.

The $7.5 Million Debt Limit: Why It Was Raised, Why It Fell Back, and Why It Matters to You​

When Subchapter V was enacted, the debt eligibility limit was about $2.7 million — indexed slightly above $3 million with inflation adjustments. In March 2020, Congress temporarily raised it to $7.5 million as part of the CARES Act, recognizing that far more businesses would need breathing room. That higher limit was extended twice, but it expired on June 21, 2024.

When the extension lapsed, the limit reverted to the inflation-adjusted figure of about $3,024,725. The practical effect was immediate: businesses with aggregate debt between roughly $3 million and $7.5 million — think a small manufacturer with equipment loans, a multi-location retailer with several leases, or a construction firm bonding several jobs — lost access to the streamlined path overnight.

Since the reversion, several bills have been introduced to restore the $7.5 million cap, with bipartisan sponsors in both chambers. As of mid-2026, the restoration has not been enacted into permanent law, but it remains actively debated, with supporters pointing to the same data you just saw: Subchapter V filings continue to climb even with the lower cap, and the businesses that most need a low-cost reorganization tool are exactly those in the $3 million to $7.5 million range that the CARES-era limit covered.

What this means if you are an owner today:

• If your total noncontingent, liquidated debt is under about $3 million, you can elect Subchapter V today with no ambiguity. This covers the vast majority of micro and small businesses.
• If your debt is between $3 million and $7.5 million, you fall into the gap. Traditional Chapter 11 remains available, but with higher cost, a creditors' committee, and the absolute priority rule. Monitor the legislative status closely with your attorney — eligibility can change with a single enactment, and planning that assumes one limit may need to pivot quickly.
• Debt is measured at filing, including secured and unsecured noncontingent debts, but excluding debts owed to affiliates or insiders and certain contingent or highly disputed amounts. How you classify and time obligations before filing matters enormously. Get advice well before you need to file.

Do not try to engineer eligibility by selectively paying down debt or reclassifying it without counsel. Courts scrutinize pre-filing transactions, and a misstep can cost you the Subchapter V election or draw an objection you could have avoided.

The Early Warning Signs You Can See in Your Own Books​

Experian's pre-filing pattern is worth memorizing, because it is exactly what shows up in accounting data:

1. Borrowing frequency rises. Applications for new credit or new credit lines 3 to 4 times the normal rate.
2. Balances creep up. Outstanding credit balances grow month over month even as revenue is flat.
3. Utilization and delinquency rise. Credit utilization pushes past 70% to 80%, and payments that were always on time start slipping to 15, then 30, then 60 days.
4. Cash conversion stretches. Receivables age, payables stretch, and the gap between recognizing revenue and collecting cash widens.

You can build a simple monthly check that surfaces all four without any special software:

A five-number dashboard to run on the first of each month​

• Cash runway: Cash on hand divided by average monthly cash outflow. If this falls below 45 days and is trending down, treat it as urgent.
• Receivables age: Total accounts receivable divided by average daily sales. If it rises by more than 10 days in a quarter, your collection process is slipping.
• Payables stretch: Are you paying vendors later this quarter than last quarter to preserve cash? Track average days to pay.
• Debt service coverage: Monthly operating cash flow divided by monthly debt service. Below 1.2x is a caution flag; below 1.0x means you are funding debt payments from reserves or new borrowing.
• Owner draw versus profit: If draws consistently exceed true owner benefit — operating profit plus add-backs — the business is distributing cash it has not earned.

A plain-text ledger makes this unusually honest. Because every transaction is an explicit, double-entry posting with a date, an account, and a source document, you can compute these ratios from the same file that produces your tax return — and you can diff the file month-to-month to see exactly what changed. See the Beancount documentation for how the posting model works, or browse the Fava dashboard for a visual complement.

What to Do If the Dashboard Is Flashing Yellow​

The window between "we are tight" and "we are filing" is where almost all value is either preserved or lost. Three moves matter most:

1. Talk to creditors before they talk to each other​

Creditors prefer a consensual workout to a bankruptcy filing. An informal forbearance, an extended payment plan, or a partial deferral in exchange for updated financials is cheaper for both sides than a contested proceeding. Approach them with clean, current statements and a specific proposal — not just a request for "more time." Your leverage is highest before you are delinquent and before one creditor sues and triggers a cascade.

2. Separate the viable business from the unviable obligation​

Ask honestly: if the debt load were restructured, would the underlying operations generate cash? A business with steady gross margins and a single overhanging obligation — a lease signed at peak rent, one financed equipment purchase that no longer fits the workload, a personal guarantee from a prior expansion — is a candidate for reorganization. A business with structurally negative unit economics needs a different conversation.

3. Get the right advisors before you need them​

• A bankruptcy attorney who regularly files Subchapter V. Not every business attorney does. Ask how many Subchapter V cases they filed in the last 12 months and what percentage confirmed.
• An accountant who can produce monthly, accrual-basis statements. Cash-basis annuals will not support a plan, a workout negotiation, or a court filing. You need monthly profit and loss, balance sheet, and cash flow statements — and ideally a 13-week cash forecast.
• A clear personal-guarantee inventory. List every lease, loan, and vendor agreement you personally guaranteed, with balances and maturity dates. Guarantees survive the business's filing and often determine whether the owner also needs individual relief.

Alternatives That Can Resolve Debt Without a Filing​

Filing is a tool, not a destiny. Depending on your creditor count, collateral, and cash flow, one of these may produce the same economic result with less cost and less public record:

• Direct negotiation. Best when you have few creditors and can offer credible partial payments. Document every amendment in writing and ensure it covers default, cure, and release terms.
• Debt consolidation. Combines multiple obligations into a single facility, often at a lower blended rate. Requires sufficient cash flow and credit strength to qualify — precisely what is scarce when you most need it, so explore it early.
• Out-of-court workout. A structured, multi-creditor agreement to modify terms without court involvement. Faster and more private than bankruptcy, but every creditor must agree; one holdout can block it.
• Assignment for the benefit of creditors (ABC). A state-law process where you transfer assets to an assignee who liquidates them for creditors. Faster than Chapter 7 and useful for an orderly wind-down, but it does not provide the automatic stay or the discharge that a federal filing does. Availability and procedure vary by state.
• Receivership or orderly sale. If the business has transferable value — a customer list, a lease in a good location, specialized equipment — a negotiated sale may return more to creditors and leave more for you than a piecemeal liquidation.

Each alternative still demands what a filing demands: accurate, current books. The business that can hand a creditor a clean aging schedule and a one-page cash forecast gets better terms than the one that hands over a shoebox.

How to Keep Your Books Ready for Any Path​

Whether you are reorganizing, negotiating, or simply managing through a tight stretch, the court, the lender, and the prospective buyer all ask for the same thing: records that are complete, consistent, and verifiable.

A few habits that pay for themselves many times over:

• Close your books monthly. Reconcile bank and credit card statements, review suspense and uncleared postings, and lock the period before you start the next one.
• Keep business and personal finances strictly separate. Commingled accounts undermine liability protection and make a filing or sale far more expensive to untangle.
• Track debt on the balance sheet, not just in a payment reminder. Every loan, line of credit, shareholder advance, and accrued obligation should appear as a liability with a current versus long-term split, so your debt service coverage ratio is never a guess.
• Retain source documents alongside postings. An invoice image, a bank statement, and a posting that cite each other are far more persuasive than any one of them alone.
• Maintain a rolling 13-week cash forecast. Update it weekly from actual postings. It is the single most useful document in a workout conversation or a Subchapter V first-day hearing.

If your current system makes any of this hard — if closing takes weeks, if cash versus accrual profit is a mystery until tax time, or if the "real" books live in a spreadsheet beside the accounting file — that is itself a risk factor. Modern plain-text accounting gives you a version-controlled, auditable ledger you can query, diff, and back up like code. You own the data, you can reconstruct any report from first principles, and you can carry the same file from the accountant to the attorney to the lender without re-keying.

Simplify Your Financial Management​

Rising filings are a reminder that cash flow surprises do not announce themselves — they accumulate quietly in receivables, payables, and borrowing patterns until the options narrow. Keeping clear, monthly, accrual-basis records is the cheapest insurance you have against that drift, and it is the foundation of every workout, reorganization, or sale that ends well.

Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Your ledger is version-controlled, auditable, and AI-ready, so the same records that run your business can support a lender review or a Subchapter V plan without a scramble. Get started for free and make your next financial conversation one you walk into prepared.