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August 6, 2026
2 minute read
The Small Business Reorganization Act of 2019 (SBRA) created Subchapter V of Chapter 11 and originally became effective on February 19, 2020. Congress enacted the SBRA in response to a widespread concern that traditional Chapter 11 cases were too expensive and too complex for many closely held businesses. The SBRA sets forth a streamlined process for qualifying debtors seeking Chapter 11 protection.
Key features in a SBRA case include: (1) eliminating the requirement of a creditors’ committee, (2) eliminating a separate disclosure statement, (3) shortened deadlines, (4) elimination of quarterly trustee fees, (5) the appointment of a Subchapter V trustee to facilitate plan negotiations, and (6) removal of the “absolute priority rule” that can prevent owners from retaining their equity interests. These changes have made Subchapter V an attractive and accessible restructuring option for small and midsized businesses.
When the SBRA was enacted, eligibility was limited to businesses with approximately $2.7 million in aggregate noncontingent liquidated debt. Shortly after the COVID-19 pandemic began, Congress temporarily increased that threshold to $7.5 million through the CARES Act. The higher threshold remained in place through several extensions until June 21, 2024. As a result, the debt threshold reverted to the original SBRA debt cap, and adjusted for inflation, is currently approximately $3.4 million. In the intervening years, this lower debt cap has created an impediment to SBRA’s original goal of broader accessibility to relief under Chapter 11 of the Bankruptcy Code.
The practical effect of raising the debt cap back to $7.5 million would be substantial. Many businesses that are currently too large to qualify for Subchapter V but too small to efficiently navigate a traditional Chapter 11 case would once again gain access to a less expensive and faster restructuring process. Businesses with debt levels between roughly $3.4 million and $7.5 million are presently forced into conventional Chapter 11 proceedings, which often involve higher professional fees, creditor committee expenses, disclosure statement requirements, and greater litigation risk. Permanently restoring the $7.5 million threshold would broaden access to reorganization, increase the likelihood that distressed businesses can continue operating, preserve jobs, and reduce liquidation pressures during periods of economic stress.
On August 3, 2026, the Senate passed S. 3977, the Bankruptcy Threshold Adjustment Act of 2026, which would permanently restore the Subchapter V debt limit to $7.5 million. The legislation was introduced by Senator Chuck Grassley with bipartisan support. According to the American Bankruptcy Institute, a companion bill, H.R. 7730, was introduced in the House and previously advanced out of the House Judiciary Committee. The Senate-passed version now proceeds to the House for consideration. The bill must still pass the House of Representatives in identical form before being presented to the President for signature. While bankruptcy practitioners generally favor the increase and view the legislation as enjoying bipartisan support, the timing of House action remains uncertain. If the House acts promptly, enactment could occur later this year; however, businesses considering a filing should remember that eligibility is generally determined as of the petition date. Until the bill is enacted, the current Subchapter V threshold remains at $3.424 million.
Should your business need restructuring assistance, please contact a member of the Michael Best team.
