Best Practices: Rising Bankruptcy Filings and a Potential Subchapter V Expansion: What Lenders Should Watch

Bankruptcy filings are continuing to rise in 2026, and small business restructurings are increasing at an even faster pace. According to Epiq AACER, total U.S. bankruptcy filings increased 8% in August 2026 compared with August 2025. More notably for commercial lenders, Subchapter V filings increased 63% during the same period. During the first six months of 2026, Subchapter V filings were 50% higher than during the first half of 2025. At the same time, Congress is considering legislation that could significantly expand the number of businesses eligible to use Subchapter V.

Subchapter V of Chapter 11 was created in 2019 to provide qualifying small businesses with a faster and generally less expensive means of reorganizing. Among other differences from a traditional Chapter 11 case, Subchapter V imposes accelerated deadlines, generally eliminates the need for a creditors’ committee, appoints a Subchapter V trustee to facilitate the reorganization, and provides debtors with greater flexibility in confirming a plan.

Most significantly for lenders, a Subchapter V debtor can confirm a plan over creditor objections while existing ownership retains its equity interests, provided the debtor satisfies the applicable requirements of the Bankruptcy Code.

The current debt limit for Subchapter V eligibility is $3.424 million. During the COVID-19 pandemic, however, Congress temporarily increased that limit to $7.5 million. The higher threshold expired in June 2024.

The bipartisan Bankruptcy Threshold Adjustment Act of 2026 would permanently restore the $7.5 million Subchapter V debt limit. The legislation has gained significant momentum: the Senate unanimously passed S. 3977 on August 3, 2026, and companion legislation, H.R. 7730, has advanced out of the House Judiciary Committee.

If enacted, the increased threshold could substantially expand the universe of small and middle-market businesses capable of restructuring under Subchapter V at a time when filings are already increasing.

Lenders managing distressed credits should weigh this potential change before a borrower files for bankruptcy. A borrower with debt above the current $3.424 million limit may presently face a traditional Chapter 11 proceeding or an out-of-court workout. If the threshold increases to $7.5 million, that same borrower may have another, and potentially more debtor-friendly, restructuring option.

Lenders evaluating troubled credits should therefore consider the borrower’s total debt, whether the borrower could qualify for Subchapter V under an increased threshold, and how a potential Subchapter V filing could affect collateral, guarantors, cash flow and the lender’s workout strategy. Early assessment matters because Subchapter V cases proceed on an expedited timeline.

SBA lenders should pay particular attention to these potential changes. Many SBA-financed businesses may fall above the current Subchapter V threshold once SBA debt is combined with mortgages, equipment financing, lines of credit, trade debt and other obligations. Raising the threshold to $7.5 million could make Subchapter V available to a substantially larger group of SBA borrowers.

SBA lenders must also consider the SBA’s servicing and liquidation requirements when a borrower encounters financial distress. A bankruptcy filing requires the lender to report the SBA loan in liquidation status, and decisions made during a bankruptcy or workout must be evaluated not only under the Bankruptcy Code, but also under applicable SBA requirements and the lender’s obligations to preserve the SBA guaranty.

With bankruptcy filings trending upward and Congress considering a significant expansion of Subchapter V eligibility, lenders should evaluate exposure well before a bankruptcy petition is filed. Identifying potential Subchapter V exposure as part of the lender’s pre-bankruptcy workout analysis may provide additional time to evaluate collateral, guaranties, restructuring alternatives and an appropriate strategy for protecting the lender’s position.

If you have questions about Subchapter V bankruptcy or its impact on an SBA borrower contact Lyndsay Rowland at Starfield & Smith, P.C., at lrowland@starfieldsmith.com.