Senate Passes Bill to Restore the $7.5 Million Subchapter V Debt Limit: What Small Business Owners Should Know

For small business owners carrying heavy commercial debt, one number decides whether a streamlined reorganization is even on the table: the Subchapter V debt limit. That number moved twice in the past six years, and Congress is now weighing whether to move it again — permanently.

On August 3, 2026, the United States Senate unanimously passed S. 3977, the Bankruptcy Threshold Adjustment Act of 2026. The bill would permanently set the Subchapter V debt limit at $7,500,000 and the Chapter 13 debt limit at $2,750,000. It has not become law. It now sits with the House of Representatives, and until the House acts and the President signs, the current limits remain in force.

This article explains what the bill would do, how the debt limit reached its current level, and why business owners carrying merchant cash advances and other commercial financing have a particular reason to follow it. It is general information about pending federal legislation, not legal advice about any specific business.

What the Senate Actually Passed

S. 3977 was introduced on March 3, 2026, by Senate Judiciary Committee Chairman Chuck Grassley of Iowa, with a bipartisan group of cosponsors including Senators Dick Durbin, John Cornyn, Sheldon Whitehouse, Lindsey Graham, and Chris Coons. A companion measure, H.R. 7730, was introduced in the House by Representative Ben Cline of Virginia.

The bill is short and does two main things. It raises the aggregate debt ceiling for small business debtors electing to proceed under Subchapter V of Chapter 11 to $7,500,000, subject to the existing conditions that at least half the debt arose from commercial or business activity and that the debtor is not part of an affiliated group exceeding that limit or a company subject to Securities Exchange Act reporting requirements. Separately, it raises the Chapter 13 ceiling for individuals with regular income to a combined $2,750,000, replacing the current split between secured and unsecured debt with a single figure.

Unanimous passage in the Senate is a meaningful signal of support, but it is one chamber. A bill must pass both the House and the Senate in identical form and be signed by the President before it takes effect.

What Subchapter V Is and Why the Debt Limit Matters So Much

Subchapter V was created by the Small Business Reorganization Act of 2019 and took effect in February 2020. It sits inside Chapter 11 but strips out much of what makes a conventional Chapter 11 expensive and slow for a smaller company: there is no creditors’ committee by default, no separate disclosure statement requirement, and the owner can generally retain equity without satisfying the absolute priority rule that applies in a standard case. A trustee is appointed to facilitate rather than to displace management.

The debt limit is not a guideline. It is a threshold eligibility test. A business over the ceiling is not eligible to elect Subchapter V at all, regardless of how well the rest of the case would fit. Its realistic options narrow to a conventional Chapter 11, a Chapter 7 liquidation, or an out-of-court workout. For a company with modest revenue, a conventional Chapter 11 is frequently not economically viable, which is precisely the gap Subchapter V was designed to close.

This is why the specific dollar figure has drawn so much legislative attention. It is the difference between a reorganization pathway existing for a given business and not existing at all.

How the Limit Reached Its Current Level

The ceiling has moved several times since Subchapter V took effect:

Date	Subchapter V debt limit
February 2020	Subchapter V takes effect with an initial limit of $2,725,625
March 2020	CARES Act temporarily raises the limit to $7,500,000
March 2021	COVID-19 Bankruptcy Relief Extension Act extends the higher limit
June 2022	Bankruptcy Threshold Adjustment and Technical Corrections Act extends it again, through June 20, 2024
June 21, 2024	The temporary increase sunsets; the limit reverts to the lower statutory figure
January 1, 2026	The limit stands at $3,424,000 following routine inflation adjustments
March 3, 2026	S. 3977 introduced in the Senate; H.R. 7730 introduced in the House
August 3, 2026	The Senate passes S. 3977 unanimously; the bill moves to the House

The practical consequence of the June 2024 sunset was a multi-year window in which businesses with debt between roughly $3.4 million and $7.5 million — companies that would have qualified a month earlier — lost access to the streamlined pathway. The American Bankruptcy Institute has estimated that between June 22, 2024 and March 15, 2026, roughly 1,475 businesses that would otherwise have been eligible to file under Subchapter V were not, because of the lower ceiling. ABI notes that the number of businesses that simply failed without filing during that period is difficult to quantify.

Why Owners Carrying Merchant Cash Advances Are Watching This Closely

The Subchapter V test looks at aggregate noncontingent, liquidated debt — not at a single obligation. That aggregation is where commercial financing enters the picture.

Business owners who have taken multiple advances, a pattern often described as stacking, can accumulate obligations across several funders in a compressed period. Combined with equipment financing, a commercial lease, trade payables, and any personally guaranteed obligations, the aggregate figure can reach a level the owner never consciously targeted. Where that aggregate lands relative to the statutory ceiling determines eligibility.

An important caution: whether any particular merchant cash advance counts toward the Subchapter V limit, and in what amount, is not a settled question that can be answered generically. It depends on how the specific agreement is characterized, on the facts of the arrangement, and on the law applied by the court hearing the case. Courts have reached different conclusions on how these agreements should be treated, and the analysis is fact-specific. This is a question for a qualified bankruptcy attorney reviewing the actual contracts, not something to estimate from a blog post. CredibleLaw maintains a general overview of bankruptcy considerations for businesses carrying advance debt for readers who want background before that conversation.

Bankruptcy is also not the only path a business in this position may consider. Negotiated resolutions outside of court are common, and whether they are preferable depends on the posture of the accounts, the timing, and what the business is trying to preserve. General information on negotiated resolution of advance obligations is available separately. Comparing options is exactly the kind of decision that benefits from counsel, because the right answer for one business is frequently the wrong answer for another with similar numbers.

The Chapter 13 Provision and Why It Matters to Owners Personally

The second half of the bill is easy to overlook, but it is directly relevant to small business owners. Commercial financing agreements frequently include personal guarantees, which means an obligation incurred by the business can follow the owner individually.

Chapter 13 currently applies separate ceilings to secured and unsecured debt. S. 3977 would replace that structure with a single combined limit of $2,750,000. For an owner whose personal exposure runs through guarantees on business obligations, the structure of that test — not only its size — can affect eligibility. Whether an individual qualifies under either the current or the proposed framework is a case-specific determination.

What the Bill Would Not Change

It is worth being clear about the limits of this legislation, because pending bills are easy to over-read.

• It does not regulate commercial financing. S. 3977 amends Title 11, the Bankruptcy Code. It does not touch how advances are marketed, priced, disclosed, or collected.
• It does not alter state commercial financing law. Disclosure and registration requirements enacted at the state level operate independently of federal bankruptcy eligibility.
• It does not create new defenses to a collection action. Eligibility to file is not the same thing as a defense to a claim.
• It does not make filing automatic, advisable, or free of consequences. Bankruptcy carries significant and lasting effects that should be weighed with counsel.

On the state law point in particular, a growing number of states have enacted commercial financing disclosure or registration requirements that apply to sales-based financing. Those regimes differ substantially in scope and in who may enforce them, and several are enforceable only by a state regulator rather than by a private party. A general survey of state commercial financing laws is maintained separately. Whether a particular requirement applies to a particular transaction, and what follows if it does not, are questions for an attorney licensed in that state.

Some commercial financing agreements have historically included confession of judgment provisions, and several jurisdictions have restricted or barred their use in this context. The rules vary by state and have changed over time, so the treatment of any given clause depends on where and when it was signed and against whom it is being asserted. Background on confession of judgment provisions is available for readers who want general orientation before speaking with counsel.

Where the Bill Stands

As of the date of publication, S. 3977 has passed the Senate and is pending in the House of Representatives. Supporters of the measure have publicly urged the House to act. Whether and when the House will take it up, whether it will pass in its current form, and whether it will be signed into law are all open. Nothing about Senate passage guarantees an outcome.

Readers evaluating their own situation should verify the current status of the legislation directly rather than relying on any secondary account, including this one. The bill’s status page on Congress.gov reflects official legislative action as it occurs.

Open Questions Worth Flagging

Two points deserve explicit caution, because published commentary on this bill has not been consistent.

The first is retroactivity. Some reporting has described the proposed limits as applying retroactively to cases filed after the June 2024 sunset, while summaries of the bill text describe the changes as applying to cases filed on or after the date of enactment. These are materially different, and anyone whose planning depends on the answer should have counsel review the operative text rather than rely on a summary.

The second is timing. Because the current limits remain in effect unless and until the bill becomes law, deferring a decision in anticipation of a change carries risk. Statutes of limitation, collection activity, and contractual deadlines do not pause while Congress deliberates.

What Business Owners Can Reasonably Do Now

• Assemble the documents. A complete set of financing agreements, guarantees, and payment histories is the starting point for any competent assessment. Reconstructing them later, under time pressure, is harder.
• Get an accurate aggregate debt figure. Estimating from memory is how owners misjudge where they stand relative to a statutory threshold.
• Have the agreements reviewed by a qualified attorney. How specific obligations are characterized is not something to determine from general reading.
• Do not defer time-sensitive decisions on the strength of a pending bill. Current law is what applies today.
• Verify the legislative status independently before acting on it.

Frequently Asked Questions

Has the Subchapter V debt limit been raised to $7.5 million?

No. As of publication, S. 3977 has passed the Senate only. The bill would set the limit at $7,500,000 permanently if it becomes law, but it must also pass the House and be signed by the President. Until then, the existing limit applies.

What is the Subchapter V debt limit right now?

As of January 1, 2026, the figure was $3,424,000, reflecting routine inflation adjustments to the original statutory amount. Because these figures are adjusted periodically, anyone relying on the number should confirm the current amount rather than assume it.

Do merchant cash advances count toward the debt limit?

That cannot be answered generically. Whether a particular advance is counted, and in what amount, turns on how the specific agreement is characterized and on the facts of the arrangement. Courts have not treated these agreements uniformly. A bankruptcy attorney reviewing the actual contracts is the appropriate source for that determination.

What happens to a business that exceeds the limit?

A business over the ceiling is not eligible to elect Subchapter V. Other paths may remain available, including a conventional Chapter 11, a Chapter 7 filing, or an out-of-court resolution. Which of those is appropriate depends entirely on the specific circumstances.

Would the change apply to cases already filed?

Published accounts differ on this point. Some describe the change as retroactive to cases filed after June 2024; summaries of the bill text describe it as applying to cases filed on or after enactment. Anyone whose situation depends on the answer should have counsel review the operative statutory text.

Does the bill change how commercial financing companies can operate?

No. S. 3977 amends the Bankruptcy Code. It does not address the marketing, pricing, disclosure, or collection of commercial financing, which are governed by other federal and state law.

Why does the Chapter 13 provision matter to a business owner?

Because commercial financing agreements frequently include personal guarantees, business obligations can create individual exposure. The Chapter 13 eligibility framework therefore matters to many owners personally, independent of what happens to the business entity.

Should a business owner wait for the bill to pass before acting?

Waiting on pending legislation is generally not advisable. Current law governs today, and collection activity, contractual deadlines, and limitations periods continue to run. Timing questions should be discussed with counsel.

Speaking With a Qualified Attorney

CredibleLaw is a national legal resource and attorney referral network. It is not a law firm and does not provide legal services, legal advice, or representation. Its role is to help business owners connect with attorneys who handle matters in the relevant practice area and jurisdiction.

Business owners weighing reorganization options, evaluating commercial financing obligations, or responding to collection activity can request a connection through the CredibleLaw case review form, or by calling 888-201-0441. General background on commercial financing disputes is available through the CredibleLaw commercial financing resource center.

Sources

S. 3977 — Bankruptcy Threshold Adjustment Act of 2026, Congress.gov: https://www.congress.gov/bill/119th-congress/senate-bill/3977

Senate Judiciary Committee announcement of passage: https://www.grassley.senate.gov/news/news-releases/senate-unanimously-passes-grassley-durbin-bankruptcy-legislation-to-support-small-businesses-and-american-families

Disclaimer

This article provides general information about pending federal legislation and is not legal advice. Legislative status changes; verify the current posture of any bill before relying on it. Eligibility for relief under the Bankruptcy Code depends on facts and circumstances that vary from case to case and on the law of the applicable jurisdiction. CredibleLaw is a legal resource and attorney referral network, not a law firm, and does not provide legal representation. No attorney-client relationship is created by reading this article or by submitting information through this website. Readers should consult a licensed attorney in their jurisdiction regarding their specific situation.