The Chapter 11 Alternatives for Most Small Businesses

The alternative for most small businesses in the U.S. in 2026 to a conventional Chapter 11 filing is a shortened Chapter 11 called Subchapter V. The alternatives for most small businesses include a negotiated workout with creditors, a state-law assignment for the benefit of creditors, a lender’s foreclosure sale or receivership, a Chapter 7 liquidation, and Chapter 13 (if the business is owned by a sole proprietor). A small business owner must consider four factors.

• The first is whether the business is worth saving.
• The second factor is the number of creditors and whether any of them may refuse to negotiate.
• The third is whether the small business owner signed a personal guarantee.
• The last factor is the aggregate amount of debt.

Subchapter V Cases

Subchapter V was created by the Small Business Reorganization Act of 2019 and took effect in February 2020. A business qualifies if its total debts at filing are no more than $3,424,000 and at least half of that debt came from business activity. That limit took effect on April 1, 2025. During the pandemic, the limit was temporarily raised to $7.5 million, but the increase expired on June 21, 2024. Companies whose main business is owning a single piece of real estate cannot use Subchapter V.

The Subchapter V debt limit may soon rise sharply. Congress passed H.R. 7730, the Bankruptcy Threshold Adjustment Act of 2026, through the House on September 16, 2026, and the Senate on September 28, 2026. In early October 2026 the bill was awaiting the President’s signature. If signed, H.R. 7730 would set the Subchapter V limit at $7.5 million permanently, with inflation adjustments every three years. It would also exclude public companies and single-asset real estate businesses. The new limit would apply only to cases filed on or after the date the bill becomes law. That timing matters a great deal for a business with between $3.4 million and $7.5 million in debt.

Subchapter V has cheaper fees because it eliminates the most expensive parts of a regular Chapter 11 case. A trustee is appointed in all cases to help the company form their plan and oversee payment. Only the business can file a plan. It must be filed within 90 days. A creditors committee is appointed only if the court finds cause. Subchapter V cases are not subject to the quarterly US Trustee fee. The quarterly fee for ordinary Chapter 11 cases is at least $250. It is 0.9% of the amount of the disbursements (with a maximum of $250,000) per quarter for quarters where the business made $1 million or more in disbursements. Both ordinary Chapter 11 cases and Subchapter V cases are subject to a $1,738 filing fee.

The main legal benefit of Subchapter V is that owners can keep their companies even if they are not fully meeting their unsecured creditors’ demands. In a regular Chapter 11, there is an “absolute priority rule” that typically does not allow owners to keep their interests in the company in preference to unpaid unsecured creditors without contributing new capital. Subchapter V does not apply the absolute priority rule. Instead, the court may still confirm a plan even if not all of the creditors approve if it is fair and equitable, not unfairly discriminatory. The company must agree to dedicate all of its future disposable income to the plan for three to five years. An increasing number of small businesses are taking advantage of this option. Subchapter V cases have jumped 11 percent to 2,446 in 2025 and 1,663 in the first half of 2026, a 50% increase from the previous year.

Out of Court Workout

A workout is cheaper and less public. The down side of a workout is that there is no automatic stay in an out of court workout and all of the creditors can sue the company to get what they are owed. The creditors sign a voluntary standstill. If any of the creditors decides to “holdout” and sue, then the workout fails. They are more likely to be successful if there are only a few creditors, e.g. the bank, landlord and one or two suppliers. If there are dozens of creditors then it may be more difficult to get everyone to agree on a plan. The big advantage to bankruptcy over a workout is that the creditors that voted against the plan will be bound by it. If the workouts are not successful, the parties may then end up in a sale, a receivership or in a bankruptcy filing which then continues where the workout left off.

Tax Consequences of Forgiven Debt

Another difference between a workout and a bankruptcy is the tax consequences of forgiven debt. The federal tax code states generally that forgiven debt is taxable income. However, debt cancellation in a bankruptcy is completely excluded from tax. The exclusion of debt cancelled outside of a bankruptcy is limited to the extent of the debtor’s insolvency immediately prior to the cancellation (i.e., the liabilities of the debtor exceed the fair market value of the debtor’s assets). The exclusion is accomplished through IRS Form 982. The excludable amount of debt must be used to reduce valuable tax attributes, beginning with net operating losses. A workout that forgives a large amount of debt for a solvent business might result in a tax bill which the debtor could have avoided through bankruptcy.

Merchant Cash Advance Debt

Before pursuing any process, owners with merchant cash advance debt must examine their agreements carefully. In January 2025, New York’s Attorney General announced that it had reached a $1.065 billion judgment with Yellowstone Capital and its affiliates. The state claimed that Yellowstone falsely represented high-interest loans as cash advances with effective rates as high as 820%. Rates above 16% are considered usurious by New York State. New York voided $534.5 million owed by over 18,000 small businesses and permanently barred the company’s principals from the industry. Yellowstone did not admit any wrongdoing. Depending on the terms of their cash advance contracts, some balances may not require repayment and may be up for challenge.

Assignment for Benefit of Creditors

An assignment for the benefit of creditors (ABC) is a state law procedure that liquidates the assets of an insolvent debtor without the filing of a petition for relief under bankruptcy law. The assignor (the debtor) assigns all of its property to an assignee (a third party) of its own choosing. The assignee liquidates the property and distributes the proceeds to the creditors according to their priority. The assignee is typically paid a percentage of the liquidation as well as a fee, up front. This may preclude the use of an ABC in smaller estates. An ABC has been estimated to take from 90 to 180 days or up to a year to complete. It includes no automatic stay and no discharge.

Under an ABC, a company disposes of its own assets, but if the owners personally guaranteed the company debts, an ABC is powerless to bar the secured lender from suing the guarantors, and funders often sue the guarantors within weeks. In 2025, the Uniform Law Commission adopted a model Uniform Assignment for Benefit of Creditors Act. In June 2026, the sixth state adopted it: Delaware.

Article 9 of the Uniform Commercial Code permits a secured lender to sell its collateral after a debtor defaults. Sales may be public or private, but all aspects of the sale must be “commercially reasonable,” including the time, manner, and terms of the sale. Many secured lenders use a pre-negotiated Article 9 sale to sell a working business to a new company. Receivership is the appointment of a receiver to manage a struggling business or its assets under court supervision. Receivers are most often appointed in state court at the request of a secured lender concerned that its collateral is losing value. A Chapter 7 case costs $338 to file. A court-appointed trustee sells the assets, and the automatic stay prevents lawsuits against the company. Section 727 (a) (1) of the Bankruptcy Code provides for a discharge in a Chapter 7 case, but only individuals get one. A corporation or LLC is simply wound up with its debts unpaid. The automatic stay does not apply to owners who personally guaranteed company debts.

Chapter 13

Sole proprietors have another option. The business and the owner are one and the same. Chapter 13 is a three to five year payment plan and is administered by a trustee appointed by the court. The debt limits are $526,700 of unsecured debt and $1,580,125 of secured debt. H.R. 7730 would eliminate the distinction between unsecured and secured debt and impose a $2.75 million debt limit for cases filed after the enactment of the bill. Owners of corporations and LLCs can file a Chapter 13 individually for their own personal guarantees of corporate debt.