Small Businesses in the U.S. That Don’t Want to Go Bankrupt

In 2026, most small businesses in the U.S. that don’t want to go bankrupt should take three steps early: (1) determine if they can operate while paying debts; (2) shield the owner from personally liable debt; and (3) negotiate a private restructuring while there is still cash and leverage. A business owner who waits until a creditor drains the bank account dry, or obtains a judgment, generally loses these options. Which of these approaches to take depends on a few things. (1) Does the business make money before paying debt? (2) How much of the business’s debt did the owner personally guarantee? (3) Are any debts legally treated as the owner’s? In some cases, filing a planned Chapter 11 bankruptcy case can be a better solution than a slow-motion train wreck outside of court.

Small Business Bankruptcy Filings

Small companies are feeling the pressure. Timing of a bankruptcy is more important for small companies. A company called Epiq AACER that keeps track of bankruptcy court filings says that in calendar year 2025, there were 31,810 commercial bankruptcy filings, an increase of 5% compared to 2024. Subchapter V of Chapter 11, a simplified bankruptcy process for small businesses, filings increased 11 percent to 2,446 filings. Small business bankruptcy filings are going up in 2026. There were 833 Subchapter V filings in the first quarter of 2026, a 67% increase over the same period in 2025. In August 2026, there were 302 Subchapter V bankruptcy filings. According to an executive at Epiq, the increase may be due to sustained economic pressures, combined with the removal of the extra support provided to businesses during the pandemic as part of the CARES Act.

Federal Payroll Taxes

Businesses that are running out of money need to decide which bills to pay. Federal payroll taxes should be at the top of the list. Income taxes and the employees’ share of Social Security and Medicare taxes withheld from wages are ‘trust fund’ money. A business is holding the money for the government. Under section 6672 of the Internal Revenue Code, the IRS can assess against a person’s personal assets an amount equal to the entire amount of unpaid trust fund money. It does so by assessing the penalty personally against any person with authority to determine which creditors get paid who willfully fails to pay the tax. The IRS has defined ‘willfulness’ without requiring any showing of ‘bad motive’. The payment of other vendor bills or rent while knowing the taxes haven’t been paid is an indicator of willfulness. Company officers, shareholders, partners, and employees who have control over payment may be assessed. A person who receives the letter from the IRS proposing the assessment has 60 days to appeal before an assessment is made.

Whose Liability Is Personally Exposed

The second decision to be made is to categorize the various debts of the company, by the ultimate liability of them. If the company takes out a bank loan, or SBA loan, or commercial lease, it may have been signed with a personal guarantee from the owner of the company. In other words, if the company defaults on the debt, it becomes the debt of the household, even if the company goes out of business, or reorganizes. When an owner decides which creditors he needs to negotiate with first, the calculation of that is not necessarily based on the size of the debt or who is owed the most, but rather by whose liability is personally exposed.

A small unpaid vendor balance may not matter to the owner because it’s not guaranteed, whereas a small to medium sized loan that was guaranteed may be critical. The same is true of a trust fund tax balance. The IRS can collect directly against the owner of the company, through assessment, and then a lien, levy and seizure if the owner doesn’t pay the penalty assessed.

Loans Dressed up as Merchant Cash Advances

Merchant cash advances require careful study before they are approved by the owner as a way to fund a cash shortage. In January 2025, the New York Attorney General announced a settlement with Yellowstone Capital and affiliated entities in the total amount of $1.065 billion in judgment. The state alleged that Yellowstone sold loans dressed up as merchant cash advances to more than 18,000 businesses across the country at interest rates up to 820%. The company took fixed payments from bank accounts, regardless of how much revenue was made. The settlement released roughly $534.5 million in debt owed by merchants and barred the companies and the officers from the business, without an admission of wrongdoing. Manhattan’s City Bakery was paying Yellowstone over $2,000 a day before shutting down.

Owners who received an Economic Injury Disaster Loan from the SBA during the pandemic have a firmer deadline compared to other creditors. The SBA started referring defaulted debts for COVID EIDL loans to the Treasury Department’s Cross-Servicing program in September 2025. Treasury has informed the SBA that it cannot refer COVID EIDL and PPP debts back to the agency once it receives the debts. The defaulted debts can still be referred to the Treasury Offset Program, which will result in any of the borrower’s federal payments being automatically applied to their debt. A business owner who has an EIDL loan will be in a stronger position to negotiate with the SBA before the debt becomes delinquent as the SBA will lose all control over the situation once the debt is referred to Treasury.

Preference Period

And the best way to negotiate with creditors and even landlords and vendors privately is to come to the table with a cash flow and a deal. In the event that a private workout falls through and a business files for bankruptcy, payments in the months before the failed workout may be clawed back. The 90-day preference period for payments to general creditors can be recaptured under section 547 of the Bankruptcy Code. As to insiders, i.e., family members and owners, a longer one year period applies. A payment made in the ordinary course of business can serve as a defense to an attempt to recapture. Payment of business debts on or after April 1, 2025, that is less than $8,575 to one creditor is also exempt. A transfer made in the two years before the bankruptcy filing to prevent creditors from getting paid, or made in exchange for less than fair value when the debtor was insolvent can also be clawed back under section 548 of the Bankruptcy Code.

Subchapter V Limit

When workouts fail, a Chapter 11 proceeding under Subchapter V is often a better option than a slow winding down. How much debt is allowable? As of April 1, 2025, it is $3,424,000. There was a temporary $7,500,000 limit until June 2024, when it expired. Congress has passed H.R. 7730, the Bankruptcy Threshold Adjustment Act of 2026. The House passed it on September 16, 2026 and the Senate passed the same bill on September 28. It would set the Subchapter V limit at $7.5 million, permanently, with an inflation adjustment every three years. As of early October 2026, it is still waiting for the President’s signature, so the lower amount applies for now.

Subchapter V revisions to the Code make changes that increase control for the debtor (owner) over the bankruptcy process compared to a normal Chapter 11 filing. Section 1189 states that the only entity allowed to file a plan is the debtor and the plan has to be filed within 90 days of the filing date. Only if there is delay that is not attributable to the debtor, can the court give an extension. Section 1191 states that the court is allowed to confirm the plan over the objections of creditors if the business contributes all its projected disposable income for three to five years. Unlike Chapter 11, Subchapter V does not require unsecured creditors be paid in full before the owners get to keep their equity. A filing fee of $1,738 is required for a Chapter 11 filing, compared to a $338 filing fee for a Chapter 7 liquidation.