This past July, Professor Edith Hotchkiss found herself in a situation rare in today’s Washington: She was testifying in favor of a bankruptcy policy change with bipartisan support—both congressional Democrats and Republicans claimed they favored it.
Hotchkiss, the Accenture Professor in the Carroll School of Management’s Seidner Department of Finance, was invited by the US House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Antitrust to discuss her research on Subchapter V of Chapter 11 of the federal bankruptcy code. The debt-size limit that qualifies small businesses to reorganize under this law had fallen, reducing eligibility. That means many more small firms—neighborhood gyms, local restaurant chains or small manufacturers—could end up closing.
Edith Hotchkiss
“Subchapter V was created because Chapter 11 wasn’t working for small firms,” Hotchkiss says. “Only about one-third of distressed small businesses were attempting to reorganize in Chapter 11, and of those, only about a third survived the process. Subchapter V was intended to fix that, under the assumption that many of these would be viable firms if they just had less debt.”
Subchapter V, passed in 2019, simplified reorganization, initially setting a threshold for qualifying at no more than $2.75 million of debt. Congress later raised the limit to $7.5 million, but last year, on account of a sunset provision, it returned to close to its original level. Hotchkiss says that, if the lower limit had been in effect over the last several years, 25-percent fewer firms entering Chapter 11 would have been able to use Subchapter V. Put differently, approximately 1,700 of the 7,300 small businesses that filed under Subchapter V wouldn’t have been eligible with the lower limit.
Lawmakers have discussed restoring the higher limit, so far to no avail. “I got the impression both sides want to try to tack this on to a larger bill,” Hotchkiss says. “But if they don’t get their way on other issues, they won’t agree to changes for Subchapter V either.”
That’s unfortunate because, according to Hotchkiss’s research, the new law is working as intended: It’s helping many struggling but viable businesses survive but doesn’t harm payouts to lenders.
As she said in her testimony, the law “more than doubles the probability of reorganization,” but “expected recovery rates to unsecured creditors are 11.9 percent higher” than in similar non-Subchapter V cases. In other words, businesses and jobs endure, and lenders end up with more than they would in a liquidation. (If bankrupt businesses don’t reorganize, they typically close.)
Hotchkiss and other testifiers at the subcommittee meeting on July 15, 2025.
Hotchkiss and her coauthors examined 6,431 bankruptcy cases filed from 2017 to 2024. They found that firms filing under Subchapter V were more likely to have their reorganization plans approved than comparable firms that didn’t file under Subchapter V. And those that did receive approval reached that point faster than the comparable firms. That reduced the overall costs of bankruptcy for the firms and their lenders.
One concern has been that Subchapter V’s streamlined process might enable even some nonviable firms to reorganize, leading them to limp along and eventually fail. Hotchkiss and her collaborators did find that many more firms could reorganize using Subchapter V. But they also showed these firms had higher chances of long-run survival.
Hotchkiss says Subchapter V was needed because lenders—"especially secured debtholders like banks”—didn’t have much incentive to participate in reorganizations before. They could cover at least some of the value of their bad loans by foreclosing on collateral, and they likely preferred that to investing staff and legal time in helping with lengthy reorganizations. Yet some of their borrowers, with forbearance, could have kept operating and would’ve ended up producing greater value than the proceeds from a liquidation. “That value preserved can be shared by everybody,” Hotchkiss says.
Think about it this way: If your gym liquidates, the owner loses her livelihood, trainers lose their jobs, and a bank may end up seizing a storefront in the midst of a recession—not the best time to find a new tenant. If the gym reorganizes, the owner keeps the business, trainers retain their jobs, the bank still sees loan payments—and you keep taking yoga and CrossFit classes.
“One thing that’s unique to small firms is that, without the owner, the business often can’t continue to exist,” Hotchkiss says, explaining the importance of this particular bankruptcy reform. “In the bankruptcy of a big company, you can bring in a new manager, and the firm continues. That doesn’t work for small businesses.”
