On August 3, 2026, the U.S. Senate passed a bill that could reshape restructuring options for thousands of small and midsized businesses — including many in New Mexico. S. 3977, the Bankruptcy Threshold Adjustment Act of 2026, would permanently restore the $7.5 million debt limit for Subchapter V of Chapter 11, the streamlined small business reorganization track capped at roughly $3.4 million since the pandemic-era increase expired in June 2024. For an oilfield services company in Hobbs, a restaurant group in Albuquerque, or a hospitality operator in Santa Fe carrying debt between those numbers, the difference can separate a fast, affordable reorganization in which the owner keeps the business from a traditional Chapter 11 whose cost pushes many companies toward liquidation.
What did the Senate pass on August 3, 2026?
S. 3977 passed the Senate with bipartisan support and now sits with the House. Its core provision amends the eligibility definition in 11 U.S.C. § 1182(1) to restore a $7.5 million ceiling on the aggregate noncontingent, liquidated debt a business may carry and still elect Subchapter V — permanently this time. The bill also consolidates the Chapter 13 debt limits into a single $2.75 million figure, meaningful for owners who guaranteed company debt. A companion bill, H.R. 7730, introduced by Representative Ben Cline, was reported out of the House Judiciary Committee in March 2026, but as of this writing the full House has not voted. Until both chambers pass identical text and the President signs it, the lower cap controls. Reports indicate the Senate-passed version would apply retroactively to cases filed after June 21, 2024, though no one should plan around that until the enacted text is confirmed.
What is the Subchapter V debt limit right now?
Here the statutory mechanics matter. When the CARES Act’s temporary $7.5 million threshold sunset on June 21, 2024, § 1182(1) reverted to a one-line cross-reference: a Subchapter V “debtor” is simply a “small business debtor” as defined in 11 U.S.C. § 101(51D). That definition caps aggregate noncontingent, liquidated secured and unsecured debts at $3,424,000 — set by the Judicial Conference’s triennial inflation adjustment effective April 1, 2025, which raised Code dollar amounts by just over 13 percent. The next automatic adjustment will not arrive until April 1, 2028. So a New Mexico business evaluating Subchapter V today must fit under $3,424,000 unless and until S. 3977 becomes law.
Which New Mexico businesses fall into the $3.4 million to $7.5 million gap?
The gap swallows the kind of companies that anchor New Mexico’s economy. Consider a Permian Basin oilfield services company in Hobbs carrying $5 million in equipment financing and vendor debt after a soft year in Lea and Eddy counties — too large for Subchapter V under the current cap, yet far too small to absorb the professional fee burn of a conventional Chapter 11. An Albuquerque restaurant group might hold $4.2 million in SBA loans, landlord claims, and supplier debt spread across affiliated entities; because § 101(51D)(B) aggregates the debts of affiliated debtors, the group cannot simply file one entity to duck under the ceiling. A Santa Fe hospitality operator that borrowed to renovate ahead of the tourism rebound could sit at $6 million with healthy operations but an unserviceable balance sheet. Under today’s law, each is forced into traditional Chapter 11 — or, too often, into a fire sale or closure because Chapter 11 does not pencil out at their size.
How different is traditional Chapter 11 from Subchapter V in practice?
The differences are structural and compound. In a traditional Chapter 11, an official committee of unsecured creditors may be appointed, and the debtor’s estate pays the committee’s lawyers and advisors. The debtor must win approval of a separate disclosure statement before soliciting votes, adding months and drafting expense, and pays U.S. Trustee quarterly fees under 28 U.S.C. § 1930(a)(6) that scale with disbursements — often tens of thousands of dollars for an operating company. And the absolute priority rule of § 1129(b) means owners generally cannot keep their equity over the objection of unpaid creditors without contributing new value. Subchapter V eliminates each of those burdens: no committee absent a court order, no disclosure statement, no quarterly fees, a plan due within 90 days of the order for relief under 11 U.S.C. § 1189(b), and a trustee appointed under 11 U.S.C. § 1183 whose job is to facilitate a consensual plan, not to displace management. Most importantly, 11 U.S.C. § 1191(b) lets the court confirm a plan over creditor objection without the absolute priority rule, so long as the plan commits the debtor’s projected disposable income for three to five years. The owner keeps the company.
| Feature | Traditional Chapter 11 | Subchapter V |
|---|---|---|
| Creditors’ committee | Typically appointed; estate pays its professionals | None unless court orders one |
| Disclosure statement | Required before solicitation | Eliminated |
| U.S. Trustee quarterly fees | Owed quarterly, scaled to disbursements | None |
| Plan deadline | Often a year or more | 90 days (§ 1189(b)) |
| Owner keeps equity over objection | Absolute priority rule applies | Yes, via § 1191(b) cramdown |
| Who may vote plan through | Needs an accepting impaired class | Confirmable with no accepting class |
| Current debt ceiling | None | $3,424,000 now; $7.5 million under S. 3977 |
What counts toward the Subchapter V debt cap?
Only noncontingent, liquidated debts count. A guaranty that has not been called, an unliquidated tort claim, or a disputed exposure not yet reduced to a fixed amount generally stays out of the calculation. Debts owed to affiliates and insiders are excluded as well — a loan from the owner or a sister company does not push the business over the line. But the aggregation rule cuts the other way: when affiliated debtors file, their debts are combined. And at least 50 percent of the counted debt must arise from commercial or business activities, a test owners with mixed personal and business debt must run carefully. These mechanics currently live in § 101(51D); S. 3977 would restore the standalone definition in § 1182(1) at the higher dollar level. Getting the math right on the petition date is critical: a successful eligibility objection can strip the Subchapter V election weeks into the case.
Should a New Mexico business file now, wait for enactment, or restructure to qualify?
Eligibility is measured as of the petition date, making timing a genuine strategic decision. A business already under $3,424,000 that needs relief now — a foreclosure, a judgment, an IRS levy — has little reason to wait. A business in the gap has a harder call. If creditor pressure can be managed for a season, waiting for enactment may unlock the far cheaper track. But waiting carries risk: collateral erodes, defaults accumulate, and Congress has missed deadlines on this exact issue before: the temporary cap lapsed in 2024 because an extension stalled. What a debtor should not do is manipulate the numbers. Paying down select debts on the eve of filing or splitting operations among entities to duck under the cap invites an eligibility objection, a bad-faith challenge, and potential dismissal under § 1112(b). Courts examine eligibility as of the petition date, but they also examine how the debtor got there. The better course is an honest balance-sheet analysis with counsel before anything is filed — the decision tree in the firm’s guide to choosing a bankruptcy chapter for a New Mexico business is a useful starting point.
How do tax claims and D.N.M. practice fit into a Subchapter V case?
New Mexico has a single federal judicial district, so every business bankruptcy in the state — from Farmington to Las Cruces — is filed in the U.S. Bankruptcy Court for the District of New Mexico, which sits in Albuquerque and routinely accommodates remote appearances, a practical point for a Hobbs or Roswell operator worried about traveling for hearings. Tax claims deserve special attention in any Subchapter V plan. Priority tax claims — recent income taxes and trust fund employment taxes under § 507(a)(8) — must be paid in full through the plan, and New Mexico gross receipts tax assessments frequently ride alongside the federal claims. Subchapter V offers a quiet advantage here: in a nonconsensual confirmation under § 1191(b), administrative and priority claims can be stretched across the plan term rather than paid on the effective date, easing the early cash crunch. Because tax debt often drives the insolvency in the first place, integrating bankruptcy strategy with IRS collection defense is where combined legal and accounting analysis earns its keep.
Frequently Asked Questions
What is the current Subchapter V debt limit in 2026?
The cap is $3,424,000 in aggregate noncontingent, liquidated debt, set by the Judicial Conference inflation adjustment effective April 1, 2025. S. 3977 would raise it to $7.5 million, but the bill has not yet become law.
When would the $7.5 million Subchapter V limit take effect?
Only after the House passes S. 3977 in identical form and the President signs it. The Senate acted on August 3, 2026, and companion bill H.R. 7730 cleared the House Judiciary Committee in March, but no House floor vote has occurred yet.
Can owners keep their equity in a Subchapter V case?
Generally yes. Under 11 U.S.C. § 1191(b), a court can confirm a plan over creditor objection without the absolute priority rule, so owners can retain their interests if the plan devotes projected disposable income to creditors for three to five years.
Does debt owed to insiders count toward the Subchapter V cap?
No. Debts owed to affiliates and insiders are excluded from the eligibility calculation, so owner loans do not count against the cap. But debts of affiliated entities filing together are aggregated, which can push a corporate family over the limit.
Can IRS and New Mexico tax debts be handled in a Subchapter V plan?
Yes. Priority tax claims must be paid in full through the plan, and in a § 1191(b) confirmation they can be paid over the plan term rather than up front. Older income taxes that miss priority status may be treated as general unsecured claims.
How North Star Law Firm Can Help
North Star Law Firm counsels New Mexico businesses statewide — Albuquerque, Santa Fe, Las Cruces, and beyond — on Subchapter V reorganizations, traditional Chapter 11 cases, and the full range of bankruptcy strategy, with particular depth where tax debt drives the filing. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state, bringing legal and accounting analysis to eligibility, feasibility, and tax claim treatment. With S. 3977 pending, a business weighing whether to file now or wait benefits from a clear-eyed balance-sheet review before the petition date locks in its options. To discuss where your company stands, contact the firm for a free consultation.