Available at: https://www.abi.org/abi-journal/the-business-debtor-in-chapter-13-revisiting-consumer-reorganization-for-small-0
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Smith, the Chapter 13 Trustee for the Tampa-Fort Myers Divisions of the Middle District of Florida, makes a useful and sometimes overlooked point: Chapter 13 is not merely a consumer bankruptcy chapter. It can also be a remarkably effective small-business reorganization tool.
That observation is particularly timely because Congress may be on the verge of dramatically expanding the number of small-business owners who can use Chapter 13.
Chapter 13 Was Never Just for Wage Earners
The stereotypical Chapter 13 debtor is an employee with a mortgage, car payment and credit-card debt who needs three to five years to reorganize those obligations.
But § 109(e) does not limit Chapter 13 to employees. It permits an "individual with regular income" to file, and that definition can readily encompass self-employed individuals and sole proprietors.
Smith emphasizes that distinction. Corporations, partnerships and LLCs cannot themselves be Chapter 13 debtors, but a sole proprietorship is generally not legally separate from its owner. Consequently, business debts incurred by the sole proprietorship are debts of the individual and can be administered through that individual's Chapter 13 case.
Congress itself contemplated this. As Smith notes, the legislative history specifically discussed whether a husband-and-wife "mom and pop grocery store" could proceed under Chapter 13 depending upon whether the business was a partnership or instead individually owned.
That remains important today for plumbers, electricians, landscapers, truck drivers, rideshare drivers, independent contractors, food-truck operators, online sellers, home-repair contractors and innumerable other people whose "business" may consist primarily of themselves, a truck, some equipment, a few employees and a lot of hard work.
For these debtors, Chapter 11—even Subchapter V—may simply be too much bankruptcy.
Chapter 13 Can Do a Lot of What a Small Business Actually Needs
Smith identifies the practical advantages of Chapter 13 for these entrepreneurs. A debtor can continue operating the business, retain essential assets, cure defaults on secured obligations, restructure taxes and repay unsecured creditors through a three-to-five-year plan.
And § 1306(b) ordinarily leaves the debtor in possession of the property of the estate. That can be critical where the debtor's future income depends on keeping trucks, tools, trailers, restaurant equipment, landscaping machinery or other commercial vehicles and equipment.
Most importantly, Chapter 13 generally avoids much of the procedural machinery—and expense—of Chapter 11.
Smith contrasts Chapter 13 with Chapter 11's disclosure-statement litigation, creditor-committee issues, operating-report requirements and substantially greater professional fees.
That distinction should not be underestimated.
A bankruptcy procedure can theoretically provide wonderful relief, but if accessing that relief costs $25,000, $50,000 or more, it isn't much of a remedy for the self-employed carpenter who needs to save a $100,000 business.
Sometimes the sophistication of a bankruptcy proceeding becomes its own barrier to bankruptcy relief.
Subchapter V Is Excellent—but Chapter 13 Can Be Simpler
The Small Business Reorganization Act made Subchapter V an enormously useful tool. It eliminated or reduced many of traditional Chapter 11's obstacles and created a specialized trustee whose role includes facilitating the development of a consensual plan.
But, as Smith correctly observes, even a streamlined Chapter 11 remains more complicated and expensive than Chapter 13.
Subchapter V offers important powers that Chapter 13 does not. But that does not mean every qualifying entrepreneur needs them.
For the smallest businesses, the best bankruptcy may often be the bankruptcy with the fewest moving parts.
And Congress may soon make that option available to far more debtors.
S. 3977 Could Dramatically Expand Chapter 13 for Small Businesses
On August 3, 2026, the Senate unanimously passed S. 3977, the Bankruptcy Threshold Adjustment Act of 2026. The bipartisan legislation is sponsored by Senators Chuck Grassley, Dick Durbin, John Cornyn, Sheldon Whitehouse, Lindsey Graham and Christopher Coons. (GovInfo)
The legislation would make several enormously important changes:
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Chapter 13: Section 109(e) would permit an individual with regular income to file Chapter 13 if that debtor has aggregate noncontingent, liquidated debts of less than $2.75 million.
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Subchapter V: Section 1182(1) would restore the debt ceiling to not more than $7.5 million in aggregate noncontingent, liquidated secured and unsecured debts, subject to the other statutory qualifications.
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Chapter 13 would no longer have separate secured and unsecured debt limits. Instead, the $2.75 million ceiling would be an aggregate limitation.
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The increases would be permanent. Unlike the previous temporary increases, there is no sunset provision sending debtors and bankruptcy attorneys back over this cliff a few years later.
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The changes would apply prospectively. They would apply to cases commenced on or after enactment, not retroactively to previously filed cases. (Govwatch)
Text and status of S. 3977, Bankruptcy Threshold Adjustment Act of 2026
This would substantially change the analysis in Smith's article. He correctly describes the presently applicable § 109(e) limits as approximately $526,700 in unsecured debt and $1,580,125 in secured debt.
Those separate limits can produce peculiar results. An individual might have a perfectly manageable overall debt load but be excluded from Chapter 13 merely because too much falls into one particular bucket.
S. 3977 would replace that approach with the much simpler question: Are the debtor's aggregate noncontingent, liquidated debts less than $2.75 million?
For small-business owners, that could be transformative.
The House Should Finish the Job
There is reason for optimism. The Senate passed S. 3977 unanimously, and companion legislation, H.R. 7730, was introduced in the House with bipartisan sponsorship. (Senate Judiciary Committee)
Hopefully, the House will now speedily pass the legislation and President Trump will sign it.
The policy argument is especially strong when viewed through the lens of Smith's article. Increasing the Chapter 13 limit is not merely about allowing somewhat wealthier consumer debtors into Chapter 13. It expands access to a comparatively inexpensive reorganization mechanism for entrepreneurs who might otherwise be forced into Subchapter V—or conclude that reorganization is simply too expensive.
A $2.75 million Chapter 13 ceiling would encompass a surprisingly substantial small business once real estate, commercial vehicles, equipment loans, personally guaranteed business obligations, taxes and trade debt are included.
That is precisely where Chapter 13 can shine.
But "Trustee Oversight" Should Not Become "Trustee Management"
There is one aspect of Smith's article where I would add an important caution.
Smith quite reasonably emphasizes the expertise of standing Chapter 13 trustees. Trustees routinely examine tax returns, profit-and-loss statements, payroll records, bank statements and cash-flow projections, and § 1302 gives them substantial responsibilities for investigating financial affairs and evaluating plans.
He also notes that Rule 2004 provides substantial investigatory authority when additional examination is actually necessary.
All true.
But the existence of supervisory authority does not mean that every small-business Chapter 13 debtor requires extensive supervision.
There is a difference between oversight and management.
If Chapter 13 is going to serve as the Bankruptcy Code's most streamlined small-business reorganization chapter, trustees, U.S. Trustees and Bankruptcy Administrators should generally calibrate their involvement to the actual complexity and risk presented by the business.
A debtor operating a landscaping company with two trucks and three employees does not necessarily need the equivalent of a miniature Chapter 11 financial audit every month.
Neither does an Uber driver.
Nor an independent plumber.
Nor a one-person consulting firm.
Nor the owner of a food truck.
Certainly, unusual transactions, unexplained losses, questionable transfers, tax problems, insider dealings or inconsistent financial information can justify greater scrutiny. Trustees have both the authority and responsibility to investigate those issues.
But where a small business has straightforward books, understandable revenue, ordinary expenses, adequate insurance, current taxes and a feasible Chapter 13 plan, the lightest effective level of oversight should ordinarily be enough.
That is not merely a matter of convenience.
It is a matter of economics.
Every additional monthly report, accountant's statement, document demand, hearing, Rule 2004 examination or attorney response costs money. And for the smallest businesses, those administrative costs come from precisely the same cash flow needed to buy inventory, repair equipment, pay employees, remain current on taxes and fund the Chapter 13 plan.
Oversight intended to protect the reorganization can, if excessive, undermine the reorganization.
Don't Turn Chapter 13 Into Chapter 11 Lite
Smith persuasively argues that the central distinction between Chapter 13 and Subchapter V is not necessarily the absence of competent oversight, but rather the different administrative structure and cost of the proceedings.
That may be the most important point in the entire discussion.
If courts, trustees, Bankruptcy Administrators or the U.S. Trustee Program respond to larger Chapter 13 business cases by importing progressively more Chapter 11-style reporting and oversight requirements, we risk eliminating the very advantage that makes Chapter 13 useful.
The goal should not be to make a $1 million sole proprietorship behave administratively like a $50 million corporation simply because both happen to be businesses.
The better approach is proportionality.
Simple business, simple oversight.
More complicated business, more oversight.
Evidence of problems, investigate.
No evidence of problems, let the debtor operate the business and fund the plan.
A Potentially Much Bigger Role for Chapter 13
Smith concludes that Chapter 13 remains an "important and underappreciated" tool for small-business restructuring. For entrepreneurs with modest businesses, stable income and manageable debt, it can preserve operations without imposing the costs of Chapter 11.
I agree.
And if the House passes S. 3977 and President Trump signs it, that observation will become even more important.
A permanent $2.75 million aggregate Chapter 13 debt limit would make Chapter 13 available to a much broader range of genuine small businesses. Meanwhile, restoring the $7.5 million Subchapter V limit would provide the next rung on the restructuring ladder for businesses that need the additional flexibility of Chapter 11.
That produces a sensible continuum:
Chapter 13 for the smallest businesses. Subchapter V for larger and more complicated small businesses. Traditional Chapter 11 where its greater complexity is actually necessary.
But that continuum works only if we resist the temptation to make every proceeding equally complicated.
The smallest of small businesses do not need bankruptcy professionals running their businesses for them. They need a breathing spell, a workable repayment plan, appropriate but proportionate oversight, and then the opportunity to get back to doing what entrepreneurs generally do best:
running their businesses.
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