New research by UConn finance professor Xiang Zheng indicates that an improved bankruptcy procedure, designed to make reorganization easier and less expensive for small businesses, is proving successful in enabling many of those companies to regroup and remain in business.<\/p>\n
Zheng co-authored the paper \u201cCan Small Businesses Survive Chapter 11?,” which is the lead article in the October issue of The Journal of Finance, a top academic publication.<\/p>\n
The findings have been included in a congressional report that recommends not only keeping the regulation but increasing its threshold from approximately $3 million to $7.5 million, a higher limit that had existed for a four-year period from 2020-2024.<\/p>\n
\u201cIt is a difficult task to run a small business today, and around 12% of those corner stores and mom-and-pop shops die every year,\u2019\u2019 Zheng says. \u201cBut with the help of the government, many of them can reorganize, regroup, and reopen. We want to see them be successful because small businesses are significant employers.\u2019\u2019<\/p>\n
Zheng co-authored the paper with professors Edith Hotchkiss of Boston College, with whom he studied as a Ph.D. student, and Benjamin Iverson of Brigham Young University, a bankruptcy expert.<\/p>\n
Newer Bankruptcy Procedure More Than Doubles Success<\/strong><\/p>\n Large U.S. companies that file for bankruptcy often re-emerge and continue some or all of their operations. But smaller businesses struggle to avoid liquidation.<\/p>\n The three researchers examined Subchapter V (SubV) of Chapter 11, a bankruptcy procedure created to make reorganization less complicated and less costly for small businesses, that can spend upwards of $1,000 an hour for a bankruptcy attorney.<\/p>\n Their findings suggest the reform has been highly effective. Businesses that are eligible for SubV are more likely to successfully reorganize and to remain in operation afterward. In addition, creditor recoveries are as good, if not better, as they are under traditional Chapter 11.<\/p>\n \u201cSmall businesses often do not have the financial resources to undergo a lengthy and expensive Chapter 11 process,\u2019\u2019 Zheng says. \u201cWe wanted to understand whether simplifying that process could help viable businesses survive and whether doing so would come at a cost to their creditors.\u2019\u2019<\/p>\n Prior to the introduction of SubV, the outlook for small businesses entering bankruptcy was bleak. From 2010 through 2019, some 70% of small businesses entering bankruptcy filed directly for Chapter 7 liquidation. For those that attempted Chapter 11 reorganization, only about a third were successful.<\/p>\n Congress created SubV through the Small Business Reorganization Act of 2019 to lessen some of those hurdles.<\/p>\n To examine the effect of SubV, Zheng and his co-authors focused their research around a $7.5 million debt-eligibility threshold\/cutoff. They studied the outcomes of businesses applying for bankruptcy relief just above and just below that figure, providing insight into similarly sized companies.<\/p>\n They discovered that access to SubV more than doubles the probability that a small business successfully reorganizes, instead of liquidating or finding itself without a confirmed reorganization strategy.<\/p>\n Revived, But Will They Survive?<\/strong><\/p>\n Zheng and his colleagues wanted to know if the new bankruptcy reorganization option that was keeping businesses alive would contribute to their long-term survival. Or was it merely transferring money from creditors to business owners? The researchers found little evidence of concern.<\/p>\n Unsecured creditor recoveries are nearly 12% in SubV cases and businesses following that pathway have a 21% higher probability of surviving in the years following the bankruptcy.<\/p>\n \u201cOne of the key findings is that the increase in reorganization does not appear to come at the expense of creditors,\u2019\u2019 Zheng says. \u201cThe businesses are more likely to survive after bankruptcy, while creditors recover at least as much as they would have under the traditional process. That suggests the reform is helping preserve businesses that are economically viable but might otherwise have been liquidated. Ours is the only academic paper to rigorously examine it.\u2019\u2019<\/p>\n Congress Takes Note of the Findings<\/strong><\/p>\n Zheng\u2019s research has taken on new significance as Congress weighs expanding access to SubV. The House Judiciary Committee in August issued a report accompanying H.R. 7730, the Bankruptcy Threshold Adjustment Act, legislation that would permanently set the SubV debt limit at $7.5 million, up from the current cutoff of about $3 million.<\/p>\n That congressional report cites Zheng, Hotchkiss and Iverson\u2019s research as evidence of SubV\u2019s \u00a0effectiveness. The legislation passed the House on Sept. 16 and the Senate on Sept. 28, with unanimous consent. It should become law soon.<\/p>\n \u201cAs academic researchers, we hope that our work can provide credible evidence that is useful when policymakers evaluate important questions,\u2019\u2019 Zheng says. \u201cIt has been very rewarding and satisfying to see this research become part of the policy discussion about how bankruptcy law can better serve small businesses.\u2019\u2019<\/p>\n Department Head Yiming Qian says research like Zheng\u2019s is one of the factors that distinguishes the UConn finance program.<\/p>\n \u201cXiang\u2019s work is a great example of how rigorous finance research can inform important public policy decisions,\u2019\u2019 she says. \u201cIt\u2019s particularly gratifying to see our faculty\u2019s research recognized and cited in congressional deliberations.\u201d<\/p>\n The U.S. has approximately 36.2 million small businesses, according to the U.S. Small Business Administration. Combined they total more than 63 million employees and almost 46% of private-sector workers. A Federal Reserve report in 2025 indicated that more than 50% of those businesses reported their financial situation as fair or poor.<\/p>\n When Zheng and his colleagues conducted their research, they examined a wide swath of industries. However, the five most frequently identified businesses in their study were real estate, food service\/restaurants, business services, health services, and special-trade contractors.<\/p>\n \u201cSmall businesses are an important part of the economy, but financial distress does not necessarily mean that the underlying business isn\u2019t worthwhile,\u2019\u2019 Zheng says. \u201cOur findings fill an important gap in our understanding of financial distress for small firms. SubV can dramatically increase the likelihood of reorganization without harming unsecured creditor recovery rates. Reducing the stress of the bankruptcy process can allow more viable small businesses to survive.\u2019\u2019<\/p>\n","protected":false},"excerpt":{"rendered":" ‘Small businesses are an important part of the economy, but financial distress does not necessarily mean that the underlying business isn\u2019t worthwhile’<\/p>\n","protected":false},"author":121,"featured_media":254498,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"wds_primary_category":0,"wds_primary_series":0,"wds_primary_attribution":0,"footnotes":""},"categories":[2471,1731,2460,2076,1862,2235,2227],"tags":[],"magazine-issues":[],"coauthors":[2105],"class_list":["post-254485","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economic-development","category-entrepreneurship","category-faculty","category-research","category-busn","category-today-homepage","category-uconn-edu-homepage"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"publishpress_future_action":{"enabled":false,"date":"2026-10-27 09:44:07","action":"change-status","newStatus":"draft","terms":[],"taxonomy":"category","extraData":[]},"publishpress_future_workflow_manual_trigger":{"enabledWorkflows":[]},"_links":{"self":[{"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/posts\/254485","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/users\/121"}],"replies":[{"embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/comments?post=254485"}],"version-history":[{"count":2,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/posts\/254485\/revisions"}],"predecessor-version":[{"id":254499,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/posts\/254485\/revisions\/254499"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/media\/254498"}],"wp:attachment":[{"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/media?parent=254485"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/categories?post=254485"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/tags?post=254485"},{"taxonomy":"magazine-issue","embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/magazine-issues?post=254485"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/today.uconn.edu\/wp-rest\/wp\/v2\/coauthors?post=254485"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}