The Corporate Snowball Effect: Understanding the 2026 Business Bankruptcy Surge

The retail landscape is undergoing a shift as corporate bankruptcy filings rise. High-profile liquidations, such as those involving Big Lots and Party City, serve as an indicator for the broader economic health of the U.S. economy. These closures are not isolated events but are the result of a cumulative financial strain, stagnant wages, and shifting consumer habits.

Updated on May 15, 2026.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

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Key Takeaways: The 2026 Corporate and Small Business Bankruptcy Surge

• The Retail Collapse: Major liquidations, including Big Lots (900 stores) and Party City (700+ stores), have left over 1,600 vacant commercial spaces and resulted in more than 12,000 job losses, signaling deeper economic strain.
• Small Business Vulnerability: Small-business bankruptcies have skyrocketed by 67%, far outpacing the 42% rise in larger corporate filings.
• Subchapter V: Unlike a Chapter 7 liquidation, which permanently closes a business, Subchapter V allows small businesses to remain open and restructure debt.
• Agricultural Crisis: Chapter 12 farmer bankruptcies surged 46% in 2025, marking three years of consecutive increases.
• The Personal Guarantee Clause: Business owners often mistakenly believe an LLC protects them from personal bankruptcy, but personal liability clauses usually require owners to file for personal relief alongside their business.

The Collapse of Retail Giants: Big Lots and Party City

The total liquidation of these two entities represents a significant loss to the brick-and-mortar sector, with Party City closing over 700 locations, resulting in more than 12,000 employees facing unemployment.

Big Lots, following a failed acquisition attempt by Nexus Capital, is expected to shut down all 900 locations. Combined, these closures leave more than 1,600 vacant commercial spaces, placing immense pressure on shopping mall landlords as the retail apocalypse continues.

The Rise of Large and Small Business Bankruptcy and the Farming Industry

While retail giants like Big Lots and Party City dominate the headlines, a more quiet but equally significant surge is occurring within the small business and agricultural sectors. The economic “snowball effect” is not limited to the mall; it has reached the family farmer and the local storefront.

The Rise of Corporate and Small Business Filings

As of early 2026, corporate bankruptcies have risen by 42%, while small-business bankruptcies have skyrocketed by 67%. Smaller businesses usually lack the cash reserves of major corporations, but those figures might be even higher since most small business owners are personally responsible for their business debt, leading many to file for personal bankruptcy rather than a corporate one.

While there has been a notable increase in Chapter 7 filings, the data fails to distinguish between a “business” filing and a “personal” filing. As a result, a business failure is frequently masked within a personal bankruptcy statistic.

Subchapter V: A Lifeline for Small Businesses

A Chapter 7 bankruptcy for a business is a liquidation under 11 U.S.C. In Chapter 7, a business ceases operations and its assets are sold off by the trustee. Once a business files Chapter 7, it is effectively closing its doors permanently.

By contrast, Subchapter V of Chapter 11 (11 U.S.C. §§ 1181–1195) allows a small business to remain open and continue operating during the bankruptcy. Created by the Small Business Reorganization Act of 2019, Subchapter V is designed specifically for small business debtors and provides a streamlined, cost‑effective alternative to a traditional Chapter 11.

Under Subchapter V, the debtor remains in possession of the business and retains control of day‑to‑day operations. A Subchapter V trustee is appointed, but the trustee’s role is supervisory and facilitative, not operational. The debtor works with the trustee and creditors to propose a feasible repayment plan.

Because Subchapter V eliminates the disclosure statement requirement, removes quarterly U.S. Trustee fees, shortens deadlines, and allows plan confirmation without creditor approval in certain circumstances, it is significantly faster and less expensive than a standard Chapter 11 case.

The Crisis for the American Farmer (Chapter 12)

The agricultural sector is currently navigating unique financial pressures that extend far beyond typical market volatility. According to the American Farm Bureau Federation, Chapter 12 farmer bankruptcies surged 46% in 2025, marking the third consecutive year of increases.

While smaller family farms often utilize the specialized protections of Chapter 12, eligibility is strictly governed by debt limits.

To qualify as a “family farmer” in 2026, the total secured and unsecured debts of an individual or entity must not exceed $12,562,250. If a farming operation’s total indebtedness surpasses this threshold, it is no longer eligible for Chapter 12 and must instead file under Chapter 11 bankruptcy.  

Chapter 12 is also for the family fishermen business, with debt totals maxed out at $2,568,000.

Understanding Business and Personal Bankruptcy

For business owners, when a business is no longer viable, Chapter 7 allows for liquidation. Although the business owner is also likely to have to file Chapter 7 personal bankruptcy, as the debts are personally guaranteed.

It’s been my experience that business owners believe that because they have a limited liability company (LLC), they are not required to file a personal bankruptcy, but an LLC does not supersede a personal liability clause. I detail this distinction in this prior article.

For small business owners operating as sole proprietors, Chapter 13 offers a unique reorganization path that is not available to corporations or LLCs. Since a sole proprietorship is legally the same as the individual, the owner can use Chapter 13 to restructure both personal and business debts into a three‑to‑five‑year payment plan. However, eligibility is strictly governed by debt limits.

If the debtor exceeds those limits, Chapter 13 is not available, and the case must instead proceed under Chapter 11. The current debt limits are $1,580,125 for secured debt and $526,700 for unsecured debt.

The Professor’s Conclusion

The 2026 bankruptcy surge is not simply a story of mismanagement. It is the predictable result of an economy where costs rise faster than revenue, where interest rates remain elevated, and where small businesses and family farms operate with razor‑thin margins. The bankruptcy code provides multiple paths: Chapter 7, 11, Subchapter V, 12, and 13.

As corporate failures accelerate and small businesses struggle to survive, the question is no longer whether bankruptcy filings will continue to rise, they will. The real question is whether consumers and businesses can adjust quickly enough.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Updated initially on May 15, 2025.