New Bankruptcy Bill Tightens Chapter 11 Rules, Sets 24-Month Conversion Limit, and Cracks Down on 'Bad Faith' Filings

Alright, let's talk bankruptcy, but not in that dry, legal textbook way. We're diving into the 'Consumer Protection and Corporate Accountability in Bankruptcy Act of 2026,' and trust me, if you're running a business, or even just keeping an eye on how big corporations operate, this one's got some real teeth.

The Clock Starts Ticking: Chapter 11 Deadlines Get Real

First up, this bill is putting a firm deadline on Chapter 11 cases. Right now, if a company files for Chapter 11 bankruptcy (that's the one where they try to reorganize and keep the business alive), they've got a "reasonable period of time" to decide if they need to convert to Chapter 7 (which means liquidating everything). This bill scraps that vague language and says, nope, you've got 24 months from the original filing date to make that call. Think of it like a project manager giving you a hard deadline instead of a 'get it done when you can' kind of instruction. For a small business owner trying to navigate a complex reorganization, this shorter leash could feel like a lot of pressure, potentially forcing a quicker — and maybe less optimal — decision.

No More Shenanigans: Cracking Down on 'Bad Faith' Bankruptcies

This is where things get really interesting. The bill adds two big new reasons a court can just dismiss a Chapter 11 case: if it's "objectively futile" (meaning, no realistic shot at success) or if the debtor filed or continued the case in "subjective bad faith." Now, 'futile' and 'bad faith' can sound a bit squishy, but the bill lays out some pretty specific scenarios where bad faith is presumed:

• Venue Shopping is Out: If a court finds you deliberately picked the wrong location to file your bankruptcy, there's a strong presumption that you're acting in bad faith. You can fight it, but you'll need "clear and convincing evidence" to prove otherwise. So, no more trying to find the most favorable court across the country just to get an edge.
• Conclusive Bad Faith: This is the big one. The bill says if a court finds a purpose of your bankruptcy is to "gain a tactical litigation advantage," "impose undue delay on creditors," or "cap the total liability" to certain creditors when you actually have the money to pay them, that's conclusively bad faith. There's no arguing your way out of that one. This also applies if, in the four years before filing, the debtor did things like divisional mergers that messed with their financial health, or transferred significant assets to an insider that could be clawed back in bankruptcy.

For a regular person, this means the bill is trying to stop big corporations from using bankruptcy as a chess move to avoid paying what they owe or to drag out lawsuits. It's aiming to make sure bankruptcy is used for genuine financial distress, not as a legal loophole. However, for a company genuinely trying to reorganize after a complex corporate restructuring, these broad definitions could create new legal hurdles and scrutiny.

Lawsuits Can Keep Rolling: A New Twist on the Automatic Stay

Normally, when a company files for bankruptcy, an "automatic stay" kicks in. This is like a pause button on most lawsuits and collection efforts against them. It's supposed to give the debtor breathing room. But this bill creates a new exception, specifically in Section 362(b)(27) of the U.S. Bankruptcy Code.

This new rule says that certain lawsuits can continue even during bankruptcy, especially if they're against an entity that's not the debtor (a "nondebtor entity"). This applies if, in the four years before bankruptcy, the debtor was involved in a corporate restructuring (like a merger or spinoff) that changed its financial situation. The claim has to be a "protected claim," which includes two main types:

• Type A: Claims against a nondebtor entity that's connected to the debtor (like an owner, manager, insurer, or someone involved in a corporate restructuring) and is alleged to be liable for a claim against the debtor.
• Type B: Claims against the debtor or a nondebtor entity related to injury, contamination, damage, or loss that affects at least 100 individuals and is caused by a product or substance the debtor or related entity made, sold, or used. Think widespread environmental damage or product liability cases.

What this means in plain English: if a big company tries to use a corporate restructuring to shed liability for, say, a faulty product that harmed a lot of people, this new rule makes it harder for them to hide behind bankruptcy. Lawsuits against related entities could keep moving forward. For the average person affected by such a situation, this could be a significant win, potentially speeding up justice and compensation. However, for the companies themselves, it means less protection during a bankruptcy filing, potentially complicating efforts to stabilize and reorganize.

What Does This Mean for You?

This bill is a strong push towards greater corporate accountability in bankruptcy. It aims to prevent companies from using the system to avoid legitimate debts or responsibilities, especially after complex corporate maneuvers. While it could make the Chapter 11 path tougher for some debtors, particularly those who've engaged in certain restructurings, it also offers more avenues for creditors and individuals to seek justice, especially in cases of widespread harm. It's about making sure that bankruptcy is a tool for genuine financial recovery, not a shield for bad actors.