Commercial Chapter 11 filings rose 11% to 6,560 in the first nine months of 2026, and Subchapter V elections, the small-business track, rose 46% to 2,442, according to Epiq AACER and the American Bankruptcy Institute. Warning signs typically show in the financials well before creditors take protective action.
The client’s CPA is often the first professional to see them. The CPA works with the bank statements, the payroll tax filings and the vendor and loan statements, and for some clients sees the lender’s compliance certificate. Management tends to read the same signs as temporary, because the most important ones appear while the company still looks healthy.
The going-concern guidance lists related conditions among its examples: recurring operating losses, default on loans and the denial of usual trade credit from suppliers (ASC 205-40-55-2). The practical question is what to do with them while options remain.
Four signals in the client’s records
Four signals tend to appear in the client’s records months before a filing. None of them needs clean books, and most show up in documents the CPA already holds.
| Signal | Where the CPA sees it | What it indicates |
| Late or partial payroll tax deposits | Deposit records, IRS notices, payroll reconciliations | Withheld taxes are being used as working capital |
| Stretched payables | Payables aging, vendor statements, credit holds, cash-in-advance demands | Suppliers are financing the company |
| Merchant cash advances | Bank statements: a large deposit, then fixed daily or weekly debits to a funder; new UCC filings | Costly short-term cash; repeat advances suggest operations cannot repay them |
| Repeated covenant waivers | Compliance certificates, loan amendments, more frequent lender reporting | Less room in each new negotiation with the lender |
The bank data is a signal in its own right. In a study of bank borrowers, credit line usage, limit violations and cash inflows showed abnormal patterns about 12 months before default.
A three-step early warning system
Turning a signal into a decision takes three things: readings that can be trusted, a short list of numbers with thresholds set in advance, and alert levels that tie each reading to an action. The CPA can help management set up all three; management owns the thresholds and the decisions. For attest clients these are nonattest services, so management also designates an individual with suitable skill, knowledge and experience to oversee them.
Step 1: Readings that can be trusted
Weak books limit which readings can be trusted; they do not rule out the system. If the books are reconciled and closed within 30 days of month-end, every metric in Step 2 works. If they are not, metrics 3 to 6 still work: past-due payments come from vendor, loan and card statements, and the 13-week cash forecast from bank and card statements and tax deposit records, while the books are fixed in parallel. The CPA is usually best placed to say which case applies.
The 13-week cash forecast is the core instrument at every level of book quality. It is updated weekly against actual results, in a base and a downside case, and shows when each obligation falls due, including payroll taxes, rent and automatic card payments.
Step 2: A short set of tracked metrics
What matters is choosing the right indicators, not tracking many. Six are enough, each with a threshold agreed in advance:
| Metric | Threshold | Clean books needed? |
| 1. Operating profit trend | Last 12 months below the prior year | Yes |
| 2. Days to collect and days of inventory | Above last year and the industry median two months running | Yes |
| 3. Payments past due | Suppliers over 15 days late two months in a row; any loan or card payment 30+ days past due | No |
| 4. Debt payments covered | Cash and unused credit below 1.2 times the debt payments due in the next six months, or a credit line over 90% drawn | No |
| 5. Weeks of cash | Under 13 weeks, from the 13-week cash forecast | No |
| 6. Forecast variance | Over the last four weeks, collections below 90% or spending above 110% of forecast | No |
Step 3: Alert levels set in advance
Five levels, agreed in advance with the CEO and the board, tie each reading to a response:
| Level | Triggered by | Response |
| 5. Normal | Books current; all six metrics inside thresholds | Monthly review within 30 days of month-end |
| 4. Watch | Books late or unreliable; metric 1 or 2 beyond threshold; loss of a key customer | Find the operating cause; fix the books |
| 3. Alert | Under 13 weeks of cash on the downside case; metric 3, 4 or 6 beyond threshold | Weekly cash meeting; freeze discretionary spending and hiring; contact lenders before any breach |
| 2. Danger | Under 13 weeks of cash on the base case; coverage below 1.0; a loan payment 90 days past due; a supplier credit hold, loan breach or judgment | Daily cash control; out-of-court and Chapter 11 options prepared; restructuring counsel retained |
| 1. Critical | Under 4 weeks of cash; payroll or payroll taxes unfunded; a levy on the operating account; a forbearance with a sale or filing date | Filing or sale options ready with counsel |
Because the tests are set in advance, management does not grade itself, and the CPA reports a reading rather than a verdict. At Levels 3 to 1, the CPA documents each reading, and at Level 2 recommends restructuring counsel in writing. The company moves to a less severe level one step at a time, only after the trigger has been fixed and has stayed clear for three months. A promised fix does not count; a signed waiver, paid arrears or closed funding does.
When to bring in restructuring counsel
At Level 2 (Danger) at the latest. The company is close to default, and each week narrows the options in and out of court. Lenders often offer forbearance before enforcing a breach; its milestones set the company’s timetable. Counsel engaged before those milestones are written has more to work with.
Until counsel is engaged, three steps keep the position from getting worse:
- Keep payroll tax deposits current. Unpaid withheld taxes can become a personal liability for the individuals responsible for paying them; raise any gap with management in writing.
- Avoid new merchant cash advances. A new advance at Level 2 or 1 adds daily debits to a company already short of cash.
- Have the financial data ready. A case moves faster when the bank statements, tax returns, receivable and payable agings, and loan documents are already assembled; The Chapter 11 Pre-Filing Data Package sets out what that package contains.
Counsel advises on whether and when to file, and on the options short of filing.
An early warning system will not prevent every filing. It buys what most distressed companies run out of: time to choose. The CPA, who sees the records first, is often the professional best placed to raise the first flag.
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Carlos Flores is a turnaround manager and fractional CFO with CFO Fractional. He serves as financial advisor to the debtor or chief restructuring officer in small and mid-sized Chapter 11 cases.
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