Small Business Chapter 11 Bankruptcy: Subchapter V Explained

Chapter 11 bankruptcy lets businesses restructure their debts and continue to operate. The process can relieve financial pressure on a business and allow it to thrive again. A Chapter 11 filing can prove too complex and expensive for many small business owners. Congress moved to provide relief in 2019.

An important piece of legislation added an amendment to Chapter 11 bankruptcy. This new law makes restructuring easier and more available to small businesses. Subchapter V streamlines the bankruptcy process. It accelerates deadlines, lowers fees, and speeds up the confirmation process of the restructuring plan. This guide explains how small business Chapter 11 bankruptcy law works under Subchapter V and whether your business qualifies.

What Are the Types of Business Bankruptcy?

Business owners considering bankruptcy can file under one of two chapters. Each offers different benefits to business owners:

• Chapter 7: This is a liquidation bankruptcy for businesses that are no longer profitable. Under a U.S. trustee, you must sell all your business assets to pay creditors and close the business. In return, you will be generally debt-free.
• Chapter 11: This is a reorganization bankruptcy in which you can force creditors to negotiate payment plans while your business remains operational. This lets you repay most of your secured debts while continuing to run the business. The court may discharge some of your unsecured debt.

Both types of bankruptcy offer an automatic stay to protect you from creditors. This is often the most significant benefit of filing for bankruptcy. The automatic stay keeps creditors from collecting and will stop most court actions against you.

The Small Business Reorganization Act of 2019

Congress enacted the Small Business Reorganization Act of 2019 (SBRA). The SBRA added Subchapter V, also called Subchapter 5, to Chapter 11 of the U.S. Bankruptcy Code. Subchapter V makes the reorganization bankruptcy process more accessible to small businesses after going into effect in 2020.

Subchapter V bankruptcy cases are less expensive and time-consuming than Chapter 11 bankruptcy. They give viable small businesses with trouble paying their obligations a simplified process for reducing their debt.

Businesses that file Subchapter V can force creditors to accept court-approved repayment plans. The repayment period and plan of reorganization lasts three to five years. Businesses can also use the plan to shed some of their unsecured debt. Unsecured debt is money owed without any offered collateral, like most credit card debt. Secured debts include a mortgage or car loan, as the creditor or lender can seize your house or car if you don’t pay as required.

Within the first 60 days of filing this petition, there will be a status conference before the court. The small business debtor must submit a consensual plan for bankruptcy. It must detail efforts to treat creditors fairly and pay down debts.

How Subchapter V Helps Small Businesses

Subchapter V is a simplified version of a traditional Chapter 11. It provides smaller businesses a faster, less expensive way to reorganize their debt payment. Where a traditional Chapter 11 can cost upward of $100K, take several years, and require the negotiation efforts of skilled bankruptcy lawyers, subchapter V eliminates most of those in favor of a quick resolution.

Chapter 11 vs. Subchapter V

Subchapter V saves small businesses time and money by abandoning the creditors’ committee. In some cases, a Section 341 Meeting of Creditors may be required. The debtor must file a reorganization plan within 90 days of filing their petition. Although creditors may challenge the debtor’s plan, the court can force them to accept it if it is “fair and equitable.” This process is called “cramdown.”

Debtors may keep equity in the company without paying off unsecured creditors if the plan dedicates three to five years of projected disposable income to the creditors equally. A small business may still be a Chapter 11 debtor if their debt burden exceeds the limit of $3.42 million.

Benefits of Subchapter V Bankruptcy

Filing a small business bankruptcy under Subchapter V of Chapter 11 offers the following benefits:

• Continued business operations: You are the “debtor in possession” of your business. This means you will continue to own and run your business if you stick to the payment plan. You must also pay your unsecured creditors with your disposable income while the plan is in place.
• No creditor approval: If the bankruptcy court finds your reorganization plan fair, it can confirm it without approval. No creditors committee needs to meet. A traditional Chapter 11 plan requires creditor approval, which is time-consuming.
• No absolute priority rule: The absolute priority rule does not apply to Subchapter V bankruptcy cases. This rule says that higher-priority creditors get paid in full before lesser creditors. The absence of this rule makes the process easier. The court must make your plan payments fair and equitable.
• Only your business can file a plan: In other Chapter 11 cases, any party in interest, like a creditor, can submit a plan on your behalf. In Subchapter V, only the individual debtor can submit one.
• No disclosure needed: In Chapter 11 cases, you must file a detailed disclosure statement with the court. The statement provides a breakdown of your business, assets, and liabilities and if you can repay your creditors. A Subchapter V case doesn’t need a disclosure statement and has reduced reporting requirements.
• Special trustee: You will continue operating your business in bankruptcy. The court designates a Subchapter V trustee to oversee the debtor’s business and operations. The trustee makes recommendations to the court about confirming the reorganization plan.
• Expenses paid in installments: In a Chapter 11 case, you must pay all administrative expenses when the plan becomes effective. Subchapter V allows you to pay the costs over the plan’s length.

If these seem somewhat complex, it’s because filing Subchapter V is not simple. Consider speaking with a bankruptcy attorney if a filing seems unavoidable.

Who Can Claim Subchapter V Bankruptcy?

To qualify for a Subchapter V bankruptcy, a business must engage in commercial business activity and meet a noncontingent debt limit. The CARES Act of 2020 raised the debt limit to $7.5 million, but that expired in 2024. The current amount, adjusted for inflation, is about $3.42 million. Legislation currently before Congress would set the limit permanently at $7.5 million for both secured and unsecured debt. The higher limit would allow more small business cases to qualify for Subchapter V reorganization.

In its current form, Subchapter V excludes single-asset real estate debtors. Single-asset real estate is one whose primary activity is owning and running a single property. Debts may not include those owed to company insiders. At least 50% of the business debt must be owed to outside creditors.

Creditors Still Have Protections

Subchapter V made filing for a reorganization bankruptcy easier for small businesses. Creditors still have the following Chapter 11 protections:

• The reorganization must offer creditors at least what they would have received had you filed under Chapter 7
• Secured creditors may keep their rights to the property they put up as collateral
• Secured creditors can protect their collateral and seek relief from the automatic stay

Creditors may use these rights to force you to give them better treatment under your plan.

Is Your Small Business Eligible for Subchapter V?

If your small business has too much debt burden, you may qualify for a Subchapter V reorganization instead of the more costly Chapter 11. You should talk to a bankruptcy lawyer or accountant, but you can also do your own financial review. Ask yourself these questions:

• Are you a profitable commercial business? If you can remain in operation, you can file a Subchapter V and attempt to repay your creditors.
• Are you a privately held company? Publicly traded businesses cannot file Subchapter V.
• Is your debt below the current federal limit? If your debt exceeds the amount, you must file a traditional Chapter 11.
• Is at least 50% of your debt owed to outside creditors? At least half your debt must be commercial debt.

Sole proprietorships, partnerships, and privately-held corporations can all qualify for Subchapter V. Independent contractors can qualify if their debts meet the threshold amount.

A Bankruptcy Attorney Can Help

Subchapter V simplified Chapter 11 filing for small businesses, but it is still a complex process. A skilled attorney can walk you through each bankruptcy filing step to ensure the best possible result. Working with an experienced bankruptcy attorney near you can offer you guidance and work to protect your assets.