How does Chapter 11 Subchapter V bankruptcy work for a small business?

February 19, 2020 was the official start date for Subchapter V of Chapter 11 of the bankruptcy code, which Congress enacted to give small businesses access to Chapter 11. Chapter 13 bankruptcy, by contrast, is only for individuals, who can’t have too much debt. It was about time. It was needed because regular Chapter 11 bankruptcy, the traditional variety, was expensive and difficult for small businesses. There were many businesses with no realistic way to reorganize their debts. Subchapter V is for individuals doing business, as well as small companies, and finally gives them a way to make it through Chapter 11.

The Small Business Reorganization Act of 2019 (the “SBRA”) established Subchapter V to streamline the reorganization process for “small business debtors.” There are so many reasons why the employees, suppliers, customers, and tax authorities that interact with these small businesses are better off when they succeed. When a business doesn’t liquidate, it keeps paying its employees, buying from its suppliers, servicing its customers, and paying taxes.

To be eligible, a business’s debts must be at least 50% from its business activity. Whether the individual guarantor and the business needs to be in operation at the time the bankruptcy is filed remains unsettled after the Wright case in South Carolina Bankruptcy Court on April 27, 2020. In Wright, the court held that neither the business debtor nor the individual guarantor needed to be engaged in business at the time of filing. This ruling might vary by jurisdiction. Unfortunately, “small business debtors” cannot include single asset real estate businesses. The debt limit was $2.7 million (with some exceptions). Then the CARES Act (March 27, 2020) increased the debt limit to $7.5 million, and Congress extended that higher limit until it expired on June 21, 2024. Since April 1, 2025 the limit has been $3,424,000; a bill to restore $7.5 million passed Congress in September 2026 and is awaiting the President’s signature. But make sure to look at your numbers.

A Much Simpler Process

Subchapter V, like traditional Chapter 11, is designed to confirm a plan of reorganization or liquidation. Sometimes, that is not what happens. Sometimes, the parties reach a settlement and the case is dismissed. But Subchapter V is a much simpler process than a traditional Chapter 11 bankruptcy. Basically, a business files, a trustee is appointed, a plan is proposed by the business, and then the court decides whether to confirm the plan.

What makes it cheaper? Among other things, there are no U.S. Trustee fees, no need for a committee, no need for disclosure statement, looser rules on retaining counsel and only the debtor files a plan. Because you are the only one that can propose a plan, you keep control over the way your business restructures. Unlike a traditional Chapter 11, creditors cannot file competing plans. In a Subchapter V case, business-related mortgages on the businessperson’s home can be modified. The absolute priority rule no longer prevents confirmation of a plan. This is probably the biggest change. All of these things will save money. And this is not a full list of the changes made to the bankruptcy code.

A trustee must be appointed in every Subchapter V case. Unlike a traditional Chapter 11 bankruptcy, the trustee is not there to run your business. The trustee is more of a built-in mediator. The trustee’s role will depend on what kind of a plan you file. You will continue to operate your business, and the trustee will help everyone reach an agreement.

Plans can be consensual or non-consensual. If it’s a consensual plan, the trustee will be finished with the plan once substantial consummation occurs, usually when payments begin. With a nonconsensual plan, the trustee remains involved through the end to make payments to creditors. But remember that you have to pay the trustee’s fees. So don’t overuse the trustee. If you reach an agreement with your creditors on a plan, the trustee will exit sooner, and you will save on fees. The fees, by the way, are usually modest, but how the role of the trustee evolves remains to be seen.

Fair and Equitable

Unlike a traditional Chapter 11 bankruptcy, the debtor’s plan can be confirmed even if all classes of creditors (whether secured or unsecured) reject it. A traditional Chapter 11 bankruptcy requires at least one class of impaired creditors to accept it. In Subchapter V, a plan must be “fair and equitable.” What this means in practice is that the creditors can vote against your plan, but if your plan is fair and equitable, the court can still confirm the plan. This is huge. Now that is an oversimplification. The analysis for fair and equitable is complicated and there is not enough space in this article to go over it all. It does mean you can’t have one creditor class stand in your way.

But what does “fair and equitable” mean? That the creditors get the greater of liquidation value or projected disposable income over three to five years. This might mean committing to paying income for three years or maybe as long as five. This raises a lot of questions. How is “income” defined? How long?

The SBRA defines “disposable income” as income not “reasonably necessary” to support the debtor and dependents or for the operation of the business. Generally, payroll, rent, marketing, supplies are considered “necessary.” In practice, then, it works like this: once reasonable expenses are paid, whatever you’re left with is your disposable income for creditors. But what about when there’s a dispute about whether the expenses are reasonable? For example, let’s say a business is paying its owner well above market. Its creditors may say that this extra pay is really disposable income that they should get. Until there is more case law, it’s possible that a stricter test will come.

Your Personal Guarantee

What about my personal guarantee? The debtor’s bankruptcy doesn’t eliminate your personal guarantee. If creditors need to collect more than the business pays them, they will come looking for you. The best thing to do is to file your own bankruptcy. The second best is to settle the debt. Settling the guaranteed debt with the creditor might resolve your personal liability without needing to file your own bankruptcy.

No matter what, you should retain a bankruptcy attorney to proceed with a Subchapter V. Individuals can sometimes pull off a Chapter 7 by being careful and lucky. It’s very rare for individuals to handle Chapter 13 or Chapter 11 themselves. Subchapter V is relatively new and a lot of it is unsettled, so retaining an experienced bankruptcy attorney matters even more than usual.