Does My Small Business Qualify for Subchapter V Bankruptcy in 2026?

Small business owners who are struggling financially can consider filing bankruptcy under subchapter V. But not all businesses are eligible for this program. Subchapter V is a part of the United States Bankruptcy Code that offers a special procedure for small businesses that file for bankruptcy. It sits inside Chapter 11 and came from the Small Business Reorganization Act of 2019. Subchapter V was added to the Bankruptcy Code to provide a simpler and less expensive way for small businesses to reorganize their finances. Certain individuals can use it too. Sometimes you are eligible for Chapter 11, but not for Subchapter V.

It Can Be Faster and Cheaper

Why do owners want it? Compared with a traditional Chapter 11 case, it can be faster and cheaper. You must file the plan within 90 days of filing the case. There’s usually no creditors’ committee. There’s no disclosure statement. The debtor does not need creditor votes to confirm a plan in Subchapter V, as long as the plan is “fair and equitable.” You don’t have to pay U.S. Trustee quarterly fees. And Subchapter V may be less risky than a traditional Chapter 11. With a Subchapter V Plan, you are the only one that can propose a plan. In a traditional Chapter 11, the debtor, the Chapter 11 trustee, and even the creditors (after 120 days) can propose a plan.

Four Requirements

So who qualifies? The Bankruptcy Code is not crystal clear on eligibility, but generally, there are four requirements. OK, first up, you have to be a “person.” Next, your total debts at the time of filing can’t exceed $7.5 million. And then, you have to be “engaged in commercial or business activities.” Fourth and final, at least half of the debtor’s total debts must be attributed to commercial or business activities. But if none of your debts arose from your business, then Subchapter V is definitely not for you. As put by the court, Subchapter V isn’t for everyone - it’s designed for small business operators who want to resolve a debt incurred through a business.

However, just because the total debt is greater than $7.5 million, does not mean you don’t qualify. The cap counts only noncontingent and liquidated, secured or unsecured debts, owed as of the filing date. Debts to insiders or affiliates are out. Contingent debts (most often guaranties where the primary debtor is not in default) aren’t included. And unliquidated debts, like most tort claims, are also excluded. In other words, the debt cap may not be as absolute as you think.

Engaged in Commercial or Business Activities

Now, the “engaged in commercial or business activities” part is tricky. It isn’t really clear what this means: the Code doesn’t define the phrase, and courts decide it case by case. Plenty has been written about whether the guarantor of the business debts of an LLC or corporation is “engaged in commercial or business activities” for purposes of Subchapter V. And many owners want to know what happens if the company has already shut down.

Here’s a 2023 case from Judge Elizabeth Stong in New York, In re Fama-Chiarizia. The debtor, an individual, owned 25% of a construction company and was a co-obligor on a promissory note. When a supplier got a $3.3 million judgment against her, it contested her eligibility under Subchapter V. She hadn’t been involved with the company for several years, it was no longer in business, and her other debts were all consumer debts. The debtor argued that Subchapter V doesn’t require that a debtor be “actively” or “currently” in business; that her debt to the supplier was a business debt of the company because she had co-signed on the company note; and that profitability or being actively engaged in business isn’t dispositive. She also pointed out that on the day she filed, she was renting a studio apartment in her two-family home, dealing with this legacy debt, and pursuing counterclaims against her former business partners.

Judge Stong found her eligible. The subject date for eligibility is the day of filing for bankruptcy, not a date in the distant past. It is not necessary that there be a connection between the eligible debts and the current business activities. Otherwise, as another court warned, you might have meritorious small businesses barred from seeking relief based on their accumulated debts from their former businesses. So the lawsuit related to the shuttered business and the apartment rental were enough.

Not every court sees it this way. Several courts say that merely having residual business debt does not qualify a debtor. On the other side is In re Bonert, a California case. Co-debtors qualified for Subchapter V even though the commercial bakery they ran closed before the filing; most of the debtors’ liabilities were related to the business of running the bakery.

Judge Stong summed it up this way: The court can consider the totality of the circumstances, including the cause of the filing, the debtor’s business at the time of filing, and the debtor’s plan for handling its assets and debts in the bankruptcy. She also agreed with the substantial majority of courts that if you are cleaning up the remains of business debts and assets when you file, you still can be eligible. Even litigation can be considered as part of the business activity.

You may well qualify for Subchapter V even if your business has wound down. But the eligibility is an issue. At the end of the day, it’s a fact-specific determination. And the answers aren’t always the same. If you are a small business owner with business debts, but you don’t think you qualify for Subchapter V, don’t take it for granted. If you are even thinking of considering filing bankruptcy, you should run the eligibility question by a bankruptcy lawyer. In some cases, Subchapter V does make sense. But you may find that a Chapter 11 plan is preferable. Or you may decide that bankruptcy isn’t the best option for you after all.