If you’re a business owner struggling with debt, it’s likely you’ve heard about Subchapter V of Chapter 11 bankruptcy being dubbed the “small business” bankruptcy. Not everyone can use Subchapter V though. The first question one has to ask is “How much debt do I owe?” As of January 1, 2026, the current debt limit for Subchapter V is $3,424,000.
Small Business Debtor
Subchapter V is only available to a small business debtor. Section 101(51D) defines a small business debtor as a person engaged in commercial or business activities that has aggregate noncontingent liquidated secured and unsecured debts, as of the date of the filing of the petition or the order for relief, of not more than the debt limit, excluding debts owed to affiliates or insiders, not less than 50 percent of which arose from the commercial or business activities of the debtor. In other words, the amount of that debt is the key.
They don’t look at every dollar you owe. There are three rules here worth noting.
- First, we look at what the company owes on the day the petition is filed (or the day the order for relief is entered).
- Second, we don’t count debts owed to affiliates or insiders.
- Third, at least half of the debt has to have been incurred in the debtor’s commercial or business activities.
That $3,424,000 figure isn’t fixed, either. It was originally $2 million, but that number goes up every year with inflation. Adjustments usually happen every April 1. Congress is looking at an amendment that would bump it up to $7.5 million right away. We had a $7.5 million limit temporarily during COVID, and there’s a lot of support to make that permanent. For a business that owes somewhere between $3,424,000 and $7.5 million, that pending change matters a great deal. If those debt limits rise, it means more businesses might qualify for Subchapter V.
If your business’ total debt is under $3.424 million, you’re probably covered, as long as it meets the other requirements for a Chapter 11 business bankruptcy. Of course, not everyone. The small business debtor definition excludes members of groups of affiliated businesses whose aggregate noncontingent liquidated secured and unsecured debts exceed $3,424,000 (other than debt owed to an affiliate or insider). It also excludes any corporation subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 and their affiliates.
Propose a Plan of Reorganization
Qualifying is only the first hurdle. If you go Subchapter V, you get to propose a plan of reorganization - but you have to, too. You don’t have to file it along with your petition, but you do have to file it within 90 days of the initial filing. Practically speaking, you should be ready to propose a plan before you file and, at the very least, know that you can file it within 90 days of filing. If you need to file immediately without a plan, say, to get the benefit of the automatic stay on collection, you should be prepared to make working with bankruptcy counsel to meet the 90-day deadline your top priority.
Just sending a plan that says, “I want to pay everyone back” doesn’t cut it. For a plan to qualify, it has to work in real life. It needs to be feasible. Under the Bankruptcy Code, that means the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor under the plan, unless the plan itself proposes it. Judges don’t want to confirm a plan just to have the company collapse again. Feasibility is going to depend on your specific business situation, so you have to partner closely with your lawyer on this one.
Think long-term. Would restructuring your debt under Subchapter V help you actually meet your business goals? This is a good tool, but it won’t work in every situation. When you are facing multiple creditors and the clock is ticking, it is easy to want an immediate fix. Sometimes, a reorganization does not make sense.
There is more than one way to restructure a business in financial trouble. You could ask for a loan extension, a lower interest rate, reduced monthly payments, a deferred payment, more time to pay, or simply more time to negotiate a settlement. Some creditors are willing to work with you; others may not be. Whichever route you take, start with the numbers: know what you owe, who you owe it to, and whether your business falls under the Subchapter V limit before you decide.
