Small Business Bankruptcy Has Changed — Subchapter V Made It Accessible

Before 2020, Chapter 11 bankruptcy was often too expensive and too complex for small businesses. The legal fees alone could run $50,000 to $100,000 or more, the process could drag on for years, and small business owners frequently lost control of their companies to creditor committees and court-appointed trustees.

The Small Business Reorganization Act (SBRA) of 2019 changed everything by creating Subchapter V of Chapter 11 — a faster, cheaper, and more owner-friendly reorganization pathway. Since taking effect on February 19, 2020, Subchapter V has transformed small business bankruptcy, allowing business owners to restructure their debts and keep their businesses alive.

At the Siddons Law Firm, we represent small business owners throughout Pennsylvania, New Jersey, New York, and Maryland in Subchapter V cases. With an LL.M. in Taxation and decades of bankruptcy experience, Attorney Michael Siddons brings the financial sophistication these cases require.

Who Qualifies for Subchapter V?

To elect Subchapter V, your business must meet these requirements:

✅ You are engaged in commercial or business activities. This includes corporations, LLCs, partnerships, and sole proprietors. It can also include individuals whose debts are primarily business debts.

✅ Your total debts do not exceed $3,424,000. As of April 1, 2025, the debt limit was adjusted to $3,424,000. This includes both secured and unsecured debts but excludes debts owed to affiliates or insiders. Note: Congress has proposed raising this limit to $7.5 million, and legislation may be enacted in 2026.

✅ At least 50% of your debts arose from business activities. This prevents individuals from using Subchapter V for primarily consumer debts.

✅ You are not a single asset real estate debtor (with some exceptions) or a company whose primary activity is operating a public company.

Key Advantages of Subchapter V Over Traditional Chapter 11

1. The Business Owner Stays in Control

In traditional Chapter 11, unsecured creditor committees can exert significant influence over business decisions, and in some cases a Chapter 11 trustee can be appointed to take over operations entirely. In Subchapter V, there is no unsecured creditors’ committee (unless the court orders one for cause), and a Sub-V trustee serves in an advisory role rather than a controlling one. You continue running your business as debtor-in-possession.

2. You Keep Your Business — No Absolute Priority Rule

This is the single biggest advantage. Traditional Chapter 11 requires compliance with the “absolute priority rule,” which means equity holders (the business owners) cannot retain their ownership interest unless all unsecured creditors are paid in full. Subchapter V eliminates the absolute priority rule, allowing business owners to keep their equity even when unsecured creditors receive less than full payment — as long as the plan is “fair and equitable” and commits all projected disposable income to the plan.

3. Dramatically Lower Costs

Without a creditors’ committee (whose professionals’ fees the debtor must pay), without the need for a disclosure statement, and with a streamlined plan process, Sub-V cases cost a fraction of traditional Chapter 11. Where a traditional Chapter 11 might cost $50,000-$150,000+ in professional fees, a Sub-V case can often be completed for significantly less.

4. Faster Resolution

The debtor must file a plan within 90 days of the petition date (extensions are possible for cause). There is no requirement to prepare and seek approval of a separate disclosure statement — the plan itself contains adequate information. Many Sub-V cases confirm a plan within 6-12 months, compared to 1-3 years for traditional Chapter 11.

5. Consensual and Non-Consensual Plan Options

If creditors accept the plan, it is confirmed as a consensual plan. If creditors reject it, the debtor can still confirm the plan as a non-consensual (cramdown) plan by committing all projected disposable income over a 3-5 year period. This gives the debtor significant leverage in negotiations.

6. Simplified Administrative Requirements

Sub-V debtors are not required to pay quarterly U.S. Trustee fees (which can be substantial in larger cases), further reducing the cost of reorganization.

How a Subchapter V Case Works: Step by Step

Step 1: Filing the Petition and Electing Sub-V. The business files a Chapter 11 petition and designates itself as a small business debtor electing Subchapter V treatment. The automatic stay immediately takes effect, stopping all collection activity, lawsuits, and creditor actions.

Step 2: Sub-V Trustee Appointment. The U.S. Trustee appoints a Sub-V trustee within days of filing. Unlike a traditional Chapter 11 trustee, the Sub-V trustee does not take control of the business. Instead, they facilitate negotiations between the debtor and creditors, help develop a consensual plan, and ensure the debtor complies with reporting requirements.

Step 3: Status Conference. The court holds a status conference within 60 days of filing to assess the debtor’s progress and set the case timeline.

Step 4: Plan Filing. The debtor must file a plan within 90 days (or longer with court approval). Only the debtor can file a plan — creditors cannot propose competing plans.

Step 5: Plan Confirmation. The court holds a confirmation hearing. If the plan meets the statutory requirements (feasibility, good faith, best interests of creditors), it is confirmed. The debtor then makes plan payments over the plan term.

Step 6: Discharge. In a consensual plan, the discharge occurs upon plan confirmation. In a non-consensual plan, the discharge occurs after all plan payments are completed (3-5 years).

What Types of Businesses Use Subchapter V?

Sub-V has been used successfully by a wide range of small businesses, including:

🔹 Restaurants, bars, and hospitality businesses

🔹 Medical and dental practices

🔹 Construction companies and contractors

🔹 Retail stores and e-commerce businesses

🔹 Professional services firms (law firms, accounting firms, consulting)

🔹 Manufacturing and distribution companies

🔹 Real estate investors and property management companies

🔹 Technology startups

🔹 Trucking and transportation companies

🔹 Franchise operators

Subchapter V vs. Chapter 7 and Chapter 13

Frequently Asked Questions — Subchapter V

Can I file Subchapter V as a sole proprietor?

Yes. Sole proprietors whose debts are primarily business debts can elect Subchapter V treatment. This can be advantageous over Chapter 13 because Sub-V has a higher debt limit, no absolute priority rule, and allows more flexibility in plan terms. Individual debtors in Sub-V also benefit from the broader discharge provisions.

What happens to my employees during a Subchapter V case?

Your business continues operating normally. Employees keep their jobs, and through first day motions, the court typically authorizes continued payment of wages, salaries, health benefits, and other employee obligations without interruption.

Can Subchapter V help with commercial lease disputes?

Yes. Sub-V gives you the power to assume (keep) or reject (walk away from) commercial leases. If a lease is above-market, you can reject it and relocate. If you want to keep the lease, you can cure defaults through your plan. You have up to 120 days after filing (extendable to 210 days) to decide.

What is the role of the Sub-V trustee?

The Sub-V trustee facilitates the case but does not take control of your business. Their primary functions are to: facilitate negotiations between the debtor and creditors, appear at court hearings, ensure the debtor complies with filing requirements, and make recommendations to the court regarding plan confirmation. Many Sub-V trustees are experienced restructuring professionals who can be valuable resources during the reorganization.

How much does a Subchapter V case cost?

Costs vary depending on the complexity of the case, but Sub-V cases are dramatically less expensive than traditional Chapter 11. Without a creditors’ committee, without disclosure statement requirements, and without quarterly U.S. Trustee fees, the total professional fees are often a fraction of a traditional Chapter 11 case. We provide detailed fee estimates during the initial consultation.

Related Resources

• First Day Motions in Chapter 11 Bankruptcy
• Chapter 7 vs Chapter 13: Which Is Right for You?
• Complete Guide to Filing Bankruptcy in PA
• Bankruptcy FAQ
• Bankruptcy Basics

This communication is from a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.