Key Takeaways

• Subchapter V is built for businesses and owners with $3,424,000 or less in debt who want to keep operating.
• Traditional Chapter 11 has no debt limit, but it costs more and gives creditors more power.
• Chapter 7 closes the business. A corporation or LLC does not receive a discharge in Chapter 7, and the owner’s personal guarantees remain.
• Chapter 13 is available only to individuals, including sole proprietors, within its debt limits.

Subchapter V of Chapter 11

• Who can file: a business or individual engaged in business with $3,424,000 or less in noncontingent, liquidated debt, at least half of it business debt.
• Who runs the business: the owner, as debtor in possession. A Subchapter V trustee monitors the case and helps the parties reach a plan.
• The plan: only the debtor may file one, and it is due in 90 days.
• Creditors: no creditors’ committee and no disclosure statement unless the court orders otherwise.
• Ownership: owners can keep the business without paying unsecured creditors in full, by committing projected disposable income for three to five years.
• Government fees: the filing fee is $1,738. No quarterly U.S. Trustee fees.

Traditional Chapter 11

• Who can file: almost any business or individual. There is no debt limit.
• Who runs the business: the owner, as debtor in possession, under the oversight of the U.S. Trustee.
• The plan: the debtor has an exclusive period to file a plan. After it ends, creditors may file their own.
• Creditors: a creditors’ committee may be appointed, and a court-approved disclosure statement is normally required before creditors vote.
• Ownership: under the absolute priority rule, owners generally cannot keep their ownership over the objection of unsecured creditors unless those creditors are paid in full or the owners contribute new value.
• Government fees: the filing fee is $1,738, plus quarterly U.S. Trustee fees based on the money the business pays out.

Chapter 7

• What happens: the business stops operating. A trustee sells the assets and pays creditors in the order the law sets.
• Discharge: only individuals receive a Chapter 7 discharge. A corporation or LLC does not. Its debts are not wiped out; the company is simply left with no assets.
• Owner’s exposure: personal guarantees survive. Creditors can pursue the owner after the company closes unless the owner files his or her own case.
• When it fits: the business cannot be made profitable, and an orderly shutdown under court supervision is better than a race among creditors.

Chapter 13 for a sole proprietor

• Who can file: individuals with regular income whose unsecured debts are under $526,700 and whose secured debts are under $1,580,125. A corporation or LLC cannot file Chapter 13.
• What it does: a three-to-five-year payment plan that can cure mortgage arrears and pay taxes over time while the owner keeps operating.
• Limits: the debt limits are low for a business, and a Chapter 13 trustee receives a percentage of plan payments.

How to choose

Start with three questions.

• Can the business make money once the debt is restructured? If not, reorganization only delays the result, and Chapter 7 or an out-of-court wind-down may be the better course.
• How much is owed, and to whom? Debt of $3,424,000 or less points to Subchapter V. More than that points to traditional Chapter 11.
• What has the owner signed personally? Guarantees, SBA loans and merchant cash advances often decide whether the owner must file too.

The answers usually narrow the choice to one chapter. The numbers confirm it.

Frequently Asked Questions

Is Subchapter V always cheaper than traditional Chapter 11?

In almost every case, yes. There is no creditors’ committee to pay for, no disclosure statement to prepare and no quarterly U.S. Trustee fees, and the case moves faster.

If my LLC files Chapter 7, am I personally protected?

Not from debts you guaranteed. The company’s Chapter 7 does not discharge your personal guarantees. Whether you need your own filing depends on what you signed.

Can I convert from one chapter to another?

Often, yes. A Chapter 11 case can be converted to Chapter 7, and a debtor who qualifies can amend the petition to elect Subchapter V. Conversion has consequences, so it should be planned and not forced by a missed deadline.

Can a business reorganize without bankruptcy?

Sometimes. A workout with the main lender or a negotiated settlement with a few large creditors can work when the creditors are few and cooperative. It does not stop lawsuits or bind creditors who refuse.

Get a straight answer

Send a list of what the business owes, what it owns and what you have signed personally to msiddons@siddonslaw.com. We will tell you which chapter fits and why.