Most business owners who call our office about Chapter 11 start with one of two sentences: “I don’t want to close” or “I don’t want to lose my business.” The business has customers and employees who rely on it. What it does not have is enough cash to satisfy a lender, a lawsuit, a landlord, and the taxing agencies all at once.
Subchapter V of Chapter 11 was written for that situation. Available since 2020, it gives a small business a way to stop collection, keep operating under its current owners, and repay creditors over three to five years out of what the business actually earns. It is still a federal court case, with firm deadlines and real obligations. But it is a case a small business can afford to file and can realistically finish.
This article follows a Subchapter V case in the order it progresses. Cases from our area are filed in the United States Bankruptcy Court for the Central District of California.
Who Can Use Subchapter V
Subchapter V is an election the debtor makes on the petition. It is available to a debtor that meets four conditions.
- It is engaged in business. The debtor may be a corporation, an LLC, a partnership, or an individual.
- Its debts are within the limit. For cases filed today the limit is $3,424,000, not counting debts owed to insiders and affiliates. Congress has recently passed a bill raising it to $7,500,000, which takes effect once signed into law.
- At least half of that debt came from the business.
- It is not excluded. A business that only owns a single real estate project cannot use Subchapter V. Neither can a publicly traded company.
Individuals qualify more often than they expect. A sole proprietor, or an owner whose debt consists mostly of personal guarantees of business loans, may be eligible.
Before Filing
Deciding whether to file, and making sure the business can survive its own first month in court.
The outcome of a Subchapter V case is largely settled before it is filed. Once the petition is on the docket the plan is due in 90 days, and the court does not extend that deadline because the debtor was unprepared. The real work starts weeks earlier, beginning with getting the business’s bookkeeping and financial statements up to date.
An honest look at the business
Subchapter V repairs a balance sheet. It does not repair a business that loses money on every sale. We start with one to two years of financial statements and ask a single question: if collection stopped tomorrow and the debt were stretched out and reduced, would this business produce more cash than it spends? If the answer is no, a different conversation is more useful, and we would rather have it at the start.
A map of the debt
Next we lay out every obligation and who holds it: bank and SBA loans, merchant cash advances (MCAs), equipment financing, the lease, payroll and sales taxes, lawsuits, and every debt the owner has personally guaranteed. Knowing which of those debts are secured by collateral and which are not drives the entire plan.
Cash on day one
This is the point that surprises owners most. If a lender has a lien on the business’s receivables and bank accounts, that money is the lender’s “cash collateral.” After filing, the business may not spend it without the lender’s agreement or a court order. We prepare the motion and a week-by-week budget before filing so the request can be heard within days.
- Do not repay loans from relatives, partners, or your own shareholder account. Payments to insiders within a year before filing can be undone.
- Do not move assets out of the business, or single out one creditor for a large catch-up payment.
- Do not let insurance lapse or stop depositing payroll taxes.
Who files, and when
Two decisions close out this stage. The first is who files: the company, the owner, or both. The second is timing. A filing date is chosen around events such as a bank levy, a trial date, a foreclosure sale, the payroll cycle, and the lease.
Filing and the First 30 Days
Stopping collection, keeping the doors open, and establishing credibility with the court.
The automatic stay
The moment the petition is filed, a federal injunction takes effect. Lawsuits against the business are frozen. Levies, garnishments, foreclosures, and repossessions stop. The stay is the breathing room the rest of the case is built on.
The owner stays in charge
No one is sent in to take over. The business continues under its existing management as a “debtor in possession,” with the duties of a fiduciary toward its creditors. That is the trade: the owner keeps control, and in exchange operates in the open.
First-day motions
In the first days we ask the court for the orders the business needs to function: permission to use cash collateral under the budget, authority to pay employees the wages they earned just before filing, and protection against utility shutoffs.
The Subchapter V trustee
A Subchapter V trustee is appointed in every case. This trustee does not run the business and does not sell its assets. The role is closer to a neutral financial professional who reviews the debtor’s finances and helps the debtor and its creditors reach an agreed plan. A cooperative relationship with the trustee is one of the most valuable assets in the case.
The meeting of creditors
A few weeks after filing, the owner testifies under oath at the meeting of creditors. The U.S. Trustee’s office, the Subchapter V trustee, and any creditor who attends may ask questions about the business and the reasons for filing. There is no judge at this meeting, and we prepare the owner for it in advance.
Operating under new rules
- Bills that arise after filing are paid on time. Debts from before filing are not paid, except as the court allows.
- Ordinary business continues without permission. Selling a major asset or taking a new loan needs court approval first.
- Banking moves to debtor-in-possession accounts, and a monthly operating report shows income, expenses, and bank activity.
- Taxes that come due after filing are paid on time.
Building the Plan
Turning the business’s real numbers into a repayment plan creditors and the court can accept.
The status conference
The court holds a status conference within 60 days of filing. Fourteen days before it, the debtor reports on its efforts to reach a plan that creditors agree to. A debtor that arrives with a draft plan and creditor discussions under way sets the tone for everything that follows.
Finding out what is really owed
Creditors file proofs of claim, and we review each one against the business’s records. Claims are often overstated by default interest, penalties, and fees, and MCA claims in particular deserve a close reading of the underlying agreement. Where a claim is wrong, we object, and the court decides the amount.
Leases and contracts
Bankruptcy lets a business choose which contracts to keep. A lease that still makes sense is assumed, which requires curing any default. One that has become a burden is rejected, and the other party is left with an unsecured claim. For a commercial lease the decision must be made within 120 days of filing unless the court extends the time.
Secured debt and taxes
A plan can restructure secured loans over a longer term and at a different interest rate. Where the collateral is worth less than the balance, the claim can in appropriate cases be divided into a secured portion and an unsecured portion. Most payroll and sales tax debt must be paid in full with interest, but the plan may spread it over a period ending five years after the filing date.
Subchapter V also contains a provision found nowhere else in Chapter 11. An individual owner who pledged the family home for a business loan may be able to modify that loan in the plan, provided the money was used primarily for the business and not to buy the home.
The plan itself
Only the debtor may file a plan. Creditors cannot file a competing one. The plan contains a brief history of the business, a liquidation analysis showing what creditors would receive if the business were shut down and sold, and projections showing that the business can make the payments it proposes. No separate disclosure statement is required unless the court orders one.
The projections are the center of the document. The plan commits the business’s projected disposable income, meaning what is left after the expenses reasonably needed to keep operating, for three to five years. We build those numbers with the owner and the business’s accountant, line by line, from actual operating history.
Confirmation
Getting the court’s approval, which makes the plan binding on every creditor.
After the plan is filed, the court sets the dates for creditors to vote, to object, and for the confirmation hearing. During that period we negotiate. Most objections are resolved by adjusting a payment term, not by litigation.
Two ways to confirm
A plan is confirmed as consensual when every class of creditors whose rights are changed votes to accept it. If a class votes no, the court can still confirm the plan as nonconsensual when it is fair and equitable. In substance that means:
- all of the business’s projected disposable income for three to five years goes to plan payments;
- there is a reasonable likelihood the business can make those payments, with remedies for creditors if it does not; and
- each creditor receives at least what it would receive in a Chapter 7 liquidation.
In a traditional Chapter 11, 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. That rule does not apply in Subchapter V. If the plan meets the tests above, the owners may keep their interests even though unsecured creditors receive only part of what they are owed.
Why the two paths differ
| Topic | Consensual plan | Nonconsensual plan |
|---|---|---|
| Discharge | Granted when the plan is confirmed. | Granted after three to five years of plan payments are completed. |
| Who sends the payments | The business pays creditors directly. | The trustee makes the payments unless the plan or the court provides otherwise. |
| Trustee’s role | Ends once the plan is substantially under way. | Continues through the life of the plan. |
A consensual plan is usually the better result. But the nonconsensual path is what gives the debtor its leverage. A creditor that knows the court can approve the plan without its vote has a reason to come to terms.
The hearing
At the confirmation hearing the owner should expect to testify about the projections and how the business will meet them. When the court signs the confirmation order, the plan replaces the old obligations.
After Confirmation
Performing the plan, earning the discharge, and closing the case.
The plan takes effect shortly after confirmation, and payments begin. From this point the business is no longer managing a crisis. It is managing a budget.
Discharge
The discharge permanently eliminates the debts the plan does not require the business to pay. Some debts survive. For an individual debtor these include domestic support, certain taxes, debts obtained by fraud, and most student loans. Student loans can be discharged in a separate proceeding when repaying them would be an undue hardship, as explained in our student loan discharge guide.
If circumstances change
A three-to-five-year plan will meet events nobody projected. A plan can be modified after confirmation with court approval, and the time to ask is before a payment is missed. A business that simply stops paying faces the remedies written into its plan, and the case can be dismissed or converted to a Chapter 7 liquidation. A plan the business can actually perform is worth more than one that looked better on paper.
Closing the case
When the plan has been carried out, the court closes the case. The business continues, owned by the same people, without the debt that brought it into court.
Personal Guarantees
Nearly every small business loan, lease, and MCA carries the owner’s personal guarantee. When a corporation or LLC files, the automatic stay protects the company. It does not ordinarily stop a creditor from pursuing the owner on a guarantee, and the company’s discharge does not release the owner.
There are three ways to deal with that:
- The plan can pay the guaranteed debt in a way that gives the creditor a reason to leave the owner alone.
- The guarantee can be negotiated separately.
- The owner can file an individual case alongside the company’s.
We work through the choice before anything is filed.
When Subchapter V Is Not the Answer
Part of our job is to say so when another route is better.
- The business is not viable. A Chapter 7 case or an orderly wind-down protects the owner better than a reorganization that fails.
- The debt is over the limit. A traditional Chapter 11 remains available, at greater cost.
- The debtor is a sole proprietor with modest debt. Chapter 13 may accomplish the same thing more simply.
- The problem is one creditor. A negotiated workout or a defense of the lawsuit may resolve it without a bankruptcy filing.
What It Costs
The court’s filing fee for a Chapter 11 case is $1,738. Unlike other Chapter 11 debtors, a Subchapter V debtor does not pay quarterly fees to the United States Trustee.
The Subchapter V trustee is paid by the business as well. The trustee’s fees are based on the time the case requires, are reviewed and approved by the court, and are typically paid through the plan.
Attorney fees depend on the size of the business, the number of creditors, and how much is contested. The court approves the attorney’s employment and reviews the fees. We discuss the expected cost and the retainer at the first meeting, before any commitment is made.
- Business tax returns for the last two years
- A current balance sheet and profit-and-loss statement
- Six months of bank statements and a list of creditors with balances
- Loan documents, MCA agreements, and the lease
- Any lawsuit papers, levy notices, or tax agency notices
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.