1. Who Can File for Subchapter 5 Bankruptcy?
A business and its owner may face the same financial crisis but need different bankruptcy strategies. Eligibility turns on the proposed debtor’s business activity, qualifying debts, and statutory exclusions. Ownership of a struggling company alone does not establish an individual’s eligibility.
Business Activity and Qualifying Debt
The applicable debt ceiling is $3,424,000 in aggregate noncontingent, liquidated secured and unsecured debt. This adjusted amount took effect April 1, 2025. Eligibility requires checking the threshold applicable when the case begins.
At least 50% of qualifying debt must arise from the debtor’s commercial or business activities. Debts owed to affiliates or insiders are excluded from the statutory calculation. A disputed debt does not automatically disappear from that calculation.
Single asset real estate debtors and certain publicly traded companies and affiliates are excluded. Related entities in bankruptcy can also affect eligibility. An attorney examines the debt schedule and entity structure before recommending a Subchapter V election.
Company Obligations and Personal Guarantees
An LLC’s loan does not automatically become its owner’s debt. A personal guarantee, however, may expose the owner to a separate collection claim. The company’s filing generally does not stay collection against a nonfiling guarantor.
Loan agreements, guarantees, and judgments identify who owes what. If the company or owner cannot qualify, a broader bankruptcy and restructuring assessment can address other available procedures.
2. Preparing a Filing That Can Support Continued Operations
A petition can pause many collection actions, but the business still needs cash for payroll, insurance, inventory, and other current expenses. Filing preparation should establish how operations will continue while the debtor develops a repayment plan.
Collection Deadlines and Access to Cash
The automatic stay generally halts covered collection actions against the debtor. Exceptions apply, and secured creditors can ask the court for permission to proceed against collateral.
Receipts may constitute cash collateral when a lender holds a lien on receivables or their proceeds. The debtor generally needs creditor consent or court authorization to use that cash. An attorney reviews the liens, negotiates operating budgets, and prepares necessary applications.
Financial Records and Pre-Filing Mistakes
The documents should support both eligibility and the proposed recovery strategy:
- Loan documents and debt schedules identify borrowers, guarantees, and collateral.
- Tax returns, financial statements, and bank records substantiate income and expenses.
- Receivables reports, leases, and forecasts show expected collections and operating needs.
Moving assets to relatives or repaying insiders before filing can create avoidance claims and disclosure problems. Preserve transaction records and review proposed transfers before acting. Incomplete books also make it harder to support projections within the short plan-filing deadline.
3. Developing and Confirming a Repayment Plan
The debtor proposes the plan and must support it with a liquidation analysis, financial projections, and legally sufficient creditor treatment. A workable proposal accounts for operating expenses and required payments without relying on unexplained revenue growth.
Choosing between Reorganization and Liquidation
A business reorganization review considers legal form, payment capacity, collateral, and the value of continued operations.
| Procedure | Eligible Debtor Types | Main Consideration |
|---|---|---|
| Chapter 7 | Individuals and eligible entities | Liquidation of nonexempt estate assets rather than a repayment plan |
| Chapter 13 | Qualifying individuals with regular income | Separate debt limits and a generally three-to-five-year repayment plan |
| Subchapter V | Qualifying business debtors, including individuals | Business-related eligibility and Chapter 11 plan confirmation |
Chapter 7
- Eligible Debtor TypesIndividuals and eligible entities
- Main ConsiderationLiquidation of nonexempt estate assets rather than a repayment plan
Chapter 13
- Eligible Debtor TypesQualifying individuals with regular income
- Main ConsiderationSeparate debt limits and a generally three-to-five-year repayment plan
Subchapter V
- Eligible Debtor TypesQualifying business debtors, including individuals
- Main ConsiderationBusiness-related eligibility and Chapter 11 plan confirmation
An LLC or corporation cannot file Chapter 13. For an individual, exceeding Chapter 13 limits does not itself establish Subchapter V eligibility.
Disposable Income and Payment Capacity
For nonconsensual confirmation, §1191(c) requires committing projected disposable income for three years, or up to five years as the court fixes. Alternatively, the plan may distribute property with a value at least equal to that projected income during the applicable period.
Section 1191(d) allows reasonably necessary support expenses and expenditures needed to continue, preserve, or operate the business. Seasonal sales, owner compensation, and working-capital needs require support in the financial records.
Secured claims, priority claims, and the liquidation-value requirement remain separate considerations. Creditors who do not accept the plan must receive the applicable statutory treatment. A low projected surplus does not excuse those requirements.
Negotiated Confirmation and Creditor Objections
A consensual plan under §1191(a) must satisfy the applicable Chapter 11 requirements, including class acceptance or unimpaired treatment. Nonconsensual confirmation under §1191(b), often called cramdown, can proceed despite class rejection when the remaining requirements are met.
The plan must not discriminate unfairly and must be fair and equitable toward impaired, nonaccepting classes. Good faith and feasibility also remain necessary. Under this route, owners may retain their interests without satisfying the ordinary Chapter 11 absolute priority rule, but retention is not automatic.
An attorney negotiates creditor treatment and addresses valuation, classification, and feasibility objections. Contested claims or liens may require related restructuring litigation.
4. Meeting Deadlines and Managing the Confirmed Plan
Subchapter V moves quickly, and confirmation does not end the debtor’s responsibilities. The confirmation route affects payment administration, discharge, and later modification. These differences should inform negotiations before the court approves the plan.
Trustee Duties and Early Deadlines
A Subchapter V trustee facilitates a consensual plan and performs statutory oversight duties. Management generally remains in control as debtor in possession unless the court orders otherwise.
The court ordinarily holds a status conference within 60 days after the order for relief. The debtor must file and serve a negotiation report at least 14 days before that conference.
Only the debtor may file a plan, ordinarily within 90 days after the order for relief. Extensions require circumstances for which the debtor should not justly be held accountable. That deadline concerns filing the plan, not obtaining confirmation.
Discharge, Modification, and Default
For a nonconsensual plan, §1192 generally ties discharge to completion of payments due within the applicable three-to-five-year period. Long-term debts and discharge exceptions require separate review. Consensual plans follow different rules, and individual debtors generally do not receive discharge merely upon confirmation.
Under §1193, consensual-plan modification generally must occur before substantial consummation. Nonconsensual plans have a separate three-to-five-year modification window. A revenue decline does not authorize the debtor to reduce payments without the required court process.
Material default may support dismissal or conversion under §1112. If continued operations are no longer viable, a corporate liquidation review can assess assets, creditor priorities, and remaining obligations.
5. Frequently Asked Questions
Asset ownership, professional roles, and case expenses can affect the filing decision even when the debtor appears eligible.
No general rule requires selling nonexempt assets first. Their value can affect creditor treatment and plan feasibility. Individual exemptions depend on applicable exemption law, including domicile rules, rather than a nationwide Subchapter V exemption.
No. The trustee performs statutory duties and facilitates reorganization. The debtor’s attorney advises the debtor, prepares filings, negotiates treatment, and responds to objections.
No. Subchapter V cases do not incur U.S. Trustee quarterly fees, but filing fees, attorney fees, trustee compensation, and other professional expenses may remain. Those expenses belong in the funding analysis.
6. Reviewing Your Subchapter 5 Bankruptcy Options
If collection threatens business accounts or essential equipment, a Subchapter 5 bankruptcy consultation can address the enforcement schedule alongside eligibility and operating funds. Bring financial statements, tax returns, loan and guarantee documents, leases, and creditor notices. An attorney can evaluate who should file, which applications may be necessary, and whether the available cash flow supports a confirmable plan.
06 Oct, 2026
