Small Business Bankruptcy: Subchapter V

Small business bankruptcy is two different problems wearing one name. An owner who wants to keep operating needs a repayment plan the court will approve. Since 2020, the version built for small businesses is Subchapter V of Chapter 11. An owner whose business is already closed needs to deal with the leftover debt. Most of that debt is usually personal because of guarantees, so it is a Chapter 7 or Chapter 13 question. The debt limit for Subchapter V has moved three times in six years. As of this writing, Congress is in the middle of moving it again.

Key points

• To qualify: the filer is engaged in business, total fixed debt is at or below $3,424,000, and at least 50 percent of that debt came from the business. Single-asset real estate businesses are excluded.
• The $7.5 million limit from the CARES Act expired June 21, 2024. The statute reverted to the §101(51D) figure, adjusted to $3,424,000 on April 1, 2025. S. 3977 would set it at $7.5 million permanently; check whether it has been enacted.
• Only the debtor files a plan, due within 90 days (§1189). No creditors' committee unless the court orders one (§1181(b)). A Subchapter V trustee monitors but does not run the business.
• The court can approve the plan over creditor objection if it commits all projected disposable income for three to five years (§1191(c)).
• A corporation or LLC gets no discharge in Chapter 7 under §727(a)(1). Chapter 7 for an entity sells off the assets. It is not a fresh start. The fresh start goes to the owner in a personal case.

Who qualifies for Subchapter V

Three points the debt test turns on:

• Non-contingent and liquidated. A disputed lawsuit for an unknown amount generally does not count against the limit. A signed note or a judgment does. This is where eligibility fights happen.
• Fifty percent business debt. A sole proprietor with a large home mortgage and modest business debt may fail the test because the mortgage is consumer debt. Courts have split on how to treat a home mortgage when the home also houses the business.
• Affiliated debtors. If the owner and the company both file, the affiliated group's combined debt is measured against the limit.

The debt limit: what the statute says today, and what is pending

The pending change is S. 3977, the Bankruptcy Threshold Adjustment Act of 2026. It was introduced in March 2026 with bipartisan sponsorship and passed the Senate by unanimous consent on August 3, 2026. It would permanently set the Subchapter V limit at $7,500,000, and the Chapter 13 limit at $2,750,000 for combined secured and unsecured debt. The companion bill, H.R. 7730, was reported out of the House Judiciary Committee in March 2026. As of the most recent source this page could verify (August 16, 2026), the bill had not passed the House or been signed. If it becomes law, the new limits apply the day it is signed.

How Subchapter V works

1. The owner stays in control

   The debtor remains a debtor in possession and keeps running the business. A Subchapter V trustee is appointed under §1183 to help the parties reach an agreed plan, monitor the case, and disburse payments in a contested case. The trustee does not take over operations unless the court removes the debtor for cause.

2. No creditors' committee, no disclosure statement by default

   Section 1181(b) switches off the creditors' committee and disclosure statement provisions unless the court orders otherwise. Those two features are a large share of the cost of a regular Chapter 11.

3. Only the debtor files a plan, within 90 days

   Section 1189 gives the debtor the exclusive right to file a plan and sets a 90-day deadline from the order for relief. The court can extend it only for circumstances the debtor should not justly be held accountable for. The plan must include a short history of the business, a liquidation analysis, and projections showing the ability to make payments (§1190).

4. Confirmation without a yes vote

   Under §1191(b), the court can approve a plan even if no impaired class accepts it. The plan must not discriminate unfairly and must be fair and equitable. Under §1191(c), fair and equitable means the plan commits all projected disposable income for three years, or up to five if the court sets a longer period. The absolute priority rule that would otherwise wipe out the owner's equity does not apply.

5. Discharge

   In an agreed plan, discharge comes when the plan is approved. In a contested plan under §1191(b), §1192 grants the discharge later. It comes after the debtor completes all payments due in the first three years of the plan, or the longer period the court fixed.

One provision matters to sole proprietors specifically. Section 1190(3) lets a Subchapter V plan modify a mortgage on the debtor's principal residence in one situation: the loan proceeds were not used primarily to buy the house, and they were used primarily in the business. A home equity line drawn to fund inventory can be reworked in Subchapter V in a way no other consumer chapter allows.

Subchapter V versus Chapter 7 for a business that has already closed

Many owners of a closed LLC or corporation discover that the entity's Chapter 7 does little for them. The business has no discharge to receive. The debts that matter, such as the SBA loan, the merchant cash advance, the commercial lease, and the business credit card, were personally guaranteed. They follow the owner. The productive case is often the owner's own Chapter 7, which discharges the guarantees along with other personal debt. A personal Chapter 13 fits when the owner has non-exempt assets to protect.

Chapter 13 has its own limits under §109(e): as of April 1, 2025, $526,700 in unsecured debt and $1,580,125 in secured debt. Owners with guarantee exposure above the unsecured figure are usually looking at an individual Chapter 7 or a conventional Chapter 11. An individual Subchapter V is also possible for a person whose debts are at least half business debts.

Personal guarantees, SBA loans, and merchant cash advances

The guarantee is the hinge of every small business case. A few patterns come up constantly:

• SBA 7(a) and EIDL loans. Loans above certain sizes carry personal guarantees and often a lien on business assets. Larger EIDL loans took collateral too. A personal Chapter 7 discharges the guarantee like any other unsecured debt, unless fraud is shown.
• Merchant cash advances. These are set up as purchases of future receivables, with a personal guarantee and often a confession of judgment. In bankruptcy they are generally unsecured claims. A UCC lien filed on receivables makes them secured up to the value of the collateral.
• Commercial leases. Rejecting a lease in bankruptcy caps the landlord's damages under §502(b)(6). The guarantee of the lease is personal debt, and a personal case addresses it.
• Trust-fund taxes. Withheld payroll tax and collected sales tax follow the responsible person and are not discharged in any chapter. See Taxes in bankruptcy.

For owners looking at replacement financing rather than a filing, the business loans hub covers how to evaluate lenders and what a personal guarantee actually commits.

Common mistakes to avoid

• ✕Filing Chapter 7 for the LLC and expecting the owner's guaranteed debts to go away. The entity gets no discharge, and the guarantees are the owner's debt.
• ✕Relying on the $7.5 million figure before S. 3977 is enacted. Until then the limit is $3,424,000 and an over-limit case is a conventional Chapter 11.
• ✕Counting a disputed, unliquidated claim against the debt limit, or failing to count a judgment that is liquidated. Eligibility turns on that classification.
• ✕Missing the 90-day plan deadline in §1189. Extensions require circumstances the debtor should not justly be held accountable for, not just more time.
• ✕Paying personal debts with business funds, or the reverse, in the months before filing. Commingling invites eligibility and preference litigation.
• ✕Leaving trust-fund taxes for last. They are not discharged in any chapter, and a Subchapter V plan has to provide for them in full.

Frequently asked questions

What is the Subchapter V debt limit in 2026?

As of September 4, 2026, the limit in 11 U.S.C. §101(51D), which §1182(1) incorporates, is $3,424,000 in total non-contingent liquidated debt, adjusted effective April 1, 2025. The temporary $7.5 million limit expired June 21, 2024. S. 3977, which would permanently restore $7.5 million, passed the Senate on August 3, 2026 and was pending in the House as of the latest source found. The Congress.gov bill page shows the current status.

Can a sole proprietor file Subchapter V?

Yes. Section 101(51D) applies to a "person engaged in commercial or business activities." An individual qualifies if total debt is within the limit and at least 50 percent of it arose from the business. A sole proprietor with a large home mortgage may fail the 50 percent test because the mortgage is consumer debt. That is a common reason individuals end up in Chapter 13 or a personal Chapter 7 instead.

How is Subchapter V different from regular Chapter 11?

Subchapter V removes the creditors' committee and disclosure statement by default (§1181). It gives the debtor the exclusive right to file a plan within 90 days (§1189). It allows confirmation without any accepting class if the plan commits projected disposable income for three to five years (§1191). And it does not apply the absolute priority rule, so the owner keeps the business. A Subchapter V trustee monitors the case but does not operate the business.

Should a closed LLC file Chapter 7?

Often there is little benefit. Under §727(a)(1), only individuals receive a Chapter 7 discharge, so an LLC or corporation in Chapter 7 is liquidated but not discharged. The debts that follow the owner are the personally guaranteed ones, and those are addressed in the owner's own Chapter 7 or Chapter 13. An entity Chapter 7 mainly provides an orderly wind-down by a trustee.

Are personal guarantees discharged in business bankruptcy?

Not by the business's case. A guarantee is the owner's personal debt, and only a case filed by the owner can discharge it. In a personal Chapter 7, guarantees on SBA loans, merchant cash advances, leases, and business credit cards are generally unsecured debt. They are discharged unless fraud is proven. Trust-fund tax liabilities are the major exception; they survive every chapter.

How long does a Subchapter V case take?

The plan is due within 90 days of filing under §1189, and approval hearings typically follow within a few months. Payments under a contested plan run three years under §1191(c), or up to five if the court sets a longer period. The discharge is entered when those payments are complete under §1192. In an agreed plan the discharge comes when the plan is approved, and the payments continue after that.

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