How Does a Small Business Meet the Subchapter V Debt Limit?
Subchapter V of Chapter 11 of the U.S. Bankruptcy Code provides a streamlined and cost-effective reorganization process tailored specifically for small businesses. Introduced by the Small Business Reorganization Act of 2019 (SBRA), this remedy is aimed at making bankruptcy more accessible for small business owners, enabling them to retain control of their operations while restructuring debts.
Initially, Subchapter V was available to businesses with aggregate debts not exceeding $2,725,625. This limit was temporarily increased to $7.5 million under the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted in March 2020 in response to the COVID-19 pandemic. The increased limit was extended multiple times but eventually was allowed to sunset on June 21, 2024. The debt threshold then reverted to its pre-pandemic level of $3,024,725 (adjusted for inflation). Effective April 1, 2025, the Subchapter V debt limit was raised to $3,424,00.
To qualify for Subchapter V, a debtor must be engaged in a commercial or business activity with debts below the applicable limit. At least 50 percent of those debts must arise from commercial or business activities, ensuring that the provision primarily benefits operational businesses rather than individuals with substantial personal debt unrelated to a business venture.
Both secured and unsecured debts are included in the aggregate debt calculation when determining eligibility for Subchapter V. Secured debts are obligations backed by collateral, such as loans secured by real estate, equipment or inventory. Unsecured debts are obligations without specific collateral backing, such as credit card balances, supplier invoices or utility bills.
The following types of debts are excluded from the eligibility calculation:
- Contingent and unliquidated debts — Contingent debts, which depend on the occurrence of a future event, and unliquidated debts, which lack a fixed or determinable amount, are generally excluded. Examples are pending litigation claims for which liability or damages have not yet been established.
- Non-business debts — Debts unrelated to the debtor’s business operations, such as personal home mortgages or medical bills, are not factored into the required business debt percentage. This ensures the focus is on the restructuring of commercial obligations.
- Insider debts — Loans or obligations owed to insiders, such as business owners, family members or affiliated entities, are generally scrutinized to prevent potential misuse of Subchapter V.
The primary benefits of Subchapter V are its simplicity and reduced costs. Unlike a traditional Chapter 11, there is no creditors’ committee, which significantly reduces administrative costs. Debtors are not obligated to file a disclosure statement and a standing trustee assists throughout the process to facilitate reorganization. Debtors can retain equity in the business without fully paying unsecured creditors, provided the reorganization plan meets certain feasibility standards and allocates all projected disposable income to debt repayment over a three- or five-year period.
The Law Offices of Michael Jay Berger in Beverly Hills helps small businesses dealing with excessive debt obtain the benefits of bankruptcy protection and reorganization. Please call 310-271-6223 or contact us online to schedule a free consultation.
