How to Meet Subchapter V’s Engaged-in-Business Requirement
Subchapter V, created by the Small Business Reorganization Act of 2019, is a streamlined remedy designed for small businesses to reorganize faster and less expensively than in a traditional Chapter 11 proceeding. Businesses that qualify can obtain protection from creditors and restructure debt based on a self-created plan within the course of three or five years, while keeping control of their operations.
To qualify for Subchapter V as of 2026, an enterprise must have less than $3.02 million in total debt, of which at least 50 percent must have arisen from business activities. It also must be “engaged in commercial or business activities.” Although this requirement may sound restrictive for a company in financial distress, courts interpret the term broadly.
A company can meet the engaged-in-business requirement in a number of ways:
- Continuing ordinary operations — This can include day‑to‑day management, employing staff, selling goods or services, storing inventory, fulfilling customer orders, servicing accounts, keeping up vendor relationships, maintaining production facilities and continuing with billing and customer support. A company does not need to be operating at full capacity or generating significant revenue to qualify. Even limited or scaled-back operations may be sufficient.
- Winding down or liquidating a business — Even if it has ceased active operations, the company leaders may still be managing the consequences of the former business by selling remaining inventory or equipment, collecting accounts receivable, paying final business expenses, resolving outstanding claims or lawsuits and preparing final tax filings or regulatory reports.
- Managing or leasing business property — A debtor can be engaged in business by owning and managing income‑producing business property, such as a multi‑tenant building, a storage facility or parking lot or a portfolio of rental properties that require active oversight. The activity must be more than passive ownership. In addition, single-asset real estate owners are excluded.
- Holding business debt and performing related obligations — A debtor may be engaged in business if it is actively managing obligations arising from past commercial activity. This can include holding business loans incurred by the former business, managing guaranty obligations tied to business operations, paying taxes, insurance, or regulatory fees related to prior business assets and handling claims and negotiating with creditors regarding debts incurred.
Courts use a broad, fact-specific analysis to decide if a company meets the engaged-in-business requirement, looking at the totality of the circumstances. However, applying the test can have inconsistent results. A qualified Subchapter V attorney can help a small business dealing with excessive debt obtain the benefits of bankruptcy protection and reorganization.
The Law Offices of Michael Jay Berger can guide business owners considering Subchapter V relief in Beverly Hills, Los Angeles and all of Southern California. Schedule a free initial consultation by calling 310-271-6223 or by contacting us online.
