Why Subchapter V Eligibility Has Become a Hot Bankruptcy Issue

Subchapter V, enacted in 2019, was designed to streamline the Chapter 11 process for small businesses with overwhelming debt loads. Offering a faster, less expensive reorganization, this remedy has surged in usage. But as filings have increased, so have disputes over which businesses can tap into Subchapter V’s benefits. Creditors are pushing back with eligibility challenges, which can shift the case to a Chapter 11 or liquidation scenario that is more favorable to creditors.

The Subchapter V process offers multiple advantages over a traditional Chapter 11. Cases proceed without a creditors’ committee, reducing procedural complexity and costs. The law also eliminates quarterly fees to the U.S. Trustee that are required in Chapter 11, and administrative expenses can be paid over the course of the case. The “absolute priority rule,” which in Chapter 11 can prevent owners from retaining equity unless all classes of creditors are paid in full, is eliminated, making it easier for business owners to keep their companies. Plan confirmation standards are also more debtor-friendly. An appointed Subchapter V trustee can facilitate negotiation with creditors. Moreover, the law allows for non-consensual plan confirmation, without requiring acceptance by an impaired class of creditors.

Eligibility challenges can arise for various reasons. One source of dispute is the Subchapter V debt limit. The Small Business Reorganization Act of 2019 set a $2.7 million cap on debts. In response to the COVID-19 pandemic’s economic effects, Congress increased this limit to $7.5 million. The limit was reduced to about $3 million in 2024. An inflation‑adjusted limit of $3.424 million took effect in April 2025. Late in the year, the U.S. Senate was considering a bill to restore the $7.5 million limit, but no action was taken.

Determining what counts as debt further complicates matters. At least 50 percent of the debtor’s total noncontingent, liquidated debt must arise from the debtor’s commercial or business activities. Courts differ on whether disputed, contingent or unliquidated claims (such as lawsuits or unresolved tax bills) should be counted toward the debt limit. Treatment of insider loans or obligations arising from personal guarantees also varies. This inconsistency increases uncertainty and creates grounds for litigation.

For debtors, preparation is key. Accurately documenting all debts, anticipating creditor objections and carefully classifying claims can prevent costly and disruptive eligibility disputes. In some cases, it may even make sense to file a traditional Chapter 11, particularly if the debtor’s eligibility is marginal.

Legislative and judicial developments in 2026 could further reshape the rules for eligibility. Whatever changes are made, this area of law is sure to remain a battleground. Businesses considering this relief should consult with an experienced Subchapter V attorney to analyze their eligibility.

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. Call 310-271-6223 or contact us online to schedule a free initial consultation.