Subchapter V Small Business Bankruptcy

A restaurant in Astoria, a contractor in the Bronx, a dental practice on the Upper East Side, a two-truck delivery company in Red Hook. Each can carry a million dollars or more in debt and still be a going concern that pays its people every Friday. When the landlord, the state tax department and three merchant cash advance lenders all demand payment in the same month, the traditional choices were poor: a Chapter 7 that closes the doors, or a full Chapter 11 whose fees can exceed what the business owes.

Subchapter V of Chapter 11, added by the Small Business Reorganization Act of 2019 and codified at 11 U.S.C. §§ 1181 through 1195, was written for exactly this business. It keeps the owner in control, removes the most expensive parts of a standard Chapter 11, and lets the court confirm a repayment plan over the objection of creditors if the business commits its projected profits for three to five years. This page explains who qualifies, what the case looks like in the Southern and Eastern Districts of New York, and what a New York City business owner should expect from the first filing to discharge.

What Subchapter V Changes

Subchapter V is not a separate chapter of the Bankruptcy Code. It is an elective track inside Chapter 11. The debtor checks a box on the petition, and 11 U.S.C. § 1181 then switches off many of the provisions that make ordinary Chapter 11 slow and costly. The main differences:

• No creditors' committee: Under § 1181(b) and § 1102(a)(3), no committee of unsecured creditors is appointed unless the court orders one for cause. In a standard Chapter 11 the debtor pays the committee's lawyers and financial advisors.
• No disclosure statement: Section 1125 does not apply unless the court says otherwise. The plan itself must contain a short history of the business, a liquidation analysis and financial projections under § 1190(1), but the separate 40-page disclosure document is gone.
• No absolute priority rule: In ordinary Chapter 11, owners cannot keep their equity unless unsecured creditors are paid in full or vote to accept. Section 1181(a) removes § 1129(b)(2)(B)(ii) for Subchapter V debtors. The owner keeps the business.
• Only the debtor may file a plan: Section 1189(a) gives the debtor the exclusive right to propose a plan for the life of the case. Creditors cannot file a competing plan.
• No quarterly United States Trustee fees: The fees under 28 U.S.C. § 1930(a)(6) that scale with disbursements do not apply to Subchapter V cases.
• A standing trustee who does not run the business: Section 1183 provides for a trustee who monitors the case and helps broker a consensual plan while the debtor remains in possession under § 1184.

For a broader comparison of Chapter 7, Chapter 11 and Subchapter V for New York companies, see our page on business bankruptcy.

Who Qualifies in New York City

Eligibility is governed by the definition of "debtor" in 11 U.S.C. § 1182(1). Four requirements matter.

1. Engaged in commercial or business activities

The debtor must be a person (which includes corporations, LLCs and individuals) engaged in commercial or business activities. Courts in New York have read this broadly. A business that has recently closed but is still winding up contracts, collecting receivables or dealing with a lease may still qualify. An individual owner who personally guaranteed the company's debts can often qualify in her own right, which matters because the automatic stay in the company's case does not protect the guarantor.

2. Total debt under the statutory cap

Aggregate noncontingent, liquidated secured and unsecured debts as of the petition date may not exceed the cap in § 1182(1)(A). The cap was temporarily raised to $7,500,000 during the pandemic, but that increase expired on June 21, 2024. The limit reverted to the inflation-adjusted figure, which is $3,424,000 for cases filed on or after April 1, 2025. The figure adjusts every three years under 11 U.S.C. § 104.

Two words in the statute do a lot of work. A debt is contingent if liability depends on a future event that has not happened, such as a guaranty that has not yet been called. A debt is unliquidated if the amount has not been fixed, such as a pending personal injury lawsuit against the business with no judgment. Contingent and unliquidated debts do not count toward the cap. Debts owed to affiliates and insiders are also excluded. A careful schedule of debts on the petition date can determine whether a borderline business qualifies.

3. At least half the debt must be business debt

Not less than 50 percent of the debt must have arisen from the commercial or business activities of the debtor. For a corporation or LLC this is almost automatic. For an individual owner it requires a careful accounting. A Brooklyn owner with $900,000 in guaranteed business loans and $400,000 in personal mortgage and credit card debt qualifies. Reverse those numbers and she does not.

4. Exclusions

Section 1182(1)(B) excludes any debtor whose primary activity is owning a single piece of real property that generates substantially all of its income (single asset real estate), any public company, and any affiliate of a public company. A landlord entity holding one commercial building in Manhattan is therefore usually not a Subchapter V candidate, even if the debt is small.

The Timeline: What Happens and When

Subchapter V runs on a compressed schedule set by statute. Missing the deadlines can cost the debtor the Subchapter V designation and push the case into an ordinary Chapter 11. The table below uses a petition filed on a Monday, March 3, as Day 0.

The 90-day plan deadline in § 1189(b) can be extended only if the court finds that the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable. Judges in the Southern and Eastern Districts of New York do grant extensions, but they expect the debtor to show why, not simply to ask. A debtor who arrives at Day 60 without projections or a draft plan is in trouble.

The Subchapter V Trustee

Every Subchapter V case has a trustee, but this is not a Chapter 7 trustee who liquidates assets, and it is not a Chapter 11 trustee who takes over management. Section 1183(b) assigns the trustee a short list of duties: appear at the status conference and confirmation hearing, investigate the debtor's financial affairs if the court orders, and, under § 1183(b)(7), facilitate the development of a consensual plan. If the plan is confirmed without full creditor consent, the trustee also receives and distributes plan payments under § 1194.

In practice, the trustee is a working mediator. She reads the projections, asks pointed questions about the owner's salary and the rent, and tells the debtor what a landlord or the New York State Department of Taxation and Finance is likely to accept. Trustees are compensated under § 330, typically on an hourly basis, and their fees are an administrative expense of the estate. In most New York City cases the trustee's fees run a small fraction of what a creditors' committee would have cost.

Confirming a Plan Over Creditor Objections

Two paths lead to confirmation.

Consensual confirmation under § 1191(a): If every impaired class of creditors votes to accept, the plan is confirmed under the ordinary standards of § 1129(a), and the debtor receives a discharge on the effective date under § 1141(d).

Nonconsensual confirmation under § 1191(b): If one or more classes reject, the court may still confirm the plan if it does not discriminate unfairly and is fair and equitable. Section 1191(c) defines fair and equitable for this purpose. Secured creditors must be treated as § 1129(b)(2)(A) requires: they keep their liens and receive payments with a present value equal to the value of their collateral. Unsecured creditors must receive all of the debtor's projected disposable income for a period of three years, or up to five years if the court sets a longer period, or property of equivalent value. The plan must also be feasible, meaning there is a reasonable likelihood the debtor can make the payments, and it must include remedies if it does not.

What "disposable income" means for a business

Section 1191(d) defines projected disposable income as income received that is not reasonably necessary for the payment of expenditures necessary for the continuation, preservation or operation of the business, or for the maintenance and support of the debtor and dependents in an individual case. Reasonable owner compensation is an operating expense. A plan that pays the owner a market salary and commits the remaining profit is ordinarily acceptable. A plan that triples the owner's salary in the projections is not.

A worked example

Consider a Queens restaurant operating as an LLC with the following debts on the petition date:

• $450,000 SBA Economic Injury Disaster Loan, secured by a blanket lien on equipment and receivables worth roughly $90,000
• $210,000 in unpaid rent and additional rent owed to the landlord
• $135,000 in New York State sales tax, of which $110,000 falls within the priority period under 11 U.S.C. § 507(a)(8)
• $180,000 across three merchant cash advance agreements
• $95,000 in vendor invoices and business credit cards

Total debt is $1,070,000, well under the cap, and all of it is business debt. Projections show net operating income of $7,500 per month after rent, payroll, food cost and a $90,000 annual salary to the owner-chef. Annual disposable income is therefore $90,000, and a three-year commitment yields $270,000.

The plan might provide: the SBA is treated as secured to $90,000 and paid that amount with interest over the plan term, with the $360,000 balance treated as unsecured. Priority sales tax of $110,000 is paid in full with interest over five years from the petition date as § 1129(a)(9)(C) requires, which § 1191(b) does not waive. The remaining $25,000 of older tax, the landlord's arrears, the merchant cash advances, the vendors and the SBA deficiency share pro rata in the disposable income left after tax and secured payments. If the restaurant needs its equipment lease and its storefront, both are assumed under § 365, and the pre-petition rent arrears are cured through the plan. If the landlord votes no, the court can still confirm under § 1191(b) because the plan commits all projected disposable income.

For a business owner whose problem is dominated by tax debt, our page on tax debt in bankruptcy explains how the priority rules and the three-year, two-year and 240-day lookback periods apply.

Problems Specific to New York City Small Businesses

Commercial leases

Rent is usually the largest fixed cost and the most urgent creditor. Filing triggers the automatic stay under § 362(a), which halts a pending Civil Court nonpayment proceeding and prevents the landlord from changing the locks. The debtor then has 120 days under § 365(d)(4) to decide whether to assume or reject the lease, with one 90-day extension available if the landlord consents or the court orders it. Assumption requires curing the arrears, which the plan can spread over time. Rejection converts the landlord's claim to pre-petition unsecured debt, and § 502(b)(6) caps it at the greater of one year's rent or 15 percent of the remaining term, not to exceed three years. On a 10-year lease at $15,000 per month with eight years left, that cap is $216,000 rather than $1,440,000. For a business with several storefronts, the ability to shed the losing locations while keeping the profitable ones is often the whole point of the case. Our retail business bankruptcy page covers lease strategy in more depth.

Sales tax and responsible person liability

New York Tax Law § 1133(a) makes officers, members and employees who are under a duty to collect and remit sales tax personally liable for the unpaid tax. The company's bankruptcy does not erase the owner's personal exposure. Where the owner's personal sales tax assessment is significant, the owner may need to file a Subchapter V case alongside the company, and the plan must pay the priority portion in full within five years.

Merchant cash advances

Merchant cash advance companies purchase a percentage of future receivables at a steep discount and typically debit the business's bank account daily. The automatic stay stops the debits. The advance company will argue it owns the receivables rather than holding a debt. Courts examine whether the agreement has a reconciliation provision, a fixed term and recourse on default; where those features are present, the arrangement is treated as a loan and the claim is unsecured or secured only to the extent of a perfected UCC filing. A properly structured plan can pay these creditors a fraction of face value.

Personal guarantees and confessions of judgment

Nearly every commercial lease, SBA loan and equipment lease in the city carries a personal guaranty. The company's filing does not stay collection against the guarantor. If the owner has judgments entered or bank accounts restrained, the owner's own Subchapter V filing may be necessary. Because the 50 percent business-debt test in § 1182(1)(A) is measured by amount, an owner whose guaranteed business debt exceeds her personal debt usually qualifies, and § 1190(3) even permits the plan to modify a mortgage on the owner's principal residence if the loan proceeds were used primarily in the business.

Medallion owners and other single-asset operators

Taxi medallion corporations are frequent Subchapter V filers because the debt is almost entirely business debt, the medallion value is far below the loan balance, and § 1191(c) allows the secured lender to be paid the collateral's present value rather than the contract balance. See our page on taxi medallion debt for the valuation issues involved.

What Subchapter V Costs Compared to Ordinary Chapter 11

The savings come from what is removed. No committee counsel. No disclosure statement hearing. No quarterly fees to the United States Trustee. A single plan filed by the debtor rather than a contested plan process. Administrative expenses, including the debtor's attorney's fees and the trustee's fees, may be paid over the life of the plan in a nonconsensual case under § 1191(e), rather than in cash at confirmation. Filing fees in the bankruptcy courts for the Southern and Eastern Districts of New York are the same as for any Chapter 11 case, currently $1,738.

When Subchapter V Is the Wrong Tool

Subchapter V does not fit every troubled business. A business with debts over the cap must file ordinary Chapter 11. A business that cannot show a path to positive cash flow cannot satisfy the feasibility requirement in § 1191(c)(3), and a Chapter 7 liquidation or an out-of-court wind-down may serve the owner better. A single asset real estate entity is excluded outright. A business whose main creditor is a secured lender with a lien on everything and a collateral value near the debt balance may not gain enough from the process to justify it. Part of the initial consultation is deciding honestly which of these categories the business falls into.

Discharge

The timing of discharge depends on how the plan was confirmed. Under a consensual plan confirmed under § 1191(a), the debtor receives a discharge on confirmation under § 1141(d). Under a nonconsensual plan confirmed under § 1191(b), § 1192 delays the discharge until the debtor completes all payments due within the first three years of the plan, or a longer period the court fixes not exceeding five years. The discharge covers all debts provided for in the plan except those on which the last payment is due after the plan term and, for individual debtors, the debts listed in § 523(a). Sales tax that the business collected from customers and failed to remit is a trust fund tax, and an individual owner does not discharge it under § 523(a)(1)(A), which is why the plan must pay it.

Where Your Case Is Filed

A business with its principal place of business in Manhattan or the Bronx files in the United States Bankruptcy Court for the Southern District of New York. A business in Brooklyn, Queens or Staten Island files in the Eastern District of New York. Both courts have judges who handle Subchapter V cases regularly and a panel of standing Subchapter V trustees appointed by the United States Trustee for Region 2. Local rules in each district govern first-day motions, the form of the status report and the procedures for cash collateral use, and the debtor's counsel must comply with them from the first filing.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].