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Small Business Bankruptcy (Chapter 11 and Subchapter V)

The reorganisation chapter for a business that wants to keep operating while it restructures its debts, and the streamlined subchapter Congress added for small businesses - who qualifies, how a plan is confirmed, and what happens to the owner's personal guarantees.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

Chapter 11 lets a business - a corporation, a partnership, an LLC or a sole proprietor - stay in possession of its assets and keep operating under court supervision while it proposes a plan to pay its creditors over time, often less than in full, and emerges with its debts restructured. The business becomes the "debtor in possession", with most of a trustee's powers and duties; the automatic stay stops collection, foreclosure and eviction; leases and contracts can be assumed, assigned or rejected; and secured lenders can be compelled to accept new terms if the plan meets the statutory tests. A committee of unsecured creditors is typically appointed and has a voice in the case.

Traditional Chapter 11 is expensive, slow and built for large companies, and for decades small businesses either could not afford it or lost control of it. The Small Business Reorganization Act of 2019 added Subchapter V for debtors engaged in business whose total debts fall below a ceiling fixed by statute. It removes the creditors' committee and the disclosure statement, appoints a standing trustee to facilitate rather than take over, requires the debtor to file a plan within a short deadline, and - the central change - lets the court confirm a plan over creditors' objections so long as it commits the debtor's projected disposable income for a period of years to payments, without the requirement that the owners contribute new value to keep their equity. The owner keeps the business.

A business bankruptcy does not discharge the owner personally. A personal guarantee on the business's bank loan, lease or supplier account is the owner's own debt, and creditors may pursue it while the business reorganises unless the owner also files. That is why a sole proprietor, whose business debts are personal debts, files as an individual - in Subchapter V, Chapter 13 or Chapter 7 - and why the owner of a corporation often files a separate personal case alongside the company's. A Chapter 7 for a corporation, by contrast, produces no discharge at all; it simply liquidates and closes the entity.

Where this comes from

Chapter 11 is 11 U.S.C. §§ 1101-1195: the debtor in possession at §§ 1107-1108, the creditors' committee at § 1102, plan contents and confirmation at §§ 1123, 1125 and 1129, and the executory-contract powers at § 365. Subchapter V is §§ 1181-1195, added by the Small Business Reorganization Act of 2019, Pub. L. 116-54, with eligibility defined at § 1182(1), the trustee at § 1183, the plan deadline at § 1189, and non-consensual confirmation at § 1191(b)-(c). The absolute-priority rule it displaces is § 1129(b)(2)(B)(ii), as construed in Bank of America v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999). The rule that a corporation receives no Chapter 7 discharge is § 727(a)(1). The Subchapter V debt ceiling has been changed by Congress more than once and is not stated here.

When people hire a lawyer for this

The decision is rarely whether to file but which entity files, in which chapter, and when - a business that files too late has usually lost the leverage the stay provides, and one whose owner has not addressed the personal guarantees has solved half the problem. A business owner should see a bankruptcy lawyer at the point where the business cannot meet payroll, taxes or a lender's demand on time, not after the lender has swept the account, and should bring the guarantees, the lease and the tax filings to the first meeting. Unpaid payroll taxes are the item to raise first: they are the owner's personal liability whatever the business does.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

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