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Small Business Bankruptcy (Chapter 11 and Subchapter V)

The reorganization 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.

Looking for a lawyer rather than a definition? Skip to the state-by-state list of law firms for this.

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 reorganizes 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.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

Find a lawyer for this in your state

Choose your state to see Bankruptcy law firms in the city where we list the most; your city may be under “other cities”, A to Z. A state marked “Bankruptcy & Debt” has no Bankruptcy listing yet and opens the broader page.

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Related terms

Other entries in the same area of law, each written from the same primary sources.

Automatic StayThe immediate, court-ordered halt to most collection activity that takes effect the moment a bankruptcy case is filed.
Bankruptcy DischargeThe court order that ends personal liability for the debts covered by a bankruptcy case - what it does, what it does not do to liens and co-signers, when it is entered, and how it can be denied or later revoked.
Bankruptcy ExemptionsThe property a person filing bankruptcy keeps - the home equity, vehicle, household goods, tools, retirement accounts and other assets the law places beyond the reach of the trustee and creditors - and the state-by-state choice of which exemption list applies.
Bankruptcy Means TestThe income calculation that decides whether a person may file a Chapter 7 case or is steered into a Chapter 13 repayment plan - a comparison of household income against the state median, followed if necessary by a line-by-line deduction of allowed expenses.
Bankruptcy Trustee and the Meeting of CreditorsThe person appointed to administer a bankruptcy case and the short, sworn examination every debtor must attend - what the trustee is looking for, who actually turns up, and what happens after.
Chapter 13 BankruptcyA reorganization bankruptcy for individuals with regular income: debts are repaid in part through a court-approved plan.
Chapter 7 BankruptcyA liquidation bankruptcy: non-exempt property may be sold to pay creditors, and qualifying debts are discharged.
Collecting a JudgmentWinning a case and being paid are two different things - the second is a separate process the winner has to start.
Non-Dischargeable DebtsThe debts a bankruptcy discharge does not erase - child and spousal support, most taxes, most student loans, criminal fines, debts from fraud or drunk-driving injuries - and the difference between those that survive automatically and those a creditor must ask the court to preserve.
Preferences and Fraudulent Transfers (Clawback)The trustee's power to undo payments and transfers made before a bankruptcy was filed - a repayment to a relative, a property signed over to a family member, a creditor paid ahead of the others - and why "I paid my brother back first" is a problem rather than a virtue.
Reaffirmation AgreementA voluntary agreement in a Chapter 7 case to remain personally liable on a debt - usually a car loan - that the discharge would otherwise wipe out, in exchange for keeping the property; what it costs, the court's role, and the alternatives of redemption and simply continuing to pay.

« All glossary terms

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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