Running a small business is challenging, and financial hardships can arise unexpectedly. Whether due to economic downturns, supply chain disruptions, or unforeseen expenses, many small business owners find themselves struggling with overwhelming debt.
If your business is facing financial distress but you want to keep it afloat, Subchapter 5 bankruptcy may be the solution you need.
At Berken Cloyes, PC, we specialize in helping small business owners navigate bankruptcy laws to find the best path forward.
What is Subchapter 5 Bankruptcy?
Subchapter 5 is a relatively new provision of Chapter 11 bankruptcy, introduced by the Small Business Reorganization Act of 2019 (SBRA). It was designed specifically to make the bankruptcy process faster, more affordable, and more accessible for small businesses.
Before Subchapter 5, Chapter 11 bankruptcy was often seen as too expensive and complex for small business owners. Now, businesses with less than $7.5 million in debt can use Subchapter 5 to restructure their debt while continuing operations.
Unlike traditional Chapter 11, Subchapter 5 eliminates many of the costly and time-consuming requirements, making it a practical and efficient option for small businesses in financial distress.
How Subchapter 5 Bankruptcy Works
Subchapter 5 allows small businesses to develop a streamlined repayment plan to reorganize their debts while maintaining control of their operations. Here’s how the process works:
1. Filing for Bankruptcy
The first step is filing a voluntary petition for Subchapter 5 bankruptcy. Along with the petition, the business owner must submit:
- A list of assets and liabilities
- A statement of financial affairs
- A summary of income and expenses
- A list of executory contracts and leases
This filing immediately halts collections, lawsuits, and creditor harassment under the automatic stay provision.
2. Appointment of a Trustee
A Subchapter 5 trustee is assigned to oversee the case and facilitate negotiations between the business and creditors. However, unlike traditional Chapter 11, the business owner remains in control of operations.
3. Creating a Repayment Plan
Within 90 days of filing, the business owner must submit a reorganization plan outlining how they intend to repay creditors over time. This plan must:
- Be fair and reasonable
- Use future business earnings to pay off debts
- Be completed within 3 to 5 years
One of the biggest advantages of Subchapter 5 is that only the business owner needs to propose the repayment plan—creditors cannot submit competing plans like in traditional Chapter 11 cases.
4. Court Approval & Implementation
If the court approves the plan, the business continues operating while making payments as outlined.
Once the repayment period is complete, remaining eligible debts may be discharged, allowing the business to move forward without crushing financial burdens.
How Subchapter 5 Can Help You Save Your Business
Subchapter 5 bankruptcy provides several key advantages that can help small business owners avoid closure and regain financial stability:
Lower Costs and Faster Process
Unlike traditional Chapter 11, which is expensive and can take years to complete, Subchapter 5:
- Eliminates the need for a creditors’ committee (reducing legal fees)
- Does not require quarterly U.S. Trustee fees
- Provides a faster timeline for case resolution
This makes it a cost-effective and practical option for small business owners looking to restructure their debt.
Allows You to Keep Ownership and Control
In a standard Chapter 11 case, business owners may have to give up equity to creditors in exchange for debt relief. However, Subchapter 5 allows business owners to keep 100% ownership while restructuring their debt.
This means you can continue operating your business without the risk of losing control.
Eliminates the Absolute Priority Rule
Traditional Chapter 11 follows the absolute priority rule, which requires that unsecured creditors must be paid in full before the business owner retains any equity.
Subchapter 5 eliminates this requirement, meaning business owners can retain equity in their company even if they don’t pay all unsecured creditors in full.
Protects Personal Assets from Business Debt
Many small business owners personally guarantee business loans, putting their home, savings, and other personal assets at risk.
Subchapter 5 allows for the modification of certain personal guarantees, giving business owners a better chance to protect their assets while restructuring business debt.
Provides an Affordable Way to Reorganize Debt
Because Subchapter 5 eliminates many of the costly administrative requirements of Chapter 11, it offers an affordable way to manage debt while staying in business.
This is particularly beneficial for small business owners who:
- Have too much debt for Chapter 13 bankruptcy
- Need to catch up on rent, payroll, or supplier payments
- Want to avoid liquidation and keep their company running
Is Your Business Eligible for Subchapter 5 Bankruptcy?
To qualify for Subchapter 5, your business must:
- Have less than $7.5 million in debt (both secured and unsecured).
- Derive at least 50% of revenue from business activities.
- Be a privately owned business (not publicly traded).
If you’re unsure whether Subchapter 5 is the right option, consulting a qualified bankruptcy attorney can help you determine the best course of action.
Save Your Business with Berken Cloyes, PC
If your small business is struggling with overwhelming debt, Subchapter 5 bankruptcy could provide the fresh start you need. At Berken Cloyes, PC, we specialize in helping small business owners navigate the bankruptcy process and protect their businesses.
Our experienced bankruptcy attorneys can:
- Evaluate your financial situation and determine if Subchapter 5 is right for you.
- Guide you through the filing process and create a feasible repayment plan.
- Help you negotiate with creditors and protect your business assets.
Don’t wait until it’s too late—contact Berken Cloyes, PC today at (303) 623-4357 for a free consultation and take the first step toward saving your business.
