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Subchapter V: A Big Deal for Small Businesses

Business Law

The importance of the viability of small businesses to the national economy cannot be overstated. According to the U.S. Small Business Administration, “Small businesses are the lifeblood of the U.S. economy: they create two-thirds of new jobs and drive U.S. innovation and competitiveness…[accounting] for 44[%] of U.S. economic activity.”[1]

Yet, until recently, small businesses facing financial challenges had little hope of survival. Reorganization through Ch. 11 of the Bankruptcy Code was not a realistic option due to its enormous cost. And liquidation in state court proceedings or bankruptcy would close the business. These important businesses could, therefore, not survive the economic turbulence larger companies could weather.

The recently enacted Small Business Reorganization Act (SBRA)[2] gives small businesses a new tool under the Bankruptcy Code to address financial challenges. The SBRA, which became effective February 19, 2020, added subchapter V to Ch. 11 of the Bankruptcy Code.[3] Subchapter V creates a streamlined process for small businesses to reorganize by creating a plan to repay creditors over three to five years, avoiding the liquidation of the business. The new subchapter V process removes many obstacles small businesses face under a Ch. 11 plan, making reorganization more affordable and realistic for smaller debtors.

At first, subchapter V could be used only by debtors with a maximum debt of $2,725,625.[4] Congress temporarily increased this limit during the COVID-19 outbreak to $7.5 million,[5] and ultimately amended Title 11 in June 2022, with the signing into law of the Bankruptcy Threshold Adjustment and Technical Corrections Act to make the increase permanent.[6]

This article discusses the background of subchapter V’s enactment and contrasts traditional Ch. 11 and subchapter V cases from the perspective of debtors and creditors. It also contrasts subchapter V proceedings with Florida state court insolvency proceedings. Finally, the last section of the article questions the interpretation of subchapter V and poses some hypotheticals that courts and bankruptcy petitioners may have to resolve as subchapter V bankruptcy law begins to develop.

Purpose of Subchapter V

Many distinctions between traditional Ch. 11 cases and subchapter V cases are more easily understood with the backdrop of the purpose of subchapter V’s creation.

Congress enacted subchapter V to “streamline the bankruptcy process by which small businesses debtors reorganize and rehabilitate their financial affairs.”[7] Statements by members of Congress in the Congressional Record reflect this sentiment among the bill’s backers. Citing economic data, Rep. Sheila Jackson Lee, D-Texas, explained that “approximately 20[%] of small businesses survive the first year, but by the five-year mark only 50[%] are still in business and by the [10]-year mark only one-third survive.”[8] Rep. David Cicilline, D-R.I., stated, “It is essential that our bankruptcy system does not punish entrepreneurship and investment by foreclosing opportunities for small business to financially reorganize.”[9]

These sentiments become apparent when reviewing the options available to small businesses before enactment of the SBRA. Before subchapter V was created, traditional Ch. 11 bankruptcy posed a very high financial barrier to a small business seeking to reorganize without liquidating, with one article estimating costs at between one to 5% of a debtor’s total assets.[10] With the filing of a traditional Ch. 11, the debtor assumes responsibility for paying fees of not only its own bankruptcy counsel and other professionals, but also professionals of the unsecured creditors’ committee that is automatically appointed in the case and any other official committee appointed in the case.[11] Similarly, the debtor must make quarterly payments to the U.S. Trustee ranging from $250 to $250,000, calculated based on the size of the debtor’s disbursements in any quarter until the case is completed.[12]

Similarly, traditional Ch. 11 timelines typically hinge on a debtor’s ability to garner consensus around a plan of reorganization. In traditional Ch. 11 cases, a debtor must propose a plan within 120 days of filing for bankruptcy[13] and confirm a plan within 180 days of filing.[14] The court can extend these deadlines.[15] Once the deadlines have passed, any other party in interest may propose a plan of reorganization.[16] Because of the multiple restrictions around confirming a nonconsensual plan, a Ch. 11 debtor usually must work diligently to formulate a plan that is accepted by all classes of creditors. This results in extensive negotiations with multiple parties and often causes the deadlines for plan confirmation to be stretched out for months and even years.

Finally, Ch. 11 constrains a debtor’s ability to act independently. Once in bankruptcy, the court must authorize any transaction not within the course of the debtor’s regular business. This includes everything from the sale of assets and the payment of debts to the taking on of additional debt and hiring of officers to assist in the restructuring.[17] A debtor must obtain court approval before it takes any of these steps, often resulting in extensive court briefing and hearings, all usually paid for by the debtor.

Thus, a company could only justify a traditional Ch. 11 filing if the expected refinancing or restructuring from the bankruptcy outweighs the costs and obstacles to routine business. These financial burdens make filing for Ch. 11 unjustifiable for small businesses. Struggling small businesses were, therefore, left with trying to reorganize their businesses while also fending off their creditors, each of which might bring its own lawsuit. Or they could liquidate their businesses through state court “assignment for the benefit of creditors” proceedings or under Ch. 7 of the Bankruptcy Code. Before proceeding to the intricacies of subchapter V and its significant benefits, an overview of non-bankruptcy proceedings available in Florida to a struggling business is in order.

Florida State Court ‘Assignment for the Benefit of Creditors’ Proceedings

Under F.S. Ch. 727, Florida law establishes a form of proceeding for insolvent businesses to windup their affairs and liquidate their assets in an orderly fashion.[18] Otherwise known as an “assignment for the benefit of creditors” or “ABC” proceeding, a business in Florida may assign its assets to an assignee who oversees the winding down of the business, liquidation of the business’ assets, and distributions of any funds to creditors under court supervision.

Unlike a bankruptcy proceeding, which proceeds in federal bankruptcy court, an assignment for the benefit of creditors operates under Florida law and the Florida Rules of Civil Procedure.[19] To begin the process, a debtor, or “assignor,” must make an irrevocable assignment to an assignee who will assist with liquidating and distributing the debtor’s assets.[20] The assignee tends to be an attorney or accountant specializing in this practice area. Aside from the written assignment, the debtor must provide detailed schedules disclosing, among other things, the debtor’s creditors and assets.[21] The debtor is also required to assist the assignee with administrating the estate, deliver all estate assets to the assignee, and submit to an examination under oath concerning the debtor’s financial condition.[22]

After the assignee has accepted the assignment, his or her primary duty is to collect and reduce the estate’s assets to liquid funds and to distribute the funds to creditors fairly.[23] Under certain circumstances, the assignee can continue to operate the business for up to 45 days or longer upon a finding by the court overseeing the case that continued operation is in the estate’s best interests.[24] Similar to a Ch. 7 bankruptcy liquidation, the assignee must pay creditors based on a statutorily created order of priority.[25]

The ultimate goal of pursuing an assignment for the benefit of creditors is to dissolve the business. This necessarily precludes any future operations or restructuring. As a result, before the enactment of subchapter V of Ch. 11 of the Bankruptcy Code, a small business realistically had two options: 1) close the doors for good, or 2) risk filing for a traditional Ch. 11, incurring significant expenses for a difficult chance to successfully restructure. Neither option is particularly appealing to a small business owner. Congress, therefore, created subchapter V to give small businesses a more realistic pathway to restructuring.

Subchapter V from the Perspective of Debtors

Subchapter V provides both financial and temporal advantages to a debtor. First, there is no requirement that a creditors’ committee be appointed, thereby relieving the debtor of the costs associated with paying the committee professionals’ fees.[26] Second, the debtor need not make payments to the United States Trustee.[27]

A subchapter V debtor is also relieved of some plan requirements present in traditional Ch. 11 cases. First, in traditional Ch. 11 cases, a plan must provide for the payment in full of administrative expenses on the plan’s effective date.[28] Practically, this means that all services rendered to the debtor during its bankruptcy must be paid in full before payments to other creditors may ensue. This requirement, however, is not present in subchapter V. Instead, the plan may provide for payment of the debtor’s bankruptcy professionals and service providers over the plan’s lifetime.[29]

Second, in traditional Ch. 11 plans, the Bankruptcy Code imposes the “absolute priority rule,” preventing any creditor of lower priority from being paid if creditors of higher priority are not paid in full.[30] The most common application of the absolute priority rule is that the debtor’s equity holders may not retain any interest in the debtor if its creditors are not going to be paid in full under the plan. Based on this rule, equity holders of a Ch. 11 debtor are usually wiped out by the bankruptcy and cannot retain an interest on account of their pre-bankruptcy equity interest. Should an equity holder wish to retain ownership of the business, it is required to provide “new value” to the debtor, which typically consists of an infusion of a significant amount of cash into the business.[31]

The absolute priority rule is not present in subchapter V bankruptcies.[32] As a result, the debtor’s equity holders may continue to retain their equity interests without providing new value even if the debtor’s creditors are not going to be paid in full under the plan.

Third, a subchapter V debtor may confirm a plan without any creditor support. In traditional Ch. 11, however, at least one impaired class of creditors, i.e., a class of creditors that will not be paid in full, must accept the plan.[33] This requirement is not present in subchapter V.[34] Instead, so long as the plan provides that all of the debtor’s disposable income over the course of the plan period will be dedicated to repayment of unsecured creditors and that secured creditors will receive the benefit of their security, the plan can be confirmed over the objection of creditors.[35]

Fourth, the only entity that may propose a plan in subchapter V is the debtor.[36] The timeline for proposing a plan is 90 days after filing for bankruptcy, which may be extended for cause by the court.[37] This feature, taken with the debtor’s ability to confirm a plan over objection of creditors, nearly guarantees that a subchapter V debtor will not stay in bankruptcy long. Although the traditional obstacles to functioning a business while in bankruptcy are imposed on a subchapter V debtor,[38] those obstacles should only be in place for a short time due to the streamlined nature of the subchapter V plan process.

Subchapter V from the Perspective of Creditors

There are several features of subchapter V that make it more appealing to creditors as well. First, while in traditional Ch. 11 cases the role of the U.S. Trustee was limited to oversight of the debtor-in-possession without substantive controls or influence on the debtor’s finances, subchapter V automatically places a trustee in the position of receiving future income of the debtor as necessary for execution of the plan.[39] This provides creditors with another level of security that the debtor will make good on the plan.

Second, the primary distinction in the plan process between a traditional Ch. 11 plan and a subchapter V plan is the ability of the debtor to confirm a plan without the consent of its creditors, or in bankruptcy parlance, to confirm a “cramdown” plan (i.e., cram it down the throats of objecting creditors). While this ability can be detrimental to creditors who may have to accept a plan over their own objection, the tradeoff is that a subchapter V debtor cannot confirm a plan unless all of its disposable income during the plan period is dedicated to repayment of its creditors.

Under a traditional Ch. 11 plan, confirmation of a cramdown plan is governed by §1129, subsections (a) and (b). The primary requirements for confirmation of a cramdown plan are 1) at least one class of creditors or equity holders whose claims are impaired under the plan, meaning they will not be paid in full, has accepted the plan;[40] 2) secured creditors retain their liens or receive payments or another form of value for the amount of their liens;[41] 3) unsecured creditors and equity holders receive property of a value equal to the allowed amount of their claims, or no junior claimholder will receive payment under the plan.

One additional protection afforded creditors in traditional Ch. 11 is that creditors must receive at least what they would have received had the debtor filed for Ch. 7 liquidation.[42] As previewed above, two of these requirements are modified in subchapter V. First, a subchapter V plan need not obtain acceptance of the plan by a class of impaired claimholders.[43] Second, so long as all of the projected disposable income of the debtor for the three- to five-year period of the plan will be applied to make payments to creditors, the plan can be confirmed, even if junior classes receive distributions while senior classes are impaired.[44]

The practical effect of the differences in requirements of plans in traditional Ch. 11 plans versus subchapter V plans is two-fold. On the one hand, a Ch. 11 proceeding provides more protection to unsecured creditors because it requires at least some creditor acceptance of the plan, requiring that at least one impaired class of creditors accept the plan. Likewise, it ensures that a junior claimholder cannot receive any payments over the objection of senior creditors because of the absolute priority rule. Neither requirement is present in subchapter V cases.

On the other hand, subchapter V provides more protection for unsecured creditors because of what the debtor must pay on unsecured claims. Under a traditional Ch. 11 plan, a debtor can confirm a plan that pays significantly less than the full amount of the unsecured creditors’ claims, so long as the total amount to be received would not be less than what the unsecured creditor would receive if the company were to liquidate.[45] In subchapter V, aside from the requirement that creditors not receive less than what they would receive in a liquidation of the debtor’s business,[46] a nonconsensual plan must provide that all projected disposable income of the debtor for the plan period will be dedicated to payment of claims.[47]

Questions of Interpretation

Can a Small Business Debtor Convert Its Case to a Subchapter V After Filing a Petition for a Traditional Ch. 11 Bankruptcy? — Under §1009(a) of the Bankruptcy Code, a “voluntary petition,…may be amended by the debtor as a matter of course at any time before the case is closed.”[48] Courts have considered whether this section allows a debtor to convert its case to a subchapter V. This question often arose at the time of passage of the SBRA when small business debtors that had filed under traditional Ch. 11 sought to convert their cases to subchapter V to access the great benefits newly available to them.

On its face, nothing in the SBRA precludes application of the statute to cases pending as of the SBRA’s effective date. For that reason, in In re Progressive Solutions, Inc., 615 B.R. 894 (Bankr. C.D. Cal. 2020), a California bankruptcy court allowed a Ch. 11 debtor to amend its petition to a subchapter V case after enactment of the SBRA, explaining that there is “no legal reason to restrict a pending [Ch.] 11 case to re-designate to a Subchapter V case….”[49] A bankruptcy court in North Carolina reached the same conclusion in In re Moore Props. of Person Cnty., LLC, Case No. 20-80081, 2020 WL 995544, at *1 (Bankr. M.D.N.C. Feb. 28, 2020), holding that, “As a small business debtor, Debtor was entitled to make the election to have subchapter V apply.”[50] In a Michigan case, a court approved two conversions: first the small business debtor converted from Ch. 13 to Ch. 11, and then sought to convert to subchapter V.[51] The court, relying on In re Moore, found the “reasoning applicable to the facts of this case, which is still in the early, pre-confirmation stage as a [Ch.] 11 case,” allowed for amendment of the petition to a subchapter V election.[52]

Judge Scott M. Grossman of the Bankruptcy Court for the Southern District of Florida in In re Seven Stars on the Hudson Corp., 618 B.R. 333 (Bankr. S.D. Fla. 2020), denied a similar attempt of a debtor to convert to subchapter V after passage of the SBRA. Judge Grossman’s ruling was based largely on the late timing of the conversion attempt. As the court explained, the debtor attempted to convert to subchapter V over a year after it had filed its initial petition under Ch. 11.[53] The belated timing would have put the debtor in immediate default of several requirements of subchapter V, including the deadline for the debtor to file a plan and for the court to hold a status conference.[54] Moreover, 1) the court had approved a settlement between the debtor and a creditor; 2) the debtor and its bank had agreed to terms for use of cash collateral; and 3) the court had ruled that the debtor would have to pay post-petition rent upon confirmation of a plan.[55] Based on the advanced stage of the proceedings, Judge Grossman denied the debtor’s last-ditch effort to convert to subchapter V.

Based on the case precedent, courts will likely look to how advanced the bankruptcy proceedings are to determine whether conversion from a traditional Ch. 11 to a subchapter V is appropriate. The further along the case is, the less ability the debtor and court have to unwind prior determinations and actions in the bankruptcy. Thus, any attempt to convert a case from Ch. 11 to subchapter V should be made as early as possible to avoid running into the obstacles outlined in In re Seven Stars on the Hudson.

Is A Bankruptcy Lender Who Is Granted An Administrative Expense On Account Of Its Loan To A Subchapter V Debtor Entitled To Administrative Expense Priority In A Subchapter V Plan? — In bankruptcy, a debtor may seek to take out credit through what is known as debtor-in-possession financing (DIP financing). The Bankruptcy Code provides that a debtor may take out credit secured by varying levels of priority and security based on the debtor’s ability to obtain financing on better terms. Under §364, a debtor must first seek to obtain financing on an unsecured basis with priority of an administrative expense under §503(b).[56] If financing is unavailable on those terms, the debtor may obtain credit by offering the lender super-priority status, meaning it will be paid ahead of all other administrative expenses.[57] It may also secure the financing with a lien on unencumbered property or a junior lien on previously encumbered property.[58] Finally, if the debtor cannot obtain credit on any of the above terms, it may grant a lien to its new lender senior to other liens.[59]

In subchapter V, a debtor has the same ability to take out financing on the bases provided in §364. As discussed, however, administrative expenses incurred under §503(b) do not have priority over other unsecured claims in subchapter V.

The question, therefore, arises whether a bankruptcy lender who lends to a subchapter V debtor with administrative expense priority for its repayment has priority to payment ahead of other creditors under the plan.

This question is most likely an improbable hypothetical. DIP Financing is generally negotiated very carefully, and payment ahead of other creditors would likely be stipulated to as part of any loan agreement. Likewise, a subchapter V debtor should not be in bankruptcy long and would likely not need financing for its short-term bankruptcy. On the other hand, maybe a subchapter V debtor would need short-term financing, and the parties might not negotiate extensively and instead merely grant the lender administrative priority.

In such an event, the lender would only have general §503(b) priority status, which is specifically exempted from priority in subchapter V. The debtor could, therefore, potentially propose to pay back its DIP lender on terms equal to or even less than its other unsecured creditors.


Because subchapter V practice is in its nascent stages, emerging case law will guide bankruptcy practitioners and set the contours of how courts will apply the statute’s provisions in the many situations that present themselves. The foundational premise of the statutory scheme, however, has created a survival mechanism for small businesses, the very lifeblood of the U.S. economy, by providing an opportunity for small businesses to preserve their going concern value and ownership equity in a cost-effective and expedient manner. Bankruptcy law’s goal of providing an honest debtor with a fresh start is now within reach of small and big businesses alike.

[1] Press Release, U.S. Small Business Administration, Small Businesses Generate 44 Percent of U.S. Economic Activity (Jan. 30, 2019), available at

[2] Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079 (codified at 11 U.S.C. §§1181-1195).

[3] Id.

[4] Id. at §2(a).

[5] Coronavirus Aid, Relief, and Economic Security Act §1113(a)(2), Pub. L. No. 116-136, 134 Stat. 281 (2020); COVID-19 Bankruptcy Relief Extension Act of 2021, Pub. L. No. 117-5, 135 Stat. 249.

[6] Bankruptcy Threshold Adjustment and Technical Corrections Act, Pub. L. No. 117-151, 136 Stat. 1297 (2022).

[7] H.R. Rep. No. 116-171 at 1 (2019).

[8] 165 Cong. Rec. E977-05 (daily ed. July 24, 2019) (statement of Rep. Jackson).

[9] 165 Cong. Rec. H7217-01, H7219 (daily ed. July 23, 2019) (statement of Rep. Cicilline).

[10] Kenneth A. Rosen, What Does Chapter 11 Really Cost?, Bloomberg Law (Apr. 20, 2016), available at

[11] 11 U.S.C. §§328 & 330.

[12] 28 U.S.C. §1930(a)(6)(B). These amounts are for the five-year period between January 1, 2021, and December 31, 2025.

[13] This time is shortened to 90 days for a debtor whose assets are limited to a single asset of real estate. See 11 U.S.C. §362(d)(3)(A) (allowing court to lift automatic stay in single-asset real estate cases if plan not filed within 90 days from petition date).

[14] 11 U.S.C. §§1121(b), (c)(3).

[15] 11 U.S.C. §1121(d).

[16] 11 U.S.C. §1121(c).

[17] See, e.g., 11 U.S.C. §§327 (employment of professionals), 363 (sale of property), 364 (obtaining credit), 547 (preferential payments).

[18] Fla. Stat. §727.102 (2022).

[19] Id.

[20] Fla. Stat. §727.104(1)(a) (2022).

[21] Fla. Stat. §727.104(1)(c).

[22] Fla. Stat. §727.107 (2022).

[23] Fla. Stat. §727.108(1) (2022).

[24] Fla. Stat. §727.108(4).

[25] Fla. Stat. §727.114 (2022).

[26] 11 U.S.C. §1181(b).

[27] 28 U.S.C. §1930(a)(6)(B).

[28] See 11 U.S.C. §1129(a)(9)(A) (requiring payment of administrative expenses on effective date of plan).

[29] 11 U.S.C. §1191(e).

[30] See 11 U.S.C. §1129(b)(2)(B), (C) (preventing payment of lower priority classes if higher priority classes are impaired).

[31] See Bank of Am. Nat. Tr. & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 450-51, 119 S. Ct. 1411, 1420, 143 L. Ed. 2d 607 (1999) (holding common law “new value” rule remains applicable under modern Bankruptcy Code).

[32] See 11 U.S.C. §1181(a) (making §1129(b) inapplicable in subchapter V cases); see also 11 U.S.C. §1191(c) (establishing requirements for nonconsensual plan in subchapter V cases).

[33] See 11 U.S.C. §1129(a)(10) (requiring at least one class of impaired creditors to accept plan).

[34] See 11 U.S.C. §1191(b) (removing requirement to comply with §1129(a)(10)).

[35] See 11 U.S.C. §1191 (c)(2).

[36] See 11 U.S.C. §1189(a) (“Only the debtor may file a plan under this Subchapter.”).

[37] 11 U.S.C. §1189(b).

[38] See 11 U.S.C. §1181 (not listing §§327, 363, 364, 547 as inapplicable in subchapter V).

[39] 11 U.S.C. §§1183, 1190(2). These sections require automatic appointment of a trustee in subchapter V with responsibilities of a traditional Ch. 7 trustee (§1183) and require that a plan submit future income of the debtor to supervision of the trustee (§1190(2)).

[40] See 11 U.S.C. §1129(a)(10) (requiring at least one impaired class of creditors to accept plan).

[41] See 11 U.S.C. §1129(b)(2) (detailing treatment of secured creditors in cramdown plan). The text in the body of this article is a summary description of what a secured creditor in a cramdown plan receives under this subsection.

[42] See 11 U.S.C. §1129(a)(7)(A)(ii) (requiring that creditors receive no less than what they would receive in a Ch. 7 liquidation).

[43] See 11 U.S.C. §1191(b) (making §1129(a)(10) inapplicable in subchapter V cases).

[44] See 11 U.S.C. §1191(c)(1) (setting forth same treatment of secured creditors in subchapter V as in traditional Ch. 11 plans).

[45] See 11 U.S.C. §1129(a)(7)(A)(ii) (requiring that creditors receive no less than what they would receive in a Ch. 7 liquidation).

[46] See 11 U.S.C. §1191(b) (requiring subchapter V plan comply with §1129(a), including subparagraph (7) requiring a creditor not receive less than it would in a liquidation); see also 11 U.S.C. §1190(1)(A) (requiring subchapter V plan to set forth a liquidation analysis).

[47] See 11 U.S.C. §1191(c)(2) (requiring subchapter V plan apply all disposable income to payments under the plan for duration of plan period).

[48] 11 U.S.C. §1009(a).

[49] In re Progressive Sols., Inc., 615 B.R. 894, 900 (Bankr. C.D. Cal. 2020).

[50] In re Moore Props. of Person Cnty., LLC, Case No. 20-80081, 2020 WL 995544, at *7 (Bankr. M.D.N.C. Feb. 28, 2020).

[51] In re Bello, 613 B.R. 894, 896 (Bankr. E.D. Mich. 2020).

[52] Id.

[53] In re Seven Stars on the Hudson Corp., 618 B.R. 333, 338 (Bankr. S.D. Fla. 2020).

[54] Id. at 338-39.

[55] Id. at 337.

[56] See 11 U.S.C. §364(a), (b) (requiring debtor to obtain financing on unsecured, priority basis before seeking higher priority or security).

[57] See 11 U.S.C. §364(c)(1) (allowing debtor to obtain credit with priority over all other administrative expense creditors).

[58] See 11 U.S.C. §364(c)(2), (3) (allowing debtor to secure financing with liens on unencumbered property or junior liens on previously encumbered property).

[59] See 11 U.S.C. §364(d) (allowing debtor to obtain credit secured by liens on property of equal or senior priority to other creditors holding liens on same property).

Robert A. StokRobert A. Stok is the managing partner of Stok Kon + Braverman. Based in Ft. Lauderdale, the firm focuses on all aspects of commercial litigation, including bankruptcy.




Tuvia Sandler is a senior associate at Stok Kon + Braverman. He leads the firm’s bankruptcy practice.




Sam SachsSam Sachs is an associate at Stok Kon + Braverman.

This column is submitted on behalf of the Business Law Section, Douglas A. Bates, chair, and Andrew Layden, editor.

Business Law