To file under Subchapter V of Chapter 11, a business must clear a debt ceiling of $3,424,000, show that at least half of that debt comes from commercial activity, be engaged in business, and not fall into one of a few categorically excluded entity types. Subchapter V eligibility turns on those four points, measured as of the filing date.
The Debt Ceiling
The combined noncontingent, liquidated secured and unsecured debts of the debtor cannot exceed $3,424,000 at the time of filing.1Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases The figure adjusts every three years under 11 U.S.C. ยง 104, and the current number took effect April 1, 2025.2Office of the Law Revision Counsel. 11 USC Chapter 1 – General Provisions
This number recently changed, and the change matters. When the Small Business Reorganization Act created Subchapter V in 2019, the original cap was roughly $2.75 million.3U.S. Department of Justice. Subchapter V Small Business Reorganizations Congress temporarily raised it to $7.5 million through the Bankruptcy Threshold Adjustment and Technical Corrections Act to help businesses during the pandemic period. That temporary increase sunsetted on June 21, 2024, and Congress did not extend it.4United States Bankruptcy Court, Southern District of Iowa. Bankruptcy Threshold Adjustment and Technical Corrections Act The limit reverted to the inflation-adjusted baseline. Businesses that would have qualified under the $7.5 million threshold but exceed $3,424,000 today no longer have access to Subchapter V.
How Debts Count Toward the Limit
Not every dollar owed counts against the ceiling. The statute counts only debts that are both noncontingent and liquidated. A noncontingent debt is one where the obligation already exists and does not depend on some future event to trigger it. A liquidated debt is one where the amount owed is already fixed or straightforward to calculate from a contract or judgment. Debts that hinge on something that hasn’t happened yet, or where the amount is genuinely unknown, sit outside the calculation.
The statute also excludes debts owed to affiliates or insiders of the debtor. That exclusion prevents intercompany loans between related entities from pushing a business over the limit. Courts look at the debt picture as of the filing date, so timing matters for close cases.
Leases are the common trap. Courts have split on whether the full remaining balance of a long-term lease counts toward the cap or only the amount that would survive a lease rejection. At least one court has held that the entire future liability on a lease qualifies as noncontingent and liquidated, counting the full amount. Other courts have treated lease-rejection damages as contingent because rejection requires a post-filing court action. If your business has significant lease obligations, the classification can decide eligibility, and you should expect a challenge either way.
The 50% Business Debt Rule
Clearing the cap is not enough. At least 50% of the debtor’s total qualifying debt must have arisen from commercial or business activities.5Office of the Law Revision Counsel. 11 USC 1182 – Definitions The rule keeps Subchapter V focused on business reorganization and stops individuals from using it to restructure primarily personal debts like home mortgages or credit card balances.
Drawing the line requires reviewing each obligation’s origin. A loan taken out to buy equipment or fund payroll is business debt. A personal car loan or a mortgage on the owner’s residence is not, even if the owner sometimes uses the car or a home office for work. For sole proprietors and other individuals running businesses, obligations often blur across both categories, and the classification of each one decides whether the 50% threshold is met.
The debtor must also be “engaged in commercial or business activities” at the time of filing. Courts have generally read this requirement broadly. Some have held that it doesn’t matter whether the debtor is currently profitable, actively operating, or even planning to continue operations. The point is to identify businesses rather than passive investors, not to punish a company that shut its doors shortly before filing.
Entities That Cannot Use Subchapter V
Some debtors are categorically excluded regardless of debt levels. Three groups are barred:
- Single asset real estate entities. If the business’s primary activity is owning one property or project, such as a single apartment complex or office building, it cannot file under Subchapter V.
- Companies subject to the reporting requirements of the Securities Exchange Act of 1934. Any entity filing periodic reports with the SEC is ineligible.
- Affiliates of an SEC-reporting company. Even a small subsidiary or related entity that would otherwise meet the debt cap cannot use Subchapter V if it is an affiliate of a publicly traded company.5Office of the Law Revision Counsel. 11 USC 1182 – Definitions
These exclusions reflect the purpose of the statute: a streamlined process for genuinely small, independently owned operating businesses.
Electing Subchapter V on the Petition
Subchapter V is an affirmative election the debtor makes in the initial bankruptcy petition. Businesses file using Official Form 201, and individuals file using Form 101, both available through the United States Courts website.6United States Courts. Voluntary Petition for Non-Individuals Filing for Bankruptcy Each form includes a checkbox to designate Subchapter V status. Miss the checkbox and the case proceeds as a standard Chapter 11.
The petition needs to be supported by recent federal income tax returns, a current balance sheet, a statement of operations, and a cash-flow statement. These records let the court assess the debtor’s financial condition and confirm eligibility. Incomplete or disorganized financials can trigger a challenge to the Subchapter V designation or lead to dismissal.
Once the petition is filed, the United States Trustee appoints a Subchapter V trustee to the case.7Office of the Law Revision Counsel. 11 USC 1183 – Trustee That trustee’s primary job is to work with the debtor and creditors to reach a consensual reorganization plan.3U.S. Department of Justice. Subchapter V Small Business Reorganizations
When Eligibility Gets Challenged
Checking the Subchapter V box on the petition does not guarantee the designation sticks. The U.S. Trustee, creditors, and other parties in interest can challenge eligibility. Common grounds include debts that exceed the cap when properly calculated, insufficient business-related debt to meet the 50% threshold, or a debtor that is not genuinely engaged in commercial activity. If the court agrees, the case gets redesignated as a standard Chapter 11, converted to Chapter 7, or dismissed.
Borderline cases are where challenges most often succeed. A debtor whose total debt sits close to $3,424,000 and includes large lease obligations should expect scrutiny over how those obligations were classified. A sole proprietor with a mix of personal and business debts may see creditors argue the 50% line wasn’t actually crossed. A defensible petition documents every debt’s origin and amount before filing, not after a creditor raises the question.