8 Deciding Factors
Subchapter V vs. Chapter 7 for a Small Business

Subchapter V keeps the doors open while Chapter 7 closes them for good.

The choice between the two chapters is a choice between a future funded from income and a liquidation distributed from assets. An MCA stack complicates both paths, because daily debits, blanket liens, and signed guaranties each follow different rules inside a reorganization than inside a shutdown, and counsel maps all three before recommending either door.

Whether the Business Will Continue Operating

The federal guidance on Chapter 11 describes reorganization as the path for a business that will continue, with the debtor remaining in possession while the plan is developed. A corporation exists apart from its owners, while a sole proprietorship has no identity distinct from the owner, so the same filing touches different property in each case. The threshold question is extremely practical: whether there is a business left to save.

Where the doors stay open and future income can fund a plan, Subchapter V supplies the faster route. Where the company will close and the assets will be sold, Chapter 7 supplies the orderly liquidation. Resist the urge to empty the operating account before filing; preference exposure looks back ninety days, and counsel should see the transfers before the petition is prepared.

The Debt Limit for Subchapter V

Eligibility turns on figures that change: the debtor must be engaged in commercial activity, with single asset real estate businesses excluded as the statute defines that category, and with combined debts at or under $3,424,000 as of filing and at least half arising from the business, though the limit adjusts and older commentary citing prior thresholds is stale. There is a particular quiet in a courtroom when the trustee states the debt total on the record and the room does the subtraction. The eligibility memo is the cheapest document in the file, and the most often skipped.

Who Proposes the Plan

Only the debtor may file a plan, and no separate disclosure statement is required unless the court orders one for cause. A trustee serves in every Subchapter V case to facilitate the plan, appear at major hearings, and ensure payments are made, while the owner continues to operate as debtor in possession. Clerks in this district check the balance sheet attachment before the petition reaches a judge. The trustee functions the way a building inspector functions in a renovation the owner still manages, present at every stage and holding no hammer.

What Confirmation Requires Without Creditor Agreement

Plans can be confirmed without creditor acceptance where they do not discriminate unfairly, are fair and equitable to each class, and commit all projected disposable income or equivalent value for three to five years. This surprises owners who equated filing with erasure, so the income commitment deserves a second reading before any petition. The math is the math, and the plan must fund it. An owner keeps equity by funding the plan from future income rather than new value, which is the provision that makes reorganization worth comparing against liquidation.

What Chapter 7 Does to an LLC

The federal guidance on Chapter 7 states the entity rule before anything else: discharge is available only to individual debtors, not to partnerships or corporations. The overlong sentence carries the consequences in one passage, because the thought requires it: the trustee sells nonexempt assets and distributes proceeds by statutory priority, valid liens ride through the case unaffected, cases holding only exempt or liened property often end in a no asset report with no distribution and no proofs of claim, and the unpaid balances remain against the shell while the owner guaranties continue as separate obligations for separate enforcement.

A discharge the statute does not grant cannot be negotiated into existence.

The trustee closed the case. The liens did not close with it. The rule is extremely unforgiving toward owners who assumed liquidation meant cancellation, and counsel should deliver that news before the petition rather than after the distribution. Often we see the guaranty question surface only when the company case ends, which is months after the answer could have shaped the strategy.

The Automatic Stay and Its Boundaries

Filing triggers the automatic stay, and daily MCA debits collecting a prepetition claim fall within the acts the stay restrains. You file the petition and then you learn what the petition means. A provider seeks stay relief for cause in order to protect and preserve the payment stream the petition interrupted. The stay has exceptions, prior dismissed cases can narrow it further, and owners with a case dismissed within the prior year face a shortened stay that ends on the thirtieth day unless the court extends it. No creditor call, even briefly, should precede counsel review once filing is contemplated.

Guaranties and the Owner Parallel Case

The guaranty survives the company case.

A guarantor is a separate obligor, so the lender pursues the owner while the trustee liquidates the company, and fraud objections of the kind the discharge statutes preserve can threaten any personal discharge the owner seeks in an individual case. Entity liquidation can also carry tax consequences of the kind settlements produce; the federal guidance on canceled debt describes the bankruptcy and insolvency exclusions at principle level. Most MCA funders understand the difference between a company debt and an owner guaranty, and they invoice as if the distinction embarrasses them. The exemptions discussion belongs to state law, which this article does not survey.

Cost, Duration, and the Settlement Alternative

No verified schedule of reorganization costs sits behind this article, so fee questions belong in the engagement letter. The committed alternative is time: three to five years of disposable income inside a plan, against the months of a liquidation. What the owner files, or does not file, this quarter determines which clock starts.

Simply bring the agreements, the filing record, and the cash forecast to the first conversation. Delancey Street offers a free confidential initial review for MCA and small business debt concerns. The company provides debt settlement services and coordinates legal questions with independently licensed counsel, and counsel can review and analyze whether negotiation or filing fits the position. Confirm eligible accounts, fees, and scope before anything is signed or filed.

Bankruptcy divides the viable from the finished, and most businesses live somewhere between those poles until the documents are read. Most owners choose from fear of the filing rather than arithmetic of the debts. I understand why, because the filing feels like the event while the debts stay in the background. The file that reaches counsel complete is the file that ends by decision rather than by drift.