Subchapter V: Eligibility under Section 1182

The Statutory Framework

Eligibility for Subchapter V is governed by 11 U.S.C. § 1182, which adopts (with modifications) the definition of "small business debtor" found in Section 101(51D). Section 1182(1)(A) defines "debtor" for purposes of Subchapter V as a person engaged in commercial or business activities (excluding a person whose primary activity is owning single asset real estate) that has aggregate non-contingent liquidated secured and unsecured debts not exceeding a statutory ceiling, not less than 50 percent of which arose from the commercial or business activities of the debtor.

Four elements must be satisfied at the petition date:

1. Person engaged in commercial or business activities;
2. Aggregate non-contingent, liquidated debts within the statutory ceiling;
3. At least 50 percent of debts arising from commercial or business activities; and
4. Not a person whose primary activity is the business of owning single asset real estate.

The Debt Ceiling: $3,024,725 (Current)

The Subchapter V debt ceiling has moved twice since enactment. The SBRA originally set the ceiling at $2,725,625 (an inflation-adjusted Section 101(51D) figure subject to triennial adjustment under Section 104). The CARES Act temporarily raised the ceiling to $7,500,000 effective March 27, 2020. That temporary ceiling was extended twice and finally lapsed on June 21, 2024.

Effective June 22, 2024, the ceiling reverted to the inflation-adjusted figure under Section 101(51D), which Judicial Conference triennial adjustments set at $3,024,725 for the period April 1, 2025 through March 31, 2028. The next scheduled adjustment is April 1, 2028.

The debt-ceiling calculation includes both secured and unsecured debts but excludes contingent and unliquidated claims. Disputed but liquidated claims are counted; truly unliquidated claims (for example, unresolved tort claims for non-economic damages) are not. The eligibility test runs at the petition date; subsequent claim allowance or amendment generally does not retroactively eliminate eligibility, but cause may exist to convert or dismiss a case that was filed in good faith on incomplete information.

The Primarily-Commercial-Debt Rule

Section 1182(1)(A) requires that "not less than 50 percent" of debts arose from the commercial or business activities of the debtor. The test is by aggregate dollar amount, not number of claims. The calculation typically excludes consumer-debt-by-origin items such as residential mortgages, personal credit-card balances, and personal auto loans.

This rule has the most teeth in individual Subchapter V cases. An individual debtor whose largest debt is a residential mortgage will often fail the 50-percent test even if the underlying business generated the financial distress. Courts have generally taken a substance-over-form approach, looking to the use of loan proceeds rather than the nominal name on the obligation. A personally guaranteed business line of credit counts as business debt; a HELOC drawn down to pay personal living expenses generally does not, even if the borrower is a business owner.

The Single-Asset-Real-Estate Exclusion

Section 1182(1)(B)(i) excludes from Subchapter V eligibility "a person whose primary activity is the business of owning single asset real estate." The term "single asset real estate" (SARE) is defined in Section 101(51B) as real property constituting a single property or project (other than residential real property with fewer than four units) that generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is conducted other than the business of operating the real property.

SARE exclusion litigation centers on whether the debtor conducts "substantial business" beyond operating the real estate. Hotels, restaurants, and full-service hospitality businesses generally fall outside SARE because of the active-service component. Pure rental properties (whether residential or commercial), parking lots, and storage facilities typically fall within SARE. Mixed-use cases turn on the proportion of revenue tied to active services versus passive rent.

The exclusion also bars affiliated entities organized as separate SAREs from aggregating to satisfy the 50-percent commercial-debt rule. Two related single-purpose entities each owning one rental property typically cannot combine under Section 1182(1)(B)(iii) (affiliated-debtor aggregation) to qualify when neither would qualify standing alone.

Affiliated-Debtor Aggregation: Section 1182(1)(B)(iii)

Section 1182(1)(B)(iii) provides that the debt ceiling is calculated by aggregating the debts of all debtors that are "affiliates" within the meaning of Section 101(2). Affiliate status generally requires 20-percent voting-stock ownership (Section 101(2)(A)) or operating-control linkages.

The aggregation rule prevents debtors from filing parallel Sub V cases for related operating entities, each below the ceiling but collectively above it. A holding company and three operating subsidiaries with combined debts of $4 million cannot each elect Subchapter V even if no single entity exceeds $3,024,725. The aggregation works in both directions: a corporate Sub V debtor whose principal individually owes another $400,000 in personal guarantees on entity debt may be ineligible if the principal’s personal debts plus the entity’s debts together exceed the ceiling and aggregation applies.

Public Company Exclusion: Section 1182(1)(B)(ii)

Section 1182(1)(B)(ii) excludes any debtor that is a corporation subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. SEC-registered public companies cannot elect Subchapter V regardless of debt level. Affiliates of public reporting companies are likewise excluded.

This exclusion is rarely litigated because public companies large enough to be SEC-registered almost always exceed the debt ceiling. The exclusion does occasionally surface for small over-the-counter reporting companies that have lost their operating businesses but retain registration status, and for affiliates of reporting parents that themselves operate small businesses below the ceiling.

Election Timing and Procedure

The Subchapter V election is made on the bankruptcy petition under Federal Rule of Bankruptcy Procedure 1020. Item 8 of Official Form 101 (individual debtors) and the corresponding item on Official Form 201 (non-individual debtors) include the affirmative Sub V election checkbox.

The election controls procedure throughout the case. A debtor that fails to elect at filing may amend the petition to add the election, subject to Bankruptcy Rule 1009; the amendment generally runs from the petition date for procedural purposes. A debtor that elects Sub V but proves ineligible faces removal of the election by court order, typically on motion by the United States Trustee, a creditor, or the Sub V trustee.

The election can also work in reverse. A standard Chapter 11 debtor may convert to Subchapter V by amendment if eligibility is satisfied. The case retains its petition-date number but proceeds under the Sub V procedural framework from the date of the amendment. Practitioners should be alert to the recalculation of the 90-day plan-filing deadline under Section 1189(b), which courts typically run from the date the election becomes effective, not the original petition date.

Related Sections and Topics

• SBRA overview
• Section 1182 statute page
• Subchapter V trustee role
• Plan confirmation strategy
• Discharge mechanics
• Section 1181 inapplicability of other Chapter 11 sections