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As small business bankruptcies rise in some equipment industries, Subchapter V of Chapter 11 is gaining favor as a faster, cost-effective way to settle debts between creditors and debtors.
Small business bankruptcies, or Subchapter V filings, increased 6% year over year through the first nine months of 2025, according to legal and compliance services firm Epiq.
At least 41 freight carriers filed for Chapter 11 bankruptcy over the past two quarters. Meanwhile, bankruptcies filed by small farms and fishermen reached nearly 200 in the first half of 2025, the highest level since 2020.
Traditional Chapter 11 proceedings create headaches for many lenders and debtors, so Subchapter V filings are becoming more common in cases involving equipment loans to small businesses, Andrew K. Alper, vice president and shareholder of Los Angeles-based law firm Frandzel, said in a panel discussion at the National Equipment Finance Association conference last week.
Subchapter V was created in 2019 to streamline the reorganization process for small businesses. To qualify, a debtor’s noncontingent debt must be $3.424 million or less, Alper said. “Noncontingent” means there are no conditions or future events that could affect the amount of debt owed.
Greater flexibility than Chapter 11
Subchapter V provides debtors greater flexibility in negotiating restructuring plans, and can also benefit creditors by removing the creditors committee, Alper said.
“In the big bankruptcies, there’s a creditors committee that protects unsecured creditors, and all they do is end up running up big bills for the most part and hurt everybody else.”
— Andrew K. Alper, VP and shareholder, Frandzel
The committee, appointed by a United States trustee and comprising the largest unsecured creditors, plays a key role in Chapter 11 cases as its members negotiate on behalf of all unsecured creditors.
However, debtors are responsible for the committee’s legal and administrative fees, inhibiting their ability to pay off equipment loans as some cases drag on, Sara Costanzo, a shareholder and creditors rights attorney at Weltman, Weinberg & Reis in Cleveland, said at the event.
“Administrative expenses, administrative claims are treated with priority,” she said. “As administrative claims increase… those become the priorities, so there’s less money there in the plan to pay absolutely any other party. Regardless if you’re secured, if there’s not enough there to pay you, you may not be recovering.”
“Pay absolutely” refers to the absolute priority rule, which dictates the creditors that get paid first and in full. A junior class of creditors or equity holders cannot recover or retain anything unless all senior creditors are paid in full, according to the Federal Bar Association.
But unlike Chapter 11, there is no absolute priority rule in Subchapter V cases, Frandzel’s Alper said.
“There’s not even any voting in a Subchapter V,” he said. “The court just looks at the plan as to whether it’s fair and equitable and it’s going to work. And that’s it.”
Moreover, a single trustee presides over Subchapter V cases to “move the case along and make certain things get done in a timely manner,” Alper said.
“They’re not going to sue you for bankruptcy preferences or avoidance actions,” he said. “That’s not their power in these cases. They’re just the traffic cop.”
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