Subchapter V Bankruptcy and Merchant Cash Advance Debt

Subchapter V is a faster, lighter Chapter 11 for small businesses whose counted debts are no more than $3,424,000 today. Filing triggers the automatic stay, which bars funders from collecting old debts from the business, daily debits included, though a funder that claims it bought your receivables can contest that. The owner keeps running the company, files a plan within 90 days and needs a bankruptcy attorney. If the debits are eating your payroll, here is how it works.

Picture Dana, who owns a commercial cleaning company in Columbus, Ohio. Over two years she took advances from five funders, and the company now owes about $557,000 on them. Every business day, $5,033 leaves the operating account: $25,166 a week, $105,698 a month. The company also owes $142,000 on an equipment loan for its vans, $95,000 on a bank line of credit and $61,000 to suppliers and on business credit cards. Last spring Dana lent the company $40,000 of her own savings to make payroll.

That stack matches the one Hamilton & Merchant Research built in What a $500,000 Merchant Cash Advance Stack Costs: five funders, with APR-equivalents from 63% to 205%. The same model shows why it cannot last. At the 8.56% average net margin of U.S. public companies outside finance (margins from NYU Stern, January 2026), profit alone covers those debits only at about $1.2 million a month in revenue. Dana's company brings in about $380,000 a month.

I work on the accounting side of debt, not the legal side. Hamilton & Merchant is not a law firm, nothing here is legal advice, and a bankruptcy case needs your own bankruptcy attorney. My aim is to explain each rule one term at a time, so you reach that attorney with the right questions. Our guide to merchant cash advance debt over $500,000 covers the other paths.

What is Subchapter V bankruptcy?

Subchapter V is a part of Chapter 11 of the Bankruptcy Code built for small businesses. The business files, keeps operating and proposes a plan to pay its creditors over time from what it earns. Congress created it in the Small Business Reorganization Act, often shortened to SBRA (U.S. Trustee Program, Subchapter V page).

Two definitions before going further. The debtor is the business that files the case. The plan is the debtor's written proposal for how much each creditor will be paid, from what money and over how long.

What separates Subchapter V from an ordinary Chapter 11 is a short list of rules, each covered in its own section below:

• The plan is due within 90 days after the order for relief, and only the debtor may file one (11 U.S.C. 1189).
• A Subchapter V trustee is appointed in every case, and one of the trustee's duties is to facilitate a consensual plan (U.S. Trustee Program; 11 U.S.C. 1183).
• No creditors' committee is formed and no disclosure statement is required unless the court orders otherwise for cause (11 U.S.C. 1181(b)).
• If creditors vote no, the court can still confirm the plan under a Subchapter V test, without the absolute priority rule (11 U.S.C. 1181(a) and 1191).

Read together, those rules describe a lighter, quicker Chapter 11 in which the owner holds the pen.

What is the Subchapter V debt limit?

Today the limit is $3,424,000 of counted debt, for cases filed on or after April 1, 2025. Cases filed from June 21, 2024 through March 31, 2025 used $3,024,725. A bill that would raise the limit to $7.5 million has passed both houses of Congress but, as of October 9, 2026, was not law.

Here is how the pieces connect. Section 1182(1) of the Bankruptcy Code now defines a Subchapter V debtor simply as a "small business debtor," so the dollar limit is the figure in the small business debtor definition at 11 U.S.C. 101(51D) (U.S. Trustee Program, Subchapter V page; 11 U.S.C. 1182, Cornell Legal Information Institute).

You may still read articles that quote $7.5 million. That was a temporary Subchapter V limit, and it expired on June 21, 2024. It may come back. H.R. 7730, the Bankruptcy Threshold Adjustment Act, passed the House by voice vote on September 16, 2026 and the Senate without amendment on September 28, 2026. As of October 9, 2026, Congress.gov showed no signature and no public law number. If it becomes law, it would write a $7,500,000 limit, excluding debts owed to affiliates or insiders, back into 11 U.S.C. 1182(1), with no sunset in its text, for cases filed on or after the date it becomes law (Congress.gov record for H.R. 7730, 119th Congress, checked October 9, 2026; engrossed bill text on govinfo.gov).

So if your counted debts sit between $3,424,000 and $7.5 million, today's rules leave you outside Subchapter V. Whether to file an ordinary Chapter 11, wait on the bill or take another path is a timing decision for your attorney, and nobody can promise when, or whether, the bill will be signed.

Do merchant cash advance balances count toward the limit?

Very likely, yes. The limit counts noncontingent, liquidated debts, and a Colorado bankruptcy court treated defaulted merchant cash advance balances as both.

Two more terms. A debt is noncontingent when the duty to pay does not depend on a future event that may never happen. It is liquidated when the amount is fixed or can be readily calculated. Under 11 U.S.C. 101(51D), the limit counts noncontingent, liquidated secured and unsecured debts as of the filing date, with these conditions (Cornell Legal Information Institute):

• Debts owed to affiliates or insiders are left out of the count. A loan from the owner who runs the company is the common example, but have your attorney confirm who counts as an insider.
• At least 50 percent of the debt must have come from the debtor's commercial or business activities.
• Single-asset real estate businesses and companies that report to the SEC are excluded.

For advances, the question is whether a funder's balance is noncontingent and liquidated when the funder says it bought future receivables rather than lent money. In In re Heart Heating & Cooling, LLC (Bankr. D. Colo., March 21, 2024), the court treated defaulted merchant cash advance balances as noncontingent and liquidated, so they counted. That ruling is quoted in the "Merchant Cash Advance Loans in Bankruptcy" seminar materials hosted by the U.S. Bankruptcy Court for the Western District of Virginia, 2025. It is one court, so I would plan as if your balances count.

A worked example with Dana's numbers

This is the first arithmetic I do with an owner in Dana's position:

1. Merchant cash advance balances, five funders: $557,000.
2. Equipment loan on the vans: $142,000.
3. Bank line of credit: $95,000.
4. Suppliers and business credit cards: $61,000.
5. Dana's own $40,000 loan to the company: left out, because it is owed to an insider.

Counted debt: $557,000 + $142,000 + $95,000 + $61,000 = $855,000. That is $2,569,000 under today's $3,424,000 limit, and all of it came from running the business, so the 50 percent test is met. Have your attorney check your own count, since whether a debt counts is a legal question and the count is taken as of the filing date.

Can Subchapter V stop merchant cash advance payments?

Filing puts the automatic stay in place, and the stay bars collection of the business's pre-filing debts, including a funder's daily debits. The open question is whether a funder that claims it bought your receivables outright is collecting a debt at all. Courts have answered that differently, so treat relief from the debits as something a funder may contest; results vary.

The automatic stay is a legal bar that arises the moment the petition is filed, without a judge signing anything first. Under 11 U.S.C. 362(a), it stays three things that matter most to a business with advances (Cornell Legal Information Institute):

1. Any act to collect a claim against the debtor that arose before the case, under 362(a)(6). A daily ACH debit on an advance treated as a loan is an act to collect.
2. The enforcement of judgments obtained before the filing, including confession-of-judgment judgments, under 362(a)(2).
3. Any act to take or control property of the estate, under 362(a)(3). The estate, in plain terms, is the property the business owns when it files.

The true-sale catch

A merchant cash advance contract is written as a purchase: the funder says it bought a share of your future receivables. If a court treats the advance as a true sale, the sold receivables are not property of the estate, the business cannot freely use that cash, and the automatic stay does not protect them. If the court treats it as a loan, the funder holds a secured or unsecured claim like other creditors ("Merchant Cash Advance Loans in Bankruptcy" seminar materials hosted by the U.S. Bankruptcy Court for the Western District of Virginia, 2025).

Two decisions show how differently this can go:

• In VPR, LLC v. Vox Funding, a 2024 Subchapter V case in the Western District of Virginia, the court's interim order of June 13, 2024 barred a funder from collecting the debtor's receivables under the automatic stay and directed the debtor's customers to pay the debtor despite the funder's payment demands. It did so without yet deciding whether the advance was a loan or a sale (the order as reproduced in the same seminar materials).
• In Carr's Plumbing, on March 9, 2026, the U.S. Bankruptcy Court for the District of Kansas denied, without prejudice, a debtor's motion to enforce the stay against a funder that had notified the debtor's customers. The court said ownership of the receivables needed a fuller presentation of evidence in an adversary proceeding, which is a separate lawsuit inside the bankruptcy case.

"Without prejudice" means the debtor could ask again with more evidence. The lesson I take from the pair: if a funder writes to your customers after you file, a quick motion may not be enough, and the separate lawsuit costs time and money.

A debit that posts after the filing

One bankruptcy court held that a creditor's ACH debit from the debtor's bank account after the filing was a willful violation of the automatic stay (In re Snowden, Bankr. W.D. Wash., Dec. 10, 2009). That creditor was a payday lender, not a merchant cash advance funder, and no ruling sanctioning a merchant cash advance funder for a post-filing debit was found. Before the filing date, ask your attorney how notice will reach each funder and your bank, and what to do if a debit posts anyway.

One caution for the days before a filing. If you block the debits or move deposits to a new account on your own, that act can breach the advance contract, and it may be exactly what a personal guaranty of performance covers. Read how to stop MCA ACH withdrawals the right way and talk to your attorney first. If a funder has already frozen an account, see what to do when a business bank account is frozen, and if a funder holds a judgment, see our guide to confessions of judgment in MCA contracts.

How do bankruptcy courts treat merchant cash advance funders?

First the court decides, if anyone asks it to, whether the advance is a loan or a true sale, and bankruptcy courts have split on that. If it is a loan, the funder is a creditor with a claim to be paid through the plan, and the next question is whether that claim is secured or unsecured.

Loan or true sale

A true sale means the funder bought receivables and took the risk that they might never come in. A loan means the business must repay however its sales go. To decide, courts read the terms, not just the title on the first page. Bankruptcy courts have come out both ways (the court opinions, on govinfo.gov and nysb.uscourts.gov):

• Loans: Cap Call, LLC v. Foster (In re Shoot the Moon, LLC) (Bankr. D. Mont., Sept. 10, 2021), covering 18 transactions, after trial; GMI Group, Inc. v. Unique Funding Solutions, LLC (Bankr. N.D. Ga., Aug. 9, 2019); and Togut v. eProdigy Financial, LLC (In re Kossoff PLLC) (Bankr. S.D.N.Y., July 27, 2026), on partial summary judgment.
• Sale: Guttman v. EBF Holdings, LLC (In re Global Energy Services, LLC) (Bankr. D. Md., March 31, 2025), at the motion-to-dismiss stage.

The Kossoff court described the case law as split but moving toward loan treatment: "more recently an increasing number ... have concluded that similar transactions are disguised loans." In June 2026 the U.S. Bankruptcy Court for the Eastern District of Louisiana held a debtor's agreements to be disguised loans under Florida, New York and Connecticut law (Crosby Tugs, L.L.C. v. Meged Funding Group, In re Crosby Marine Transportation, LLC). Usury and recharacterization claims are for your attorney to judge and bring.

What the research shows

Hamilton & Merchant Research read 59 U.S. court decisions from 2017 to October 8, 2026 on this question: 27 went toward a loan or let a usury claim proceed, 22 held the advance a true sale, and 7 left it for trial. Many loan-side rulings only let a claim proceed at an early stage, so they are not final findings (How Courts Decide Whether a Merchant Cash Advance Is a Loan, October 2026, in the Hamilton & Merchant Research library).

The court you are in matters. Bankruptcy courts in 2025–2026 went toward a loan 10 times and a sale 2 times; New York's Appellate Division in 2024–2026 held for a sale 9 times and a loan 2 times. Reconciliation, the right to have payments adjusted to actual receipts, lined up closely with the result: where a court found a real, mandatory reconciliation right, the funder won 16 of 16 times, and where the clause was discretionary or illusory, the decision went toward a loan 21 of 21 times. No decision calling an advance a true sale found a fixed payment not tied to receipts, a fixed term, or recourse if the business fails. Our explainers on the reconciliation right in MCA contracts and on reading your MCA contract show where to find those terms.

Secured or unsecured claim

A secured claim is backed by a lien on property, such as receivables or equipment. An unsecured claim has nothing behind it and is paid from what the plan offers that group. If a funder filed a UCC-1 financing statement, that is a public notice that it claims an interest in the business's assets. With five funders, filings may overlap on the same receivables, and the order they were filed in, what each covers and what the collateral is worth all bear on how much of each claim is secured. Those are questions for your attorney, but you can do the legwork: pull the UCC filings on your business from your state's filing office and list them by funder and date. Our guides to UCC liens and MCA bank freezes and to getting a UCC lien removed after payoff cover the rest.

How long does Subchapter V take?

The first deadline is short: the business must file its plan within 90 days after the order for relief, which is the legal starting point of the case. If the plan is confirmed over creditors' objections, the Subchapter V test looks at three years of projected disposable income, or a longer period of up to five years that the court sets.

Ninety days is roughly three months; a case that begins in early March has a plan due around the end of May, and your attorney will give you the exact date. The court may extend the deadline only for circumstances the debtor should not be held accountable for (11 U.S.C. 1189), so I would plan as if the date cannot move. Three other rules shape those months:

1. Only the debtor may file a plan; creditors cannot file competing plans (11 U.S.C. 1189). Funders can vote against yours, but they cannot put their own in front of the court.
2. A Subchapter V trustee is appointed in every case, unlike other Chapter 11 cases, and one of the trustee's duties is to facilitate a consensual plan, meaning one the creditors accept (U.S. Trustee Program; 11 U.S.C. 1183).
3. No creditors' committee, a group of creditors organized to act together in the case, is formed, and no disclosure statement, a separate detailed explanation of the plan sent before the vote, is required unless the court orders otherwise for cause (11 U.S.C. 1181(b)).

What can a Subchapter V plan do with merchant cash advance debt?

A plan proposes to pay funders from what the business can afford over three to five years, instead of what the contracts demand each day. If creditors reject it, the court, at the debtor's request, must still confirm it if it does not discriminate unfairly and is fair and equitable (11 U.S.C. 1191(b)). Whether a given plan passes is for the court; results vary.

Among its requirements, a Subchapter V plan that is fair and equitable commits all projected disposable income for three years, or a longer period of up to five years that the court sets (11 U.S.C. 1191(c)). Projected disposable income, in plain words, is the money the business expects to bring in over that period that it does not need to keep operating. Here is the arithmetic only, with an invented figure: if Dana's projections showed $9,000 a month to spare, three years would be 36 × $9,000 = $324,000 and five years 60 × $9,000 = $540,000. Today her five advances take $105,698 a month, more than eleven times that figure.

Cramdown is the term for confirming a plan over creditors' objections. The ordinary Chapter 11 cramdown section, 11 U.S.C. 1129(b), contains the absolute priority rule, and it does not apply in Subchapter V (11 U.S.C. 1181(a) and 1191). So owners can keep their ownership without paying unsecured creditors in full, if the court confirms a plan that meets the Subchapter V test.

Does Subchapter V protect my personal guarantee?

Not automatically. The automatic stay protects the debtor that filed, and its collection provision covers acts to collect "a claim against the debtor." An owner who signed a personal guarantee but has not filed is not the debtor in the business's case, so the business's filing does not automatically protect the owner as guarantor (11 U.S.C. 362(a), Cornell Legal Information Institute).

Your exposure turns on the exact words you signed and on which events count as a default, such as whether a bankruptcy filing with no other breach triggers it. A guaranty of payment promises the money if the business does not pay. A guaranty of performance promises only that the business will keep its contract promises, such as not diverting deposits or closing the account. Four opinions show the wording at work:

• Global Energy (Bankr. D. Md., March 31, 2025): the guaranty covered the business's duties to do or not do certain things, not payment on default, which supported treating the advance as a sale.
• Shoot the Moon (Bankr. D. Mont., Sept. 10, 2021): "an absolute, primary, and continuing guaranty of payment and performance" was one of the recourse terms behind holding 18 transactions were loans.
• Kossoff (Bankr. S.D.N.Y., July 27, 2026): the guarantee covered only compliance, but the court gave that little weight because a breach would almost always come first, and held the advances were disguised loans.
• GMI Group (Bankr. N.D. Ga., Aug. 9, 2019): a guaranty of performance only, yet a loan, because a default clause made repayment effectively certain.

Plan around this with counsel. The business's attorney represents the business, so ask whether you need separate advice as guarantor. Our guide to personal guarantees in merchant cash advance contracts goes deeper.

Is debt forgiven in a Subchapter V case taxable?

Forgiven debt is generally taxable income, "income from discharge of indebtedness," unless an exclusion applies (26 U.S.C. 61(a)(11); IRS Publication 4681, 2025). The two that matter most for a business are debt forgiven in a bankruptcy (title 11) case and debt forgiven while insolvent (26 U.S.C. 108(a)(1)(A)–(B)). Which one fits depends on how the business is taxed, so this is a CPA conversation.

• For a partnership, including a multi-member LLC taxed as one, the tests apply owner by owner; for an S corporation, at the company level (26 U.S.C. 108(d)(6) and 108(d)(7)(A)).
• Insolvency means liabilities exceed the fair market value of assets immediately before the cancellation, and the exclusion is capped at that gap (26 U.S.C. 108(a)(3) and 108(d)(3)). Liabilities of $900,000 against assets worth $700,000 cap it at $200,000. It is claimed on Form 982, line 1b.
• Excluded amounts reduce tax attributes such as net operating losses and basis (26 U.S.C. 108(b)).
• Applicable financial entities must file Form 1099-C for each canceled debt of $600 or more when an identifiable event occurs (IRS Instructions for Forms 1099-A and 1099-C, rev. 04/2025).

Not settled: how settling an advance written as a purchase of receivables is taxed, and whether a given funder issues a Form 1099-C. Put both on your CPA's list.

How does Subchapter V compare with Chapter 11 and an out-of-court deal?

Subchapter V is lighter and faster than an ordinary Chapter 11, and unlike an out-of-court restructuring it brings the automatic stay and a court that can confirm a plan over objections. An out-of-court deal avoids court but needs every funder to agree.

For more depth, see bankruptcy vs. settlement vs. restructuring and the guide to settling with an MCA funder.

What should I bring to a bankruptcy attorney?

Bring documents, not memory. I grew up in a California military family, where every move started with one binder of papers; build that binder here:

1. Every advance contract and each funder's payment history.
2. Bank statements with each funder's debits marked.
3. Every other debt: lender, balance, collateral.
4. Every personal guarantee, with its signature page.
5. Lawsuits, judgments and funder letters to customers.
6. UCC filings, listed by funder and date.
7. Recent financial statements, tax returns and any owner loans to the company.

Your first 30 days

1. Week 1: Do the limit count above with your own numbers.
2. Week 1: Do not block debits, close accounts or move deposits on your own.
3. Week 1: Build the binder.
4. Week 2: Meet at least two bankruptcy attorneys who handle Subchapter V cases. Ask how they would answer a true-sale claim, and get fees in writing.
5. Week 3: Ask your CPA how the business is taxed and what forgiven debt would mean.
6. Week 4: Get advice on your personal guarantee. Log every debit and funder contact throughout.

To understand your stack before that first attorney meeting, call Hamilton & Merchant at (407) 993-1416 for a free, confidential first conversation about your stack. Hamilton & Merchant is not a law firm and does not file cases; results vary.

Questions and answers