CPAs: 5 Things to Know about Subchapter 5 Bankruptcy

E.J. Simonsen | Jul 6, 2022

Subchapter 5 bankruptcy was added to Chapter 11 of the U.S. Bankruptcy Code in 2020. This makes it one of the newest forms of reorganization bankruptcy available to Texas businesses today. As such, many CPAs, accountants, and other business financial advisers either aren't aware of it or don’t fully understand how different it is from other types of bankruptcy. 

As a firm that handles business debt relief and business bankruptcy, The Lane Law Firm has seen first-hand what Subchapter 5 bankruptcy can do for our clients. 

First, it was created to save small businesses, not liquidate them. 

Second, it makes a Chapter 11 bankruptcy more accessible, both in cost and speed, to small businesses, and in our time working with clients to file and reorganize their debt, we've seen that it's been highly successful. 

In most cases, Chapter 11, Subchapter 5 bankruptcy reduces secured debt down to the value of the underlying assets, and reduces unsecured debt by 70-95%.  Read our recent case study where we were able to resolve 90% of one business's total debt. 


If you're a CPA or an accountant working with small businesses, and you've been wondering about the viability of Chapter 11, Subchapter 5 bankruptcy, this article is for you. Here are 5 things CPAs need to know about Subchapter 5, including who is eligible, and how you fit into the process. 

1. How Does a Business Qualify for Subchapter 5 Bankruptcy?

Subchapter 5 bankruptcy is designed to help small business owners reorganize debt and develop a plan to pay down remaining debt, without shutting down business operations. While any business can file a traditional Chapter 11 bankruptcy, Subchapter 5 is limited to businesses that meet the following requirements. 

To qualify for a Subchapter 5 business bankruptcy:

  1. The company must still be pursuing business activities
  2. 50% of the business's debt must come from business activities
  3. The business must have non-contingent debt* of less than $7,500,000

*Disputed debt (ex. alleged sales of receivables) are generally excluded from this calculation

2. How Can a CPA Advise a Business About Subchapter 5 Bankruptcy?

The qualifications are just one element to understand about Subchapter 5 bankruptcy. But how can CPAs know if a business is a good fit for bankruptcy? 

It's never easy to tell anyone that bankruptcy is the best option. But a major benefit of a Subchapter 5 bankruptcy is that the business owner can retain their equity and continue management during the bankruptcy while looming payment obligations are paused. In many cases, bankruptcy is the only option that guarantees enough breathing room to save the business and the business owner from financial ruin. 

You may consider advising a business about a Subchapter 5 bankruptcy if the business fits one or more of the below situations:

  • The business is unable or cannot reasonably refinance its debt
  • Assets secured by debt are worth far less than the debt itself (underwater)
  • Predatory lenders took advantage of or are harassing the business owner
  • You, the CPA, recognize that there is no better way for the business to get itself out of this level of debt
  • The business owner is committed to keeping the business going, and you can see a path forward if the debt is restructured or reduced

If you're working with a business where one or more of the above situations applies, then Subchapter 5 business bankruptcy may be an option.

3. What is a CPA's Role in a Subchapter 5 Bankruptcy?

As a CPA, you know when a business qualifies for Subchapter 5. You can recommend Subchapter 5 bankruptcy when you feel it's the right move for your clients. As you know, they're not obligated to take that advice, but we feel it's important that all CPAs have the information they need to understand Subchapter 5, and to be able to confidently recommend it as a solution for right-fit clients. 

Once a business has decided to file a Subchapter 5 bankruptcy, you can continue to work with them to ensure the business’s monthly financial reporting is accurate, and develop financial projections that show the business is on the right track. 

4. How Do CPAs Get Paid if a Client is Filing Bankruptcy?

Many CPAs understand the benefits of bankruptcy, but it's natural to worry that if a client goes bankrupt, you may be unable to collect their past-due bill or continue on retainer for your services. Luckily, in most Chapter 11, Subchapter 5 bankruptcies, a CPA can not only reclaim past due balances but can also be paid as the bankruptcy case progresses. 

In fact, many CPAs don't know that it's actually easier to get paid during a bankruptcy than it is to get paid for work done before the bankruptcy. Too often, we find CPAs feel that when they have an outstanding balance due, they'll likely never see payment. As the client is fast approaching a point of no return, it can seem like there's no hope for that outstanding balance. Subchapter 5 often solves this dilemma and turns an uncollectible bill into a paid bill and more paid work. 

For the court to confirm a reorganization plan for a business, the plan has to accommodate for professional and administrative fees. We make sure that a CPA's effort during bankruptcy is properly prioritized for payment. Moreover, in some cases, we request that the court appoint the CPA as a contract CFO. Regardless, the work a CPA does during the bankruptcy process is fairly easy to account for and you can be assured of receiving payment. 

5. Who Can CPAs Turn To for Help With a Client's Subchapter 5 Bankruptcy?

The Subchapter 5 bankruptcy process is right for some businesses, but advising a business that it's their best option is only the first step. Once a business decides to file for Chapter 11, Subchapter 5 bankruptcy, where do you go from there?

A qualified business bankruptcy attorney can help facilitate the legal proceedings of a Subchapter 5 business bankruptcy. From submitting the legal filings to keeping predatory lenders like merchant cash advance companies at bay, an experienced attorney can handle the tricky legal elements of bankruptcy. This gives you the space you need to work with the business owner to develop a financial reorganization plan that gets the business back on its feet. 

CPAs: Is Subchapter 5 Right for Your Clients?

Subchapter 5 bankruptcy is new, but that doesn't mean it can't be beneficial for your clients. If you're a CPA who is working with small businesses in over their heads in debt or those who are constantly harassed by debt collectors or MCA companies, it's important to know that Subchapter 5 is an option. 

For more information on how to work with businesses who may be good candidates for Subchapter 5, get in touch with our team, or consider learning more about our CPA Collaboration & Debt Restructuring Program. We work with CPAs like you to find financial solutions for small businesses.


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