Chapter 13 is for individuals with regular income and debts under the § 109(e) limits. Chapter 7 shuts the business down. If you own a business that owes the IRS and you want to keep operating, the realistic bankruptcy tool is often Chapter 11, and for smaller businesses that usually means Subchapter V.
Here is how Subchapter V treats tax debt, and where business owners get surprised.
Who qualifies for Subchapter V
Subchapter V is available to a "small business debtor," defined in 11 U.S.C. § 101(51D). In plain terms, that is a person or entity engaged in commercial or business activities with aggregate noncontingent, liquidated secured and unsecured debts under a dollar cap, not counting debts owed to affiliates or insiders, at least 50 percent of which arose from the debtor's business activities. Certain public companies and their affiliates are excluded.
The cap has moved around. A temporary higher limit enacted during the pandemic expired in June 2024, and the limit reverted to the § 101(51D) figure, which is adjusted for inflation every three years. For cases filed on or after April 1, 2025, that figure is $3,424,000. Check the amount in effect on your filing date, because the next adjustment is scheduled for April 2028.
Tax debt counts toward the cap. An individual who runs a business as a sole proprietor can use Subchapter V, and that is often the route for someone whose debts are too large for Chapter 13.
Why Subchapter V is different from regular Chapter 11
- Only the debtor files a plan, and it must be filed within 90 days after the order for relief unless the court extends the deadline for circumstances you should not justly be held accountable for (11 U.S.C. § 1189).
- No absolute priority rule. Section 1181(a) makes § 1129(b) inapplicable. Instead, a plan can be confirmed over creditor objection under § 1191(b) if it does not discriminate unfairly, is fair and equitable, and commits all projected disposable income for three to five years (§ 1191(c)). Owners can keep their equity without paying unsecured creditors in full.
- No creditors' committee unless the court orders otherwise, and no disclosure statement requirement in most cases (§ 1181(b)).
- A Subchapter V trustee is appointed to monitor the case and help the parties reach a consensual plan.
How priority taxes must be paid
This is where the IRS has the most leverage. Section 1191(a) requires a Subchapter V plan to meet all of § 1129(a) except paragraph (15), and the cramdown in § 1191(b) does not excuse § 1129(a)(9). So the priority tax rule from regular Chapter 11 still applies.
Under 11 U.S.C. § 1129(a)(9)(C), a priority tax claim under § 507(a)(8) must receive regular installment payments in cash:
- with a total value, as of the plan's effective date, equal to the allowed claim (which means interest);
- over a period ending not later than five years after the date of the order for relief; and
- in a manner not less favorable than the most favored nonpriority unsecured claim under the plan.
Two details matter. First, the five years run from the filing date, not from confirmation. Every month you spend in the case before confirmation shortens the payment period. Second, because the payments must equal the claim's value as of the effective date, the IRS gets interest, and under 11 U.S.C. § 511 the rate is the nonbankruptcy rate, fixed as of the month the plan is confirmed. That is a real difference from Chapter 13; see interest on tax debt in bankruptcy.
Section 1129(a)(9)(D) applies the same treatment to a secured tax claim that would be a priority claim if it were not secured. A recorded lien does not give the IRS a longer leash, but it does not give you one either.
Payroll taxes: the business and the owner are different taxpayers
Unpaid payroll taxes are the most common reason small businesses end up here. The withheld portion is a trust fund tax, and trust fund taxes are priority claims under § 507(a)(8)(C) no matter how old they are. The plan has to pay them under the § 1129(a)(9)(C) rules.
The other problem: if the business is a corporation or LLC, its bankruptcy does not protect you personally. The IRS can assess the trust fund recovery penalty against responsible persons, and the owner's personal liability is a separate debt. Whether the IRS can pursue you while the business plan pays the same tax is a question to sort out before filing, not after. See trust fund taxes and the TFRP in bankruptcy and the overview of payroll tax problems.
What the discharge covers
The discharge depends on how the plan was confirmed:
- Consensual plan (§ 1191(a)). The general Chapter 11 discharge in § 1141(d) applies, except that § 1141(d)(5), which delays an individual's discharge until plan payments are complete, does not apply in Subchapter V. For an individual, § 1141(d)(2) still excepts any debt that § 523 makes nondischargeable, including taxes under § 523(a)(1). For a corporation, § 1141(d)(6)(B) excepts taxes for which the debtor made a fraudulent return or willfully attempted to evade or defeat the tax.
- Nonconsensual plan (§ 1191(b)). Under § 1192, the discharge comes after you complete the payments due within the first three years of the plan (or a longer period the court fixes, up to five years). It excludes debts on which the last payment is due later, and debts of the kind specified in § 523(a). Courts have disagreed about whether that § 523(a) language reaches corporations and LLCs or only individuals, so a business entity should not count on avoiding it.
Practically, priority taxes get paid through the plan either way. The discharge question matters most for older tax debt and for anything the plan does not pay in full.
Is it worth it?
Subchapter V is expensive compared with Chapter 13 and slow compared with Chapter 7. It tends to make sense when the business is viable going forward, the tax debt is mostly priority and can be paid within five years of filing, and there is also a large pile of other unsecured debt the plan can cut down. It tends not to make sense when the tax debt alone cannot be paid in five years, or when the real problem is the owner's personal trust fund liability rather than the company's debts.
For individuals under the § 109(e) limits, compare it with Chapter 7 and Chapter 13. For a business that owes but is not ready for bankruptcy, start with what to do when a small business owes back taxes.
Run the numbers before you run to court
A Chapter 11 case with tax debt is a cash flow projection that the IRS gets to cross-examine. Call Darrin T. Mish, tax attorney, at (813) 229-7100 to look at whether your business can carry a plan before you file one. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation. Five years from filing goes faster than five years from confirmation.