Subchapter V Bankruptcy for Franchisees

Subchapter V is a streamlined Chapter 11 bankruptcy built for small businesses, and franchise owners can use it. Filing stops collection that day, keeps you in control of the business, and rolls the royalties and rent you have fallen behind on, vendor balances, and loan debt into one court-approved repayment plan, generally three to five years. Your franchise agreement is not automatically lost when you file.

Updated August 2026.

A franchise is not a generic small business. Someone else owns the brand you operate under, a royalty invoice arrives whether or not the month was good, and the agreement that makes all of it possible has its own life inside a bankruptcy case. This page covers those franchise-specific pieces. For the case mechanics that apply to every small business, start with our Subchapter V bankruptcy overview.

Can a franchisee file Subchapter V bankruptcy?

Yes, if the business is engaged in commercial activity and its qualifying debt is at or under the Subchapter V limit, which is $3,424,000 for cases filed on or after April 1, 2025. The count includes both secured debts, the ones with collateral behind them, and unsecured debts, the ones without, so long as they are fixed in amount and actually owed (the statute calls them noncontingent and liquidated). It leaves out debt owed to your own affiliates and insiders, and at least half of the total must come from business activity (11 U.S.C. §101(51D)). A franchised restaurant sits in both worlds, and our Subchapter V for restaurants page covers the extra rules that come with food service, including produce-supplier trusts and the way Pennsylvania and New Jersey treat liquor licenses.

A franchise debt stack usually fits that shape. The loan that funded the build-out, royalty and ad-fund arrears, back rent, equipment financing, and supplier balances are all business debts, so the half-from-business test is rarely the problem. The limit is what to watch, and it moves: the figure adjusts every three years, and the temporary $7,500,000 limit you may have read about expired on June 21, 2024. Any article still quoting it is out of date. Our current bankruptcy numbers page tracks the figures that control filing decisions.

What happens to my franchise agreement when I file?

Nothing happens to it automatically. Bankruptcy law treats a franchise agreement as an executory contract (a contract where both sides still owe each other ongoing obligations), and the choice of what to do with it sits on your side of the case, with court approval: keep it or walk away (11 U.S.C. §365(a)). In Subchapter V you make that call as the debtor in possession, the owner who keeps running the business while the case is open.

Keeping it means catching up. To assume the agreement, the legal word for keeping it, you must cure the defaults (catch up what you owe, or show the court you promptly will), compensate the franchisor for its actual losses from the default, and show you can perform going forward (§365(b)(1)). So the royalty arrears, the payments you have already missed, do not vanish if you keep the brand. They get paid on terms the court accepts, and building those terms is plan design, not improvisation.

Walking away has a defined price. Rejecting the agreement is treated as a breach that happened immediately before your filing date (§365(g)(1)). That turns the franchisor’s damages into a claim inside your case, generally standing in line with your other unsecured creditors rather than ahead of them (§502(g)).

You do not have to decide on day one. For an executory contract like this one, the decision can wait as late as plan confirmation, although the franchisor can ask the court to set an earlier deadline (§365(d)(2)). Subchapter V compresses that runway anyway, so walk in with a working answer rather than a hope.

Handing it to a buyer is the hard one. Bankruptcy law overrides most contract clauses that forbid assignment (§365(f)), but a separate rule pushes the other way: a contract cannot be assumed or assigned over the other party’s objection where the law outside bankruptcy lets that party refuse to accept performance from anyone but you (§365(c)(1)). Franchise systems are built on the franchisor controlling who operates its brand, so as a practical matter, selling the franchise usually needs the franchisor at the table. We treat consent as something to negotiate, not assume.

Can the franchisor terminate my franchise because I filed?

Not because of the filing itself. Most franchise agreements contain an ipso facto clause (the clause that makes a bankruptcy filing or insolvency itself a default), and bankruptcy law switches those off: once the case starts, the agreement may not be terminated or modified solely because of a provision conditioned on your insolvency or your filing (§365(e)(1)).

The automatic stay (the court order that stops collection the moment you file) adds a second wall. It halts collection of what the business owed before the case and any act to take possession of, or exercise control over, the business’s property (11 U.S.C. §362(a)), and the estate that forms at filing sweeps in all of the business’s legal and equitable interests, your contract rights included (§541(a)).

Timing is the catch. These protections work on an agreement that is still alive when you file. If the franchisor fully terminated it first, there may be nothing left to protect, and whether anything survives becomes a fight you do not want. If default notices are arriving, do not wait out the cure deadline printed in them. We will go through the notices with you in a free consultation while the agreement still exists to be saved.

What happens to the lease on my location?

Your lease runs on a stricter clock than your franchise agreement. A commercial lease is deemed rejected, and the space surrendered, unless you assume it within 120 days after the order for relief (in a voluntary case, the day you file) or by plan confirmation, whichever comes first (§365(d)(4)). The court can extend that once, by 90 days, for cause. After that, only the landlord’s prior written consent buys more time.

While you decide, rent does not pause: the obligations that come due under the lease after filing must be performed on time until the lease is assumed or rejected (§365(d)(3)).

If the location is the problem, rejection comes with a built-in ceiling on the damage. A landlord’s claim for a terminated lease is capped at the rent for the greater of one year or 15 percent of the remaining term (never more than three years), plus any rent already unpaid (§502(b)(6)). Walking away in year two of a ten-year lease does not mean owing eight years of rent.

The lease and the franchise agreement are separate contracts with separate deadlines, and they do not have to share a fate. Keeping the franchise while shedding an overpriced lease, or the reverse, are both on the menu, subject to what your franchise agreement says about the location.

How does a Subchapter V plan handle royalties, rent, and vendor debt?

The plan splits your obligations in two: what keeps the business running gets paid as an operating cost, and what built up before the case gets restructured. Your plan commits the business’s projected disposable income for three years, or up to five if the court sets a longer period (§1191(c)), and disposable income expressly excludes what is necessary for the continuation, preservation, or operation of the business (§1191(d)). Ongoing royalties and rent under an agreement you keep sit on the operating side of that line; the old vendor balances, the arrears you are curing, and the unsecured debt sit on the plan side. Only you can file the plan, and it is due 90 days after the case starts (§1189), which is fast enough that the numbers work happens before filing, not after.

How the plan gets confirmed changes when your discharge (the court order wiping out what remains of the restructured debt) arrives. If every class of creditors whose rights the plan changes accepts it, the plan is confirmed as consensual and the discharge arrives at confirmation itself (§1191(a); §1141(d)). If a class says no, the court can still confirm the plan over the objection so long as it does not discriminate unfairly and is fair and equitable (§1191(b)); the trade is that the discharge then waits until you finish the payments due in the first three years of the plan, or the longer period the court fixed, up to five (§1192). Either way the business keeps operating under your control the whole time.

What about my personal guarantees to the franchisor and the SBA?

The company’s Subchapter V does not erase them. Bankruptcy law is explicit that a discharge of the debtor’s debt does not affect the liability of any other entity on that debt (11 U.S.C. §524(e)). If you personally guaranteed the franchise agreement, the lease, or a business loan, that guarantee is your own debt, and the company’s discharge does not touch it. What helps you is indirect but real: every dollar the plan pays shrinks the balance your guarantee points at.

A personally guaranteed SBA loan deserves its own attention, because default there starts a federal collection sequence with its own rules and deadlines. Our SBA loan default page walks through that sequence and what bankruptcy does to it. The honest planning question is whether the company’s case alone protects you, or whether the owner needs a path too, and that is a both-at-once conversation, not two separate ones. The full set of options lives on our business debt relief overview.

What if the franchise is not worth saving?

Then do not reorganize it. Subchapter V is built for a business that can earn its way forward once the old debt is restructured. If the unit economics are gone, the same tools point toward an exit instead: rejecting the agreement turns the franchisor’s damages into a claim in the case (§365(g)), rejecting the lease caps the landlord’s claim (§502(b)(6)), and the wind-down can be sequenced to leave you personally in the strongest position the facts allow. Our closing a business with debt page covers that path, including what to settle before you hand back the keys.

Where would a Pennsylvania or New Jersey franchisee’s case be filed?

Philadelphia-area franchisees file in the United States Bankruptcy Court for the Eastern District of Pennsylvania, which sits in Philadelphia, and South Jersey franchisees file in the District of New Jersey, which hears South Jersey cases in its Camden vicinage (the court’s word for one of its regional divisions). We help franchise owners anywhere in Pennsylvania or New Jersey. Most of our clients are across Greater Philadelphia and South Jersey.

New Jersey adds a layer worth knowing about before any case is filed. The New Jersey Franchise Practices Act bars a covered franchisor from terminating, canceling, or failing to renew a franchise without good cause, defines good cause as the franchisee’s failure to substantially comply with the franchise’s requirements, and requires 60 days of written notice stating the reasons (N.J.S.A. 56:10-5). It covers franchises with a New Jersey place of business, more than $35,000 in gross sales between franchisor and franchisee over the prior 12 months, and more than 20 percent of the franchisee’s gross sales coming from the franchise (N.J.S.A. 56:10-4). That statute operates outside bankruptcy, but it is part of the leverage picture we look at for any New Jersey franchisee facing a termination threat.

Franchisee Subchapter V questions

If the royalty invoices and the rent are winning right now, find out early what a plan would look like. Book a free consultation and we will tell you whether Subchapter V fits your franchise or whether a different door out serves you better. It is free, by phone or Zoom, with no pressure and no obligation.