Subchapter V Bankruptcy for Restaurants

Subchapter V is a streamlined version of Chapter 11 that lets a restaurant reorganize its debt while the kitchen keeps running. You stay in charge of the business, the automatic stay (the court order that stops collection the moment you file) freezes evictions and vendor lawsuits, and a court-approved plan spreads back rent, distributor balances, and equipment notes across payments your covers can actually support.

Updated August 2026. Mike Assad, PA & NJ Bankruptcy Lawyer.

Can a restaurant file Subchapter V bankruptcy?

Yes, as long as the restaurant is engaged in commercial activity and its debts total no more than $3,424,000, the limit for cases filed on or after April 1, 2025. Add up what the business actually owes, secured and unsecured, set aside anything owed to your own insiders and affiliates, and at least half of what is left has to come from running the restaurant (11 U.S.C. §101(51D)). Independent restaurants and small local groups usually sit well inside that line. One corporation, one LLC, or a sole proprietor operating a single room can all qualify. You keep running the place the whole time as what the code calls the debtor in possession, so nobody outside takes over your kitchen and no trustee starts scheduling your staff.

What happens to your lease and your build-out?

Your lease runs on a tighter clock than anything else in the case, so it drives the timeline. A commercial lease is treated as rejected, and the space has to be handed back, unless you assume it (formally commit to keeping it) by the earlier of 120 days after your case opens or the day your plan is confirmed. The court can add one 90-day extension for cause, and anything beyond that needs the landlord’s written consent each time (11 U.S.C. §365(d)(4)). Meanwhile the rent doesn’t pause: you have to keep current on lease obligations that come due after filing while you decide (§365(d)(3)).

That clock usually works in a restaurant’s favor, because the hood, the grease trap, the walk-in, and the rest of the build-out are worth far more in that room than in a liquidation. If the rent still matches the covers, the leverage is real and landlords tend to deal. If it doesn’t, handing the space back caps what the landlord can claim against you: the rent reserved, without acceleration, for the greater of one year or 15 percent of the remaining term (never more than three years), plus rent already unpaid (§502(b)(6)). A landlord holding a decade of remaining term suddenly has a much smaller claim.

Why can a produce supplier get paid ahead of your other creditors?

Because federal law may hold that produce, and the money you made selling it, in trust for the supplier. Under the Perishable Agricultural Commodities Act, produce, anything made from it, and the receivables or proceeds from selling it are held in trust for unpaid suppliers until they are paid in full (7 U.S.C. §499e(c)(2)). Trust money isn’t really the restaurant’s to distribute: property you hold legal title to but no equitable interest in enters the bankruptcy estate only to the extent of that legal title (11 U.S.C. §541(d)). Owners are often blindsided by this, because the produce vendor looks like every other unsecured supplier right up until it doesn’t.

Two things decide whether it reaches your restaurant. The first is volume. A buyer purchasing solely for sale at retail is not a covered “dealer” until its produce purchases pass $230,000 of invoice cost in a calendar year, and the USDA counts every fresh and frozen fruit and vegetable purchase toward that total, no matter how small any single order was or whether it crossed a state line (7 U.S.C. §499a(b)(6)(B); 7 C.F.R. §46.2(m)(2)).

The second is where you file, and here Pennsylvania and New Jersey restaurants have a clearer answer than most of the country. In 2000 the Third Circuit, the federal appeals court covering both states, held that restaurants are dealers under the plain language of the Act (In re Magic Restaurants, Inc., 205 F.3d 108). A Pennsylvania bankruptcy court had reached the opposite conclusion three years earlier (In re Italian Oven, 207 B.R. 839), and one judge on the Third Circuit panel wrote separately to disagree, which is why you can still find articles telling restaurant owners the Act doesn’t apply to them. In the courts that hear our clients’ cases, the appeals court has answered it.

A supplier can also lose the trust by not protecting it, either by giving written notice within 30 calendar days after payment was due or by carrying the statutory language on its invoices (§499e(c)(3) and (4)). Sorting out which distributors actually preserved a trust claim and which are ordinary unsecured creditors is one of the first things we do with your accounts, because it changes what the plan has to pay.

What happens to unpaid sales tax and payroll tax?

It gets treated as money that was never the restaurant’s, and it’s the piece we look at earliest. A tax you were required to collect or withhold, and are liable for in whatever capacity, is a priority claim in the case, which puts it ahead of ordinary unsecured debt in the plan (11 U.S.C. §507(a)(8)(C)). That covers the sales tax rung on every check and the tax withheld from your staff’s pay.

Pennsylvania says so directly. Sales tax collected from customers “shall constitute a trust fund for the Commonwealth,” and that trust is enforceable against the business, its representatives, and anyone who receives part of the money knowing the trust is being broken (72 P.S. §7225). There is also no deadline on it. The Department of Revenue has no time limitation to collect trust fund taxes a business collected or withheld but willfully failed, grossly neglected, or refused to remit, while ordinary assessed taxes get a ten-year collection window (Tax Reform Code §3003.23).

New Jersey aims at the people instead of the pot of money. Every person required to collect sales tax “shall be personally liable” for it, and the people required to collect it expressly include any officer or employee under a duty to act for the corporation, plus any member of a partnership (N.J.S.A. 54:32B-14(a) and 54:32B-2(w)). For a New Jersey restaurant, unremitted sales tax can follow the owner personally, which is often the fact that decides whether the business files by itself or the owner needs a filing too.

Do your employees get paid before other creditors?

Up to a point, yes. Wages, salaries, and commissions, including vacation, severance, and sick leave pay, are a fourth-priority claim when they were earned within 180 days before the filing or before the business stopped operating, whichever comes first. The cap is $17,150 per employee (11 U.S.C. §507(a)(4), as adjusted effective April 1, 2025). For most restaurants that ceiling is high enough to cover the back pay owed to a server or a line cook in full, which matters if you want the same crew walking back through the door.

What happens to outstanding gift cards and event deposits?

They are worth more than most owners assume. A customer’s deposit for goods or services that were never delivered, made before the case for personal, family, or household use, is a seventh-priority claim capped at $3,800 per person (11 U.S.C. §507(a)(7), as adjusted effective April 1, 2025). An unredeemed gift card or a paid-for holiday party that never happened is not just another unsecured claim at the back of the line: up to that cap it ranks ahead of your food distributor and your equipment lender. That’s worth knowing before you decide whether to keep honoring cards at the register, and it’s usually the answer that protects the goodwill that fills tables later.

What happens to your liquor license in Pennsylvania and New Jersey?

The two states point in opposite directions, so the answer depends on which side of the river you pour on. In Pennsylvania, a license may not be assigned, and only the Liquor Control Board can transfer one from one person to another or one place to another, on payment of the transfer filing fee (47 P.S. §4-468(a)). The same section then draws a line that matters in a bankruptcy: as between the board and the licensee the license is a privilege, but “as between the licensee and third parties, the license shall constitute property” (§468(d)).

New Jersey’s statute says close to the reverse. Under no circumstances is a license to be deemed property subject to sale, pledge, lien, levy, attachment, execution, or seizure for debts, with a narrow carve-out for State tax liens (N.J.S.A. 33:1-26). That same statute names bankruptcy out loud: where the business devolves on someone other than the licensee, the director or the issuing authority may, in its discretion, extend the license for a limited time within its term. And a person-to-person transfer needs the licensee’s written consent, a sworn application, published notice, and a fee of 10 percent of the annual license fee that the authority keeps whether or not the transfer is granted.

How a bankruptcy court handles a license in any particular case is decided case by case, and we aren’t going to promise you an outcome on a web page. What we do is map the license obligations at the start, keep the license current with the state and the municipality while the case runs, and build the plan so the license is never the thing that trips.

How long does a restaurant’s Subchapter V case take?

The plan is due 90 days after the case opens, and only you can file one. A court can extend that deadline when the delay is due to circumstances you shouldn’t fairly be blamed for (11 U.S.C. §1189). If creditors agree, the plan is confirmed consensually and the discharge lands at confirmation. If they don’t, the court can still confirm over their objection as long as the plan does not discriminate unfairly and is fair and equitable, and in that case the plan commits your projected disposable income for three years, or a longer period the court sets, up to five (§1191). The discharge then comes after you complete the payments due in that period (§1192).

One detail matters more to a restaurant than almost any other business: disposable income leaves out what you spend to keep operating (§1191(d)). Food cost, payroll, rent, utilities, and the repairs a kitchen constantly needs are operating expenses, not plan money. The plan is built on what is genuinely left over.

Talk it through before the next rent date

Most restaurant owners wait until an eviction complaint or a frozen distributor account forces the issue, and the 120-day lease clock is a lot friendlier when it starts on your schedule. We charge affordable fees for Subchapter V work, with payment plans, and the first conversation costs nothing. Book a free consultation online and bring your lease, your distributor statements, and last year’s numbers. If Subchapter V isn’t the right tool, we’ll tell you that too, and our closing a business with debt page covers the other path.

Restaurant Subchapter V questions