Last week this blog covered the Senate’s passage of S. 3977, the bill that would restore the $7.5 million Subchapter V debt limit. While Congress debates how high the cap should be, a precedential appellate decision just settled something more immediately useful: how to count the debts that go under it. In In re Alecto Healthcare Services LLC, No. 25-1853 (3d Cir. July 28, 2026), the Third Circuit held that a $3.7 million claim stayed out of the eligibility math because, on the day of filing, it was contingent and unliquidated: the creditor had not yet made the written demand its own settlement agreement required. One unsent letter kept the debtor inside Subchapter V. New Mexico owners weighing a filing, and creditors positioning against one, should understand exactly how that happened.
Why does Subchapter V eligibility get litigated at all?
Because the two tracks of Chapter 11 produce different winners. Subchapter V strips out creditor committees, softens the absolute priority rule so owners can keep their equity while paying projected disposable income over three to five years, and moves fast on a budget a small business can survive. Traditional Chapter 11 hands creditors far more leverage and burns far more cash. The gate between the tracks is 11 U.S.C. § 1182(1): only a debtor whose aggregate noncontingent, liquidated debts fall at or below the cap may elect Subchapter V. Today that cap is $3,424,000; S. 3977 would lift it back to $7.5 million, but the House has not yet acted, so the small number governs every New Mexico filing this week. When a debtor sits near the line, creditors who prefer the leverage of traditional Chapter 11 attack the election, and the fight is always over which claims count.
How did a $3.7 million debt escape the count in Alecto?
The debtor, a healthcare holding company, had agreed years earlier to cover another company’s lease obligations, with one procedural condition: the creditor had to make written demand before payment came due. The demand had never been sent when the bankruptcy petition hit the docket. The Third Circuit held the claim was contingent, because the obligation to pay would not exist until the demand occurred, and unliquidated, because the amount owed varied with the underlying leases and could not be readily and precisely computed without invoices. Both determinations were made as of the petition date; the creditor’s after-the-fact demand and $3.7 million proof of claim changed nothing. With that claim excluded, the debtor’s qualifying debt sat around $3.4 million, inside the then-applicable cap, and the Subchapter V election held.
What does petition-date debt counting mean for a New Mexico filer?
It means the eligibility snapshot is partly within the debtor’s control, and the pre-filing review should treat every obligation’s trigger conditions as seriously as its amount. Personal guarantees the lender has not called, indemnification promises no one has invoked, merchant cash advance reconciliation rights, disputed tax assessments still in administrative process, unbilled contract true-ups, and pending litigation without judgment can all be contingent, unliquidated, or both on the right facts. For a business straddling the $3.4 million line, the sequencing question is stark: file before the lender accelerates and the guarantee may not count; file after, and it almost certainly does. That is not gamesmanship; the statute makes the petition date the measuring stick, and the Third Circuit just confirmed courts will read the underlying agreements exactly as written. An owner who waits for the demand letter to arrive has, quite literally, let the creditor draft the eligibility analysis.
Weighing a Subchapter V Filing? Contact Us Now
What is the creditor counter-move?
Symmetrical and simple: convert conditional exposure into countable debt before the petition. A creditor holding demand-conditioned claims against a wobbling counterparty should send the demand, issue the invoices, liquidate the amount by stipulation or judgment, and paper the file, because those steps performed prepetition could push the debtor over the cap and out of Subchapter V. Once the case is filed, an objecting creditor needs evidence, not indignation. The Alecto creditors also lost a second fight, over a plan that settled fraudulent transfer claims against insiders who had received a subsidiary holding a $50.7 million building for $28.4 million; the $25,000 settlement survived because an independent director testified from a forensic review and unrebutted solvency evidence that the claims had little chance of success, and the objectors offered no affirmative evidence of their own. Courts approve settlements that clear the lowest point in the range of reasonableness, and objections without valuation or solvency proof do not move that needle in the Tenth Circuit any more than they did in the Third.
How does the pending debt-limit legislation change the calculus?
If the House passes S. 3977 and the President signs it, the cap returns to $7.5 million and most of the borderline questions dissolve for a few years: businesses carrying debt between $3.4 million and $7.5 million, the band where many New Mexico contractors, restaurant groups, and medical practices sit after layering SBA loans on top of trade debt, would regain the streamlined track. Until then, the contingent-unliquidated analysis is the only route into Subchapter V for that band, and it will not stretch to cover debts that are simply due and owing. A business in the gap has three honest options: engineer eligibility where legitimate trigger conditions genuinely have not occurred, file a traditional Chapter 11 and budget for it, or wait on Congress with a bridge plan and the risk that creditors act first. Each path has a shelf life, and the right one depends on how close the creditors are to moving.
| Obligation on the petition date | Likely counted toward the cap? | Practice point |
|---|---|---|
| Trade payables, invoiced and due | Yes | No structuring changes these |
| Guarantee not yet called | Often no, contingent | Filing before acceleration can keep it out |
| Claim requiring written demand, none made | No, contingent (Alecto) | Creditors: send the demand early |
| Obligation with amount varying by month, uninvoiced | No, unliquidated (Alecto) | Readily and precisely determinable is the test |
| Judgment entered before filing | Yes | The Alecto objectors’ own wage judgment counted |
Frequently Asked Questions
What is the Subchapter V debt limit for a New Mexico business today?
$3,424,000 in aggregate noncontingent, liquidated debt, measured on the petition date. S. 3977 would restore the $7.5 million cap, but it has not passed the House, so the lower figure controls current filings.
What makes a debt contingent for Subchapter V purposes?
The obligation to pay has not yet come into existence because it depends on a future event. In Alecto, a settlement requiring written demand before payment made the claim contingent until the demand was sent, which happened only after filing.
What makes a debt unliquidated?
Its amount is not readily and precisely determinable from the parties’ agreement. Varying monthly lease charges with no invoices meant the debtor could not compute what it owed, so the claim was unliquidated on the petition date.
Can creditors defeat a Subchapter V election?
Yes, with preparation. Making demands, invoicing, and liquidating claims before the petition adds them to the count, and a well-supported eligibility objection can push a debtor into traditional Chapter 11. Evidence, not argument, decides these fights.
Does a claim filed after the petition change the eligibility math?
No. Eligibility is fixed at the petition date. The Alecto creditor’s post-petition demand and $3.7 million proof of claim did not make the debt countable.
Is Subchapter V still worth it at the lower cap?
For qualifying businesses, yes: no committee in most cases, retained ownership, a three-to-five-year disposable income plan, and dramatically lower cost than traditional Chapter 11. The cap question is about access, not about the tool’s value.
How North Star Law Firm Can Help
North Star Law Firm guides New Mexico small businesses through Subchapter V from the eligibility analysis forward, mapping every claim’s contingency and liquidation status before the petition locks the snapshot, and represents creditors deciding when a demand letter changes the game. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico, and the claim-level accounting behind these disputes is native ground for an attorney-CPA. The firm’s Subchapter V practice sits within its full bankruptcy practice, and its earlier analysis of the Senate’s $7.5 million restoration bill tracks the legislation that could widen the gate. Contact North Star Law Firm before demands start arriving; Alecto shows eligibility is usually won or lost before anyone reaches the courthouse.