Don and Dora are Arizona natives who’ve built a stable, comfortable life in their three decades of marriage. Dora works as a bookkeeper. Don spent 20 years growing his small business, Don’s Donuts, into a neighborhood favorite. They aren’t wealthy, but they’re steady. They paid their bills, saved for the future, and did everything they thought responsible business owners should do.
But when the economy faltered, Don’s Donuts closed. The loss was difficult, but Dora’s steady income and Don’s new job kept their household on track.
Then one evening, everything changed.
Don and Dora are at the kitchen table when a process server knocks at their door and hands Dora a thick packet of legal papers. Inside was a lawsuit from a lender she had never heard of.
Dora looks at Don. “What is this?”
Don hesitates, then explains that when the donut shop was struggling to stay open, he had taken out a loan to keep the business afloat. The bank required a personal guaranty. He signed it.
Now that the business was gone, the lender was seeking repayment from Don personally. The amount: one million dollars.
To Dora, the number threatens everything they’ve worked for. But what many couples don’t realize is that, unlike other debts, when only one spouse signs a guaranty, Arizona law protects the marital community.
Recent changes to the bankruptcy code may finally offer a way to address a spouse’s separate obligations while affording their marital community the protections guaranteed by Arizona statutes.
When Only One Spouse Signs
Personal guarantees—where a bank requires an individual owner to personally back a business loan —are common in small‑business lending. Many Arizona business owners are surprised to learn that a guaranty signed by only one spouse may not place all of their assets at risk.
In Arizona, most assets acquired during marriage are considered community property. Generally, either spouse can bind the marital community, placing the couple’s assets at risk. But guarantees are an exception. A lender generally can’t touch those shared assets unless both spouses signed the guaranty. If only one spouse signed, the lender’s claim is limited to that spouse’s “separate” assets, which long-married couples don’t usually have.
However, a creditor may still obtain a judgment against the spouse who signed the guaranty. Judgments can be enforced for years and be repeatedly renewed. So even if a creditor can’t collect today, the debt can follow a person far into the future, becoming collectible if a marriage ends or the spouse acquires separate assets.
If Don ceases to be married to Dora, whether by divorce or death, then his assets may become available to satisfy the judgment. The nightmare scenario for Don would be to lose Dora and suddenly face collection efforts on a judgment that has been accruing interest for 20 or more years.
Until now, bankruptcy has not offered a clean solution to this problem without risking community assets.
Subchapter V changes that.
How Subchapter V Helps
Subchapter V is designed for small businesses and individuals with primarily business debts. The total debt cannot exceed $3,424,000 (adjusted annually for inflation). It gives individuals a way to reorganize their finances without the complexity and cost of a full Chapter 11 case.
One of its most important features for married couples is the ability to separate community debts from one‑spouse debts. Community assets can be used to pay community creditors, while separate creditors—including those with a guaranty signed by only one spouse—are limited to that spouse’s separate property. And because many married couples in Arizona have little or no separate property (because it’s generally all community property), it may be possible to discharge a separate obligation while retaining the community assets.
For a couple like Don and Dora, this means they can protect their home, savings, and other assets they built together, while still resolving Don’s personal guaranty on the now-defunct business.
Why Traditional Bankruptcy Doesn’t Work
Bankruptcy permits businesses and individuals to subject their assets to administration by the bankruptcy court, declare certain assets as exempt, pay creditors to the extent of their non-exempt assets, and discharge their debts. If the business or individual lacks non-exempt assets, there is nothing to administer or distribute to creditors, and the case is considered to be a “no-asset case.” The overwhelming majority of bankruptcy filings are no-asset cases.
Before Subchapter V, business owners and individuals with large one‑spouse debts faced a maze of bankruptcy limitations:
- Chapter 7 (liquidation): A trustee can sell non‑exempt assets (including community property such as real estate, vehicles, and savings accounts) to pay creditors. For most couples, the prospect of a trustee liquidating their non-exempt community assets is more threatening than a judgment that cannot be enforced against those assets.
- Chapter 13 (repayment plan): A similar result to Subchapter V, but it has an unsecured debt limit of $526,700, which keeps many business owners from qualifying.
- Traditional Chapter 11 (reorganization): Expensive, time-consuming, and contains technical hurdles (like the “absolute priority rule”) that make it hard for individuals to retain assets unless creditors are paid in full.
None of these options struck the right balance between resolving separate debt and protecting the marital community.
A Practical Path Forward
Subchapter V fills that gap. It’s a streamlined version of Chapter 11 built for small businesses and individuals with less than $3,424,000 in debt. All debt counts toward the limitation, but most of the debt must arise from business.
The process moves quickly, the business owner keeps control of assets, and there’s no absolute priority rule standing in the way of a workable plan. A Subchapter V trustee is appointed and helps guide the process, generally focusing on solutions rather than litigation.
Most importantly, Subchapter V allows married couples like Don and Dora to:
- Use community assets to pay community debts
- Protect those assets from being used to satisfy separate obligations, like one-spouse guarantees
- Discharge the separate debt entirely if there’s no separate property to reach
- Eliminate judgments that could otherwise linger for decades
For Arizona business owners who once signed personal guaranties to support their companies, Subchapter V offers a way to pay old debts without dismantling everything their families have built.
Practical Steps If You Get “The Knock”
- Don’t ignore it. Lawsuits and judgments move quickly, and deadlines matter.
- Gather what you signed. If only one spouse signed a guaranty, that detail can be critical.
- Consult with bankruptcy counsel early. An Arizona attorney experienced in Subchapter V can quickly tell you if it’s possible to meet the Subchapter V debt limits if you act early.
- Don’t engage in any extraordinary transactions before discussing them with counsel.
Back to Ordinary
A few months later, Don and Dora are back at their kitchen table, but the atmosphere has changed. The lawsuit that once felt overwhelming now sits resolved in a tidy stack of papers. Their home is still theirs, their savings are intact, and the future no longer feels like it’s hanging on a signature Dora never gave.
With Subchapter V, they addressed their community obligations while finally putting Don’s individual guaranty behind them. The judgment that once threatened to follow them for decades is gone. The constant worry that tomorrow might bring a new collection effort has disappeared.
Life hasn’t become perfect—but it’s steady again. Predictable. Ordinary.
And for Arizona business owners who once signed personal guaranties to support their companies, ordinary is its own kind of relief.
We encourage business owners with questions about Subchapter V to consult with experienced bankruptcy counsel. This article is not intended to serve as legal advice, nor is it a comprehensive discussion of all options available to discharge debts.
Click here to read the article published in the February 2026 issue of In Business Magazine.
About the AuthorS
Kortney Otten focuses her practice on commercial bankruptcy and business law, including contracts, transactions, and litigation. Her significant experience in state, federal, and appellate courts enables her to advise businesses effectively on resolving problems through mediation and settlement advocacy.
Dale Schian is a veteran insolvency strategist and counselor representing businesses and individuals in all aspects of commercial creditor and debtor-related endeavors. He is regularly involved in complex out-of-court workouts, restructurings, and Chapter 11 reorganizations.