The Subchapter V Plan

The 90-Day Deadline

Under 11 U.S.C. § 1189(b), the debtor must file a plan within 90 days after the order for relief. The court can extend this deadline "if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable."

In practice, courts routinely grant 30-60 day extensions for cause. But do not plan on it. The best approach is to start drafting the plan before you even file the petition. Your financial projections, creditor treatment, and plan terms should be substantially complete at filing.

What the Plan Must Contain

Because Subchapter V eliminates the separate disclosure statement, the plan itself must include adequate information. At minimum:

• Brief history of the business operations. What does the business do, how long has it operated, and what led to the bankruptcy filing.
• Liquidation analysis. Show that creditors receive at least as much under the plan as they would in a Chapter 7 liquidation. This is the "best interests of creditors" test.
• Financial projections. Revenue, expenses, and cash flow projections for the plan period (typically 3-5 years). These must be realistic and supportable.
• Classification of claims. Group creditors into classes based on the nature of their claims (secured, priority unsecured, general unsecured).
• Treatment of each class. How each class will be paid -- amount, timing, interest rate, and any modifications to original terms.
• Means of implementation. Where the money will come from. Ongoing business income, asset sales, new financing, or a combination.

Treatment of Claims

Secured creditors

Secured claims must be treated in one of three ways: (1) the plan provides that the creditor retains its lien and receives deferred payments equal to the allowed amount of the claim, (2) the debtor surrenders the collateral, or (3) the creditor accepts different treatment.

For vehicle loans and equipment financing, the plan can modify the terms -- extending the payment period, reducing the interest rate to the current market rate, or cramming down the claim to the collateral's value if the loan is not a purchase money security interest obtained within the applicable time period.

Priority claims

Priority claims (taxes, domestic support obligations, administrative expenses) must generally be paid in full. The plan can propose deferred payments of priority tax claims over a period not exceeding 5 years from the petition date.

General unsecured creditors

The plan must provide that unsecured creditors receive at least as much as they would in a Chapter 7 liquidation. Under a consensual plan (§ 1191(a)), the debtor has flexibility in the percentage and timing of distributions. Under cramdown (§ 1191(b)), the debtor must commit all projected disposable income for 3-5 years.

Confirmation: Consensual vs. Cramdown

There are two paths to getting a Sub V plan confirmed:

Section 1191(a) -- Consensual confirmation

• All impaired classes vote to accept the plan
• Each accepting class must have more than 50% in number and at least two-thirds in amount of the voting creditors accept
• Unimpaired classes are deemed to accept
• Classes that do not vote are deemed to accept
• Discharge at confirmation -- the debtor receives the discharge immediately

Section 1191(b) -- Cramdown confirmation

• At least one impaired class rejects the plan
• The plan does not discriminate unfairly and is fair and equitable with respect to each rejecting class
• The debtor must commit all projected disposable income for 3-5 years to unsecured creditors
• The absolute priority rule does not apply -- the debtor keeps the business
• Discharge after plan completion -- not at confirmation

Feasibility

The court will not confirm a plan that is not feasible. Under 11 U.S.C. § 1129(a)(11) (applicable to Sub V through § 1191), confirmation requires that the plan is "not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor."

Your financial projections must be credible. The court and the Sub V trustee will scrutinize them. Common feasibility problems:

• Over-optimistic revenue projections. If your business lost money last year, projecting 30% growth requires strong justification.
• Ignoring seasonal patterns. Monthly cash flow matters. An annual surplus is meaningless if you cannot make January payments.
• Understating expenses. Courts have seen this before. Be realistic about costs.
• No contingency buffer. Plans that work only if everything goes perfectly are not feasible.

Related Pages

• Subchapter V Complete Guide
• Do I Qualify for Subchapter V?
• Subchapter V Costs
• Subchapter V Discharge (1191a vs 1191b)
• Subchapter V FAQ
• Section 1189 -- Filing of the Plan
• Section 1190 -- Acceptance of the Plan