Key Takeaways

• Only the debtor can file a plan. Creditors cannot file a competing plan.
• The plan is due within 90 days after the case is filed. The court may extend the deadline only for circumstances the debtor should not be held accountable for.
• The court holds a status conference within 60 days, and the debtor files a report 14 days before it.
• A plan can be confirmed over creditor objections if it is fair and commits the debtor’s projected disposable income for three to five years.
• Owners can keep their ownership even when creditors are not paid in full.

The timeline

• Filing. The petition is filed with the Subchapter V election. The automatic stay stops lawsuits, levies and collection.
• Trustee. A Subchapter V trustee is appointed. The trustee does not run the business. The owner stays in control as debtor in possession.
• First weeks. The debtor files schedules and financial reports, opens the required bank accounts and attends the meeting of creditors.
• Within 60 days. The court holds a status conference. Fourteen days before it, the debtor files a report on the efforts made to reach a consensual plan (11 U.S.C. § 1188).
• Within 90 days. The debtor files the plan (11 U.S.C. § 1189).
• Confirmation. Creditors vote and may object. The court holds a hearing and decides whether to confirm.
• Payments. The debtor makes the plan payments, usually for three to five years.

What the plan must contain

Under 11 U.S.C. § 1190, a Subchapter V plan must include:

• A brief history of the debtor’s business operations.
• A liquidation analysis, showing what creditors would receive if the business were closed and sold.
• Projections showing that the debtor can make the plan payments.
• A commitment of future earnings or other income as needed to carry out the plan.

No separate disclosure statement is required unless the court orders one. No creditors’ committee is appointed unless the court orders one for cause. Those two differences account for much of the savings over a traditional Chapter 11 case.

Two ways to confirm a plan

With creditor consent. If every class of creditors that is affected by the plan votes to accept it, the court confirms the plan under § 1191(a).

Without creditor consent. If a class votes no, the court can still confirm the plan under § 1191(b) at the debtor’s request. The plan must not discriminate unfairly and must be fair and equitable. In Subchapter V that means, among other things:

• The plan commits all of the debtor’s projected disposable income for three years, or a longer period up to five years set by the court, or distributes property worth at least that amount.
• The debtor will be able to make the payments, or there is a reasonable likelihood that it will and the plan gives creditors remedies if payments are missed.
• Secured creditors receive the treatment the Bankruptcy Code requires for secured claims.

Either way, each creditor must receive at least what it would receive if the business were liquidated in Chapter 7.

What disposable income means

Disposable income is the income the debtor receives that is not reasonably necessary for the support of the debtor and dependents, for domestic support obligations, or for the expenses needed to continue, preserve and operate the business (11 U.S.C. § 1191(d)). Ordinary operating costs, payroll, taxes and inventory come first. What is left funds the plan.

Owners keep the business

In a traditional Chapter 11 case, the absolute priority rule can prevent owners from keeping their ownership unless unsecured creditors are paid in full or vote for the plan. That rule does not apply in Subchapter V (11 U.S.C. § 1181(a)). An owner can keep the company by committing its projected disposable income to the plan.

A home mortgage that financed the business

Most bankruptcy chapters do not allow a plan to change a mortgage on the debtor’s home. Subchapter V has a narrow exception. A plan may modify a claim secured only by the debtor’s principal residence if the loan proceeds were not used primarily to buy the home and were used primarily in connection with the debtor’s small business (11 U.S.C. § 1190(3)). An owner who borrowed against the house to fund the business should raise this at the first meeting.

When the debts are discharged

If the plan is confirmed with creditor consent, the discharge generally takes effect when the plan is confirmed.

If the plan is confirmed without consent under § 1191(b), the discharge comes after the debtor completes the payments due in the first three years of the plan, or a longer period up to five years set by the court (11 U.S.C. § 1192). Debts on which the last payment is due after that period are not discharged, and neither are the kinds of debt listed in § 523(a), such as most taxes entitled to priority, domestic support and debts obtained by fraud.

Frequently Asked Questions

Can the 90-day plan deadline be extended?

Only in limited cases. The court may extend it if the need for more time comes from circumstances for which the debtor should not justly be held accountable. Being busy or behind on bookkeeping is not enough, so the financial work should start before filing.

Do creditors have to vote for the plan?

No. Creditor acceptance makes the case simpler and the discharge faster, but a plan can be confirmed without it if the plan meets the fairness requirements described above.

What happens if the business misses a plan payment?

It depends on the plan. A plan confirmed without creditor consent usually has to state what remedies creditors have if payments are missed. A plan can also be modified with court approval if circumstances change.

How long does a Subchapter V case take?

The plan is due in 90 days and confirmation often follows within a few months. Plan payments then run three to five years.

Start with the numbers

A plan is built from the business’s real income and expenses. Send the last 12 months of profit and loss statements and a list of debts to msiddons@siddonslaw.com, and we will tell you what a plan could look like.