Subchapter V Plan Confirmation: 5 Requirements When Creditors Vote No

If creditors vote “no,” the debtor can still move to confirm the plan over the creditor’s objection. In a Subchapter V case, a plan can be confirmed even if none of the creditors in a particular class vote in favor of the plan (this is different from the rules in a normal Chapter 11 case, where the plan can only be confirmed if at least one class of creditors votes in favor of the plan). Instead, to confirm a Subchapter V plan, the bankruptcy court must find that the plan does not unfairly discriminate against non-accepting classes of creditors and is “fair and equitable”.

As for the vote itself, in general it takes the affirmative vote of 2/3 in dollar amount and more than half in number of claims in each class for a plan to be accepted. If all impaired classes vote in favor of a Subchapter V plan, the plan is considered consensual. Votes come from the “impaired” creditors, which are those which the plan does not leave unchanged.

All Other Requirements of § 1129(a)

Except for paragraphs (8), (10) and (15), the Subchapter V plan must still meet all other requirements of § 1129(a). The plan must provide to creditors of a non-consenting class whose claims are “impaired” as much as they would have received in a Chapter 7 liquidation.

The small business debtor’s treatment of creditors in its Subchapter V Plan cannot unfairly discriminate against non-accepting classes of creditors. In general, creditors with similar legal and equitable rights should receive equivalent treatment under the plan. Different classes can be created with differing treatment as long as there are good reasons for that (i.e., that the difference in treatment has a reasonable basis). The plan also must have been proposed in good faith.

Likewise, a class of secured creditors does not necessarily have to vote in favor of a plan for the plan to be confirmed. In order to be confirmed, a debtor’s Subchapter V plan must be “fair and equitable” to secured creditors. Subchapter V cases follow the same standards that non-Subchapter V cases use to evaluate cram down treatment of secured creditors.

The bankruptcy court must find that, under the Subchapter V plan, the debtor will pay all of its disposable income for a three-year period (or longer, up to five years if the court sets it) to make plan payments on behalf of creditors.

Disposable income means income that is not reasonably necessary for the support of the debtor or their dependents, post-petition domestic support obligations, or for the operation of a business. The payments from that future income are what ultimately funds the plan.

The absolute priority rule does not apply in Subchapter V cases, so businesses can retain their ownership shares without paying unsecured creditors in full. In non-Subchapter V Chapter 11s, owners usually have to provide new value if they want to keep their business interests and unsecured creditors don’t get paid in full. In Subchapter V cases, though, owners get a pass on this “new value” requirement. These changes help give the owners of a small business a path for keeping their business after bankruptcy, even when their creditors are not in favor of the plan. Administrative expenses, including attorney’s fees, can also be paid over time rather than being paid as full cash on the effective date of the plan.

Finally, the Subchapter V plan must also be feasible. The Subchapter V debtor must show it can make all plan payments, or that there is a “reasonable likelihood” that it can. If you just use the likelihood theory, you have to explain exactly what you will do if you can’t make plan payments, like possibly selling nonexempt assets.

If the debtor can meet all of these elements, the bankruptcy court can confirm a Subchapter V plan even over the creditors’ objection. Confirming a Subchapter V case over the objection of a creditor has some costs. First, your trustee will not be released at the end of the process, as they otherwise would be. Rather, the trustee will stay in place for the life of the Subchapter V plan to make payments to creditors out of what you earn after the filing of your case. That can cost money, because the trustee is paid out of plan funds. After a cramdown, all of your post-petition earnings become estate property until the case is closed. Second, your debts aren’t discharged until you finish plan payments (3 to 5 years usually). Even then, certain debts, like student loans, cannot be discharged.

Negotiating a Consensual Plan

Having said all that, Subchapter V debtors are still better served by negotiating a consensual plan with their creditors if they can. A consensual plan can be substantially more cost efficient. If the creditors do vote “yes,” and all the rules are followed, you can immediately get a discharge. Plus, the trustee’s job ends once the plan is substantially consummated.

In a nutshell, a Subchapter V debtor does not have to make its plan acceptable to everyone to get it confirmed. If they can show that all of the requirements of § 1191(b) are met, the debtor can cram its plan through over creditors’ objections.