Sub-Chapter V Small Business Debtors and Confirmation of A Plan of Reorganization

The goals of Sub-chapter V are to minimize the time and expense of small business reorganization.

status conference

Within 60 days of the filing, the bankruptcy court is expected to hold a status conference “to further the expeditious and economical resolution” of the case. 11 U.S.C. 1188. At least 14 days prior to the conference, the debtor is required to file a report detailing its efforts to attain a consensual plan of reorganization.

exclusive right to file plan of reorganization

As a small business debtor, you must file a plan within 90 days of the petition filing unless that deadline is extended by the court due to circumstances beyond the debtor’s control. Only the debtor may file the plan. Thus, there is no fear of competing plans being filed by creditors or parties in interest, as there would be in a regular Chapter 11. In this respect, small business debtors enjoy the same perpetual plan exclusivity as do consumer debtors under chapter 13.

While a Sub-chapter V Debtor is not required to prepare and file a Disclosure Statement so as to solicit plan acceptance, the plan must include certain information typically found in a Disclosure Statement. For instance, the plan must include the history of the business operations, a liquidation analysis, and projections of ability of the debtor to make payments as proposed under the plan.

disposable income from business must be devoted to funding of plan

Similar to a Chapter 13, a Sub-chapter V plan may last no less than three years and no more than five years. The small business debtor in a Sub-chapter V must dedicate all its monthly disposable income to the funding of its plan of reorganization.

Disposable income in the context of a Sub-chapter V requires all income not reasonably necessary (1) to maintain and support the debtor or a dependent, (2) to satisfy domestic support obligations that become first payable post-petition, or (3) for the continuation, preservation or operation of the debtor’s business to be devoted to the plan payments.

modifications of mortgages on residence permitted

An individual who qualifies as a small business debtor can modify the mortgage on his or her principal residence, provided that the mortgage loan was not used to acquire the real property but was used primarily in connection with the debtor’s business. This is a powerful tool as such modifications of mortgages on a debtor’s principal residences are not possible in chapter 13 or ordinary chapter 11.

Consequently, under Sub-chapter V plan of reorganization, an individual who incurs debts investing in a commercial activity by borrowing against the equity in his or her home could modify the claim of the mortgagee. The small business debtor in the plan of reorganization may modify that mortgage by proposing a lower interest rate, extending the maturity date, and/or cramming the loan down to the value of the secured claim (the debtor might even attempt to “strip” the lien if it is junior to other liens and there is no equity for the lien to attach).

confirmation of the plan

To confirm a small business debtor plan of reorganization, the debtor must still meet the criteria provided for in section 1129(a) of the Bankruptcy Code, with the critical exception that the debtor does not need to obtain the acceptance of an impaired class of creditors.  The small business debtor also has the flexibility to pay administrative claims over the life of the plan instead of in cash on the effective date. 11 U.S.C. 1191(e).

If the small business debtor plan of reorganization does not have the acceptance of all impaired classes of creditors, the court can confirm the plan under 1191(b), “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”

If the plan is confirmed under the section 1191(b) “cram down” provision, then all property specified in section 541 that the debtor acquires post-petition and before the case is closed, dismissed, or converted becomes property of the estate.  Presumably, this means that the debtor cannot use the property outside the ordinary course of business without court approval.

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