Subchapter V: Can A Plan Term Be Less Than 3 Years?

An early end

By: Donald L Swanson

The term of a Subchapter V plan can be less than three years, based upon the language of the statute!”

–A Bankruptcy Judge’s comment at a bankruptcy conference in December 2019 (as I recall it).

Upon hearing that comment, I went scrambling to find the statutory language.  And here it is (from 11 U.S.C. § 1191(c)(2)):

(2) As of the effective date of the plan—(A) the plan provides that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date that the first payment is due under the plan will be applied to make payments under the plan; or (B) the value of the property to be distributed under the plan in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date on which the first distribution is due under the plan is not less than the projected disposable income of the debtor.

I’ll not attempt a parsing of such statutory language, other than:

  • Nowhere does Congress declare that the term of a Subchapter V plan “shall be for a minimum of three years”; and
  • Instead, Congress merely refers to “projected disposable income” that is “to be received in the 3-year period.”

So . . . how about this?  A Subchapter V debtor’s plan:

  • projects the amount of disposable income to be paid over three years at $XXXX;
  • uses exit financing to pay that projected amount to unsecured creditors on the effective date of the plan (i.e., the day after the confirmation order becomes final and no longer subject to appeal);
  • the term of the plan expires immediately thereafter; and
  • debtor receives a discharge immediately upon the plan term’s expiration.

Such a plan can, of course, be confirmed as consensual—via facilitation, mediation and/or direct negotiations.  But can it be approved over objection?  The Bankruptcy Judge quoted above says the answer is, “Yes.”

What follows is related information.

Chapter 12 — A Poor Example

Chapter 12 has language similar to the § 1191(c)(2) provisions quoted above. 

Back in the earliest days of Chapter 12 (enacted in 1986), short term plans happened.  I remember filing a one month plan and a six months plan—and getting them confirmed.

But short-term plans in Chapter 12 have gone the way of wooly mammoths. The extinction of short term Chapter 12 plans started with this language from a ruling on a proposed three-year plan: “the plan will remain open for three years and all of the debtors’ projected disposable income received in the three-year period shall be applied to make payments under the plan.” (In re Wobig, 73 B.R. 292, par. 14 (Bankr.D.Neb. 1987). 

Then, other courts cited the In re Wobig language, without independent analysis, for this proposition: “section 1225(b)(1)(B) mandated that a Chapter 12 plan remain open for three years” (see, e.g., In re Schwartz,  85 B.R. 829, 830 (Bankr. S.D. Iowa 1988)).

Then, the 3-year mandated process morphed into the idea that “projected disposable income” must be determined after-the-fact and not merely projected (see, e.g., In re Fleshman,123 B.R. 842, 844 (Bkrtcy.W.D.Mo. 1990)). 

The Eighth Circuit followed suit, requiring that projected disposable income be computed after the conclusion of a three years plan, based on actual numbers, not on previously-projected numbers.  See, e.g., In re Broken Bow Ranch, Inc., 33 F.3d 1005 (8th Cir. 1994). 

But where is the statutory basis for such rulings?  Since when does “projected disposable income” require, (i) a 3-years plan, and (ii) a calculation of “actual” disposable income after that 3-years plan is concluded?

Chapters 11 & 13—Prohibitions of Short Term Plans

In regular Chapter 11, individual debtors must have five year plans under § 1129(a)(15). To be confirmed, the term of an individual debtor’s plan must be a “5-year period . . . , or . . . the period for which the plan provides payments, whichever is longer.”

Similarly, § 1325(b)(4)(A) specifies that the term of a Chapter 13 plan must be “(i) 3 years; or (ii) not less than 5 years, if . . . “  

Such Chapters 11 and 13 provisions show that Congress knows how to establish a minimum period for the term of a plan, when that is its intention.  In Subchapter V, by contrast, Congress chose to avoid such minimum-term language.

Short Term Plans in Regular Chapter 11

In regular Chapter 11, short term plans are common. Here are pertinent provisions:

  • A non-individual debtor receives a discharge “upon confirmation” (§ 1141(d)); and
  • A plan is substantially consummated when, (i) all proposed transfers are made, (ii) management of the reorganized debtor is in place, and (iii) distributions under the plan begin (§ 1101(2)).

Accordingly, it is common for the term of a plan, under regular Chapter 11, to be very short.

Conclusion

Subchapter V allows for plans with terms shorter than 3 years. 

Whether any debtor attorney will have the chutzpah to propose such a plan—and whether a bankruptcy judge will ever approve such a plan over objection—remains to be seen.  

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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