How a Subchapter V Repayment Plan Can Meet the “Best Efforts” Test

Subchapter V of the Bankruptcy Code is a debt relief remedy for small business owners in financial distress. It was enacted as a cure for the difficult challenges faced by small businesses attempting to restructure using the traditional Chapter 11 process. A reorganization plan in Chapter 11 often precludes small business owners from retaining equity, without which there is little incentive to continue operating the business.

Subchapter V provides a more useful debt reorganization remedy for small business debtors. It allows them to confirm a repayment plan and retain ownership equity as long as they meet the “best efforts” test. This means the plan must commit all of the debtor’s projected “disposable income” toward repaying unsecured creditors over the plan’s period of three to five years.

The definition of “disposable income” under Subchapter V is broad, reflecting the realities of running a small business. It encompasses income that is not essential for the maintenance or support of the debtor or their dependents, any domestic support obligations or expenditures necessary for the continuation, preservation or operation of the business. This expansive view affords business owners flexibility in accounting methods. It allows them to allocate net profits towards future business expenses or even deferred benefits for themselves, beyond the duration of the plan. This can dramatically reduce the disposable income that is devoted to repaying creditors. 

Unlike in a traditional Chapter 11, where a creditors’ committee can prevent confirmation of a plan, only the Subchapter V trustee has the authority to object. The trustee is likely to intervene only in cases of apparent fraud or bad faith. This typically means a smooth path to plan confirmation for business owners, allowing them to retain equity while repaying only a small fraction of their debts.

Nevertheless, a Subchapter V reorganization plan should be comprehensive and transparent. It should not only detail the company’s finances but also demonstrate feasibility relative to the company’s economic circumstances. It should convincingly project how the business will generate sufficient income to cover its obligations and attain ongoing viability.

An experienced Subchapter V bankruptcy attorney can provide invaluable guidance in drafting a plan that is in line with the ability of the business to complete it. They can also assist in negotiating with creditors and interfacing with the bankruptcy court, so that the plan’s provisions are clearly understood and not likely to be challenged.

The Law Offices of Michael Jay Berger in Beverly Hills helps small businesses dealing with excessive debt obtain the benefits of bankruptcy protection and reorganization. Please call 310-271-6223 or contact us online to schedule a free consultation.