SUBCHAPTER V CRAMDOWN PLAN PAYMENTS: True-Up to Actual Disposable Income or Stay True to Projected Disposable Income?

One of the most significant advantages of Subchapter V is found in its “cramdown” provision. Cramdown is the process by which a debtor confirms a Chapter 11 plan when the debtor does not have the consent of all impaired classes of creditors that are eligible to vote on the plan. In both traditional Chapter 11 and Subchapter V cases, cramdown requires that the plan does not “discriminate unfairly” and is “fair and equitable” with respect to each non‑consenting, impaired class of claims. However, unlike traditional Chapter 11, Subchapter V further specifies that a plan is “fair and equitable” if the debtor is providing all of its “projected disposable income” (or its value) to fund plan payments over the three‑to‑five‑year life of the plan. Regardless of whether such payments pay unsecured creditors in full, the debtor’s owner can retain the equity in the company without providing any contribution to the plan. This is a significant deviation from the “absolute priority rule” in traditional Chapter 11 cases, which generally requires the full payment of all claims before owners can retain equity interests, and makes reorganizing in bankruptcy a much more viable option for small business owners.

So, then, what happens if the debtor’s actual income over the life of the plan ultimately exceeds the amount projected at the time of confirmation? Can the debtor be compelled to include a “true‑up” provision in the plan that calls for the upward adjustment of plan payments accordingly? The case law on this issue is sparse, with courts having reached conflicting holdings. In January 2023, the United States District Court for the Middle District of Florida held, in In re Staples, that the court may require a Subchapter V plan to include a true‑up provision under which creditors would be entitled to any upside in the event that the debtor’s actual disposable income exceeds its projected disposable income. However, in its decision in In re Packet Construction, LLC in April 2024, the United States Bankruptcy Court for the Western District of Texas declined to follow Staples, and instead held that Subchapter V does not require the inclusion of a true‑up provision in the plan.