The Small Business Reorganization Act of 2019 (SBRA), effective February 19, 2020, has created timely opportunities for individuals to confirm a Chapter 11 plan. Prior to the enactment of this legislation, individuals who did not qualify for Chapter 13, generally because their debts exceeded statutory limits, were forced to use the business reorganization provisions in Chapter 11. These provisions subjected individuals to the cramdown requirements of the absolute priority rule and made it difficult for individual debtors to confirm a Chapter 11 plan of reorganization. Thankfully, however, mere months before the COVID-19 pandemic, Congress passed the SBRA and eliminated the absolute priority rule for qualifying small businesses, which can include individuals.
The absolute priority rule was derived under Chapter X of the Chandler Act, which was the predecessor to the Bankruptcy Code enacted in 1978. Under the Bankruptcy Code, the absolute priority rule generally applies when a class of unsecured creditors did not vote in favor of the plan treatment (cramdown) and required the debtor to pay in full the allowed unsecured claims of the rejecting class if any junior interests, such as equity holders, were retaining their interest. In the case of an individual, the Supreme Court held in Norwest Bank Worthington v. Ahlers that the individual debtor should be regarded as an equity class, junior to unsecured creditors. This made it extremely difficult for an individual to confirm a Chapter 11 plan unless the creditors consented or the creditors were receiving full payment. Alternatively, the debtor could perhaps propose a new value plan to get around the absolute priority rule and retain their interest in their property, but such plans were difficult because the Supreme Court required significant new value and monies’ worth up front, and a promise to provide future labor was not enough to qualify as new value.
Congress confirmed that the absolute priority rule applied to individual debtors through the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This legislation appeared to make significant changes for individuals in Chapter 11 cases by acknowledging that individuals were subject to the absolute priority rule, but it did provide an exception: “in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115 . . . .” Section 1115, in turn, added to property of the estate in an individual Chapter 11 case income the debtor earned post-petition, thus making the individual Chapter 11 case similar to a Chapter 13 case. The big advantage was that there is no debt limit in Chapter 11; thus, the individual could confirm a plan by satisfying the requirements of section 1129(a)(15). This provision permitted a plan to be approved when the debtor paid his or her “projected disposable income” to be accumulated over a 60-month period.
Although insolvency professionals welcomed the new provisions under section 1129(a)(15), the confirmation requirements were still subject to the remaining confirmation requirements under section 1129(a), thus requiring the acceptance of creditors (contrary to Chapter 13), and when that acceptance was not forthcoming, the individual debtor was still subject to the absolute priority rule when a class of unsecured creditors objected to the plan. This would not have been a major obstacle, however, if the exception to the absolute priority rule that was added by BAPCPA had been interpreted broadly. Unfortunately for individual debtors, the failure of Congress to make it clear in any legislative history when BAPCPA was enacted that Congress intended the exception to be interpreted broadly (thus eliminating the absolute priority rule as it applied to individuals) created concerns among the circuit courts that the exception should be interpreted narrowly to only except the debtor’s post-petition income that was added by section 1115. Consequently, in a normal Chapter 11, individual debtors are unable to confirm a plan that allows them to retain their nonexempt property over the objection of unsecured creditors unless such objecting unsecured creditors are paid in full. Alternatively, individual debtors can retain their nonexempt property if they convince the court that they are able to provide “new value” that will circumvent the requirements of the absolute priority rule. Given that the requirements of the new value are rather stringent, this is rarely achieved.
Congress appears to have come to the rescue of individual debtors through the passage of the SBRA. This statute created a new Subchapter V within Chapter 11 that is available to electing small-business debtors who have secured and unsecured debts less than $2,725,625.00. Given that there is no exclusion for individuals, these provisions will apply to individuals, provided that their debts are primarily business debts, they otherwise fit within the debt limits, and they are “engaged in commercial or business activities.” In response to the COVID-19 pandemic, Congress increased the debt limit for Subchapter V cases to $7,500,000.00 for one year, ending March 27, 2021.
Although there are many aspects of the new Subchapter V that are beneficial to an individual debtor, the most significant is the elimination of the absolute priority rule. The new Subchapter V does not include a limitation on equity retaining ownership if a class of allowed unsecured claims votes against the plan. A debtor may confirm a plan over the objection of an unsecured creditor class so long as (1) all “projected disposable income” of the debtor to be received in a three-year period, or such longer period as the court may approve but not to exceed five years, will be applied to the plan, or (2) the value of the property to be distributed under the plan in the three- to five-year period is not less than the “projected disposable income” of the debtor.
Other advantages of Subchapter V to an individual are as follows:
Plan exclusivity. Only the debtor may file a plan in Subchapter V. Thus, there is no exclusivity period that expires after 120 days like a normal Chapter 11 case, or 180 days in the case of a traditional small business.
Reduced administrative expenses. There are no U.S. trustees fees in a Subchapter V case, thus reducing the administrative expenses to the debtor. Further, unless the bankruptcy court orders otherwise, a committee of creditors may not be appointed in a Subchapter V case and the individual debtor will not have to pay the expenses of such committee.
Easier retention of counsel. In a typical Chapter 11, the court will not approve retention of the debtor’s counsel if they are owed any amounts for prebankruptcy services. Subchapter V has a special rule and allows retention of counsel or other professionals so long as the debtor’s prepetition fees do not exceed $10,000. Thus, attorneys who provide services to an individual will still be able to represent the individual in the bankruptcy case even though there are some fees owed when the Subchapter V case is filed.
Modification of certain mortgages on principal residences. The restrictions on modification of a mortgage on the debtor’s residence were modified by Subchapter V to enable the debtor to modify such claims when the proceeds of the relevant mortgage were “used primarily in connection with the small business of the debtor.” Although most mortgages are typically purchase money security interests and would still be prohibited from modification, this unique provision in Subchapter V will allow mortgage modification if the individual debtor had used a majority of the value in the debtor’s home to finance business operations.
Limited post-confirmation plan modifications. Only the debtor may modify a plan after confirmation in Subchapter V. This is a distinct advantage because section 1127(e) permits the trustee, U.S. trustee, or holders of an allowed unsecured claim to seek a modification to increase the amount of payments or extend or reduce the time for payments in a normal individual Chapter 11 case. Limiting plan modification to only the debtor excludes these parties from the threat of increasing plan payments when the debtor’s operations turn out to be more favorable than projected when the plan was confirmed. On the other hand, if the debtor’s projections were too generous, the debtor has the power to seek modification in order to reduce plan payments in a Subchapter V case. This modification right expires upon “substantial consummation” when the plan is a consensual plan approved pursuant to section 1191(a), but can be accomplished at any time after confirmation when the plan is approved over the objection of a class of unsecured creditors pursuant to section 1191(b).
Paying administrative expenses over term of plan. Subchapter V permits the debtor to pay administrative expenses over the life of the plan, provided the plan was approved pursuant to the cramdown provisions of section 1191(b). A plan that is a consensual plan approved under section 1191(a) must provide for the payment of administrative expenses on the effective date of the plan in the same manner as a typical Chapter 11 plan under section 1129(a)(9)(A).
Possibility of early discharge. Subchapter V allows an individual to obtain a discharge on the effective date of the plan, provided the plan was a consensual plan approved under section 1191(a).  In a cramdown plan approved under section 1191(b), the debtor’s discharge does not occur until the completion of the plan payments. This latter requirement is similar to the discharge granted under section 1141(d)(5) in a non-Subchapter V Chapter 11 case, subject, however, to the exceptions to dischargeability of certain debts under section 523, which continue to apply to the individual debtor in Subchapter V.
No limitation on cramdown of car loans. Subchapter V does not incorporate the requirements of section 1325(a) (hanging paragraph) that requires a Chapter 13 debtor to pay the full amount of a personal motor vehicle loan incurred within 910 days prior to the bankruptcy filing instead of the value of that collateral that normally is required for a secured claim under section 506(b). This means that the individual in a Subchapter V case will be able to force the vehicle lender to accept payments equal to the value of the vehicle even though the value is less than the full amount of the vehicle loan.
Greater protection of the automatic stay. Subchapter V does not invoke the exceptions to the automatic stay under section 362(n) that applies to a “small business case” that is filed within two years after the confirmation or dismissal of a prior small business case. Thus, an individual in a Subchapter V case may file a second case within two years of the prior case and stay the actions of creditors that were pursuing the debtor.
Although there are many advantages to the Subchapter V for individual debtors, there are certain disadvantages that an individual must consider before heading down this path.
Limitations on eligibility. As previously discussed, there are debt limits for individuals seeking to take advantage of Subchapter V, and not less than 50 percent of the debts at issue must have arisen from the commercial or business activities of the debtor. Furthermore, the debtor must be “engaged in commercial or business activities.” At least one court has ruled that an individual debtor met this requirement because he was “addressing residual business debt” arising from his defunct, closely held companies.
Appointment of Subchapter V trustee. Each Subchapter V case requires the appointment of a trustee. This does not require that the debtor turn over operations to the trustee because the trustee’s duties are similar to a trustee under Chapter 12. The Subchapter V trustee is tasked primarily with assisting the debtor in proposing and confirming a plan as well as making distributions under the plan. The debtor is responsible for the Subchapter V trustee’s fees. When the debtor has proposed a consensual plan, the trustee may be removed upon the substantial consummation of the plan, which generally occurs on or about the effective date of the plan when payments have been initiated to creditors. In a nonconsensual plan, the trustee is responsible for making plan distributions to creditors until the plan is complete. At that time, the trustee will file a final accounting and a final report.
Plan deadlines and other mandatory procedures. A Subchapter V debtor has only 90 days to file a plan. This is a tighter deadline than a typical Chapter 11. Additionally, the court will hold a status conference within 60 days after the order of relief, and two weeks prior to that status conference the debtor must file a notice with the court explaining the debtor’s progress in confirming a consensual plan and providing such other information as the court may require. This cuts in half the timing requirement for filing a plan in a small business case as provided under section 1121(e). A debtor may obtain an extension of the plan filing deadline, but the grounds for such an extension are limited under the statute to circumstances beyond the debtor’s control.
Remedies upon plan default. Section 1191(c) requires the plan to provide appropriate remedies to protect the holders of claims in interest in the event that planned payments are not made. The normal requirements under Chapter 11 are merely that the plan is feasible pursuant to section 1129(a)(11), which does not require remedies to protect creditors. The only way to avoid this requirement is to convince the court with certainty that the debtor will be able to make all payments under the plan. Meeting such a standard is unlikely unless the plan already proposes a liquidation and more certain distributions to creditors. Any payment plan based on projected disposable income is not likely to have that certainty. The advantage provided to creditors by this provision is that when a plan includes a remedy, the creditor will have good grounds to force the debtor to pursue those remedies in lieu of dismissal of the Chapter 11 case or subsequent new filing of a Chapter 11 case (Chapter 22). It is also likely that courts will not view further reorganization as an adequate remedy, but rather may force a liquidation to protect the interests of creditors.
Despite these burdens on debtors, it is clear the advantages to eligible individuals under Subchapter V, particularly the elimination of the absolute priority rule, will make it substantially easier for individuals to confirm Chapter 11 plans. The plan will not depend on approval of an impaired class, and the debtor may retain assets without paying unsecured claims in full. These benefits, in tandem with the higher debt limits under the CARES Act through March 2021, will likely increase the number of individuals eligible for and taking advantage of the new Subchapter V. No doubt the current economic decline caused by the COVID-19 pandemic will result in a surge of debtors in need of bankruptcy protection. Thus, Subchapter V could not have been enacted at a more opportune time.
 Pub. L. No. 116-54, 133 Stat. 1079 (2019).
 H.R. Rep. No. 959, 95th Cong., 1st Sess. 413 (1978).
 11 U.S.C. § 1129(b)(2)(B)(ii).
 485 U.S. 197, 108 S. Ct. 963 (1988) (case involving an individual farmer).
 See Norwest, 485 U.S. at 202–06, 108 S. Ct. at 966–68 (rejecting argument that the “sweat equity” of the farmer after confirmation of the plan was sufficient new value for the farmer to retain his interest in farm).
 Pub. L. 109-8, 119 Stat. 23 § 321 (Apr. 20, 2005).
 See Zachary v. Calif. Bank & Trust, 811 F.3d 1191 (9th Cir. 2016); In re Ice House America, LLC, 751 F.3d 734 (6th Cir. 2014); In re Lively, 717 F.3d 406 (5th Cir. 2013); In re Stephens, 704 F.3d 1279 (10th Cir. 2013); In re Maharja, 449 B.R. 484 (Bankr. E.D. Va. 2011), aff’d , 681 F.3d 335 (4th Cir. 2012); In re Woodward, 537 B.R. 894 (8th Cir. BAP 2015).
 11 U.S.C. § 101(51D) (defining “small-business debtor”).
 CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).
 11 U.S.C. § 1191(b), (c).
 Id. § 1189(a).
 Id. § 1121(d)(2).
 Id. § 1121(e).
 28 U.S.C. § 1930(a)(6).
 See 11 U.S.C. §§ 1102(a)(3), 1181(b).
 See id. § 327(a) (authorizing retention of professional persons “that do not hold or represent an interest adverse to the estate, and that are disinterested persons”); id. § 101(14) (defining “disinterested person” as a person that “is not a creditor”).
 Id. § 1195.
 Id. § 1190(3).
 The recent case of In re Ventura, 2020 WL 1867898 (Bankr. E.D.N.Y. Apr. 10, 2020), identified certain factors to consider before allowing modification of a mortgage on a principal residence in Subchapter V.
 11 U.S.C. § 1193.
 Id. § 1101(2).
 Id. § 1191(e).
 Id. § 1192.
 Id. § 1181(c).
 See id. §§ 523(a), 1141(d), 1181(c), and 1192(2).
 Id. § 362(n)(1).
 Id. § 101(51D).
 See In re Wright, 2020 WL 2193240 (Bankr. D.S.C. Apr. 27, 2020).
 Id. § 1183.
 Id. § 1101(2).
 Id. § 1188(c).
 Id. § 1188(b).