Menu
Subchapter V Plans -- The Best Interests Test and Owner Pay Issues
Three Key Takeaways
A recent Subchapter V decision shows how a plan can fail confirmation even when no creditor objects and which confirmation requirements are easy to overlook. The principal issue precluding confirmation was the best-interests calculation pursuant to section 1129(a)(7) of the Bankruptcy Code. Related defects followed from owner compensation issues: the projected disposable income figure pursuant to section 1191(c)(2) and (d), insider compensation disclosure pursuant to section 1129(a)(5)(B), feasibility pursuant to section 1129(a)(11), and a good faith question the bankruptcy court reserved.
The points are illustrated by In re Nebraska Peace of Mind Behavioral Health, LLC, No. BK 26-40156, 2026 WL 2411074 (Bankr. D. Neb. Aug. 17, 2026). Nebraska Peace of Mind Behavioral Health, LLC (the “Debtor”) proposed a three-year Subchapter V plan. The unsecured class held claims totaling $323,188.76 and voted against the plan. Not a single creditor objected to the plan in writing. The bankruptcy court noted that it has an independent duty to determine whether every element necessary for confirmation is met, even when no one objects. It refused to confirm the plan and required a modification pursuant to section 1193(a) of the Bankruptcy Code.
A Subchapter V plan is confirmed in one of two ways. Pursuant to section 1191(a), the court confirms the plan if the requirements of section 1129(a) of the Bankruptcy Code are met, including that all classes have accepted the plan (or are otherwise unimpaired). If an impaired class rejects the plan, confirmation is available only pursuant to section 1191(b) of the Bankruptcy Code. Section 1191(b) states that a plan may be confirmed if the other applicable requirements of section 1129(a) are met (subject to certain exceptions) and if the plan does not discriminate unfairly and is “fair and equitable” as to each impaired class that has not accepted.
Section 1191(c) of the Bankruptcy Code defines “fair and equitable.” Pursuant to section 1191(c)(2), as of the effective date of the plan, the plan must pay all “projected disposable income” over a three to five-year period to creditors. Pursuant to section 1191(c)(3), the debtor must be able to make the plan payments, or there must be a reasonable likelihood that it will be able to do so. Because the unsecured class did not accept the plan, confirmation was available only pursuant to section 1191(b), so the plan had to be fair and equitable as to that class. Unsecured creditors were therefore to be paid from “projected disposable income,” which is the first issue the bankruptcy court noted in its opinion.
Unless the holder of an impaired claim has accepted the plan, the best interests of creditors test pursuant to section 1129(a)(7) requires that the holder receive or retain property of a value, as of the effective date of the plan, that is not less than what the holder would receive or retain in a chapter 7 liquidation on that date (i.e., if the debtor’s assets were simply liquidated and used to pay off creditor claims). The bankruptcy court held that the words “as of the effective date of the plan” require deferred payments to be discounted to present value before they are compared to the amount creditors would receive in a liquidation.
The court described the Debtor as “asset rich” on a liquidation basis and “cash poor” on an operating basis. The plan projected that unsecured creditors would receive $54,810.95 in a hypothetical chapter 7 liquidation, after taking into account chapter 7 trustee fees and expenses. Projected disposable income pursuant to section 1191(c)(2) and (d) over the three-year plan term was $37,374. To close the gap and ensure that the best interests test was met, the Debtor proposed to pay unsecured creditors $17,436.88 on the effective date and the remaining $37,374 in twelve quarterly payments, resulting in total payments to creditors of $54,810.88 over three years.
The bankruptcy court relied on Farm Credit Servs. of Am. v. Topp (In re Topp), 75 F.4th 959, 961 (8th Cir. 2023). Though Topp was a chapter 12 case, the court cited it for the general proposition that “[g]enerally, money now is worth more than money later. Accordingly, future payments must be discounted before adding them up to see whether the total equals the present value of a claim. Discounting is achieved by applying an interest rate that captures the time value of money,” often called the discount rate. Nebraska Peace of Mind, 2026 WL 2411074, at *2 (quoting Topp, 75 F.4th at 961). The Debtor did not discount the deferred payments at all, which the court described as a discount rate of zero percent. Using a four percent rate solely as an illustration, the court explained that the twelve quarterly payments were worth only $35,053.94 in effective-date dollars, not the $37,374 the Debtor counted toward the best interests test. The plan therefore paid less than the liquidation number even before Subchapter V trustee fees were deducted. Id. at *2 & n.3.
The Debtor argued that unsecured creditors are not entitled to interest on their claims; however, the bankruptcy court noted that “[t]his argument misses the point.” Id. at *2. Discounting a future income stream to present value does not pay interest, but it does recognize that money paid on the effective date is worth more than the same number of dollars paid over three years. The court also rejected the assumption that unsecured creditors have a claim of $54,810.95, because their claims totaled over $300,000 and $54,810.95 was the minimum value the plan had to pay out, as of the effective date, in order to satisfy the best interests test.
Ultimately, the bankruptcy court refused to confirm the plan because it did not satisfy the best interests test. When a plan pays unsecured creditors over time, the best interests test requires the debtor to pay them interest, meaning dollars over and above the amount they would receive in a chapter 7 case, so that the value of the payment stream as of the effective date equals the liquidation number over the plan payment period. The plan could not be confirmed unless it was modified to pay unsecured creditors value of not less than $54,810.95 as of the effective date (when taking into account present value), net of the Subchapter V trustee’s compensation.
The Debtor’s plan also proposed to pay two of its three owners for management services after confirmation, but the projections carried both a payroll line and an owner draw line. The plan was silent as to whether the owners were receiving a salary for services or taking draws on account of their equity. The distinction was important and relevant because reasonable compensation for services actually rendered is a business expense that can reduce “projected disposable income” pursuant to section 1191(d)(2) of the Bankruptcy Code, while a distribution on account of equity does not. Because the Debtor did not distinguish sufficiently between salary and draws, the bankruptcy court could not find that projected disposable income was correctly calculated pursuant to section 1191(c)(2) and (d).
The same owner-pay issue produced three other confirmation issues. Section 1129(a)(5)(B) requires disclosure of any insider who will be employed or retained by the reorganized debtor, and the nature of that insider’s compensation. The plan gave titles and annual numbers but did not describe the services the owners would provide or how the owners would be paid, so the court found that the insider-compensation disclosure was inadequate. Section 1129(a)(11) requires a finding that confirmation is not likely to be followed by liquidation or further reorganization. If the owners were paid more or drew more than the projections assume, the plan may be underfunded and would not be feasible. Finally, section 1129(a)(3) of the Bankruptcy Code requires that the plan be “proposed in good faith.” While the court did not decide that issue, in a footnote it stated that the relationship between the proposed payments to the owners and the much smaller proposed distribution to unsecured creditors may bear on good faith. Id. at *3-4 & n.7.
The bankruptcy court did not deny confirmation with prejudice. It found that the plan could be modified to meet the statute. Pursuant to section 1193(a), a debtor may modify a plan at any time before confirmation. A modification in this case has to: (a) deliver unsecured creditors value of not less than $54,810.95 as of the effective date, net of Subchapter V trustee compensation; (b) state what each owner is paid, how that pay is funded, and what services are provided in exchange; and (c) add back to disposable income any portion of the draws that is a distribution on account of equity.
Based on these issues, Nebraska Peace of Mind provides a roadmap for ensuring that “projected disposable income” is sufficient to pay creditor claims:
FactorLaw confirms numerous chapter 11 plans each year, including Subchapter V plans, and represents creditors at confirmation. That work regularly results in issues related to the two questions this case presents: whether deferred payments to unsecured creditors have a present value, as of the effective date, of not less than the chapter 7 liquidation number and whether owner pay is compensation for services or a distribution on account of equity.
By: Sean P. Williams
FactorLaw is a debt relief agency. We help people file for relief under the Bankruptcy Code.
© 2026 Law Office of William J. Factor, Ltd.|Legal Disclaimer|Privacy Policy | Terms of Service | Chicago Bankruptcy