Subchapter V Plan Term: Why Courts Extend Plans to Five Years | North Star Law Firm

Subchapter V of Chapter 11 was designed to give small businesses a fast, flexible path through reorganization without the procedural overhead of a traditional Chapter 11. The promise is real. The case timelines are compressed, the absolute priority rule does not apply over creditor objection, and a debtor can confirm a plan that retains equity for existing owners as long as the plan commits the debtor's projected disposable income to creditors over a three-to-five-year period. For a Houston-area business owner facing a sudden judgment, a tax debt the company cannot pay, or a guaranty exposure on a defunct line of credit, Subchapter V is often the single best tool available.

What is the difference between a three-year and five-year Subchapter V plan?

The flexibility cuts both ways. Section 1191(c)(2) of the Bankruptcy Code requires that a Subchapter V plan, to be confirmed over a creditor objection, must commit either all of the debtor's projected disposable income or property of equivalent value over a period of not less than three years and not more than five years, as the court fixes. The choice between three and five is not the debtor's. The court decides, applying a fair-and-equitable analysis under § 1191(c) that has been the subject of growing case law since the Small Business Reorganization Act took effect in February 2020.

What happened in In re Honey Do Franchising Group?

The April 17, 2026, memorandum opinion in In re Honey Do Franchising Group, Inc., from the Bankruptcy Court for the Eastern District of Tennessee, is a useful illustration of how that analysis plays out. The debtor is a handyman services franchisor. Its financial distress arose from a 2024 arbitration award in favor of a former multi-unit franchisee, 5 Talents, Inc., which exceeded $1.3 million after attorneys' fees. The award was confirmed by a federal district court, leaving Honey Do with an unsecured judgment liability it could not pay through operations. It filed Subchapter V relying on its royalty stream from approximately ten remaining franchisees, but it was hampered by an outdated Franchise Disclosure Document, the FDD, which prevented it from selling new franchises during the wind-up of the dispute.

The plan proposed a three-year commitment of projected disposable income, the statutory floor under § 1191(c)(2). The judgment creditor, 5 Talents, objected. Its objections were the standard Subchapter V plan attacks: bad faith under § 1129(a)(3), failure to maximize the estate under the best-interests test of § 1129(a)(7), improper insider preferences, and understatement of projected disposable income. The court rejected most of the bad-faith arguments. The debtor had not designed the franchise dispute, the operational structure made business sense, and the debtor had attempted to negotiate a resolution before filing. The court accepted the debtor's valuation of the franchise system, which placed minimal independent value on trademarks and other intangibles and instead treated the royalty stream as the locus of value. On the best-interests test, the court was satisfied that liquidation would yield even less than the plan offered, given the secured creditor's blanket lien and the limited standalone value of the intangibles.

Why did the court extend the plan to five years?

What the court did not accept was the three-year term. After working through the fair-and-equitable analysis under § 1191(c), it imposed a five-year commitment period. Three factors drove the result. The debtor's projected expenses included substantial spending on franchise development and marketing, which would primarily benefit the franchisor's long-term growth rather than the existing creditor body. The debtor's principals had increased their compensation and maintained insider arrangements, including lease payments to an entity affiliated with the principals, which the court found warranted closer scrutiny. And the projections included minimal benefit to creditors from future franchise sales, even though the debtor planned to incur substantial expenses to support those sales. The combination of insider-friendly compensation, growth-oriented spending, and uncertain near-term creditor benefit pushed the court to extend the term and impose conditions that capture additional disposable income if actual performance exceeds projections.

The case is not unusual in any of its component pieces. What it illustrates clearly is the analytical framework. A Subchapter V court evaluating the term of a plan looks at how the debtor proposes to spend its projected income during the commitment period. Spending that primarily benefits the existing equity holders or that prioritizes long-term enterprise value over near-term creditor recovery invites a longer term. Insider compensation and related-party transactions invite scrutiny. Optimistic projections that depend on uncertain future revenue invite mechanisms to capture the upside if the projections turn out to be conservative. None of this is hostile to debtors. It reflects the statutory requirement that the plan be fair and equitable to creditors, which is the price of Subchapter V's relaxation of the absolute priority rule.

How does insider compensation affect Subchapter V plan confirmation?

For Houston-area business owners contemplating a Subchapter V filing, several practical points emerge from the analysis. The first is that compensation decisions matter. A founder who has been paying himself or herself a market salary that reflects the work the founder actually performs is in a far better position than one who pays himself a premium to compensate for risk or to extract value before creditors share in the recovery. Compensation that is documented as reasonable for the role being performed, supported by external comparables where possible, will not draw the kind of scrutiny that drove the result in Honey Do.

Will related-party transactions be reviewed by the bankruptcy court?

Yes. Related-party transactions are visible. Lease payments to entities affiliated with the principals, management fees paid to holding companies, and intercompany allocations within a corporate group are routinely examined in Subchapter V confirmation. They are not necessarily disqualifying. They become problematic when the structure cannot be defended on independent economic terms or when the related-party arrangements consume cash that could otherwise go to creditors. Cleaning up these relationships before filing, or at least documenting their economic terms with evidence of arm's-length comparables, materially improves the confirmation posture.

Can I spend money on business growth during my Subchapter V plan?

Growth spending requires justification. A debtor that proposes to invest in development, marketing, or expansion during the plan commitment period must be prepared to explain why that spending is essential to the business's viability and how the creditors share in the resulting value. The Honey Do court accepted that some growth spending was reasonable but found that the debtor had not adequately tied its proposed expenditures to a near-term creditor benefit. A different debtor, with a clearer linkage between investment and projected free cash flow that flows to creditors during the plan term, might have prevailed on a three-year term.

Worth flagging for franchisors specifically is that regulatory compliance is operational. Honey Do's FDD lapse was not a technical issue. It was a direct constraint on the company's ability to generate revenue and therefore on its ability to pay creditors. Any franchisor approaching restructuring should verify FDD currency and compliance before filing, and any franchisor facing distress should treat FDD maintenance as a priority expense rather than a deferrable cost.

What is the current Subchapter V debt limit?

Worth flagging in any Subchapter V conversation right now is the debt limit issue. Eligibility under § 101(51D) requires that the debtor's noncontingent liquidated debts, excluding affiliate and insider debt, not exceed the statutory cap. The temporary $7.5 million cap that took effect during the COVID-19 emergency expired on June 21, 2024, and the cap reverted to the inflation-adjusted SBRA original. As of April 1, 2025, that figure stands at $3,424,000, and it remains the operative cap for cases filed in 2026. The bipartisan Bankruptcy Threshold Adjustment Act of 2026, introduced in March, would restore the $7.5 million cap, but as of this writing the bill has not been enacted. Businesses with debts in the $3.5 million to $7.5 million range should plan around the current cap and watch the legislative calendar.

What should creditors do when objecting to a Subchapter V plan?

For creditors on the other side of these cases, particularly judgment creditors like the franchisee in Honey Do, the lessons are equally instructive. A well-prepared objection to confirmation, supported by substantive evidence on insider compensation, related-party arrangements, and the relationship between projected expenses and creditor recovery, materially shapes the outcome. The Honey Do objector did not block confirmation, but it did persuade the court to extend the term and impose conditions that captured upside performance. A creditor that walks into confirmation without that kind of substantive record gets the three-year term the debtor proposed. A creditor that builds the record gets meaningful additional value over the life of the plan.

Pre-filing planning is where most of these issues are won or lost. A debtor that has cleaned up insider compensation, documented related-party transactions on arm's-length terms, and built a plan that ties projected expenses to creditor recovery in a defensible way enters confirmation with the wind at its back. A debtor that files in haste, with unresolved related-party issues and an aggressive insider compensation structure, faces the kind of judicial scrutiny that produces five-year terms and upside-capture provisions. The work to do before filing is more important than the work after, and the time pressure that accompanies a creditor judgment or a sudden tax assessment should not displace the planning that puts the debtor in the best position.

Subchapter V remains the right vehicle for many small business reorganizations. The path is faster, cheaper, and more flexible than traditional Chapter 11. But the price of that flexibility is that the court retains real authority to shape the plan, including by extending the term and imposing conditions that protect the creditor body. North Star Law Firm represents debtors and creditors in Subchapter V proceedings, including pre-filing planning, plan formulation, and confirmation litigation.

Frequently asked questions

What is the difference between a three-year and five-year Subchapter V plan?

Section 1191(c)(2) requires a non-consensual Subchapter V plan to commit projected disposable income for a period of not less than three years and not more than five years, as the court determines. The court evaluates the fairness and equity of the plan under § 1191(c) based on factors including insider compensation, growth-oriented spending, and the linkage between projected expenses and creditor recovery.

What is the current Subchapter V debt limit?

As of April 1, 2025, the inflation-adjusted Subchapter V debt limit under § 101(51D) is $3,424,000 in noncontingent liquidated debts, excluding affiliate and insider debt. The temporary $7.5 million cap expired June 21, 2024. The Bankruptcy Threshold Adjustment Act of 2026, introduced in March, would restore the higher cap but has not been enacted.

Will my insider compensation be reviewed in Subchapter V?

Yes. Compensation paid to principals and related parties is routinely examined in Subchapter V confirmation. Compensation that is documented as reasonable for the role and supported by external comparables generally avoids scrutiny. Compensation that exceeds market levels or that funds related-party transactions invites the kind of analysis that led to the five-year term in In re Honey Do Franchising Group.

Can I spend money on business growth during my Subchapter V plan?

Yes, but the spending must be justified. Courts evaluate whether proposed expenditures are essential to the business's viability and whether the creditor body shares in the resulting value. Growth spending that primarily benefits long-term enterprise value without near-term creditor benefit can extend the plan term or trigger upside-capture mechanisms.

Why did the Honey Do court extend the plan from three to five years?

The court identified three factors: substantial spending on franchise development and marketing that primarily benefited the franchisor's long-term growth rather than current creditors, increased insider compensation and lease payments to an affiliated entity, and projections showing minimal near-term creditor benefit from future franchise sales. The combination warranted a longer commitment period under the fair-and-equitable analysis.