When Cramdown Is Needed
If any impaired class of claims fails to accept the plan, consensual confirmation under Section 1191(a) is unavailable. The debtor must satisfy the more demanding requirements of Section 1191(b) to confirm the plan over objection.
Cramdown is the backstop that ensures a viable business can reorganize even when some creditors object. Without it, a single hostile creditor could block a plan that benefits everyone else.
The Projected Disposable Income Requirement
Under Section 1191(c)(2), the plan must provide that all of the debtor's projected disposable income received during the applicable commitment period (3-5 years) will be applied to make payments under the plan.
"Projected disposable income" is defined as income not reasonably necessary for:
- Maintenance or support of the debtor or a dependent
- Payment of domestic support obligations
- Expenditures necessary for continuation, preservation, or operation of the business
No means test: Unlike Chapter 13, Subchapter V does not use the mechanical IRS expense standards. Courts examine actual income projections and actual reasonable expenses. This gives courts flexibility to account for the realities of running a business.
The Fair and Equitable Standard
Secured Claims
For each dissenting class of secured claims, the plan must provide that:
- The creditor retains its lien
- The debtor makes deferred cash payments totaling at least the present value of the allowed secured claim
Unsecured Claims
The absolute priority rule does not apply. The plan need only commit all projected disposable income. The debtor retains equity interest in the business.
No Unfair Discrimination
The plan must not discriminate unfairly among classes of similar priority. Some differential treatment is permitted if there is a reasonable basis for it.
Cramdown vs. Chapter 13 Comparison
| Feature | Chapter 13 | Subchapter V Cramdown |
|---|---|---|
| Income test | Means test formula | Actual projected income |
| Expense standards | IRS allowances | Reasonable actual expenses |
| Commitment period | 3 or 5 years (based on median) | 3-5 years (flexible) |
| Debt limit | ~$2.75M (combined) | $7.5M |
| Business expenses | Limited recognition | Full recognition |
| Absolute priority | N/A | Does not apply |
See also: Calculating disposable income | Discharge timing
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