Reorganizing Your Debts: Small Business Chapter 11 Bankruptcy

Chapter 11 bankruptcy is notoriously expensive and time-intensive for business owners. However, in 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which aimed to make the process simpler and less expensive for small businesses that otherwise would have been forced into a Chapter 7 liquidation bankruptcy.

If you are considering bankruptcy for your small business, here’s what you should know about Chapter 11 bankruptcy.

Are You a Small Business Debtor?

According to the Bankruptcy Code, a small business debtor is a small business structured as a sole proprietorship, partnership, or corporation that meets these criteria:

  • The small business owes no more than $2,566,050 in liquidated, secured, non-secured, and non-contingent debt, not including debt owed to affiliates.
  • The small business is engaged in commercial activities in addition to owning or operating real property.
  • The small business does not have an active creditor committee.

How Is This Different from Regular Chapter 11 Bankruptcy?

The primary difference between Chapter 11 as a small business debtor and normal Chapter 11 is that the process is streamlined. Rather than oversight from a creditors committee, a small business debtor must submit information to the U.S. Trustee. After an initial interview with the U.S. Trustee at the beginning of the case, the Trustee will evaluate the debtor’s obligations that would arise during Chapter 11. Usually, the Trustee will review the debtor’s business plan to determine viability. The debtor also must file a monthly financial report with the Trustee.

Because the small business deals with the U.S. Trustee instead of a creditors committee, it will have more freedom to continue operations of the business without interference from creditors while it figures out how to restructure business to pay off its debts. In a regular Chapter 11 bankruptcy case, creditors can propose plans at the same time as the small business debtor. The small business debtor has a 180-day exclusivity period, which can be extended to 300 days. Because creditors cannot propose a plan until the exclusivity period ends, this allows the case to move more quickly, which translates into reduced costs for the debtor.

With court approval, the small business debtor also may not have to file a disclosure statement with creditors before submitting it for approval to the court. A disclosure statement contains all the information that a creditor might want to see before voting for approval. Essentially, not filing a disclosure statement allows the small business to move forward without creditors having a say in the reorganization plan.

Are you considering Chapter 11 bankruptcy for your small business? Contact us today to learn more about how we can help you.