Small Business Provisions of Chapter 11 Bankruptcy

In our last blog, we touched on the three potential bankruptcy options for your small businesses and their owners. I’d like to dig a bit deeper into the last option, Chapter 11. Filing under this chapter can be a saving grace, because it is the only bankruptcy chapter that can allow for the business to reorganize and continue operations.

Chapter 11 Overview

Chapter 11 is perhaps the most well known chapter of the business options. It generally appears in the media when large corporations have financial trouble and look to the bankruptcy courts for assistance. However, most business that file for Chapter 11 are far from being the size of those large multinational companies, like GM, Chrysler and United Airlines who have recently been through bankruptcy.

As previously mentioned, the failing business can restructure its finances after its Plan of Reorganization is approved by the bankruptcy court. This will allow the continuation of operations once debt service is adjusted in a fashion that permits the company to pay its expenses and debt service on the income it has, while ensuring that the creditors are paid as much or more than each would have received had the company liquidated.  The goal is a return to profitability.

Chapter 11 Provisions

Almost all rules and requirements that must be met by small businesses and large corporations under Chapter 11 are the same. However, there are certain provisions that small business debtors can use to fast track them through the bankruptcy process and cut their legal and other miscellaneous expenses.

These provisions, under the Bankruptcy Code, are applicable to small businesses that were filed by a “small business debtor” who would be identified by both of the following:

  1. Being engaged in any business or other commercial activity.
  2. Owing no more than $2,566,050 in total claims (excluding obligations owed to insiders).

Some of these “special” provisions owed are:

No Creditors’ Committee

Usually in cases under Chapter 11, if the unsecured creditors are interested, a committee is appointed for representing the interests of the body of unsecured creditors. This committee can retain attorneys and other various professionals at the the expense of the debtor in an attempt to maximize the returns to the unsecured class or classes of creditors; but it significantly increases the cost of the reorganization. For a small business, the bankruptcy court can order that this no creditors’ committee should be appointed.

Filing and Reporting Duties

Other reporting and filing requirements are assigned to small businesses that aren’t for other larger debtors. For example, a small business debtor must attach a recent balance sheet, operations statement, cash flow statement, and federal tax return to its bankruptcy petition when it files for bankruptcy protection.

U.S. Trustee Oversight

The United States Trustee’s office is the agency in charge of overseeing bankruptcy case files for the Department of Justice. Under bankruptcy law, small business cases are given more oversight by the U.S. Trustee’s office than their larger counterparts.

Plan Deadline

There are usually no deadlines assigned for filing a Chapter 11 Plan unless there is one set by the bankruptcy court. But in small business cases the debtor is only permitted 300 days to prepare and file a Chapter 11 Plan. There may be an extension given, but this only occurs when and if the debtor proves the extension will be able to gain approval within a reasonable amount of time.

Plan Proposal Period

Creditors are permitted to file Chapter 11 Plans. In order to file a plan, the exclusivity period of 120 days after the debtor files its petition. In the case of small businesses, the exclusivity period is extended to 180 days. The longer the period, the more risk is then reduced for the debtor of having to litigate the competing plans which could result in losing the business.

Disclosure Statement

Usually in Chapter 11, the debtor needs to prepare a disclosure statement and submit it to the court for approval. It must also circulate copies to creditors and other parties involved. In Chapter 11, disclosure statements must provide ample amounts of information about the debtor and the proposed plan and are usually very expensive to prepare. However, for small businesses, the bankruptcy court is able to permit a combined plan and disclosure statement or, waive the disclosure statement requirements if the Plan provides sufficient information. This can be a tremendous help when it comes to expediting the reorganization of the business and reduce legal fees and costs as well.

Confirmation

For purposes of expediting the procedure, the Debtor must obtain confirmation of its plan of reorganization within 45 days of filing the Plan.  This period can be extended once, under certain strict requirements.  However, the filing of a new or amended Plan operates to restart this deadline.

The Bankruptcy Code permits small businesses to reorganize or use Chapter 11 to liquidate assets in an orderly and beneficial way.  For a small business, the process is streamlined to a degree, in exchange for additional oversight and strict deadlines.  All of this works together to keep the cost in check, while making reorganization a much more viable option for smaller businesses.

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