Chapter 11 Bankruptcy

Filing for Chapter 11 Bankruptcy 

If you’re a small business falling into insurmountable debt, filing for a Chapter 11 bankruptcy, commonly known as reorganization bankruptcy, might be your best option. It can be costly, time-consuming, and complicated, which is why some small businesses avoid it. But, it’s the only bankruptcy option that allows a business to stay in business. Chapter 11 allows a business to restructure and continue to operate. To determine whether or not filing a Chapter 11 bankruptcy is the right course of action for your business, consider the following questions.

What is Chapter 11?

Chapter l1 is a term that makes the news when major corporations have financial problems and turn to the bankruptcy courts for help. The truth is, though, small businesses and companies that are not well known file the most Chapter 11 bankruptcies. Under Chapter 11, a business can restructure its finances through a plan of reorganization approved by the bankruptcy court. A Chapter 11 plan can help a business balance its income and expenses while regaining profit, regaining profitability, and continuing to operate. Chapter 11 also allows the Debtor to sell some or all of their assets and downsize their business if necessary.

What types of businesses are eligible for Chapter 11?

Any business that is operated as a partnership, a limited liability company (LLC), or a corporation and is looking to restructure, is eligible to file for Chapter 11. It is also the only bankruptcy option for individuals that are in debt, want to reorganize, and owe too much money to meet Chapter 13 eligibility requirements.

How long does the process of filing a Chapter 11 take?

An individual or business has a 120-day period during which it has an exclusive right to file a plan. This exclusivity period may be extended or reduced by the court, but under no circumstances may this period be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. One of the drawbacks to filing a Chapter 11 is that it can take many years to be resolved unless the court, the U.S. trustee, the committee, or another party in interest acts to ensure the case’s timely resolution.

Are there any special provisions for small businesses filing a Chapter 11?

For the most part, small businesses have to abide by the same rules and procedures as major corporations and must meet the same requirements to reorganize under Chapter 11. There are, however, some special provisions that can help them reduce fees and restructuring costs that speed up the resolution process.

1.  Under the Bankruptcy Code, a Chapter 11 proceeding filed by a small business debtor is considered to be a small business case. A “small business debtor” is defined as person or entity who:

  • is engaged in business or other commercial activities
  • owes no more than $2,490,925 in total claims (excluding obligations owed to insiders such as family members of the business owners)

2.  In Chapter 11 cases, a committee is usually appointed to represent the interests of unsecured creditors. A creditors’ committee can retain attorneys and other professionals at the petitioner’s expense, which can significantly increase the cost of Chapter 11 reorganization. In a small business case, the bankruptcy court can order that no creditors’ committee be appointed.

3.  Small businesses are subject to some reporting and filing requirements that other Chapter 11 petitioners are not. A small business debtor must attach its most recently prepared balance sheet, statement of operations, cash flow statement, and federal tax return to its bankruptcy petition when filing for Chapter 11 relief.

4.  Under the bankruptcy laws, small business cases are subject to more oversight by the U.S. Trustee’s office than other Chapter 11 proceedings.

5.  In small business cases, the business has only 300 days to propose a Chapter 11 plan.  The court can extend the 300-day deadline, but only if the debtor proves that it will be able to obtain approval of a plan within a reasonable period of time.

6.  In most Chapter 11 cases, the petitioner must prepare a disclosure statement, submit it to the bankruptcy court for its approval, and circulate copies to creditors and other parties in interest. They must provide extensive information about the debtor and proposed plan, and are often expensive to prepare. In small business cases, the bankruptcy court can waive the disclosure statement requirement, which can significantly expedite the reorganization process and reduce legal and other costs.