Small Business Chapter Eleven

Depending on the circumstances, small businesses have three potential bankruptcy options. Read on to learn more.

Chapter 7 – Chapter 7 is a bankruptcy option for debtors that do not have the means to restructure their obligations and continue in business. In Chapter 7, a trustee is appointed, available assets are sold, and creditors are paid to the extent funds are available. Partnerships, limited liability companies, and corporations are all eligible to file bankruptcy under Chapter 7. Depending on their income, individuals who own and operate small businesses as sole proprietorships also may file bankruptcy under Chapter 7. To learn more, see the articles in Chapter 7 for Small Business Owners.

Chapter 13 – Chapter 13 can be a restructuring option for small businesses owned and operated by individuals (a sole proprietorship). Only individuals can file Chapter 13, so it is not an option for businesses operated through partnerships, limited liability companies, or corporations. Chapter 13 eligibility is also subject to debt limits. As of April 2019, an individual owing more than $419,275 for unsecured debt and $1,257,850 for secured debt can’t file Chapter 13. (The limits for cases filed before April 1, 2019, are $394,725 in unsecured debt and $1,184,200 in secured debt.) To learn more, see the articles in Chapter 13 for Small Business Owners.

Chapter 11 – Another option for a small business is Chapter 11 bankruptcy. Generally, small businesses shy away from Chapter 11, because it is expensive, risky, time-consuming, and complex. Chapter 11 is the only bankruptcy option, however, for a small business seeking to restructure and continue in operation if it is owned by a partnership, limited liability company, or corporation. Chapter 11 is also the only bankruptcy option for individual business debtors who want to reorganize but owe too much money to meet Chapter 13’s eligibility requirements.

Chapter 11, Subdivision V – Most small businesses in need of reorganization help turn to this modified Chapter 11 specially designed for small business filers. It’s a simplified reorganization that doesn’t involve a creditors’ committee and disclosure statements and the bankruptcy judge can confirm a plan without creditor consensus. Small businesses with debt of $2,725,625 or less are eligible. In response to the coronavirus pandemic, the debt limit is currently $7,500,000 until March 26, 2021.

Learn about all of the options available to small businesses and their owners by reading Chapter 7 vs. Chapter 11 Bankruptcy.

What Is Chapter 11 Bankruptcy?

Chapter 11 is part of the United States Bankruptcy Code. Chapter 11 generally gets in the news when major corporations — like General Motors, K-Mart, and United Airlines — have financial problems and turn to the bankruptcy courts for help. Most Chapter 11 cases, however, are filed by businesses and companies that are far from being household names.

Under Chapter 11, a debtor can restructure its finances through a plan of reorganization approved by the bankruptcy court. By reducing obligations and modifying payment terms, a Chapter 11 plan can help a debtor balance its income and expenses, regain profitability, and continue in operation. Under Chapter 11, a debtor also can sell some or all of its assets so it can downsize its business if necessary or pay down claims that it owes.

Special Provisions for Small Business Debtors in Chapter 11, Subdivision V Cases

For the most part, small businesses and major corporations have to follow the same rules and meet the same requirements to reorganize under Chapter 11. There are, however, some special provisions for small business debtors that can help them fast track through the Chapter 11 process and reduce legal and other restructuring expenses.

Under the Bankruptcy Code, a Chapter 11, Subdivision V proceeding filed by a “small business debtor” is considered to be a “small business case.” A “small business debtor” is a person or entity who: (1) is engaged in business or other commercial activities; and (2) owes no more than $2,725,625 as of April 1, 2019, in total claims, excluding obligations owed to insiders such as family members of the business owners. (In response to the coronavirus pandemic, the debt limit has been increased to $7,500,000 until March 26, 2021.)

Source: https://www.nolo.com/legal-encyclopedia/chapter-11-bankruptcy-small-business-owners.html