Filing Chapter 11 Bankruptcy for Small Businesses

Close up of petition for bankruptcy form and pen, chapter 11 bankruptcy

Small business bankruptcy, while certainly no walk in the park, does not necessarily mean the end of the business. For many small business owners, filing bankruptcy actually allows the business a second chance. Depending upon your circumstances, filing for Chapter 11 bankruptcy may afford you the opportunity to restructure - while your business continues to operate, and ideally, emerge as a viable entity on the other side.

If your business is facing high amounts of debt yet you have good reason to believe that you can survive it, then filing for Chapter 11 may be the ideal solution to your debt problem. Below, we’ll explore scenarios in which Chapter 11 may be appropriate, as well as how the process works, recent provisions afforded to small business debtors, and the importance of having an experienced bankruptcy lawyer by your side.

When Chapter 11 Bankruptcy May Be Best for Your Business

Part of the Federal Bankruptcy Code, Chapter 11 is commonly referred to as a reorganization bankruptcy. Chapter 11 is familiar to many thanks to the big-name brands that turn to bankruptcy during times of financial distress. However, small business Chapter 11 bankruptcy cases get filed more frequently results in Chapter 11 than big-name corporate bankruptcy cases.

Chapter 11 is the only type of bankruptcy open to partnerships, corporations, or limited liability companies that are intending to continue operations and restructure their businesses. In addition, sole proprietors who owe too much money to meet the requirements for Chapter 13 reorganization bankruptcy may instead file for Chapter 11.

Even with recently streamlined procedures, small business bankruptcy is a time-consuming and complex process, and it can also involve significant financial risks and costs. That being said, Chapter 11 may be the best option for your small business to survive and continue operating.

How Chapter 11 Bankruptcy Works for Small Businesses

When a small business files for Chapter 11, they generally do so in the bankruptcy court that serves their principal place of business. Due to the complexity of Chapter 11, an experienced bankruptcy lawyer plays a critical role in supporting the debtor throughout the process.

The bankruptcy court will require detailed information regarding all assets, liabilities, current income and expenditures, contracts and leases, and all other financial affairs. If the business is a sole proprietorship, the individual will need to file additional paperwork, such as proof of credit counseling and copies of any debt repayment plans created. Ensuring that all the proper documentation is gathered can be an overwhelming process, but your lawyer can advise on what documents are required - and what is not. Preparing under the guidance of your lawyer will not only help you stay organized and on track but will also assist greatly in preparing for bankruptcy court hearings.

Once everything is filed, the small business owner temporarily becomes a debtor in possession. This term essentially means that the debtor's business assets still remain within their control. This title also comes with responsibilities, including accounting for all property, responding to claims, filing any additional reports required by the court, and generally proposing a plan that benefits all creditors. 

During this stage of a small business bankruptcy filing, the debtor must also develop and submit a plan for reorganization. All claims by creditors must be listed, in addition to detailed steps for repaying each of them. The goal of the reorganization plan is to renegotiate payment terms, reduce obligations, balance out income and expenses, sell off assets if necessary, and all the while remaining in operation. All of this serves to illustrate, again, the complexity of the Chapter 11 bankruptcy case process, and why working in tandem with an experienced bankruptcy lawyer will go far in mitigating stressful mistakes.

In order for the reorganization plan to be approved, a creditor’s committee may be required by the court in order to help represent the interests of the creditors owed. This committee may consult with the debtor and investigate debts over the course of the case process. However, recent changes to the Chapter 11 bankruptcy code can now offer a faster track to some small business owners facing bankruptcy.

Small Business Debtors and Special Provisions in Chapter 11

The Small Business Reorganization Act of 2019 went into effect in 2020, providing a bit more flexibility to those filing a small business bankruptcy. There are specific debt limits, along with other requirements, which must be met in order for a small business owner to qualify for this type of Chapter 11 bankruptcy.

The Chapter 11 special provisions rid those who qualify from the requirement for a creditor’s committee unless otherwise, court-ordered. This, along with shortened deadlines, allows debtors to see their cases resolved faster. Considering it typically takes 3-5 years to complete the repayment plan, any reduction in the timespan comes as a relief.

During the bankruptcy case process, a trustee is appointed to assist the debtor and other parties with the development of a realistic reorganization plan, while also reviewing regular reports submitted by the debtor in possession. The trustee is also paid by the debtor for their services. Creditors are still provided copies of the plan so that they can be informed of repayment projections.

Finally, the debtor may receive a discharge of debts when the court has approved the reorganization plan. Creditors can no longer collect on discharged debts, but may only collect the debts allowed by the bankruptcy plan or bankruptcy court, and only in accordance with the terms of the bankruptcy plan. 

The Importance of Having a Bankruptcy Lawyer

Small business bankruptcy is a complicated process that should not be embarked on alone. Even with the promise of an appointed trustee, a small business owner will still need the counsel of one or more legal specialists in bankruptcy cases. The financial and legal risks of going it alone are great. Bolster your chances to emerge from bankruptcy ahead and enlist the support of an experienced bankruptcy lawyer. Importantly, make sure you do so beginning when you start having financial difficulties. 

Our dedicated team of bankruptcy attorneys can advise you on the best bankruptcy options for your small business while providing you with constant support during the resolution of your financial situation. You can emerge from Chapter 11 with an even stronger business. To discuss the bankruptcy needs of your business with an experienced lawyer, contact our bankruptcy law firm today.

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Idaho 83702
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Twin Falls, ID 83301

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