Small Business Case
Chapter 11 bankruptcy, also known as Corporation Bankruptcy, is the only bankruptcy option allowed for small businesses. In most cases, individuals who run a small business try other reorganization chapters like Chapter 13 bankruptcy but find the process not possible. The reason why most small business cases shy away from filing a bankruptcy case under Chapter 11 is because its process takes too long a time, is too complex, is risky for most businesses, and most of all, is expensive. However, the Bankruptcy Code only allows small business reorganization options under Chapter 11 and even without a partnership, individuals who are business debtors also fall under this bankruptcy chapter.
But while the idea of filing for a Chapter 11 bankruptcy case is frightening, there are actually special provisions provided under this Chapter to help reduce restructuring and legal expenses.
Small business cases defined
Small business cases refer to small business debtors and is defined an entity or a person who is engage in business or other similar commercial activities and one who does not owe more than $2,490,925, including the debts owed to insiders, in total claims.
How Chapter 11 bankruptcy works for small business cases
In the case of small businesses, the debtor should file a petition stating that they are in fact a small business debtor for proper designation. The determination of such a filing will then be tested with a two part test wherein the said debtor will submit their latest financial documents to support their Chapter 11 petition or provide instead a statement under oath explaining why such documents are absent.
Since small business cases owe more than individual insolvency cases, the small business debtor must come up with a reorganization plan approved by the bankruptcy court to help pay their creditors, regain profitability, and continue their business operation. Downsizing and liquidation is also allowed under Chapter 11 wherein a debtor can sell some or all of their assets if necessary to pay off their creditor’s claims.
Special provisions for small business cases
One of the biggest issues with filing for a Chapter 11 bankruptcy case is the expenses restructuring and legal fees. To reduce those, the government has provided special provisions for Chapter 11 set under the bankruptcy code.
- No deadlines
Unless set by the bankruptcy court small business cases do not have to meet any deadline when filing for bankruptcy under Chapter 11.
- No creditors’ committee
A creditors’ committee retain professional fees at the expense of the debtor which typically increase cost. This is not a problem with small business cases.
- Additional oversight of a U.S. Trustee
Small business cases require more oversight by the office of the U.S. Trustee compared to other proceedings under Chapter 11.
- Additional duties for filing and reporting
There are some filing and reporting requirements that is not required of most debtors who filed their case under Chapter 11. In the case of small business cases however, additional supporting financial documents like balance sheets, cash flow statements, federal tax returns, and statement of operations are required.
- Longer exclusivity period
Most debtors who filed for a Chapter 11 bankruptcy is entitled to an exclusivity period of 120 days to propose their reorganization plan. Small business debtors have longer exclusivity period with 180 days.
- No disclosure statement
The bankruptcy court has the right to waive the requirement for a disclosure with small business cases which significantly reduce legal fees and other costs on the process of reorganization.