Can Chapter 11 Bankruptcy Work for the “Small Business Debtor?”

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Can Chapter 11 Bankruptcy Work for the “Small Business Debtor?”

Some small business owners may be somewhat familiar with Chapter 11 bankruptcy due to news reports regarding large companies “reorganizing” their debt.

These business owners may contemplate Chapter 11 bankruptcy as a means to reorganize their company’s debts, but they may believe that Chapter 11 is only appropriate for large corporations and other large organizations.

While Chapter 11 bankruptcy is often the best option for large organizations that take on too much debt, it also can provide additional options for the owners of small or mid-sized businesses.

If your business is having difficulty meeting its obligations, a Philadelphia bankruptcy attorney of Sadek Bankruptcy Law Offices may be able to help. We can assess whether Chapter 11 bankruptcy is appropriate for a reorganization of your businesses finances.

We can also explore additional bankruptcy and non-bankruptcy options to provide greater flexibility. To schedule a confidential consultation at our Philadelphia, Delaware County, Bucks County, or South Jersey law office call 215-545-0008.

What Is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is can be both voluntary and involuntary in nature. That is, a business owner can file for bankruptcy relief under Chapter 11 of the U.S. Bankruptcy Code Likewise, creditors may band together and attempt to force a Chapter 11 bankruptcy.

For the purposes of this post, we will focus only on voluntary Chapter 11 small to mid-sized business bankruptcies. Generally speaking, a Chapter 11 case will permit a business owner to restructure the company’s debt while it continues operations.

The Bankruptcy Code includes special provisions intended to better tailor the process towards growing businesses.

How Is the Bankruptcy Code Designed to Handle the Small Business Debtor’s Chapter 11 Filing?

In a Chapter 11 bankruptcy, a creditor committee can play a major role in the proceedings.

The creditor committee is appointed by the bankruptcy trustee and I usually comprised of the seven creditors holding the largest unsecured claims against the debtor. 11 U.S.C. § 1102.

This committee will play a role in many of the major milestones involved in a Chapter 11 bankruptcy including developing the bankruptcy plan, investigating the filer’s practices and finances, and consulting with the debtor-in-possession throughout the matter.

However, in some small business bankruptcies, it may be difficult or impossible to find creditors willing to serve. Alternatively, the nature of the debt may mean that the committee will play only a limited role in the proceedings.

Therefore, owners of a small business may be able to qualify as a “small business debtor” under 11 U.S.C. § 101(51C). One is considered a small business debtor when:

  • The party is engaged in commercial transactions where the non-contingent liquidated, secured, and unsecured debts aggregate to $2,490,925 or less.
  • The business operations are not primarily the owning or operation of real property.
  • The court must determine that, under 11 U.S.C. § 101(51D), no credit committee is required to be appointed or an already appointed creditor committee is insufficiently active.

When these requirements are met, there is no requirement for a creditor’s committee. However, in exchange for this relaxation of requirements, the small business filer receives additional scrutiny from the bankruptcy trustee.

The small business debtor is required to meet with the trustee for an initial interview.

During this interview, the filer’s responsibilities will be discussed and the business’s plan and viability will be assessed. The bankruptcy trustee will also provide oversight throughout the proceedings.

In additional, a small business Chapter 11 filer is responsible for producing the company’s most recently prepared balance sheet, statement of operations, cash-flow statement, and the most recently filed income tax return.

The individual is required to keep the court apprised of the business’s financial status, profitability, expenses, and other financial details throughout the proceedings.

Chapter 7 and Chapter 13 Can Provide Alternate Small Business Debt Relief

There are some situations where Chapter 11 may be less appropriate and the business may be better served by a Chapter 7 or Chapter 13 bankruptcy filing. For instance, in some scenarios where the business is not a separate legal entity, Chapter 13 bankruptcy may present a more appropriate approach.

This type of arrangement is fairly typical for extremely small businesses such as a sole proprietorship. Chapter 13 bankruptcy will also allow an individual to reorganize debts while providing additional debt relief benefits.

These benefits include additional time to make payments to creditors under a three to five-year payment plan and the potential for a discharge of remaining non-priority debts at the close of the case.

However, in some scenarios, it may simply make more sense to liquidate the business and start a new entity. In scenarios like these, Chapter 7 bankruptcy is often the most effective means of eliminating the taxpayer’s debt.

Upon the successful close of the case, utilizing Chapter 7 bankruptcy to liquidate a business that is a separate entity will extinguish the debts and obligations of the entity.

Once these liabilities have been handled, the business owner can start a new business entity that is free from debt and able to conduct its operations without the interruptions and interference that can be created by debt and cash flow issues. The business can even perform the same or substantially the same goods or services.

Let a Philadelphia Bankruptcy Attorney Help You Determine What Type of Bankruptcy Is Right for Your Small Business

The bankruptcy attorneys of Sadek Bankruptcy Law Offices are proud to work with and support the entrepreneurs and drivers of economic growth in Philadelphia and throughout southeastern Pennsylvania and southern New Jersey.

From our Center City Philadelphia, northeast Philadelphia, Bucks County, Delaware County, and South Jersey law offices, we can provide strategic guidance regarding Chapter 11 bankruptcy for a small to mid-sized business.

We can also provide information regarding whether a Chapter 7 or Chapter 13 bankruptcy filing might be appropriate for your business and its goals.

To schedule a confidential consultation with a Philadelphia bankruptcy lawyer, call Sadek Bankruptcy Law Offices at 215-545-0008 today. You can also request a consultation by submitting your information in the web form provided on this page.