Chapter 11 Business Bankruptcy
New Easier and Faster Small Business Bankruptcy Option Explained
Chapter 11 Business Bankruptcy is a legal process by which a business may declare bankruptcy but continue to operate the business under supervision. This process is called "reorganization," because the bankruptcy process reorganizes the business to be more efficient and to be able to pay the creditors of the business. It's kind of like getting a "reboot" for your business, to bring new life into it.
The bankruptcy process for Chapter 11 and other types of bankruptcies are run through a special legal system (part of the U.S. courts system), called bankruptcy court. It's under the circuit court system in the U. S. Courts website.
New Small Business Bankruptcy Process
A new subchapter V of Chapter 11 is now available for small businesses to speed up the time for the process and at lower cost. This new process is part of the Small Business Reorganization Act of 2019 (SBRA), which "attempts to strike a balance between Chapter 7 (liquidation) and Chapter 11." Small business debtors are those with less than about $2.7 million in debts and who meet other requirements.
If your small business qualifies for the new Subchapter V process, you'll see shorter deadlines for completing the process and greater flexibility in negotiating with creditors. The new plan also gives debtor companies a private trustee to help facilitate consensus on the reorganization plan.
Businesses usually seek Chapter 11 bankruptcy when the value of the business is greater than the sum of its assets; in other words, the business has a significant amount of goodwill as a "going concern" which would be lost if the business were sold or liquidated.
When a business files Chapter 11 bankruptcy, the debtor becomes what's called a "debtor in possession." That is, the debtor is in possession of the business assets.The debtor-in-possession has fiduciary responsibilities to manage the business and bring it back out of bankruptcy.
This person acts as a bankruptcy trustee, with (according to the Bankruptcy Court) responsibility for "accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator."
More on How the Small Business Option Works
Chapter 11 is different for small businesses, and some special rules apply to these business bankruptcies. There are two qualifications for the small business case:
- The debtor must be in an ongoing business, with debts of $2,566,050 or less.
- There is no creditor's committee (a group of creditors who agree on how business assets are to be distributed to creditors).
The debtor-in-possession, in this case,must provide initial financial statements, including the most recent tax return, a balance sheet, statement of operations, cash-flow statement and other statements.
Small business debtors are subject to additional oversight by the bankruptcy trustee, including an initial interview and monitoring during the process.
The Process for Chapter 11 Bankruptcy
The bankruptcy process begins with your meeting with a bankruptcy attorney, who can help you decide which form of bankruptcy is best. You will need to file bankruptcy in the state where you are doing business because bankruptcy is a state-driven process.
A petition is the formal beginning of the bankruptcy process. The petition includes an intent to file a plan for reorganization. Typically, your business will be assigned a trustee, who will guide the business through the reorganization process.
A disclosure statement is also required at the beginning of the bankruptcy process. The US Courts website says this disclosure "must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization."
The Automatic Stay
An automatic stay is usually set in place at the beginning of Chapter 11. This stay (actually an injunction) prevents judgments, collection activities, foreclosures, and repossessions against the business during the process. The stay gives the debtor company a breather and allows time for negotiations on the company's behalf to resolve financial difficulties.
An automatic stay may not protect a debtor from all creditors. The Bankruptcy Court says, "There are many different time frames and deadlines, and creditors (such as child support services) may still take action to collect from a debtor."
After Chapter 11 Bankruptcy
In many cases, a business may re-emerge from Chapter 11 and continue to operate normally. In other cases, the reorganized business can be sold after some period of time.
Disclaimer: The content in this article and on this website is for informational purposes only. The author is not an attorney or tax professional. Every business bankruptcy situation is different, and bankruptcy laws and regulations. If you are considering business bankruptcy, find a bankruptcy attorney and financial advisors who can help you with this process.
United States Courts. "Chapter 11 – Bankruptcy Basics." Accessed Oct 13n, 2020.
American Bar Association. "The Small Business Reorganization Act: Big Changes for Small Businesses." Accessed Oct. 13, 2020
U.S. Department of Justice. "U.S. Trustee Program Ready to Implement the Small Business Reorganization Act of 2019." Accessed Oct. 13, 2020.
U.S. Bankruptcy Court. Central District of California. "Automatic Stay, What is it and Does it Protect a Debtor from All Creditors?" Accessed Oct. 13, 2020.