If you own a small business and are experiencing financial distress, there are several bankruptcy options available to you. Although some require the company to be dissolved, others allow you to restructure and eliminate your debts while keeping your business afloat.
Chapter 7 bankruptcy is an option for debtors that cannot afford to restructure and continue their business. During this process, a trustee is appointed and assets are sold to pay the creditors as much as possible. Partnerships, limited liability companies, and corporations can all file Chapter 7, and depending on the circumstances, it isalso available to sole proprietors of small businesses.
Chapter 13 bankruptcy is a restructuring option available only to businesses owned by an individual. However, Chapter 13 has a debt limit. If the owner owes more than $383,175 in unsecured debt or $1,149,525 in secured debt, he or she cannot file Chapter 13.
But what about Bankruptcy for Small Business Owners? Chapter 11 bankruptcy is another option for small business owners. Since it is risky, complex, time-consuming,and expensive, many debtors do not give this option the consideration it deserves. Chapter 11 is the only bankruptcy option for small businesses that wish to restructureand maintain operations if they are owned by a partnership, limited liability company, or corporation. It is also the only option for debtors who wish to restructure but exceed the monetary limits of Chapter 13 bankruptcy.
You may have seen Chapter 11 bankruptcy in the news, since many big-name companies such as K-Mart and United Airlines have utilized it. However, most Chapter 11 filings are undertaken by small businesses unknown nation-wide. Through Chapter 11, the company restructures its finances through a plan that is approved by the bankruptcy court. The plan reduces obligations and alters payment terms to make the debt more manageable, and can help the business owner balance income and expenses, regain profitability, and remain in operation. The debtor can also downsize the business by selling some inconsequential assets.
There are some special provisions for small businesses during Chapter 11 bankruptcy that can help them speed up the process and reduce expenses. A “small business case” involves a “small business debtor” who is engaged in business activities and owes no more than $2,490,925 in total claims. This sum excludes obligations to family members. Outlined below are some of the special procedures for small business Chapter 11 cases:
No Creditor’s Committee. In most Chapter 11 cases, a creditor’s committee is appointed to represent unsecured creditors. This committee can hire lawyers andother professionals at the debtor’s expense, greatly increasing the cost of filing.
No Disclosure Statement. A disclosure statement is usually prepared by the debtor and submitted to the bankruptcy court for approval. It provides extensive information about the debtor and the restructuring plan and can be expensive to prepare. If the disclosure statement requirement is waived, it can reduce costsand expedite the process.
Additional U.S. Trustee Oversight. For Chapter 11 cases involving small businesses, the United States Trustee’s Office oversees bankruptcy cases on behalf of the Department of Justice. More oversight gives more leeway during the case.
Longer Exclusive Period to Propose Plan. In some bankruptcy cases, creditors file competing Chapter 11 plans that include the liquidation or takeover of the debtor’s business. The debtor usually has a 120-day period to propose their plan and maintain exclusive rights to it. For small businesses, this period is extendedto 180 days, reducing the risk of having to litigate competing plans.
Plan Deadline. There is generally no deadline for filing a Chapter 11 plan unless the court assigns one. However, in small business cases, the debtor has 300 daysto provide a plan, unless the court allows an extension.
Additional Filing and Reporting Duties. Small businesses must fulfill additional requirements, such as recently prepared balance sheets, statements of operationsand cash flow, and federal tax returns.
If you are a small business owner experiencing financial distress, you might want to consider Chapter 11 bankruptcy as an option to keep your business afloat. The legal team at Hathaway Law would be happy to help you decide if this is the right action for you. We can guide you through every step of the process, and make sure you do everything in your power to keep your business up and running. Nothing gives us greater pleasure than to help small businesses turn around their situation and onceagain become a strong, crucial part of their local economy. Call Dan Higson to speak to an attorney about Bankruptcy for Small Business Owners.