You may have heard that the Chapter 11 process is somewhat streamlined for small businesses, and this is true. A “small business debtor” is a person or entity who: (1) is engaged in business or other commercial activities; and (2) owes no more than $2,725,625 in total claims as of April 1, 2019, excluding obligations owed to insiders such as family members of the business owners. A small business debtor can fast track their filing procedurally.
If you qualify as a small business debtor, you can restructure your debt obligations and modify your payment terms subject to these relaxed Chapter 11 procedures.
There is No Creditors’ Committee Representing the Interests of Unsecured Creditors
Normally, when a Chapter 11 case is filed, a creditors’ committee is appointed so that the interests of unsecured creditors of the debtor are represented. In a small business bankruptcy case, the debtor can ask the court to issue an order preventing the creditors’ committee from forming.
Why is this advantageous? A creditors’ committee has the power to retain attorneys and other professionals at the debtor’s expense. This can increase the cost of filing Chapter 11 significantly.
A Small Business Debtor has a Longer Exclusive Period to Propose a Reorganization Plan
Creditors have the power and right to file Chapter 11 plans for the debtor if the debtor fails to do so within a specified period of time, and often there is more than one creditor plan proposed! Of course, Chapter 11 plans filed by creditors frequently provide for the liquidation or takeover of the debtor’s assets and business, which would be more to their benefit than the debtor retaining assets and control of operations.
In a normal Chapter 11 case, the debtor has the exclusive right to propose a plan of reorganization for 120 days, after which the creditors may propose competing plans. The exclusive right to propose a reorganization plan is extended to 180 days for small business debtors. This additional time reduces the risk that creditors will have the opportunity to propose competing plans, which would force the debtor to litigate the issue and introduce the risk that the debtor might lose the business.
No Disclosure Statement is Required in a Small Business Chapter 11 Case
A disclosure statement in Chapter 11 bankruptcy is similar in concept to a stock prospectus for stock offerings. A chapter 11 debtor must provide detailed information about the business, its operations, expenses, debts, and the proposed plan. These are typically expensive to prepare.
Ordinarily, a Chapter 11 debtor must prepare such a disclosure statement, file it with the bankruptcy court for its approval, and serve copies upon its creditors and other parties in interest. In small business cases, however, the debtor can ask the bankruptcy court to waive the disclosure statement requirement. This not only reduces legal fees and other costs to the debtor but significantly expedites the reorganization process.
A Small Business Debtor Has These Additional Responsibilities
More Filing and Reporting Duties
Small business debtors must satisfy some reporting and filing requirements that are not imposed on other Chapter 11 debtors. For example, a small business debtor must attach the following to its bankruptcy petition in its initial Chapter 11 filing:
- The most recently prepared balance sheet;
- A statement of operations;
- A cash flow statement, and;
- The most recent federal tax return.
CFO Persepective’s Free Tools can help you prepare some of these forms.
There is Additional U.S. Trustee Oversight
The United States Trustee’s Office oversees all bankruptcy cases on behalf of the Department of Justice. Pursuant to bankruptcy law, small business cases are subject to more oversight by a Trustee than other Chapter 11 cases.
This additional oversight should not be intrusive or hinder the process unless the small business debtor fails to follow the procedure or fails to make all disclosures.
In conclusion, if you need to reorganize your business debt, before filing Chapter 11 be sure to find out whether you qualify as a small business debtor to take advantage of these procedural and financial advantages.
Need help managing cash? Download the free guide titled Quick Tips for Improved Cash Flow
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.
Note: The views, advice, information, and opinions expressed in guest post articles like this are those of the author. CFO Perspective does not verify the accuracy of such views, advice, information, and opinions. The purpose of these articles is to educate and inform. Please consult a qualified professional for advice specific to your situation.