Chapter 11 for Small Businesses

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If a small business is a corporation or partnership, it is a separate legal entity from its shareholders and partners. Such an entity is able to file for Chapter 11 itself. There are several factors to consider in relation to bankruptcy of a small business, which will determine whether or not Chapter 11 is the right chapter under which to file. As Chapter 11 effectively allows for reorganization of a business’s debts, it is necessary to give some consideration to what it was that got the business into trouble in the first place. If sales were too low, or there wasn’t enough demand for the business, reorganization is unlikely to solve these problems.

Automatic Stay

Chapter 11 does allow a small business “breathing space” in that money that had been used to cover debt installments could be used pro-actively to assist the business. This is because once the automatic stay is in effect, creditors are not allowed to continue to pursue payment of their debts. Reorganization can also be used to the business’s advantage in that it may be able to cut inefficient or expensive contracts.

Despite the obvious benefits, Chapter 11 requires a considerable amount of time and effort. Although creditors will no longer be demanding money, business owners must fully disclose the company’s financial situation to the court and creditors, not only at the beginning of the proceedings and then at monthly intervals thereafter.

 

Fast Track

If a small business owes less than $2,000,000 it can elect to be “fast tracked” under Chapter 11 and will be treated differently to other Chapter 11 cases. Fast tracking negates the requirement for several stages of the bankruptcy case: the approval of the disclosure statement may be combined with the confirmation hearing; there is no requirement for a creditors’ committee to be appointed; the debtor has less time to file a plan (100 days after order for relief granted) after which time any other interested party can file a plan (up to 160 days after order for relief.)

Effect on the Business

The advantage of Chapter 11 is that it allows the debtor in possession (once the bankruptcy petition has been filed) to continue to run the business. However, the business has to be run in a way that is in the best interests of the creditors. This is known as having a “fiduciary duty” towards them, which means that you have to be honest about the business’s affairs and keep creditors updated, as well as having to consider their interests before your own. The majority of Chapter 11 cases are either converted to Chapter 7 or are dismissed.

If you are facing financial difficulties, and your business is suffering, consult with a bankruptcy lawyer to discuss your options.
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