How Does Chapter 11 Bankruptcy Work For Small Businesses?
When a business is struggling, it may get shut down permanently, or the owner may try to reorganize it and keep it alive. A reorganization can be accomplished through a Chapter 11 bankruptcy.
The process may vary from one case to another, but it starts with filing a petition. The debtor pays fees and creates and files a reorganization plan. The court needs to approve a disclosure statement that outlines the company’s financial affairs. Creditors impacted by the plan may vote on the reorganization plan. The court may approve the plan, or it may convert it to a different type of bankruptcy or dismiss the case altogether. The plan must prove that the business has a reasonable chance of staying afloat.
While all sizes of businesses can file for Chapter 11 bankruptcy, small businesses do have a couple of options. Small business cases and Subchapter V offer simplified processes, resulting in a streamlined way for small businesses to reorganize and work out a plan to repay creditors. These options provide structured and court-supervised processes for a business to reorganize its finances and are especially beneficial for smaller businesses with a manageable debt level. Here is a look at these options in more detail.
Small Business Case
A small business case is a good option for a company that has a smaller amount of debt compared to larger companies. The business must have a total debt under $3,024,725. This includes both secured and unsecured debts. Also, at least half of the total debt must be related to the business’s operations.
Small business cases are simplified. They offer a more streamlined and expedited process compared to regular Chapter 11 cases. The business will develop a reorganization plan to propose how to repay creditors over a period of time. This plan must be approved by the bankruptcy court before it can be implemented.
However, there are stringent reporting requirements. Small business debtors are required to file the following on a regular basis:
- Financial reports on profitability
- Monthly operating reports
- Reasonable estimates of projected cash receipts and disbursements
- Comparisons of actual receipts and disbursements to those projected in earlier reports
- Proof of compliance with post-petition duties
Subchapter V
Subchapter V is a subset of Chapter 11 bankruptcy. Subchapter V follows many of the same guidelines and provisions as Chapter 11, but the requirements are lessened for a small business.
A small business under Subchapter V is defined as a person engaged in commercial or business activities and having secured and unsecured debts totaling less than $3,024,725. At least half of this debt must come from commercial or business activities.
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Small businesses may qualify for Chapter 11 bankruptcy under Subchapter V or a small business case, which can help streamline the process.
Bankruptcy is a huge decision. Count on West Palm Beach bankruptcy attorney Brian K. McMahon, P.A., to give you the advice you need to move forward. We can find the option that’s best for your small business. Schedule a consultation with us today by calling (561) 658-1789 or filling out the online form. We serve the West Palm Beach, Boca Raton, Port St. Lucie, and South Florida areas.