Chapter 11 bankruptcy allows a business owner the opportunity to restructure a business while it continues to operate. If a business owner is facing high amounts of debt, but believes that the business can thrive after some reorganization, then filing for Chapter 11 bankruptcy may be an ideal solution to solve a difficult financial situation.
Chapter 11 Bankruptcy
As part of the Federal Bankruptcy Code, Chapter 11 is commonly referred to as a reorganization bankruptcy. Chapter 11 is available to both big brand names and small businesses alike. Chapter 11 is available to partnerships, corporations, or limited liability companies that are intending to continue operations and restructure their businesses. Chapter 11 is also available to sole proprietors who may not qualify for Chapter 13 bankruptcy.
How Chapter 11 Bankruptcy Works For Small Businesses
Small businesses will file for Chapter 11 in the bankruptcy court that serves their principal place of business. The bankruptcy court will require detailed information regarding all assets, liabilities, current income and expenditures, contracts and leases, and all other financial affairs. Sole proprietorships must file additional paperwork, such as proof of credit counseling and copies of any debt repayment plans created. Due to the complexity of Chapter 11, an experienced bankruptcy lawyer plays a crucial role in the process, providing guidance and expertise throughout the process.
When the bankruptcy is filed, the small business owner temporarily becomes a debtor in possession, meaning the bankruptcy filer’s business assets still remain within their control, but requiring them to carry out a number of responsibilities including accounting for all property, responding to claims, filing any additional reports required by the court, and proposing a plan that benefits all creditors.
A plan for reorganization must include all claims by creditors and detailed steps for repaying each of them. The goal of the reorganization plan is to renegotiate payment terms, reduce obligations, balance out income and expenses, and sell off assets as necessary – all while the business remains in operation. During this stage of the bankruptcy, an experienced bankruptcy attorney is essential to get the business back on track.
Small Business Debtors and Special Provisions in Chapter 11
Typically, in order for the reorganization plan to be approved, a creditors’ committee may be required by the court to represent the creditors ‘interests, which can be a time consuming process. However, recent changes to the Chapter 11 bankruptcy code offers a faster track to some small business owners facing bankruptcy.
Generally speaking, the Small Business Reorganization Act of 2019, effective 2020, rids qualified filers of the requirement for a creditor’s committee. This, along with shortened deadlines, allows filers to resolve their cases more quickly, a welcome alternative to the previously standard 3 to 5 year period to complete a repayment plan. It is important to work with an experienced attorney to determine if a business qualifies under the new plan.
The Role of the Trustee
During the bankruptcy case process, a trustee is appointed and paid for by the filer to assist the business owner and other parties with the development of a realistic reorganization plan, while also reviewing regular reports submitted by the debtor in possession. Creditors are provided copies of the plan so that they can be informed of repayment projections.
Chapter 11 Bankruptcy Outcomes
The debtor may receive a debt discharge when the court approves the reorganization plan, limiting creditors to collect on debts allowed by the bankruptcy plan or bankruptcy court, and only in accordance with the terms of the bankruptcy plan.
Contact an Experienced Chapter 11 Bankruptcy Lawyer
The benefit of working with an experienced bankruptcy attorney when filing Chapter 11 bankruptcy cannot be overstated. If you are facing financial difficulty, Peoria bankruptcy attorney Charles E Covey can advise you on the best strategy for your small business, which may include filing for bankruptcy protection. Contact our offices today via our website contact form or call 309-674-8125 for immediate assistance.