Small Business Reorganizations (Chapter 11 Bankruptcy)

A Chapter 11 bankruptcy reorganization can provide powerful relief for a struggling business or for individuals.

Do You Qualify for a Small Business Reorganization Under Chapter 11?

A Chapter 11 bankruptcy for small business can help companies whose debt service has exceeded its cash flow, and paying its operating expenses as they come due is either no longer an option (or won’t be, in the foreseeable future). It is generally used by business entities, such as corporations, partnerships, or limited liability companies, though sole proprietors can file for a Chapter 11 bankruptcy too. To qualify, a business must have less than $2,725,625.00 total secured and unsecured debt. This “debt ceiling” is similar to the limits placed on an individual wage earner trying to file a Chapter 13 bankruptcy.

What are the Benefits of Small Business Reorganization?

A small business reorganization is a form of bankruptcy, under Chapter 11 of the bankruptcy code. When any bankruptcy petition is filed, it triggers an “automatic stay” on all collections efforts related to the entity (person or business) who filed it. This can provide some breathing room for small business owners who have fallen behind on their payments. However, as a reorganization, it also allows you some flexibility as the “debtor in possession.” You aren’t required to liquidate your business. Instead, you remain in control of the company and its assets.

The small business reorganization plan you and your small business bankruptcy attorney submit to the trustee can:

  • Cure unpaid mortgage arrearages
  • Reduce secured debt (down to the value of the collateral)
  • Allow you to assume or reject leases
  • Provide partial payment of trade debt or unsecured debt
  • Allow for the sale of selected assets

Together, these options allow businesses to trim unproductive assets, get out of obligations that no longer suit the business, and satisfy creditors for less than the full amount owed.

How a Chapter 11 Bankruptcy for Small Business Works

Chapter 11 has been around for a long time, but the 2019 Small Business Reorganization Act (SBRA) made it far more helpful to small business owners looking for ways to get out of debt. Like a Chapter 13 repayment plan, a Chapter 11 bankruptcy allows a small business to lay out a plan to repay debts under the supervision of the bankruptcy trustee. The SBRA streamlines the plan confirmation process, reducing the cost of a small business bankruptcy.

A Chapter 11 bankruptcy starts with a petition, filed along with a statement of the debtor’s financial affairs and schedules disclosing the debtor’s:

  • Assets
  • Liabilities
  • Income
  • Expenditures
  • Contracts
  • Unexpired leases

The small business must also file a statement and plan for reorganization. It must identify each class of claims against the company, and how those claims will be treated under the reorganization plan. Under a traditional Chapter 11 bankruptcy, any creditor receiving less than the full amount owed is entitled to review the debtor’s disclosure statement and has the authority to vote whether to approve the plan by ballot. However, the SBRA removes this voting requirement to confirm the plan. In most cases, the SBRA allows debtors to avoid the cost of paying for the creditor’s committee professionals and still have their plan confirmed.

The SBRA also makes it easier for small businesses to have their reorganization plans confirmed as long as the plan does not “discriminate unfairly” against particular creditors, and the plan itself is “fair and equitable.” Even if a creditor objects, the plan can be confirmed as long as it applies all the company’s projected disposable income for three to five years toward making plan repayments. Once the debtor makes all the payments in the plan, the remaining dischargeable debts are forgiven.

Residential Mortgages in a Small Business Reorganization

Unlike Chapter 7 and Chapter 13 bankruptcies, a Chapter 11 bankruptcy filed under the SBRA can sometimes cover residential mortgages. Generally, as secured debt, mortgages are excluded from bankruptcy proceedings. But the SBRA covers residential mortgages incurred for business purposes other than acquiring the residence. This can allow small business owners to restructure the debt they incurred in founding or funding the business.

Shareholders’ Role in Small Business Bankruptcy

Under a traditional Chapter 11 bankruptcy, small business owners with equity interests – such as partners or shareholders – might be prohibited (under certain circumstances) from retaining their interests if a class of creditors opposes their reorganization plan. This creates an obstacle for many small business reorganizations since it requires shareholders to inject new capital to keep their interest in the company. The SBRA removes this requirement by allowing a reorganization plan to be approved over creditors’ objections. This places a limit on the “rule of absolute priority” and allows small business owners to stay in charge of their businesses without seeking out rare “debtor in possession financing.”

Get Help Filing a Chapter 11 Bankruptcy for Small Business

Reorganizing your business is complicated. Even under the SBRA, the requirements for filing a Chapter 11 bankruptcy can be confusing for small business owners. Don’t try to handle it on your own! Please call us at (860) 264-1551 or contact us at your convenience to discuss your small business reorganization and prepare your Chapter 11 bankruptcy. We’re here to help you and your business. The bankruptcy attorneys at Lawrence & Jurkiewicz, LLC represent clients in Hartford and Litchfield Counties.