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allows a business to remain in operation while it pays off past due debts through a repayment plan that can last several years. Most people have heard of Chapter 11 through news stories about major corporations that have filed under this chapter like General Motors. However, a business does not need to be very large to take advantage of Chapter 11 proceedings, and in fact the Code has laid out special provisions that apply only to small business debtors.

What is a Small Business Debtor?

11 U.S.C. Sec. 101(51D) of the bankruptcy code defines small business debtors whose noncontingent secured and unsecured debts does not exceed $2,566,050. At least fifty percent of these debts need to have arisen from commercial or business activities, and the section excludes any business whose primary activity is the ownership and management of a single piece of real estate.

In addition to these debt limits, the small business debtor will need to have accurate financial information for the business readily available, including a description of its operations, assets and liabilities as well as a schedule of any executory contracts and leases the business has undertaken.  

Any business owner that can meet these requirements will be able to file under Chapter 11 as a small business debtor and receive the benefits associated with this special categorization.

Benefits of Filing as a Small Business

The advantages to filing for Chapter 11 as a small business revolve around eliminating obstacles in the procedure that might make sense to impose upon a major corporation, but have little benefit in a bankruptcy proceeding for a small operation. Some of these benefits include:

• No Required Disclosure Statement – Typically anyone filing for Chapter 11 will need to compile extensive information regarding every aspect of their business operations and its finances at the time of filing. This disclosure statement usually requires an analysis of liquidating the business, descriptions of any current or pending litigation, detailed analysis of any tax consequences to filing, and several other pieces of information.  While this information is vital to gaining a full understanding of a global business with many employees and locations, it’s usually not necessary for businesses that meet the requirements to be deemed “small,” and so the court in many cases will waive this requirement for a small business filing for Chapter 11. Removing this requirement will save small business owners a great deal of time and expense in preparing to file the bankruptcy petition.
• No Creditors Committee – In a standard Chapter 11 case a committee is appointed to represent the interests of unsecured creditors who may be at risk of not receiving all of what is owed to them. This committee is empowered to hire attorneys, accountants and whoever else they may reasonably need to fully represent the interests of the creditors. All of these costs usually come at the expense of the business filing for bankruptcy, so anyone filing under the small business provisions stands to save a significant amount thereby avoiding the need for a committee.
• Extended Time to Submit Exclusive Plan – Sometimes the creditors of a business will submit a repayment plan to compete with the one that is submitted by the person or business filing for bankruptcy. These plans usually heavily favor the creditor making the submission, and often involve some sale of assets to repay the creditors in full. Fortunately, the bankruptcy code gives the party filing a set period of time in which they are the only ones permitted to submit a plan. 

If this plan gets approved there is no opportunity or need to discuss competing plans. In a standard Chapter 11 case the party filing will have 120 days to submit a plan before losing the exclusive right, however, this timeline is extended to 180 days for those filing under the small business provisions.

Disadvantages of Filing as a Small Business

Small business filers will receive some excellent benefits for classifying their business as such, but there are some downsides. It’s important to be aware of some of the differences a small business will face when filing under these provisions, including:

• Deadline to Submit Plan – Typically businesses are given all the time they need to develop and submit a plan for repayment of debts. This makes sense for large companies with many moving parts that need time to put together a plan that is feasible and likely to be confirmed by the court.  However small businesses don’t usually have as many factors to consider in developing their plan, and so the court has imposed a 300 day limit for these businesses to develop their plan. This can be extended by the court if the filing party can demonstrate that it will be able to prepare a plan which will be approved within a reasonable time period.
• More Oversight by Trustee – One of the primary benefits for a business filing under Chapter 11 is that they can remain in operation throughout the proceeding, and in large part maintain control over all business decisions. It’s been determined that this makes sense for large companies whose own officers and managers will have a better understanding of what is required to keep the business going. 

Small businesses typically aren’t as complicated to keep running and may present more opportunities for “bad faith” by the business owner throughout the proceeding. Bad faith dealings occur when someone associated with the bankruptcy filing attempts to transfer assets or pay off lower priority debts in ways that are not permitted by the bankruptcy code. The courts will appoint a trustee to oversee these proceedings, and in the case of a small business, they can expect the trustee to play a larger role in business decisions that relate to the company’s finances.

Conclusion

The decision to file for bankruptcy is always a difficult one, and the complexities involved when filing for the bankruptcy of a business make the entire process even more stressful for many. The best way to determine which chapter of the code to file under, whether to classify one’s business as small, and to accurately prepare the required paperwork for filing is to consult with an experienced attorney before filing the petition. At Rosenblum Law our attorneys are ready to help, call us today.