Chapter 11 Bankruptcy for a Small Business
Key Takeaways:
- Chapter 11 reorganization bankruptcy allows small business owners to continue operating the business.
- If a business can’t make the payments under the Chapter 11 reorganization plan, it can be converted to Chapter 7 bankruptcy.
- Creditors and the bankruptcy can question you about your business in the meeting of creditors.
Many small businesses start on the wrong foot and fall into debt before the owners get a handle on their business operations. Chapter 7 bankruptcy would clear up business debt but sink the business. Chapter 11 bankruptcy may be a better option for small business owners who must restructure to become profitable again.
If you have questions about how filing Chapter 11 could help your business, talk to a bankruptcy lawyer in your state to find out about your business bankruptcy filing options.
What Is Chapter 11 Bankruptcy?
Different types of bankruptcy are based on different chapters of the U.S. bankruptcy code. Chapter 11 is specifically for businesses, usually corporations or partnerships. Like Chapter 13 bankruptcy for individuals, Chapter 11 is a type of reorganization bankruptcy where the business pays back creditors over time and keeps the business as a going concern.
Chapter 11 bankruptcy is different from liquidation bankruptcy, where debtors must sell off their assets to pay creditors. With Chapter 11, you remain in possession of the business assets and continue operating the business. You can then propose a reorganization plan to repay creditors over time, for up to five years or longer.
What Small Businesses Are Eligible for Chapter 11?
Almost any business or individual with business debts can file for Chapter 11 bankruptcy. This includes small businesses, sole proprietorships, partnerships, joint ventures, corporations, and limited liability companies (LLCs). However, Chapter 11 is generally more complex than other bankruptcy cases and may cost more.
There are special categories of Chapter 11 created specifically for small businesses. These are intended to streamline the process and lower costs for small business debtors like yourself.
How Does Chapter 11 Work?
Before filing Chapter 11, you must complete an approved credit counseling program. After credit counseling, Chapter 11 starts with filing the bankruptcy petition and filing fees in bankruptcy court. You also need to provide information about your financial situation, including your business’s:
- Assets and liabilities
- Business income and expenditures
- Executory contracts and unexpired leases
- Statement of financial affairs
You must file a written disclosure statement and a plan of reorganization with the court. The disclosure statement must have bankruptcy court approval before a vote on the reorganization plan. In some cases, the plan can be modified if the circumstances warrant it.
A U.S. trustee is appointed to supervise the bankruptcy and monitor your business’s operations. The trustee calls a meeting of creditors where the trustee and creditors may question you under oath.
As soon as the business files for bankruptcy, there is an automatic stay on all judgments, collections actions, foreclosures, and repossession of property. This gives you temporary relief from debt collections.
What Happens if the Small Business Continues Losing Money?
Even with reorganization, financial difficulties may make it impossible for the small business to see profitability. If the business cannot continue the repayment plan or misses payments to creditors, the bankruptcy court or the business can convert the bankruptcy to Chapter 7. Under Chapter 7, a bankruptcy trustee takes possession of the business assets and sells them to pay off creditors.
What Happens at the End of Chapter 11 Bankruptcy?
After the business complies with all the repayment plan terms, the business is discharged of all remaining debts under the reorganization plan. Unsecured creditors cannot make claims on discharged unsecured debt. The business has a fresh start and can operate free from the oversight of prior creditors and the bankruptcy trustee.
Some debts are not dischargeable. If you have a question about what debts are eligible for bankruptcy discharge, talk to your bankruptcy lawyer.
How Can a Bankruptcy Attorney Help?
Chapter 11 business bankruptcy laws are generally more complex and time-consuming than Chapter 7 or Chapter 13. Your bankruptcy attorney will help you review your financial situation to understand what type of bankruptcy is right for your business. An attorney can prepare all the necessary documents and develop a repayment plan that the court, trustee, and creditors will approve.
An experienced bankruptcy attorney can also help you avoid common mistakes that complicate the bankruptcy process.
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