Best Bankruptcy Options for Small Businesses

Posted on December 8, 2011 at 3:36pm by

A Chapter 11 bankruptcy is a reorganization bankruptcy that permits the business to continue to operate while working out a plan to pay its creditors. Under a Chapter 11, a business is under scrutiny from the Court, but the advantage is that the business remains in existence. This can be a good choice for small businesses with strong assets and a future, but which also need additional time to deal with their creditors.

A Chapter 7 bankruptcy, during which the Court or secured creditors liquidate everything that a business has, might not be the right answer for your small business. For this reason, many businesses opt for Chapter 11. If your company is facing financial difficulties and is considering filing for bankruptcy, a Kansas City bankruptcy attorney can advise you how best to proceed.

Chapter 11 for Small Businesses

US bankruptcy law treats small businesses differently than others for Chapter 11 bankruptcy purposes. To qualify as a “small business debtor”, the government uses a two-part test:

  • First, the debtor must be involved in commercial activities (besides owning or operating real estate property) and the total, liquidated secured and unsecured debts must be less than $2,190,000.
  • Second, the US Trustee must not have appointed a creditors’ committee (those unsecured creditors having claims against the company). Alternatively, the court must determine that the committee is not active and representative enough to oversee the debtor’s bankruptcy.

Small business bankruptcies do involve specific filing requirements. The company must provide to the Court items such as:

  • A balance sheet;
  • A statement of operations;
  • A cash-flow statement; and
  • The most recently filed tax return.

The company also needs to file statements about its profitability, cash receipts, and disbursements on an ongoing basis with the Court. On the plus side, small business bankruptcies do not require a separate hearing to approve the business’s Disclosure Statement. The Court can do this at the same time as the confirmation hearing (when the Court considers the business’s Chapter 11 Plan).

The US Trustee will oversee a small business filing under Chapter 11. The small business must attend an interview early in the case with the Trustee to enable the Trustee to evaluate the business’s viability, business plan, and obligations to file documents. The Trustee will closely monitor the business’s activities during the bankruptcy to determine if the business is in jeopardy of not meeting its bankruptcy plan and other filing obligations.

An expedited process is another benefit of the small business bankruptcy plan. These bankruptcies normally proceed much quicker than other Chapter 11 cases. A small business bankruptcy is required to file a Chapter 11 Plan in, at most 300 days. Other Chapter 11 cases can have as many as 18 months to do so.

If you are involved with a small business considering filing for bankruptcy, contact a Kansas City bankruptcy lawyer at The Sader Law Firm to determine your best option.