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Small Business Chapter 11 Bankruptcy

In 2019 a new subchapter of Chapter 11 bankruptcy reorganization (Small Business Reorganization Act (H.R. 3311; S. 1091) (the “SBRA”) was created specifically for small businesses to reorganize their debts through filing for bankruptcy protection. This is available for both individuals and business entities such as corporation, limited liability companies and partnerships. Generally if your business has less than $7,500,000 in various debts this new subchapter, Subchapter V, is available to reorganize business debts while continuing to operate the business. Schedule a free consultation with our experienced bankruptcy attorney to find out how small business bankruptcy can help you keep the doors open while reorganizing your debts. Bankruptcy is the law and these recent changes to the Bankruptcy Code were made specifically to make small business bankruptcy cases less expensive and more streamlined for your benefit. Call us toll free at 1-877-9NEW-LIFE or 510-574-7320 to schedule a free consultation.

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What is Different Under Subchapter V and prior Chapter 11 Reorganizations?

Both individuals and business entities with unsecured debts when excluding debts owed to affiliates and/or insiders of not more than $2,725,625, recently increased to $7,500,000 due to the passage of the CARES Act from the Coronavirus relief effort, and not less than 50% of that debt be from commercial and business activities qualify to file under the new Small Business Reorganization Act for Chapter 11. If your business primarily owns real estate then you also qualify for Subchapter V too. If you are a small business owner now is the time to take advantage of the recent increase in the debt limitation increase provided for in the Coronavirus given it is likely your business has been negatively affected by the shelter in place orders and lack of business.

There are many changes to normal reorganization under Chapter 11 that Subchapter V provides and the following provides some of the main aspects that are beneficial. Depending upon your circumstances the following may or may not be applicable.

Filing a small business chapter 11 reorganization case is an opt-in process requiring a box be checked on the voluntary petition to specifically opt-in. This will eliminate normal requirements for plan confirmation and disclosure statement filing under normal chapter 11 reorganization procedures. Under the new Subchapter V procedures you will remain in possession of the business and operate it normally unless a party-in-interest requests reinstatement of the normal debtor-in-possession procedures. The new Subchapter V small business chapter 11 reorganization allows you to operate like reorganizing under Chapter 13. In chapter 11 small business bankruptcy case the debtor must file the business’s more recent balance sheet, statement of operations, cash-flow statement and federal income tax return. If any of these documents are not available then a declaration as to why must be filed explaining why the documents cannot be filed.

A Small Business Trustee will be appointed from a panel of trustees created for the specific purpose of assisting with administering the Subchapter V chapter 11 case. The small business trustee will collect the chapter 11 plan payments and can seek to operate the business if the case breaks down and a consensual chapter 11 plan cannot be presented and approved. Hopefully the small business trustee will be limited to helping to facilitate the development of a consensual plan of reorganization and not be ultra-aggressive in seeking to take over the small business. We shall see.

Timing wise small business chapter 11 cases should move fast if successful reorganization can be obtained. Within 60 days of the filing of the case the court is supposed to hold a status conference and 14 days prior to the conference the debtor is supposed to file a report regarding the efforts taken to formulate a consensual chapter 11 small business reorganization plan. The debtor must file a chapter 11 plan within 90 days of the small business chapter 11 case being filed. This time period can be extended depending upon why a chapter 11 plan could not be filed within the 90 day time limit.

In Subchapter V small business chapter 11 reorganization only the debtor, the bankruptcy filer, may propose a plan of reorganization. This is the same right debtors have under Chapter 13 and Chapter 12 family farmers and fishermen.

Another huge addition or change is the ability of an individual that qualifies to file under Subchapter V can modify the terms of their debt secured by their primary residence via the chapter 11 plan. This is huge. I cannot stress enough now wonderful this change is. This is provided that the secured mortgage debt, which is consensual, was not used to acquire (purchase) the real property but was used primarily in connection with the debtor's business. This is another change that was previously only available to debtors filing under Chapter 12 as family farmers or fishermen. This means the secured loan terms could be modified to lower the interest rate, extend the term of the loan to make the monthly payments lower or strip off the secured lien entirely or cramming down the amount owed on the secured loan to secured portion of the loan only. Again, this is huge if your circumstances include this scenario.

A committee of general unsecured creditors can be created but will hopefully be unlikely as not necessary given the other changes Subchapter V provides. Even in normal chapter 11 reorganizations the creation of a committee of general unsecured creditors is not does not always happen.

A Subchapter V chapter 11 plan of reorganization can be confirmed with and by the consent of creditors. If so, then a discharge is immediately received upon confirmation of the chapter 11 small business plan of reorganization.