Small Business Chapter 11 Bankruptcy

Small Business Chapter 11 Reorganization

chapter 11 bankruptcy small business reorganization

If a business would be profitable if it weren't for a heavy debt load; a Chapter 11 Bankruptcy could be the best option. A Massachusetts Chapter 11 Business Bankruptcy is a reorganization proceeding in which the business continues to operate while attempting to restructure its debts.

In February 2020, a new provision of the bankruptcy code went into effect, The Small Business Reorganization Act (“SBRA”). The SBRA is aimed at helping small business debtors with reorganization. A small business that files a Chapter 11 Bankruptcy continues to operate while attempting to restructure its debts. A Chapter 11 is usually beneficial to both the business and to the creditors, because Creditors will usually receive more than they would if the business were closed and liquidated.

When a Business files a Chapter 11 Bankruptcy, there is an automatic stay, meaning that the creditors cannot take any action against the business. Unlike a usual Chapter 11, a Trustee is appointed by the Bankruptcy Court that will act as a fiduciary for creditors, usually in lieu of the appointment of a creditors’ committee. The small business will stay open continue to operate, while it prepares a plan of reorganization ("chapter 11 plan") that must be approved by the Bankruptcy Court. If the Chapter 11 plan is approved, it binds both the debtor and the creditors to its terms of repayment. Under the chapter 11 plan, the debtor-in-possession can reduce debts by repaying a portion of its obligations and discharging others. It can also terminate burdensome contracts and leases, recover or sell business assets and rescale operations to get back to profitability.

Small Business Chapter 11 Facts

The Debtor in Possession

A debtor in possession, or "DIP", is an individual or corporation that has filed for Chapter 11 bankruptcy protection and remains in control of the business and its assets, and has the power to continue to operate the business. A debtor who files a Chapter 11 bankruptcy case becomes the debtor in possession.

A debtor in possession can be terminated and the court if it is improperly managing the assets, or not following Court orders. If terminated, the Court will appoint a trustee to oversee the business and its assets.  

Reporting Requirements in Small Business Reorganization
A small business that files chapter 11 must file a Monthly Operating Report ("MOR").  This report outlines all the income, and expenditures of the business over the course of the month.  These reports are mandatory and are filed with the United States Trustee's office.
The Plan of Reorganization
In a Small Business Chapter 11, the business has 90 days to submit a "plan of reorganization." The Chapter 11 plan is a proposal that is filed with the court that is designed  to reduce obligations and modifying payment terms, helping a debtor balance its income and expenses, regain profitability, and continue in operation.
Personal Liability

Filing a Chapter 7 or 11 for a corporation or LLC does NOT eliminate the personal obligations of the corporation’s officers or principals.

Therefore, if a corporate officer or partner has signed a personal guarantee for a corporate debt, or is otherwise obligated for a corporate debt (such as trust fund portion of payroll taxes or the responsible officer for sales taxes or other debts), then he or she will remain obligated after a bankruptcy.

Who Qualifies as a "Small Business"?
A Small Business Chapter 11 proceeding can be filed by an entity who: (1) is engaged in business or other commercial activities; and (2) owes no more than $2,725,625 as of April 1, 2019,  in total claims, excluding obligations owed to insiders such as family members of the business owners are eligible to file a small business chapter 11 bankruptcy.  For more information, contact a business bankruptcy lawyer at Grantham Law.
How much does it cost?
Chapter 11 small business bankruptcies are complicated time-consuming.  Attorneys and other professionals cannot be paid after the Chapter 11 case is filed, except upon approval by the bankruptcy court, and an application for fees can only be filed every 4 months. Large up-front retainers are required to enable professionals to ensure sufficient funds will be available to pay their fees as the case progresses.  

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