The Small Business Case And Small Business Debtors
The Bankruptcy Code allows small business debtors to file for relief under two different special categories of chapter 11 intended to streamline processes and reduce costs. The first, referred to as a small business case ), was created in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act , and the second, referred to as subchapter V, was created in 2019 by the Small Business Reorganization Act . A debtor may elect either of these two options based on certain eligibility criteria. Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed. The two types of cases have different debt limits, defined as the total amount of noncontingent liquidated secured and unsecured debt at the time the debtor files their bankruptcy case.
In addition to accelerated deadlines and faster plan confirmation, small business and subchapter V cases have other key differences from ordinary chapter 11 cases: a creditors committee is not automatically appointed and instead will only be appointed upon a showing of cause, 11 U.S.C. § 1102, and the debtor or debtor in possession has additional duties, 11 U.S.C. § 1116.
Why Do Companies File For Chapter 11
When an organization files for Chapter 11 bankruptcy, it is often the result of significant financial distress that hinders its ability to sustain profitability, meet the obligations on its debts, and ultimately continue to operate in its current state.The intent of a Debtor in declaring Ch.11 bankruptcy is to undergo a reorganization of its affairs and restructuring of its debts, so that it can maximize the amount paid to its Creditors.
Corporations may seek bankruptcy protection for any number of reasons. These include general economic weakness, operational conflicts, ineffective business strategies, increased competition, regulatory changes, litigation , environmental issues, illegal business activities, or fraud.
Most companies that file for Ch.11 are typically larger businesses, however, recent modifications made to the Bankruptcy Code has allowed smaller business owners and certain individuals to benefit from filing for reorganization as well. Either way, Ch.11 offers a fresh start to businesses that need time and assistance to regain their financial bearings.
Claim Bar Dates In Chapter 11
The time for filing claims in a Chapter 11 case is not determined by statute or rule. The bankruptcy court fixes the date by which creditors are to file their pre-petition claims in a Chapter 11 case. )
The claim of a governmental unit is considered timely if the claim is filed before 180 days after the order for relief to file a timely claim for a pre-petition period. The order for relief is the petition date in a voluntary case. for additional information.) However, in “prepackaged cases,” it may be in the best interest of the IRS to file a claim as soon as possible. Confirmation of the plan may occur before the 180-day period for filing a proof of claim expires in a “prepackaged case.”
When certain debts are listed on the debtor’s bankruptcy schedules, a proof of claim is deemed as filed on behalf of the IRS. Debts are not deemed as filed on behalf of the IRS when they are scheduled as disputed, contingent, or unliquidated in the Chapter 11 case. and Bankruptcy Rule 3003 and )
Individuals who file Chapter 11 bankruptcy cases are required to report income of the bankruptcy estate on Form 1041, U.S. Income Tax Return for Estates and Trusts. These post-petition income tax liabilities are claimable on Form 6338-A. FI files Form 6338-A to request payment of unpaid post-petition Form 1041 liabilities in the Chapter 11 case. See the following subsections in IRM 5.9.8, Processing Chapter 11 Cases, for additional information:
IRM 126.96.36.199, Internal Revenue Code § 1398 Issues
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Benefits And Disadvantages Of Chapter 11 Bankruptcy
For all its challenges, Chapter 11 offers some benefits. Here are some of the most important:
- The business keeps operating under current ownership and management.
- As a debtor-in-possession, the business can borrow money on better terms.
- The business can get out from under burdensome leases and other contracts.
- The business may be able to sell previously encumbered assets to raise money.
- Ultimately, the business may be able to emerge as financially healthy.
Chapter 11s disadvantages include:
- Not shielding sole proprietors from creditors seeking repayment.
- Its expensive, thanks to the need for legal and other professional advice.
- Cases can take a long time.
- The business may not be able to sell assets, borrow or make other decisions without court approval.
- Chapter 11 may not work, leading to the business being forced to close its doors and liquidate.
Chapter 11 Bankruptcy Reorganization Faqs
1. What is Chapter 11?
Chapter 11 is the chapter of the Bankruptcy Code that permits a person or business to reorganize while obtaining protection from its creditors. Chapter 11 of the Bankruptcy Code is entitled Reorganization. The Bankruptcy Code is the name given to that portion of the federal laws that deal with bankruptcy.
2. Who may file under Chapter 11?
Legally, anyone except a governmental agency, an estate, a nonbusiness trust, a stockbroker, a commodity broker, an insurance company, a bank, or an SBA-licensed small business investment company may file under Chapter 11. An individual may not file under Chapter 11 if he or she has had another bankruptcy case dismissed upon certain grounds within the last 180 days. As a practical matter, Chapter 11 is available to virtually any business or person able to afford the expenses of the case.
3. Are there any financial or insolvency requirements for filing under Chapter 11?
4. What is a debtor?
A debtor is a person or business concerning whom a case under the Bankruptcy Code has been commenced. A person or business who files a Chapter 11 case is referred to as a debtor. A debtor who qualifies may be treated as a small business debtor in a Chapter 11 case.
5. What is a small business debtor?
6. How does a debtor get to be treated as a small business debtor?
A qualifying debtor who checks the appropriate box on the Chapter 11 petition will be treated as a small business debtor unless and until the court orders otherwise.
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Debt Forgiveness Vs Debt Reorganization
Debt forgiveness is the common term for what is legally known as a bankruptcy discharge, a core component of a Chapter 7 filing that is also used to a lesser degree in Chapter 11 filings. Unless a creditor disputes a particular discharge request, most discharges are automatically approved. A bankruptcy court then mails a copy of discharge orders to all applicable creditors. Under a discharge order, the creditor must “forgive” the debts listed by no longer seeking repayment. In the eyes of the law, discharged debt is no longer owed.
This is a different process from debt reorganization, which is used in a Chapter 11 filing. Under debt reorganization, debts are not discharged or forgiven. Instead, loan terms are altered in a way that a debtor will hopefully be able to repay his debt more successfully. For example, debt APR or interest rates may be lowered, or the length of time a debtor has to repay a loan may be extended.
Mortgages are very rarely exempt from the bankruptcy process. This means that someone filing for Chapter 7 must continue to make payments on his mortgage. If he cannot make these payments, he may also eventually end up going through a judicial or non-judicial foreclosure process on top of his bankruptcy.
The Process For Chapter 11 Bankruptcy
A Chapter 11 case starts with the filing of a petition in the bankruptcy court where you are a resident. The petition may be voluntary or involuntary. A voluntary petition is submitted by the debtor, on the condition that no prior bankruptcy petition was dismissed due to the debtors intentional failure to appear in court or comply with court orders. Upon filing the petition, the debtor must submit a schedule of current income and expenditures, assets and liabilities, executory contracts, and unexpired leases, as well as a statement of financial affairs. After the debtor has filed the petition, they automatically assume the role of debtor in possession and take control of the business operations and assets during the reorganization. An involuntary petition is filed by creditors who meet certain requirements provided by the bankruptcy court.
The voluntary petition includes the debtors tax identification number, the location of principal assets, residence, and his intention to file a plan of reorganization. When receiving the petition, the bankruptcy court is required to charge a $1,167 filing fee and a $500 administrative fee. The fee is paid to the court clerk in whole, or in installments as decided by the court. If the court allows payment in installments, the debtor is limited to four installments, with the final payment not being later than 120 days from the date of the case filing.
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Who Should File For Chapter 11 Or Chapter 7
In most cases, individuals will want to file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy, in particular, is meant for individuals who are seeking a “fresh start,” but corporations may also file for Chapter 7 . This form of bankruptcy focuses on discharging as many debts as possible and liquidating assets to pay off a variety of remaining debts that cannot be discharged.
A minimum amount of debt is not required for someone to file either Chapter 11 or Chapter 7 bankruptcy. However, to file for Chapter 7 bankruptcy, individuals need to pass a “means test,” usually by having a large amount of unmanageable debt and/or a low income that hinders debt repayment. Those who have a lot of disposable income are less likely to have their Chapter 7 filing approved.
Chapter 11, which is more expensive than Chapter 7, is typically intended for medium- to large-sized businesses, but smaller businesses and sole proprietors may also want to consider this type of bankruptcy. Unlike Chapter 7, Chapter 11 does not liquidate assets, only restructures debts. This allows a debtor to protect an important asset, such as a business, from liquidation. In the case of sole proprietorships and similarly small businesses, Chapter 11 bankruptcy affects both business and personal assets.
Hire A Professional Credit Counselor
Its a requirement that all individuals who file for any form of bankruptcy must obtain pre-bankruptcy credit counseling before they file. Thats especially important in Chapter 11 cases because Chapter 11 is the most complicated and expensive form of bankruptcy. A credit counselor can help you understand the advantages and disadvantages specific to your Chapter 11 case, and also explain the alternatives available to you.
The agency offering the credit counseling must be approved by the U.S. Trustee Program office, and your session with the counselor must take place within 180 days before you file for bankruptcy.
If you decide to file, a credit counselor can be invaluable to have on board throughout the process. Youll be dealing with your own stressful business or personal financial situation, and youll be in numerous negotiations with creditors as well as making a series of appearances in bankruptcy court.
It makes sense to have expert help at your disposal from start to finish.
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Claims Resolution And Creditor Recovery
During the pendency of the bankruptcy case, the Debtor will review all of the filed Creditor claims and compare the information with their own financial records to confirm validity, accuracy and the amount of all the owed amounts. This process is referred to as Claims Reconciliation. Resulting from this reconciliation, valid Creditor claims are accounted for in the Plan of Reorganization.
After court-confirmation of the Plan of Reorganization, the Debtor can initiate the Claims Resolution process according to the approved Plan. This involves the Debtor making payment distribution, making equity distribution, implementing new loan repayment terms, or providing other equitable remedies as agreed in the confirmed Plan with each Creditor class on their bankruptcy claims.
Unfortunately, the bankruptcy process does not guarantee that a Creditor will receive payment on their claim. If there is nothing remaining from the bankruptcy estate for the Debtor to make distributions from, Creditors will not receive a claim payout. Alternative methods may be pursued by the Debtor such as the issuing of promissory notes, creation of installment payment plans, or conversion to equity in the reorganized Company.
Acceptance Of The Plan Of Reorganization
As noted earlier, only the debtor may file a plan of reorganization during the first 120-day period after the petition is filed . The court may grant extension of this exclusive period up to 18 months after the petition date. In addition, the debtor has 180 days after the petition date or entry of the order for relief to obtain acceptances of its plan. 11 U.S.C. § 1121. The court may extend or reduce this acceptance exclusive period for cause. 11 U.S.C. § 1121. In practice, debtors typically seek extensions of both the plan filing and plan acceptance deadlines at the same time so that any order sought from the court allows the debtor two months to seek acceptances after filing a plan before any competing plan can be filed.
If the exclusive period expires before the debtor has filed and obtained acceptance of a plan, other parties in interest in a case, such as the creditors’ committee or a creditor, may file a plan. Such a plan may compete with a plan filed by another party in interest or by the debtor. If a trustee is appointed, the trustee must file a plan, a report explaining why the trustee will not file a plan, or a recommendation for conversion or dismissal of the case. 11 U.S.C. § 1106. A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and solicitation.
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What Are The Disadvantages Of Filing Chapter 11
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For a company that is struggling to the point where it is considering filing for bankruptcy, the legal costs alone might be a bit onerous.
Plus, the reorganization plan has to be approved by the bankruptcy court and must be manageable enough to where they can reasonably pay off the debt over time. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
What Are Successful Bankruptcy Outcomes
After a long and grueling legal process, the Debtor has finally resolved its disagreements, reduced its liabilities, obtained creditor votes, and received court confirmation on its Plan of Reorganization. Once the Plan of Reorganization is put into effect and payouts have been distributed to Creditor classes on their claims, the Debtor can successfully emerge anew.
Having reorganized to be a healthier and more financially viable business, the Debtor has effectively restructured its debts, assets, and other affairs through the Ch.11 court process to position itself to increase value and be profitable again. As stated above, the premise behind Ch.11 Bankruptcy is to afford the Debtor a just, legal process through which it can protect its business and be provided the opportunity to reorganize its operations and affairs for future viability.
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Examples Of Chapter 11 Bankruptcy
While Chapter 11 bankruptcies may appear to be a lot more successful than Chapter 7 situations, history shows that most companies entering Chapter 11 don’t survive either. Less than 10% of Chapter 11 filings have actually been successful.
Notable Chapter 11 success stories include Apple Computer , General Motors , Marvel Entertainment ), and Texaco ). In most of these successes, the companies had major assistance from other companies or the US government in working through their difficulties.
One notable Chapter 11 situation still in progress is Sears Holdings Corp. . The original restructure request by Sears was filed in October of 2018. In October of 2019, 13 vendors pushed for the company to be moved from chapter 11 to chapter 7 proceedings because they would do better in a liquidation than the proposed restructuring but this was denied by the court.
Sears assets were purchased by Eddie Lampert in 2019 with the stock remaining tradable while in chapter 11 proceedings. As of September 2021, Sears still had 19 Sears department stores and 15 Kmart stores open, though more of them are looking at permanent closure in the near future. This is the last of what was once 3,500 stores with more than 250,000 jobs that were cut over a 15-year period. Sears stock is still traded on the pink sheets with a November 23, 2021, price of $0.02 per share.
Petition Filing With The Court
After selecting legal representation and the specific court district to declare bankruptcy, the Debtor can proceed with officially filing their bankruptcy petition.
Bankruptcy petitions, whether voluntary or involuntary, and any other documents required for the filing, can be found on the US courtâs website. They can then be downloaded and filled out to be submitted to the bankruptcy court district in which the Debtor is filing.
The paperwork for filing a bankruptcy petition is relatively straightforward. Each page has easy-to-read instructions at the top, as well as more specific instructions for each question in the left-hand column. Legal representation will provide assistance for a Debtor in filling out and completing the appropriate documents, and gathering the initial information needed to present their case.
What information does one need to fill out the bankruptcy petition? The following is a list of the necessary information a debtor will have to provide at the time of petition filing.
- For individuals – Voluntary Petition Official Form 101
- For non-individuals – Voluntary Petition Official Form 201
- List of Creditors Who Have the 20 Largest Unsecured Bankruptcy Claims and Are Not Insiders
- Statement About Social Security Numbers
- Disclosure of Compensation of Bankruptcy Petition Preparer
- Bankruptcy Petition Preparerâs Notice, Declaration and Signature
- Federal Income Tax Return
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