Why File Bankruptcy as a Small Business Under Chapter 11?

According to the U.S. Census Bureau, small businesses employing four employees or less represent about 93% of the total gross income made by all businesses in the United States. The greatest majority of small businesses fail before they ever reach the age of five years old, and many of them are forced into bankruptcy protection. Why should a small business debtor file for bankruptcy protection under a chapter 11 instead of some other type of bankruptcy?

Bankrupt shop, signes.

Bankrupt shop, a small business (Photo credit: Wikipedia)

A chapter 11 is a type of bankruptcy in the Bankruptcy Code providing bankruptcy relief for businesses. If a small business is struggling but still has a viable chance of being successful, the reorganization plan of the chapter 11 bankruptcy may be the exact solution for some small businesses. This type of bankruptcy allows a business facing bankruptcy to reorganize and make a plan to pay back all or part of its unsecured debts while continuing to pay for its secured debts. This plan can keep a business alive by paying its creditors over
time.

A chapter 11 bankruptcy can be filed by individuals, corporations, or partnerships.

Debtors filing a chapter 11 may do so as either a small or large business. To
qualify to file as a small business, which allows small business debtors to file under different rules, a debtor must first
be engaged in commercial or business activities, other than primarily owning or operating real property, with total non-contingent liquidated secured and unsecured debts of $2,343,300 or less. Secondly, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active to provide oversight of the debtor. The U.S. Trustee will normally monitor the activities of the small business filer in absence of an oversight creditor committee.

As a small business, a filing debtor has the options of filing bankruptcy under a chapter 7,
11, 12, or 13.

In order for a small business to file bankruptcy under a chapter 7, the liquidation bankruptcy, the small business will generally have little or no assets. The debtor must be able to pass the means test or more than half the debts owed by the debtor must be non-consumer debts.

In order to file a chapter 12, the small business debtor would have to be a commercial farmer of fisherman.

A debtor owning a small business can file under a chapter 13, so why might an owner of a
small business want to file under a chapter 11 instead? Here are some potential reasons why a small business owner might file under a chapter 11 in lieu of some other type bankruptcy:

  • the owner or owners of the small business might not qualify to file another type of
    bankruptcy;

  • a court can dismiss this chapter only after a hearing and only for cause;

  • the filer may exceed the debt limitations for filing a chapter 13;

  • there is no time limit on the duration of implementing a plan;

  • and individual debtors are not required to turn over their “disposable income” to
    a trustee.

A chapter 11 bankruptcy is not for every small business. If you are in doubt as to which bankruptcy you should file, contact a local bankruptcy to help you make an informed decision on which one will be right for your particular situation.

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