Small Business Chapter 11 Bankruptcy
The primary purpose of chapter 11 bankruptcy is the reorganization of a business. Fortunately for large corporations and mom-and-pop shops, there is no restriction on the size of a business when it comes to qualifying for chapter 11 bankruptcy. As a result, businesses both large and small can turn to chapter 11 bankruptcy to restructure their debt while continuing operations.
While both large and small businesses can qualify for chapter 11 bankruptcy, businesses that qualify as a “small business” under the Bankruptcy Code enjoy more streamlined procedures that expedite the chapter 11 bankruptcy case.
Qualifying as a Small Business
Under Title 11 of the United States Code, a business qualifies as a “small business” if the debtor:
- Is engaged in commercial or business activities (excluding persons whose primary activity is the business of owning or operating real property) with aggregate noncontingent liquidated secured and unsecured debts of $2,725,625 or less.
- Has a case in which the U.S. Trustee has not appointed a creditor’s committee, or the court has deemed the creditor’s committee to be insufficiently active to provide oversight of the debtor.
The concurrence of these requisites will trigger the procedure used for small businesses in a Chapter 11 bankruptcy case. However, the debtor must adequately state in the petition if the debtor is a small business debtor. As mentioned above, the court follows different procedures in small business bankruptcy cases.
One feature peculiar to small business debtors is the presence of a deadline for the filing of the plan. Take note that in the usual Chapter 11 bankruptcy cases, there is no deadline for the submission of a plan. The debtor can submit a plan so long as the court has not approved another plan yet (such as the creditors’ plan). However, in the case of a small business debtor for a Chapter 11 bankruptcy case, the debtor only has three hundred (300) days from the granting of the order of relief to file a plan.
Take note that a deadline is not similar to the exclusive period. The exclusive period exists even when the debtor is not a small business debtor. The exclusive period means that only a debtor can file a plan within that period of time. However, a deadline means that the debtor can only file a plan before the deadline; otherwise, the case will be terminated or converted. However, this deadline applies only to the debtor, meaning that creditors can still file a creditors’ plan even after the expiration of the 300-day deadline.
Exclusive Right to File a Plan
In a small business bankruptcy case, the exclusive period is also longer. The small business debtor has a period of one hundred eighty (180) days within which he/she has the exclusive right to file a plan. Compare this with the usual exclusive period of one hundred twenty (120) granted in Chapter 11 Bankruptcy cases that doesn’t involve small businesses.
The appointment of a creditor’s committee is optional in the case of a small business debtor. This is favorable to the debtor, as the expenses of a creditor’s committee are usually charged to the debtor’s account. When a creditor’s committee is appointed, the committee has the power to retain the services of professionals they deem necessary to the case, such as accountants, lawyers, etc. – all of these have to be paid by the debtor.
The presence of a US Trustee is required in Chapter 11 bankruptcy cases. The US Trustee is not to confused with the case trustee, who is appointed only in certain circumstances (read more on that topic here). The US Trustee plays an expanded role in small business bankruptcy cases. The US Trustee is mandated to conduct additional monitoring. An example of additional monitoring is the requirement of the initial debtor interview with the small business debtor.