What Is A Chapter 11 Reorganization For Small Businesses?

Corporations (including Not-For-Profit Corporations), Partnerships,  and Individuals who exceed the debts limits for a Chapter 13 are  candidates for a Chapter 11.

The  definition of a Small Business in a Chapter 11 is one where the debts  don’t exceed about $2.5 million (currently $2,566,050). The debt limit  excludes amounts owed to persons considered “insiders” such as  stockholders and/or family members.


  1. The  filing of a Chapter 11 imposes the powerful Automatic Stay against all  creditors including the IRS. It is similar to an Injunction imposed  against all who seek money or property from the company.
  2. The  filing of a Chapter 11 makes the Debtor a Debtor-In-Possession with all  the powers of a trustee.The Debtor-In-Possession (D.I.P.) can object to  claims; file motions to retrieve repossessed property like a car or  truck; and sell certain property that it no longer needs.
  3. Excessive  secured debts can be reduced where the balance owed exceeds the value  of the property. This can apply to a fleet of trucks or restaurant or  grocery store freezer.
  4. Unfavorable leases, rental and other contracts can be cancelled.
  5. The  company can get some breathing room. Upon filing a Chapter 11 case, the  company gets an immediate reprieve in paying unsecured debts including  past tax debts.
  6. Property can be sold that is no longer needed for the business.
  7. The company can get a chance to regroup and repay your tax debts and unsecured debts over great period of time.
  8. Many  debts can be reduced below 100% down to some fair amount based on the  value of the company.The filing of the Chapter 11 will allow the company  to focus on the future. It can make plans on how to build the company  profitability.
  9. The ultimate end of a Chapter 11 is for  the Debtor to file a plan and have the court confirm it. The plan  generally allows modifying the payments that differ the contractual  terms due prior to the filing. In some cases it can actually reduce the  amount owed.

Even though a  Small Business Chapter 11 is an opportunity to reorganize a troubled  business a lot of work has be done before the a case is filed.

The  law requires certain documents and schedules to be included when the  case is filed. The Debtor to be must have a balance sheet; a statement  of its operations, and a cash flow statement. And, the Debtor must  submit its most recent Federal Income Tax return. In addition the  initial filing must include a schedule of executory contracts and leases  and well as a statement of financial affairs. Where practical the  company should employ an Accountant to help comply with required  schedules and the accountant has to be paid immediately. Likewise if  appraisals will be needed it is best obtain such before filing. As best  you can and with the help of your lawyer you should be prepared to enter  the Chapter 11 with comprehensive schedules and documents.

When  a case is filed as a Small Business Chapter 11 you will not have the  burden of a Creditor’s Committee. Thus you avoid the expensive costs and  fees. Since a Creditor’s Committee generally has antagonistic  objectives you avoid likely court fights.

That said the U.S. Trustee’s office takes a larger role in overseeing the Chapter 11 from start to finish.

The  plan will have to show how the Debtor will be able to go forward  profitably. In other words the income going forward must exceed the  expenses including debt repayment.

Small  Business cases move on a faster track. The code gives the Debtor 300  days to file a plan which can only be extended under certain  circumstances. But both U.S. Trustee and the Bankruptcy Judge will  pressure the Debtor to move faster.

In  Small Business cases the Chapter 11 Debtor has the exclusive right to  file a plan within 180 days. The 180 day period can be extended by order  of Court. If a plan is not filed within the Debtor’s exclusive period  creditors can file a plan which is often a plan to liquidate the  company.

In a Small Business case the  Bankruptcy Court can waive the requirement of the Chapter 11 Debtor to  file a Disclosure Statement. If the Court so waives the requirement it  can expedite the process and save a great deal of additional expense.

The  Debtor must account for all property; examine all claims; object to  claims when appropriate, provide monthly operating reports.

The  Debtor In Possession has the right to hire lawyers, accountants,  appraisers and other professional. But the Bankruptcy Court must first  approve the hiring of the various professional

For more information on Chapter 11 Reorganization Of Small Business, a Complimentary consultation is your next best step. Get the information and legal answers you are seeking by calling today.

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