Chapter 11 bankruptcy proceedings help a business debtor to restructure his/her finances through a reorganization plan approved by the US bankruptcy court. Chapter 11 plan helps the debtor to reduce his/her financial obligations and modify the payment terms in tune with the income and expenses of the business. Moreover, Chapter 11 enables to downsize the business by selling off some or all of its real property and settle its creditors. However, Chapter 11 bankruptcy proceedings are expensive, risky, time-consuming and complex and are only an option if a small business seeks a restructure and continuation in operation.
In general, Chapter 11 demands the same rules and requirements for small businesses and major corporations for its reorganization. However, Chapter 11 has some special provisions to reduce legal and other restructuring expenses. In some small business cases the U.S. trustee may find difficulty in appointing a creditors’ committee, or the appointed creditors’ committee may not be involved actively in the case. In such situation, the Bankruptcy Code will treat this issue as a “small business case” or a “small business debtor” rather than a usual bankruptcy case.
The determination of a “small business case” or a “small business debtor” requires two part test. The small business debtor may be an individual or separate legal entity who (1) is affianced in business or other commercial activities that owes not above $2,343,300 in total claims; and (2) there will be no creditors’ committee, or its performance may not be up to satisfaction.
In a small business case or small business debtor, the debtor in possession of the real property must submit the latest balance sheet, statement of operations, cash-flow statement and most recent tax return receipt along with the Chapter 11 petition. Otherwise, it is essential to provide a statement under oath explaining the absence of such documents through senior management personnel or counsel in the trustee meeting or before the bankruptcy court. The small business case or small business debtor must file the profitability and projected cash receipts and disbursements of the business with the bankruptcy court in accordance with federal rules and bankruptcy proceedings.
The US Trustee gives special attention to a small business case or small business debtor. The small business debtor must attend an interview with the US Trustee to evaluate the debtor’s viability, business plan and to explain certain debtor obligations. Moreover, the US Trustee has a supervising power to identify if the debtor has capacity to confirm the plan. However, Chapter 11 provides certain special procedures for the small business case or small business debtor. They are:
- Chapter 11 cases require creditors’ committee to protect the interest on unsecured creditors. In a small business case or small business debtor, the creditors’ committee may be excluded to reduce operation expenses.
- For more transparency, Chapter 11 requires the small business case or small business debtor to submit some additional filings such as balance sheet, statement of operations, cash flow statement, and federal tax return along with its bankruptcy petition.
- In the case of a small business debtor or a small business case, Chapter 11 fixes a deadline of 300 days to propose the Chapter 11 plan.
- In the case of a small business debtor or a small business case, Chapter 11 provides an exclusive right of 180 days to file the Chapter 11 plan.
- In the case of a small business debtor or a small business case, the bankruptcy court waives the disclosure statement requirement.