Is Chapter 11 bankruptcy the best option for my small business?

On Behalf of | Aug 3, 2022 | Chapter 11 |

In New York, Chapter 11 bankruptcy is frequently viewed as an option for large companies that are experiencing widespread financial challenges. It offers businesses various strategies to get on stronger financial ground while staying in operation.

For many, Chapter 11 is simply a protective device to stop debt problems from getting worse. The business can eventually reorganize its debts and move forward. For smaller businesses, it can also be an effective alternative. From the start, it is important to understand the available categories of Chapter 11 for smaller businesses.

Key points about Chapter 11 for smaller businesses

Two categories of Chapter 11 bankruptcy are specifically tailored for small businesses. One is called a “small business case.” The other is “subchapter V.” Prospective Chapter 11 filers must meet specific criteria to be eligible. With these categories, the process is completed faster than it would be under a conventional Chapter 11. Deadlines are accelerated and the plan will be confirmed at a faster pace than other types of Chapter 11.

There are debt limits associated with these categories. To use this type of plan, the business has a maximum debt limit of $3,024,725. At least half of that must have come from the business or commercial activities. This applies to both a small business case and subchapter V.

In most conventional Chapter 11 cases, a creditors’ committee is appointed. This is generally comprised of unsecured creditors who have the seven largest claims. With a small business case or subchapter V, there is no automatic creditors’ committee and one will only be needed if there is cause.

In these cases, the debtor will need to provide more in-depth information about the business finances such as cash flow and its balance sheet. Failure to do so will warrant the court asking the debtor to say under oath why they are not being provided. There are also filing requirements about profitability, projections and whether the debtor is complying with the law.

Small businesses should be aware of how Chapter 11 can specifically help them

Many businesses face challenges. Recent times have been particularly rough for everyone with fewer customers, less money to spend and health concerns coming to the forefront. For smaller businesses, this can be a financial and emotional hardship as they have placed all their eggs in one basket and are unsure as to what they will do if they do not find a viable path out of debt. They might not be aware of the aspects of Chapter 11 that are designed for their situation. Experienced bankruptcy professionals can assess the case, look at the finances and forge a viable plan to move forward.