Chapter 11 Business Bankruptcy
Business Reorganization for Small Businesses
What is Chapter 11 Business Bankruptcy?
Chapter 11 Business Bankruptcy is a legal process by which a business may declare bankruptcy but continue to operate the business under supervision. This process is called "reorganization," because the bankruptcy process reorganizes the business to be more efficient and to be able to pay the creditors of the business. It's kind of like getting a "jump start" for your business, to bring new life into it.
The bankruptcy process for Chapter 11 and other types of bankruptcies is run through a special legal system (part of the U.S. courts system), called bankruptcy court. It's under the circuit court system in the U. S. Courts website.
What Happens to Business Debts in Chapter 11?
When a business files Chapter 11 bankruptcy, the debtor becomes what's called a "debtor in possession." That is, the debtor is in possession of the business assets.
The bankruptcy court may also exempt the business from paying all or part of its debts. Chapter 11 bankruptcy is usually sought and granted in the case where the value of the business is greater than the sum of its assets; in other words, the business has a significant amount of goodwill as a "going concern" which would be lost if the business were sold or liquidated.
What is a Debtor-in-Possession?
The debtor (owner of the business) becomes a debtor-in-possession during a Chapter 11 bankruptcy.
That is, the debtor is still in possession of the business. The debtor-in-possession has fiduciary responsibilities to manage the business and bring it back out of bankruptcy. This person acts like a bankruptcy trustee, with (according to the Bankruptcy Court) responsibility for "accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator."
How Does Chapter 11 Work for Small Businesses?
Chapter 11 is different for small businesses, and some special rules apply to these business bankruptcies. There are two qualifications for the small business case:
- The debtor must be in an ongoing business, with debts of $2566 or less.
- There is no creditor's committee (a group of creditors who agree on how business assets are to be distributed to creditors).
The debtor-in-possession in this case must provide initial financial statements, including the most recent tax return, a balance sheet, statement of operations, cash-flow statement and other statements. The small business case requires more oversight by the trustee, including frequent reports and financial statements.
The benefit of small business Chapter 11 bankruptcy is that it can be accomplished more quickly than a traditional Chapter 11 bankruptcy.
What is the Process for Chapter 11 Bankruptcy?
The bankruptcy process begins with your meeting with a bankruptcy attorney, who can help you decide which form of bankruptcy is best. You will need to file bankruptcy in the state where you are doing business, because bankruptcy is a state-driven process.
A petition is the formal beginning of the bankruptcy process.
The petition includes an intent to file a plan for reorganization. Typically, your business will be assigned a trustee, who will guide the business through the reorganization process.
A disclosure statement is also required at the beginning of the bankruptcy process. The US Courts website says this disclosure:
must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization.
The Automatic Stay and Chapter 11
An automatic stay is set in place at the beginning of Chapter 11. This stay prevents judgments, collection activities, foreclosures, and repossessions against the business during the process. The stay gives the debtor company a breather and allows time for negotiations on the company's behalf to resolve financial difficulties.
What happens at the end of Chapter 11 bankruptcy?
In many cases, a business may re-emerge from Chapter 11 and continue to operate normally. In other cases, the reorganized business can be sold after some period of time.
For more details, see this article about Chapter 11 bankruptcy basics on the U.S. Courts website.
Disclaimer: The content in this article and on this website is for informational purposes only. The author is not an attorney or tax professional. Every business bankruptcy situation is different, and bankruptcy laws and regulations. If you are considering business bankruptcy, find a bankruptcy attorney and financial advisors who can help you with this process.