The Small Business Case of a Chapter 11 Bankruptcy

 

There are a variety of ways an individual or group of individuals owning a small business can file for bankruptcy protection. An individual, partnership or corporation can file a chapter 7, 12, or 13 bankruptcy, depending on what their business and financial circumstances are. This article deals with the small business case of a chapter 11 bankruptcy.

Notice of closure attached to the door of a co...

When filing a small business case under a chapter 11 bankruptcy. (Photo credit: Wikipedia)

What is a Chapter 11 Bankruptcy for Small Business Cases?

Filing bankruptcy in the United States involves a formal legal procedure for dealing with debt problems of individuals and businesses. Every American citizen has the Constitutional right to formally file for bankruptcy protection, but they must do so under the federal bankruptcy laws as stated in Title 11 of the United States Bankruptcy Code. There are primarily six different kinds of chapters under the Bankruptcy Code an individual or business can file in order to seek out legal protection from creditors.

A chapter 11 bankruptcy is one of the six types of bankruptcies that can be filed for bankruptcy protection, and it is a bankruptcy primarily used for all types of businesses, large and small. This type of bankruptcy allows a business facing bankruptcy to reorganize and make a plan to pay back all or part of its unsecured debts while continuing to pay for its secured debts. This plan can keep a business alive by paying its creditors over time.

A chapter 11 bankruptcy can be filed by individuals, corporations, or partnerships.

Debtors filing a chapter 11 may do so by being designated as either a small or large business. When filing a small business case, debtors file under different bankruptcy rules than what larger businesses do.

What Qualifies as Filing a Small Business Case in a Chapter 11?

To qualify to file as a small business, a debtor must first be engaged in commercial or business activities, other than primarily owning or operating real property, with total non-contingent liquidated secured and unsecured debts of $2,343,300 or less. Secondly, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active to provide oversight of the debtor.

When a small business is allowed to file a chapter 11 under the small business case rules, the U.S. Trustee will normally monitor the activities of the small business in the absence of an oversight creditor committee. Most small businesses do not have the large creditor base that is associated with a larger corporations filing for protection. In some small business cases, a panel trustee or operations manager may be appointed by a U.S. Trustee to monitor the case if the managing group’s ability has come under question.

Since bankruptcy laws can be very complicated, determining what type of bankruptcy chapter should be filed can be a challenge for any business. It is always recommended a business seek out professional legal help from a qualified bankruptcy attorney before filing bankruptcy, especially when considering filing a small business case.

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