Robert J. Adams and Associates
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.
A Small Business Chapter 11 offers the following advantages:
- 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.
- 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.
- 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.
- Unfavorable leases, rental and other contracts can be cancelled.
- 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.
- Property can be sold that is no longer needed for the business.
- The company can get a chance to regroup and repay your tax debts and unsecured debts over great period of time.
- 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.
- 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
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