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Should You File for a “Small Business” Bankruptcy Under Chapter 11?

Enacted in 2019, the federal Small Business Reorganization Act (SMRA) established special procedures for small businesses seeking to reorganize their debts under Chapter 11 of the U.S. Bankruptcy Code. As explained in Business Law Today shortly after the SBRA’s enactment, “the act lowers costs and streamlines the plan confirmation process to better enable small businesses to survive bankruptcy and retain control of their operations.”

But, this was not the first effort to make it easier (and more affordable) for small businesses to pursue Chapter 11 reorganizations. In 2005, Congress created the “small business case” Chapter 11 bankruptcy as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). As explained by the U.S. Courts:

“A debtor may elect either of these two options based on certain eligibility criteria. Both [BAPCPA] and [SMRA] cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed. The two types of cases have different debt limits, defined as the total amount of noncontingent liquidated secured and unsecured debt at the time the debtor files their bankruptcy case.”

So, if your small business is struggling and you are considering a Chapter 11 bankruptcy, should you file under the SBRA, the BAPCPA or the ordinary provisions of the U.S. Bankruptcy Code?

Differences Between Small Business Bankruptcies and Other Business Bankruptcies Under Chapter 11

The primary differences between small business bankruptcies and other business bankruptcies under Chapter 11 relate to cost and efficiency. As simply put in the Business Law Today article linked above, “a small business may not be able to afford the costs of a chapter 11” bankruptcy under the ordinary requirements in many cases.

The SBRA (which created the “subchapter V bankruptcy,” as it added this new subchapter to Chapter 11 of the U.S. Bankruptcy Code) and BAPCPA both include provisions designed to reduce the costs of going through the Chapter 11 bankruptcy process. For example, subchapter V bankruptcies and small business cases both involve “accelerated deadlines and faster plan confirmation,” and both allow for confirmation without the formation of a creditors’ committee unless the business’s creditors show cause. In addition, the trustee’s role is typically more limited in subchapter V bankruptcies and small business cases; and, facing fewer restrictions and less oversight, small business owners are able to maintain their primary focus on driving their businesses toward sustainable profitability.

To file a subchapter V bankruptcy or small business case, the business must check the appropriate box on its Chapter 11 petition. Before doing so, the business should confirm that it satisfies the maximum debt threshold, as the bankruptcy courts can reject subchapter V and small business case elections from debtors that do not qualify.   

Similarities Between Small Business Bankruptcies Under the SBRA and BAPCPA

There are many similarities between small business bankruptcies under subchapter V and small business cases. For example, under both the SBRA and BAPCPA:

  • To qualify, a small business must have “total noncontingent liquidated secured and unsecured debts of $3,024,725 or less [as of 2022], not less than 50 percent of which arose from the commercial or business activities of the debtor.”
  • At a minimum, the small business must attach “its most recent balance sheet, statement of operations, cash-flow statement and Federal income tax return” to its Chapter 11 bankruptcy petition. If any of these are unavailable, the business must provide “a statement under oath explaining the absence of such documents.”
  • Rather than the disclosure statements normally required during a Chapter 11 bankruptcy proceeding, small businesses must make ongoing filings concerning their “profitability and projected cash receipts and disbursements,” and they must confirm that they have timely filed their tax returns with the Internal Revenue Service (IRS).

Differences Between Small Business Bankruptcies Under the SBRA and BAPCPA

While there are similarities between small business bankruptcies under the SBRA and BAPCPA, there are notable differences as well. Some examples of these differences include:

  • Debtors in small business cases are subject to additional oversight as compared to those in subchapter V bankruptcies. Additionally, in a small business case, “[t]he U.S. trustee will . . . monitor the activities of the debtor . . . to identify as promptly as possible whether the debtor will be unable to confirm a plan.” In contrast, the trustee’s primary role under subchapter V is “facilitating the development of and overseeing the debtor’s plan of reorganization.”
  • In a small business case, “only the debtor may file a plan during the first 180 days after the case is filed.” This “exclusivity period” can be extended up to 300 days subject to court approval—compared to a maximum exclusivity period of 18 months in ordinary Chapter 11 cases. In subchapter V bankruptcies, “only the debtor may file a plan.”
  • Subchapter V adopts more lenient confirmation requirements as compared to the BAPCPA and the ordinary provisions of Chapter 11. Under subchapter V, “[p]lans can be confirmed as long as they do not discriminate unfairly, are fair and equitable with respect to each class of claims or interests, [and] provide that all projected disposable income of the debtor (or equivalent value) is paid into the plan for a three to five year period.”

Which Type of Chapter 11 Bankruptcy Should Small Business Owners Choose?

Given the various differences between subchapter V bankruptcies, small business cases, and ordinary business bankruptcy filings under Chapter 11, which option should small business owners choose? Small business owners need to work with their bankruptcy counsel to answer this question on a case-by-case basis. Each option will make more or less sense in different scenarios, and small business owners need to make informed and strategic decisions based on their companies’ unique financial circumstances.

Speak with a Chapter 11 Business Bankruptcy Lawyer in Confidence

If you need to know more about filing for a small business bankruptcy under Chapter 11, we invite you to schedule a free initial consultation. To discuss your options with an experienced business bankruptcy lawyer in confidence, please call 305-768-9909 or request an appointment online today.

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