Understanding the Key Terms in a Small Business Bankruptcy

If you are struggling to keep your small business afloat, filing for bankruptcy could be a smart solution. Through bankruptcy, small businesses can reorganize their debts, reduce their monthly financial obligations and regain the financial standing they need to remain viable. Small business owners have multiple options available, and choosing the best option for your business starts with seeking advice from an experienced Miami bankruptcy litigation attorney.

10 Key Terms in a Small Business Bankruptcy Under Chapter 11

To ensure that you are making informed decisions, you will want to familiarize yourself with the key terms that you will encounter during the small business bankruptcy process. These key terms include:

1. Reorganization

Keeping your business afloat through bankruptcy involves reorganizing your business’s debts under Chapter 11 of the U.S. Bankruptcy Code. When you file for a small business bankruptcy under Chapter 11, you will work with your business’s Miami bankruptcy litigation attorney to develop a reorganization plan that reduces your business’s monthly debt load to a manageable level. This contrasts with pursuing a liquidation bankruptcy under Chapter 7, which generally involves selling a business’s assets and winding up its operations.

2. Discharge

Even though the primary focus of a small business bankruptcy under Chapter 11 is reorganization, businesses can still eliminate some of their debts during the process. This is known as a discharge. An experienced Miami bankruptcy litigation attorney can help you decide which debts to include in your business’s reorganization plan and which ones you should seek to discharge during your business’s bankruptcy. Confirmation of a reorganization plan under Chapter 11 also discharges any debts that creditors fail to preserve during the process.

3. Small Business Case

Chapter 11 includes special provisions for small business bankruptcies. One option is to file what is known as a “small business case.” If your business’s aggregate debts fall below the threshold for filing a small business case, this option can significantly streamline the reorganization process while also reducing the costs involved.

4. Subchapter V

Another option for small business owners is to file under Subchapter V. Introduced in 2019, Subchapter V offers even greater benefits than filing a “small business case,” which has been an option since 2005. While pursuing a small business case makes sense in some circumstances, many small business owners will find that filing under Subchapter V is the better option.

Some of the additional benefits of a Subchapter V filing include being able to move forward without filing a disclosure statement and the ability to obtain approval of the business’s reorganization plan without a creditors’ committee (in most cases). For more information, you can read our overview of the Subchapter V small business bankruptcy process.

5. Debtor in Possession

Whether a business files a small business case or files under Subchapter V, it will be classified as a “debtor in possession.” This means that the business will remain in control of its assets throughout the bankruptcy process. As a small business owner, what this means for you is that you can continue to run your business while its bankruptcy is pending. The disruptions to your business will be minimal, and you will not have a trustee making decisions about your business over which you have no control.

6. Statement of Financial Affairs

While small businesses don’t need to submit a disclosure statement under Subchapter V, they must still file a statement of financial affairs. This is essentially a summary of your small business’s assets and debts. Along with this statement of financial affairs, small businesses pursuing reorganization under Subchapter V must also prepare several “Schedules” that list their assets and liabilities individually.

7. Creditors

A business’s creditors are the companies and individuals to which it owes outstanding financial obligations. These can include everything from lessors and employees who are owed rent and wages to utility companies and independent contractors who have unpaid bills. During the bankruptcy process, a small business’s creditors will be identified in different ways (i.e., secured vs. unsecured) and will be afforded different levels of priority.

While all creditors have the opportunity to play a limited role in the small business bankruptcy process, small businesses and their counsel ultimately have much more control than in a traditional Chapter 11 filing. Additionally, while traditional Chapter 11 cases involve the formation of a creditors’ committee that plays a major role in developing the business’s reorganization plan, there is no creditors’ committee in most Subchapter V cases.

8. Trustee

During a small business bankruptcy under Chapter 11 (whether a “small business case” or a Subchapter V filing), the trustee’s role is primarily to facilitate a swift and successful resolution. This also stands in stark contrast to a traditional Chapter 11 case, during which the trustee will often play a significant role in the business’s day-to-day operations and executive decision-making. So, while you will need to work with a trustee during the small business bankruptcy process, the trustee will not take control of your business.  

9. Prepack

One of the most efficient ways to finalize a small business bankruptcy is by negotiating a prepackaged reorganization plan, or “prepack.” Negotiating with your small business’s creditors prior to filing for bankruptcy can potentially open up other opportunities as well, including the opportunity to renegotiate liabilities or informally restructure debts outside of the bankruptcy process.

10. Non-Dischargeability

Finally, while it is important to understand what you can achieve through a small business bankruptcy, it is also important to understand the process’s limitations. For example, certain debts may not be eligible for discharge, and mistakes along the way can lead to a determination of non-dischargeability. As you weigh your options and prepare to move forward with a plan to restore your small business’s financial stability, it will be critical to work with an experienced Miami bankruptcy litigation attorney who can help you make smart decisions.

Discuss Your Options with a Miami Bankruptcy Litigation Attorney

If you would like to know more about the bankruptcy options for small businesses under Chapter 11, we invite you to get in touch. Please call 305-768-9909 or contact us online to schedule an appointment at Edelboim Liberman today.