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Year In Review: Key Insights on Chapter 11 for Small Business Owners Considering Bankruptcy in 2024

It’s been a tough year for many small businesses in Florida. From the lingering effects of the COVID-19 pandemic to Hurricane Idalia, various issues negatively impacted small business owners who could do little but face the consequences of factors that were beyond their control.

For small businesses that are struggling heading into 2024, it may be worth considering a Chapter 11 bankruptcy. There are special procedures for small business bankruptcy filings under Chapter 11, and these procedures make filing an economical choice for companies of all sizes. If you are interested in speaking with a Miami Chapter 11 bankruptcy lawyer, here are some key insights that you can use to make informed decisions as you move forward:

When Is It Time to Consider a Business Bankruptcy?

Small business owners have several factors to consider when thinking about filing for bankruptcy under Chapter 11. While this starts with assessing whether the business can meet Chapter 11’s filing requirements, there are numerous substantive considerations as well. For example, when evaluating the viability of a Chapter 11 filing, small business owners will want to carefully consider questions such as:

  • Are the benefits of a Chapter 11 filing the benefits your company needs?
  • Do the benefits outweigh the drawbacks?
  • Are there better alternatives available?
  • Do any of the business’s creditors have defenses to discharge?
  • Do any of the business’s creditors have claims for non-dischargeability?

We answered these questions—and many more—in an article titled, When Is It Time to Consider a Business Bankruptcy? earlier this year. If you are considering a Chapter 11 filing, this article is a good place to start.

Is a Chapter 11 Bankruptcy the Smart Choice for Your Business?

While filing under Chapter 11 is a smart choice for many small business owners, it isn’t the right choice for all companies. Depending on the circumstances, various alternatives to a Chapter 11 filing could be better for addressing a company’s financial situation. These may include alternatives such as:

  • A Chapter 7 liquidation filing
  • An equity infusion
  • Internal restructuring
  • Informal workout (debt restructuring)
  • An assignment for the benefit of creditors

Additionally, while a traditional Chapter 11 filing will make sense for some companies, small businesses will often benefit from making a Subchapter 5 filing or submitting a “small business case” under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. To learn about all of these options, you can read: Business Bankruptcy: Options and Alternatives for Companies in Financial Distress.

Can Your Small Business Take Advantage of the Benefits of Subchapter 5?

For many small businesses, the best option for restoring their financial stability will be to file under Subchapter 5. Congress created Subchapter 5 (of Chapter 11) in 2019 with the specific purpose of opening up the benefits of Chapter 11 to small businesses. Subchapter 5 streamlines the reorganization process for small businesses while also reducing the time and costs involved.

To qualify for a Subchapter 5 bankruptcy, a business must have “aggregate noncontingent liquidated secured and unsecured debts [of] not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor.” If your business qualifies, you can read Subchapter 5 Bankruptcy: Understanding the Benefits for Small Businesses to learn more.

What Benefits Can Your Small Business Achieve Through a Chapter 11 Filing?

Whether you choose to file under Subchapter 5, BAPCPA, or the standard reorganization provisions of Chapter 11, you need to make sure that filing will be worth it before you get started. While all types of Chapter 11 bankruptcy filings afford several benefits, a Chapter 11 filing won’t necessarily provide the outcome that a struggling small business needs. Some of the main benefits of filing under Chapter 11 include:

  • Protection under the “automatic stay”
  • Access to debtor-in-possession financing
  • The ability to reject leases and other executory contracts
  • The ability to sell encumbered business assets
  • No oversight from a bankruptcy trustee

As discussed above, Subchapter 5 and BAPCPA filings offer additional benefits as well. To learn more about all of these benefits, you can read: A Closer Look at Some of the Benefits (and Limitations) of a Chapter 11 Business Bankruptcy.

What Can You Do to Streamline the Chapter 11 Bankruptcy Process?

Once you make the decision to move forward with pursuing a small business bankruptcy, you will want to do everything you can to streamline the process. While your Miami Chapter 11 bankruptcy lawyer will play a central role in helping you complete the process as efficiently as possible, there are some steps that you will need to take as well—including steps that you will need to take prior to filing. For some tips on what you can do to get ready, you can read:  How Can (and Should) Business Owners Streamline the Bankruptcy Process?

Will Your Small Business’s Creditors Have Grounds to Intervene in Its Chapter 11 Filing?

Finally, along with assessing your business’s eligibility and ensuring that filing under Chapter 11 is your best option, you will also want to work with your lawyer to determine if your business’s creditors will have grounds to intervene. For example, if any of your business’s creditors have grounds to assert preference claims, this could throw a wrench in the process—and you may want to address the issue before submitting your small business’s petition to the U.S. Bankruptcy Court. For more information about this potential concern (and what you can do about it), you can read: When Can Creditors Assert Preference Claims in Business Bankruptcy Cases?

Request a Free Initial Consultation with a Miami Chapter 11 Bankruptcy Lawyer

If your small business is struggling and you are thinking about filing for bankruptcy in 2024, we invite you to contact us for more information. To request a free initial consultation with a Miami Chapter 11 bankruptcy lawyer at Edelboim Liberman, please call 305-768-9909 or send us a message online today.

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