What is a Small Business Chapter 11 Bankruptcy Case?

By Tony Arnest

It is often asked - in contemplation of filing a Chapter 11 Bankruptcy case - whether there is a significant difference between a “small” versus a “large” business Bankruptcy. The short answer is yes, but it may depend upon certain definitions. What is generally not known is that Chapter 11 Bankruptcy proceedings for a “small business” can be treated differently than other Chapter 11 Bankruptcy cases. Under 11 U.S.C. § 101(51C), the small business bankruptcy is not defined in terms of corporation vs. sole proprietorship, or partnership vs. limited liability company, etc. Rather, it is identified as a case where there is a small business debtor and small business debt. This distinction can affect how a Chapter 11 Bankruptcy case is approached. Consequently, many small business owners will ask what defines a small business debtor. The U.S. Bankruptcy Code outlines a two (2) part test:

Question 1: Is the business debtor involved in business or commercial activities (with the exception of primarily owning and operating real property) with liquidated, non-contingent unsecured and secured debts of $2,000,000 or less?

Question 2: Has the U.S. Trustee appointed a creditors' committee, and if they have not, has the U.S. Trustee decided the creditors' committee is unable to sufficiently oversee the debtor (11 U.S.C. § 101(51D))?

In order to prepare a Chapter 11 Bankruptcy small business case, the small business debtor (generally called the“debtor in possession” after the filing) must provide the most recent prepared balance sheet, cash-flow statements, a statement of operations and the most recently filed United States tax return. All documents must be attached to the Chapter 11 Bankruptcy petition. If these documents are not provided, a statement that clearly outlines the reason(s) for their omission or absence must be attached to the filing. Under 11 U.S.C. §§ 308, 116, the small business debtor must also provide documentation outlining their projected cash receipts and disbursements and their profitability analysis. In addition, the debtor will also provide the Bankruptcy Court with reports about their tax status and whether or not all of the business tax returns have been filed.

As with most Chapter 11 cases, the U.S. Trustee provides monitoring for these types of cases. This oversight may include evaluating the debtor's viability; reviewing the debtor's business reorganization plan; defining and explaining the requirements for filing the debtor's bankruptcy reports; and overseeing the debtor's business activities throughout the duration of the bankruptcy proceeding.

If you are a small business that may be considering filing a Chapter 11 Small Business Bankruptcy, you should know that in many instances, these cases can often be resolved more quickly than large business bankruptcies. Often, small business debtors will be able to prepare and file their Chapter 11 Bankruptcy “disclosure statement” and “plan for reorganization” during the first 180 days after the initial Bankruptcy filing. This is often referred to as the "exclusivity period." Of course, depending upon the circumstances, this period can be extended significantly with Court approval. The faster a debtor can present the Bankruptcy Court and creditors with a reorganization plan, the faster a bankruptcy proceeding may come to an amicable conclusion for all parties concerned.

(The presenter, Tony Arnest, is a licensed attorney in California. He is a debt relief agency and helps people file for bankruptcy. This information is being provided solely for educational purposes, and is not intended to offer legal advice or serve as a solicitation for business in anyway.)

What is a "Small Business" Chapter 11 Bankruptcy Case?

Tony Arnest