Chapter 11 Can Help Turn Around A Small Business

June 25, 2012

For many people Chapter 11 bankruptcy conjures up thoughts of General Motors or Washington Mutual. Fortunately, Chapter 11 bankruptcy is not just reserved for billion dollar corporations, but is a useful tool for many small companies suffering from financial distress that need to reorganize.

Chapter 11 of the Bankruptcy Code contains special provisions designed for small businesses. Generally, to qualify for these special bankruptcy procedures the small business must be engaged in commerce with debts less than $2.19 million. The small business must file a bankruptcy petition and include (1) the most recent balance sheet; (2) a statement of operations; (3) a cash flow statement; and (4) the most recent tax return.

The federal law imposes an automatic stay after the Chapter 11 case is filed that prohibits all collection actions against the small business. This stay halts lawsuits, assets seizures, and other legal actions. Normal business operations continue under the court’s supervision during the pendency of the bankruptcy.

The goal of the Chapter 11 is to obtain a court-ordered plan to repay some or all of the company’s debts over time. The business debtor’s plan may propose to pay a percentage of the debt, or change the terms of leases and contracts. In general, the court will confirm a plan that is feasible, proposed in good faith, and complies with the legal requirements under the Bankruptcy Code. Creditors must also receive as much as it would if the business’s assets were liquidated.

Chapter 11 bankruptcy offers financially distressed small businesses an opportunity to continue operations while restructuring debts. If your company could benefit from Chapter 11 of the Bankruptcy Code, contact an experienced bankruptcy attorney and discuss your options.

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