Chapter 11 bankruptcy protection was created for certain small businesses to use when they are under financial distress. It is an excellent option for Michigan small business owners to use in order to remain open for business, eliminate debts and to restructure their business. It is different from Chapter 13, which is also a restructuring option, but for small businesses that are owned by individuals and that only owe a restricted amount of debt.
Here are some of the most frequently asked questions about Chapter 11 bankruptcy:
Which small businesses are allowed to file under Chapter 11?
- Businesses that are owned by a person or entity can seek protection from debts while they restructure their business and continue operations.
- Businesses with high levels of debt; above $360,475 unsecured or $1,081,400 secured.
- Businesses that are structured as a partnership, a limited liability company, or a corporation.
- Businesses that are owned by an individual if they owe more than the above mentioned debt levels.
- To be deemed a small business, the company must be commercial and owe no more than a total of $2,343,300, excluding insider debts.
How can restructuring under Chapter 11 help a small business stay operational?
- With reductions in debt and/or modification of payment terms, the business can achieve a balanced budget and operate profitably to remain in business.
- Under restructuring, the business is allowed to sell off some assets or downsize.
- Restructuring plans must be approved by the bankruptcy court.
- The owner/debtor may be able to obtain new financing and loans with court approval, as well as cancel or reject contracts.
- Litigation protection is set through an automatic stay until the court can resolve the issues.
- A company’s creditors may end up with ownership and thus can continue possible recovery of their debts because the company remains in business.
How can filing Chapter 11 bankruptcy save the company money?
- The court can order that no expensive creditor’s committee be appointed.
- Under reorganization, contracts and debts can be revised and reworked.
- Litigation costs can be reduced.
What are possible negatives with Chapter 11 bankruptcy filing?
- There may be additional reporting and filing required by the courts for some small businesses.
- Some small businesses may have a plan deadline that larger small businesses do not have to submit.
- There may be greater oversight by the U.S. Trustee’s office for some businesses.
- If the company owes more than assets held, company ownership may pass along to creditors.
What other relief might be offered to small business owners with Chapter 11 bankruptcy?
- The court may allow the small business to have a longer time to propose a plan and thus save their business from takeover by creditor’s plans.
- The court may waive the necessary disclosure statement and thus save legal preparation costs.
The major advantage to a small company in filing Chapter 11 bankruptcy is that the owners/debtors or appointed trustees remain in control of the company, subject to court oversight. The company remains operational and can become profitable while debts may be reduced or renegotiated which can allow creditors to be satisfied. Small business owners in the Detroit and southeast area of Michigan should consult with a bankruptcy attorney if they are struggling with debt issues.