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SMALL BUSINESS BANKRUPTCY

Traditional Chapter 11

Chapter 11 reorganization cases can be filed by businesses and individuals and involve the debtor creating a Chapter 11 plan which, if confirmed by the bankruptcy court, becomes a legally binding agreement among the debtor and the creditors as to how the debtor’s debt will be repaid. Chapter 11 cases are more often filed by businesses than individuals and, in either case, determining the advisability and feasibility of filing Chapter 11 involves a complex analysis.

Chapter 11 is often used by individuals whose debts exceed the chapter 13 debt limits and wish to keep properties from foreclosure or “cram down” mortgage balances to their properties are no longer “underwater”.  Chapter 11 is also commonly used to liquidate assets and other property on the debtor’s terms, and in an orderly, timely manner to achieve fair market value (as opposed to fire-sale prices at a foreclosure action). A chapter 11 debtor manages its assets and operates its affairs, much like it did prior to bankruptcy, but with the oversight of the bankruptcy court.

Benefits of chapter 11 include:

  • No bankruptcy trustee; the debtor remains in possession of its assets with the power to sell free and clear of liens;

  • The exclusive right to present its own plan of reorganization for a period of time that, once confirmed, overrides pre-bankruptcy agreements with creditors;

  • The opportunity to “cram down” mortgages on properties other than an individual debtor’s personal residence (limited ability for a small business debtor to modify lien secured by individual debtor’s primary residence);

  • The opportunity to pay unsecured creditors a fraction of what such creditors are owed under a confirmed plan and a discharge for individual debtors.

On the creditor side, we represent secured lenders, trade creditors, unsecured creditors, asset buyers, and litigation creditors who may have a claim against a Chapter 11 debtor. On the debtor side, we handle individual and small business chapter 11 debtors. Our fee arrangements and engagement terms vary depending on the size and nature of the case.

 

Subchapter V: Small Business Chapter 11

On August 23, 2019, Present Trump signed into law the Small Business Reorganization Act that went into effect February 19, 2020. Applicable to certain individuals and small businesses, the new law aims to streamline the Chapter 11 process to be more affordable to debtors and creditors alike, while adding features that have enormous benefit to debtors.

Eligibility:

  • Secured and unsecured debts must not exceed $2,725,625.

  • Individuals or businesses may file.

  • UPDATE: Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law effective March 27, 2020, the eligibility limit has increased to $7,500,000 for at least 1 year.

  • No single asset real estate debtors (only asset is real estate and does not derive income from any other source).

  • At least 50% of debt non-consumer (business) debt.

Case Administration:

  • Debtor may operate its business and retain possession of assets with all powers of a bankruptcy trustee.

  • Only the debtor can file a plan of reorganization (no creditor committee plans).

  • Professionals (debtors’ counsel) are no longer disqualified from representing the debtors in chapter 11 if they hold a claim against debtors of less than $10,000 (hurdle of finding new counsel and generating new retainer is eliminated).

  • US Trustee’s office appoints a trustee akin to chapter 13 trustee, whose role is mostly as disbursing agent for plan payments. May facilitate plan confirmation. Role terminated upon debtor’s substantial consummation of payments under confirmed plan.

  • Debtor need not file and obtain approval of disclosure statement or solicit plan votes.

  • Debtor may confirm a plan over objections of creditors if the debtor has dedicated three to five years of net income towards plan payments to creditors.

Plan features: 

  • No longer need to obtain “impaired accepting” class of creditors (previously source of expensive, time-consuming litigation, and sometimes insurmountable obstacle).

  • Administrative claims need not be paid in full upon plan confirmation (can be paid over time under the plan).

  • Debtor can modify mortgage against primary residence if at least 50% of proceeds used for business purposes.

  • Debtor may cram down liens like traditional chapter 11 bankruptcy.

  • Elimination of absolute priority rule (the rule required individual debtors and owners of small business debtor to pay creditors in full prior to receiving any property under the plan).

  • Individual debtor may obtain discharge upon plan confirmation (as opposed to discharge upon completion of plan payments after confirmation).

 

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