Recognizing that small businesses in particular were having difficulty coping with the lengthy time frames and significant costs of a typical Chapter 11 case, the framers of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the most recent version of bankruptcy law) introduced several special provisions for small businesses under the Bankruptcy Code. The intent behind these provisions was to help make the Chapter 11 process at least slightly easier and less expensive for small companies that would otherwise be forced to liquidate and shut down operations completely.
Under the Bankruptcy Code, a small business debtor is a sole proprietor, corporation, or partnership engaged in commercial or business activities (other than ownership or operation of real property; different rules apply in that case).
Additionally, to qualify as a small business debtor, the total debts of the business -- including noncontingent, liquidated, secured, and unsecured debt, but excluding obligations owed to insiders or affiliates -- must be no more than $2,490,925 (note that this amount is adjusted every three years, with the next adjustment date occurring on April 1, 2016).
Furthermore, a small business debtor must not have an active creditors’ committee (in larger bankruptcy cases, such a committee is typically appointed by the US trustee to oversee the debtor’s bankruptcy proceedings).
Special Chapter 11 Provisions for Small Businesses
Small companies still have to follow many of the same rules and meet many of the same requirements as larger debtors under Chapter 11. However, a number of special provisions do apply in situations that qualify as small business cases.
No creditors’ committee
As mentioned above, not having a creditors’ committee is not only a special provision, but also a requirement for small business debtors. This can have the effect of helping to reduce some of the costs of a Chapter 11 reorganization, as creditors’ committees typically retain attorneys and other professionals to help oversee the case, and those professional fees are paid from the debtor’s estate.
Additional US trustee oversight
To compensate for the lack of a creditors’ committee, small business Chapter 11 cases are subject to more oversight by the US trustee than standard Chapter 11 cases. Small business debtors are required to attend an initial interview with the US trustee early in the process, during which the US trustee evaluates the debtor’s viability, ascertains the feasibility of the debtor’s business plan, and outlines the debtor’s obligations under Chapter 11. As the case proceeds, the US trustee will carefully monitor the small business debtor’s activities in order to be able to identify potential problems with the reorganization as soon as possible.
Additional filing and reporting duties
To assist with the US trustee’s closer oversight of small business Chapter 11 cases, small business debtors must fulfill some additional filing and reporting requirements that do not apply to larger debtors. For example, when small business debtors file for Chapter 11, they must attach their most recent balance sheet, cash flow statement, statement of operations, and federal tax return to their bankruptcy petition. They must also submit detailed financial reports, including income and outflow, throughout the bankruptcy process (usually on a monthly basis).
No disclosure statement
In a standard Chapter 11 case, the debtor must provide a disclosure statement to the bankruptcy court and to its creditors with extensive information about the debtor’s current financial affairs and the proposed plan for reorganizing its operations. Disclosure statements are not only expensive and time-consuming to prepare, but because they must be approved by the court before the reorganization plan can be confirmed, they can lead to prolonged legal battles between creditors, other parties, and the debtor. In small business cases, however, the court can waive the disclosure statement requirement.
A longer exclusive period to propose a reorganization plan
Under Chapter 11 rules, the debtor is not the only one who can propose a plan of reorganization for their business; after a set time, creditors can also make propositions of their own if they don’t accept the debtor’s plan. After filing for bankruptcy, a small business debtor has a larger window of exclusivity to propose a plan before others can -- 180 days as opposed to the 120 days available to debtors in larger Chapter 11 cases. This helps reduce the small business debtor’s risk of having to litigate competing plans, and therefore helps to move the case along more quickly.