Even businesses that are founded on great ideas can fail to be as profitable as their owners intended. While a business owner still believes in his or her idea, the business may fail because of debts to creditors and dwindling assets to cover them. In this situation, a business owner can choose to file for Chapter 11 bankruptcy in order to avoid going out of business.

Filing for Chapter 11 bankruptcy instead of Chapter 13 bankruptcy can in some ways be a strategic decision. For businesses that want to remain in operation after bankruptcy proceedings, filing for Chapter 11 bankruptcy may be the better route. Chapter 11 bankruptcy allows a business to reorganize its debts so that they can be paid without liquidating the business. Under Chapter 13, liquidation is inevitable. When deciding to file under Chapter 11, there are some issues small business owners should keep in mind.

When a business files for Chapter 11 bankruptcy, a committee is formed to ensure that the creditors’ rights are protected. These committees can get expensive, especially since they may be allowed to hire attorneys and other professionals to help with their work. The costs incurred by the committee are usually passed on to the business, adding to its debt. However, a committee is not necessary for a business debtor that is considered a small business.

A business qualifies as a small debtor when two conditions are met:

• The business is engaged in commercial or business activities and owes no more than $2,566,050 to creditors, excluding debts owed to family members.
• The business’s case must be one where a creditors’ committee has not been appointed, or the court has determined the creditors’ committee is insufficiently active to adequately provide oversight of the debtor.

Instead of a committee, a trustee is appointed to undertake some of the same tasks a committee would have if the business was not a small business.

If a business qualifies as a small business, it has to present a plan of reorganization, which basically outlines how the business will repay the creditors. However, there is no deadline or set time period within which the business has to complete repayment, except any periods included in the plan. The trustee and the court have to approve the plan, and therefore, a business cannot present a plan with an unrealistic or unduly long repayment period. If the business debtor fails to file a plan within a certain period of time, and fails to ask for an extension, the creditors may be allowed to file a plan for the debtor to follow.

Filing for Chapter 11 as a small business is also advantageous because the court may waive the requirement that the business present a disclosure statement. This can further reduce the expenses involved with bankruptcy.

Contact Us for Legal Assistance

If you are a small business owner who is going through financial troubles and you are considering filing for bankruptcy, you need to speak with an experienced bankruptcy attorney to discuss the best approach for your business. Our experienced attorneys can discuss the legal issues that will arise in a bankruptcy and how they will affect your business. For more information, call us at Resnick Law, P.C., in Bloomfield Hills and Detroit, Michigan.

(image courtesy of Ian Baldwin)