Small Business Chapter 11 vs. Regular Chapter 11

Introducing Small Business Chapter 11

In response to concerns that Chapter 11 was too burdensome for smaller companies, Congress passed the Small Business Reorganization Act. This legislation, effective February 2020, created a special process under Subchapter V of Chapter 11, exclusively for small business debtors.

To qualify for bankruptcy, a business must be engaged in commercial or business activities and have combined secured and unsecured debts not exceeding a certain threshold (currently adjusted periodically based on inflation). The law was designed to provide a more efficient and affordable reorganization option, allowing small businesses to repay debts while continuing to operate.

Differences Between Regular & Small Business Chapter 11

Let’s take a deeper look at how these two types of Chapter 11 differ and what that means for your business.

1. Eligibility and Filing Requirements

• Small Business Chapter 11: Only businesses primarily owning or operating commercial activities with limited total debt can file under Subchapter V. The filing must include detailed financial affairs, tax returns, and a cash flow statement.
• Regular Chapter 11: Any business, regardless of size or debt, can file. The process starts with submitting a bankruptcy petition, accompanying bankruptcy forms, and disclosures about the debtor’s assets, liabilities, and business operations.

2. Control of the Process

• Small Business Chapter 11: Only the debtor can file a reorganization plan. There’s no competing plan from creditors. The debtor remains in control, which promotes a successful outcome.
• Regular Chapter 11: After the initial 120-day exclusivity period, other parties—including a creditors committee—can propose competing plans. This can complicate the process for the debtor.

3. Speed and Simplicity

• Small Business Chapter 11: The law mandates a faster process. The debtor must file a plan within 90 days, and there’s typically only one confirmation hearing. No disclosure statement is required unless the court finds it necessary.
• Regular Chapter 11: The process is longer and more involved. A separate disclosure statement, which outlines the debtor’s viability and financial future, is required before a plan can be confirmed.

4. Creditors’ Committees and Voting

• Small Business Chapter 11: No creditors committee is appointed unless ordered by the court. This helps simplify proceedings and reduce costs.
• Regular Chapter 11: A creditors committee representing unsecured creditors is often appointed. Their input can delay the process and lead to more administrative expenses.

Additionally, under Subchapter V, the debtor can confirm a plan without approval from any class of creditors, including other unsecured creditors, as long as the court finds the plan fair and equitable.

Role of the Bankruptcy Court

Under a regular and small business Chapter 11, the bankruptcy court oversees the entire process. It reviews the bankruptcy filing, makes sure both parties comply with the bankruptcy procedure, and holds confirmation hearings. The court must approve key decisions, such as asset transfers, changes in business operations, and the final bankruptcy plan. Filing fees apply in both versions, but small businesses may benefit from reduced administrative obligations.

Financial Reporting & Oversight

In both versions, the debtor must submit monthly operating reports detailing cash receipts, employee wages, and ordinary course expenses. However, the bankruptcy code requires small business debtors to submit such documents in a more simplified format. These reports provide the court and creditors insight into the debtor’s business and projected cash receipts.

Treatment of Assets & Personal Liability

Under either version of Chapter 11, the debtor’s property becomes part of the bankruptcy estate. For small business owners, especially sole proprietors, this can include personal property and other assets tied to the business. If personal assets are used as collateral for business loans, the distinction between business and personal liability becomes critically important.

That’s why it’s advisable to work with a bankruptcy attorney or restructuring advisor who can help navigate these nuances, especially when considering how to protect exempt property and address obligations like child support or tax debts, which may not be discharged.