Filing for Chapter 11 Bankruptcy can be very helpful to businesses, especially small ones. All kinds of businesses file for Chapter 11 Bankruptcy, ranging from large corporations to small family-owned ones. The law, however, makes special allowances for small businesses when they file for Chapter 11 Bankruptcy. In the case of a small business debtor, the law aims to give the debtor as much advantage as possible and the opportunity to reduce expenses.
Small Business Debtor
In order for a business to fall under the small business category, it must conform to the requisites set forth by law. The requirements are as follows:
- Be engaged in business or other commercial activities
- The total amount of debts owed by the business must not exceed $2,725,625.
The definition of a small business does not really rest on the type of business. A corporation can be considered a small business if the above-mentioned requirements are met. On the other hand, a sole proprietorship may not qualify as a small business if it does not meet the requirements, especially the debt ceiling.
If the filing was a voluntary petition, meaning that it was the debtor who filed the bankruptcy case in court, then the debtor must also state in the petition whether or not the debtor is a small business debtor. Alternatively, if the petition was filed involuntarily, meaning that the creditors filed it, then there is no need for the creditors to state on the petition whether or not the debtor is a small business debtor. The debtor, however, may file a statement with the court within 14 days from the entry of the order for relief, as to whether it is a small business debtor.
So, what are the special features in a small business debtor bankruptcy case?
In a regular Chapter 11 Bankruptcy case, the court usually appoints a creditor’s committee. The purpose of this committee is to consult with the debtor regarding the plan, as well as to monitor the debtor’s conduct of the business. A creditor’s committee is given a wide array of powers, including the power to hire personnel deemed necessary for the bankruptcy proceedings. A debtor can incur large expenses with the presence of a creditor committee, as the debtor is required to pay for the personnel hired by the committee. In a small business bankruptcy case, the appointment of a creditor committee is optional; most of the time, the court will not even appoint one. This way, the debtor gets to save on costs.
Monitoring by the US Trustee
During the pendency of proceedings, a US Trustee is appointed to help monitor and supervise the case. The role of a US trustee in a regular bankruptcy case is mostly limited to supervision and ensuring compliance. In a small business debtor’s case, however, the US Trustee’s role is expanded. For example, the US Trustee is required to hold the so-called initial debtor interview. During this interview, the US will perform the following:
- Investigate the debtor’s viability
- Inquire about the debtor’s small business plan
- Explain the debtor’s obligations to file monthly operating reports and other required reports
- Attempt to develop an agreed scheduling order
- Inform the debtor of other obligations.
At this point, it might also be helpful to note that a US trustee is different from a case trustee. When a case trustee is appointed, the debtor loses possession of the assets and becomes a debtor out of possession.
The small business debtor is given a deadline of 300 days to file the plan, unlike in a regular case where there is no deadline. Furthermore, the debtor’s exclusive period to file a plan is longer in a small business bankruptcy case – 180 days as opposed to the usual 120 days.