Is Chapter 11 good for small businesses?

Massachusetts businesses that struggle with financial problems may look to a Chapter 11 bankruptcy for help. Now, a new bill proposes changes that gives small businesses more options beyond the traditional Chapter 11 plan.

Many companies in Massachusetts that find themselves facing serious financial challenges are small businesses that may feel they have limited options for addressing these challenges. Currently, a Chapter 11 bankruptcy is commonly used by businesses but it does not always sufficiently serve the needs of small businesses.

The high cost and complicated steps involved sometimes end up sending owners into Chapter 7 bankruptcies or other agreements that result in the liquidation of all assets and the closing of companies.

Bloomberg Law reported at the end of last year that a new bill was proposed in Congress that may bring some relief and new hope to small business owners.

How Chapter 11 works

As explained by the U.S. Courts, a Chapter 11 bankruptcy may be used by sole proprietorships, partnerships or corporations. This type of bankruptcy is akin to a Chapter 13 plan in that it reorganizes debt into a form of debt consolidation for repayment.

Creditors must be involved in the process of approving a proposed reorganization plan. If any creditor does not approve the plan, it may be denied. Companies seeking Chapter 11 relief may request help from a judge to require creditors to accept a plan but this is not guaranteed to succeed. This action is called a "cram down".

If a plan is approved, payments are made over a period of time that does not have a stipulated minimum or maximum. The average time that a Chapter 11 spans ranges from six months to 24 months.

Proposed Subchapter V of the Bankruptcy Code

Currently, a company seeking Chapter 11 must provide a disclosure statement and other supporting documentation along the road to receiving this type of help. The onus placed on struggling businesses can cost them an extensive amount of time and money, preventing some from ever being able to get help through a Chapter 11. If they cannot get this help, they often end up losing their businesses altogether.

Senate Bill 3689 and House Bill 7190 propose to create Subchapter V of the bankruptcy code specifically for small businesses who might otherwise try to seek Chapter 11 relief. The objective of the bill is to help more companies remain in business by making some form of bankruptcy more readily available to them.

The new option would lessen the documentation requirements and costs involved as well as put a standing trustee in place to provide more oversight of cases.

Legal counsel for financially burdened businesses

Massachusetts company owners who want to learn more about their options for debt relief and for keeping their companies afloat should work with attorneys experienced in this area of law, especially in light of potentially changing rules.