How To File a Chapter 11 Bankruptcy as a Small Business Owner

Chapter 11 of the U.S. bankruptcy code permits sole proprietorships, partnerships and corporations to restructure their debt and modify the terms of both their unsecured and secured financial obligations. How to file a bankruptcy as a small business owner depends on the financial situation of the company and whether they wish to liquidate their assets and discharge debts.

An Overview of Chapter 11 Bankruptcy

When a business owner files for Chapter 11 protection, they are allowed to remain in control of their company while formulating a plan to repay their creditors. Federal law views the owner as a “debtor in possession” which allows them to act as their own Trustee. They can hire professionals, such as accountants, attorneys and appraisers to assist them in administering the estate while the bankruptcy court oversees all of these dealings. In most Chapter 11 cases, a creditors’ committee is convened which may not be necessary for small business owners. In many situations, the Federal Bankruptcy Court will appoint a U.S. Trustee to examine the particulars of the case. When this occurs, the owner must attend an initial interview with the Trustee who will evaluate the viability of the company and determine if a Chapter 7 liquidation proceeding would be a better solution.

Process of Chapter 11 for the Small Business Owner

Once the debtor files their bankruptcy petition, the Federal Court issues an automatic stay, which immediately stops all collection efforts by creditors and any foreclosure proceedings on the horizon. This gives the owner a temporary relief while they are developing a plan to renegotiate more favorable terms with their creditors. The owner must be prepared to furnish the following documents when they file their bankruptcy petition:

• The business owner’s most recent balance sheet showing monies coming into the company and being paid out to the creditors
• Their statement of operations and a listing of the senior management
• The list of creditors who hold the 20 largest unsecured claims
• Copies of the most recent federal income tax returns

The debtor has 120 days in which to formulate their reorganization plan and submit it for the court’s approval. If the plan is confirmed, the court may discharge all debts that existed prior to the plan. The primary goal of Chapter 11 is to get relief from financial obligations while attempting to get the company back to a profitable position.

Why You Need Advice From a Legal Expert

Most small business owners may not be aware that filing Chapter 11 is an expensive and lengthy process. They must devote considerable time in preparing schedules, filing monthly financial reports and meeting with the U.S. Trustee assigned to the case.