Chapter 11 Bankruptcy for Small Businesses

The small business bankruptcy attorneys at Dennery law understand that operating a small business poses financial challenges that in some cases warrant reorganizing under chapter 11 of bankruptcy code. A cash flow crisis will impact an operator’s ability to maintain inventory, motivate key employees or market your goods or services. Razor-thin margins quickly turn into operating losses unless debts and current liabilities are reorganized. Add to that the breach of a key contract, tax levies or seizures, or the suspension of crucial operating license, and the resources that you depend on to build your brand and services are now completely depleted.

A Chapter 11 small business bankruptcy gives you the time and the flexibility to recover from a downturn in sales, an interruption in business, or a cash flow crisis. Filing a small business chapter 11 is the right decision where the ownership has the ability to turn around by reorganizing business debts, tweaking revenue models, and adjusting operational expenses. Chapter 11 also provides a mechanism to sell a small business as a going concern, free and clear of certain liabilities, which allows for a maximum recovery to the creditors thereby reducing any personal liability of the individual owners. 

The Small Business Bankruptcy Attorneys at Dennery Law are available for remote or telephone
consultations. In-person appointments are available on weekdays, evenings, and weekends in
Lexington, Louisville, and Northern Kentucky.

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What is a Chapter 11 Bankruptcy?

Corporations, sole proprietors, limited liability companies, trusts, or partnerships may file for a Chapter 11 small business bankruptcy. Under Chapter 11,  the business owners are appointed as the debtor-in-possession and given the authority to operate and manage the business and to propose a plan of reorganization. A Chapter 11 plan of reorganization addresses how the company will reduce, reorganize, and repay debt obligations to creditors, including payables to vendors, arrears on sales taxes, and business lenders. A Chapter 11 plan can also modify the payment obligations to factoring and financing companies, business lenders, or even payments due under equipment leases. Importantly, developing a Chapter 11 plan of reorganization provides the small business owner an opportunity to assess and re-evaluate the company’s corporate structure, identify operational deficiencies, and to explore strategies for business development. Small business owners can use the relief that Chapter 11 provides to launch rebranding campaigns, raise capital or secure commercial financing, or even selling some, all, or substantially all of the business assets as an ongoing concern. 

Chapter 11 Subchapter V

Chapter 11 of the Bankruptcy sets out rules specifically designed for small businesses including those contained in subchapter V.  These special rules streamline the bankruptcy process, simplify the legal work, and in turn reduce the overall costs of filing for Chapter 11. Subchapter V was added to Chapter 11 of the bankruptcy code pursuant to the Small Business Reorganization Act which was passed into law in 2019. Subchapter V makes it easier and less expensive for small business owners to get protection from their business creditors, reorganize and reduce their debt, and emerge from bankruptcy with their equity intact. Starting in February 2020, Small businesses with less than $7.5M in debt were permitted to take advantage of Chapter 11 protection with much less effort and expense than required under the traditional small business Chapter 11.

Benefits of filing a small business case under subchapter V of Chapter 11,  include: 

  • Immediate relief: Stop collection actions, litigation, and tax levies or seizures.
  • Catch up on arrears: Catch up on arrears to taxing agencies, vendors, mortgages, and other business creditors under a repayment plan that works with your operating budget.
  • Increase cash flow: Reduce or eliminate obligations to business creditors. 
  • Reorganize and Grow: Raise capital and implement rebranding and growth campaigns. 
  • Emerge with your equity –Emerge out of bankruptcy after 3 to 5 years with your ownership intact, fewer liabilities, and a much better chance of turning a profit.