Chapter 11 is a form of bankruptcy, in which the Debtor proposes a plan, which is then voted on by the creditors. It is typically used by businesses, although it can also be used by individuals. Some well-known examples of Chapter 11 Bankruptcy Cases include the General Motors Case, Exxon, and the rapper, Fifty Cent.
Small Businesses in financial trouble can also use Chapter 11. The most important benefit is that it provides protection from creditors, while the individual develops a plan to pay them back.
Although it is more expensive and cumbersome than Chapter 13, Chapter 11 is an option for a small business seeking to restructure and continue in operation. This is particularly useful for a business that is not eligible for Chapter 13, either because it is a partnership, limited liability company, or corporation (only individuals can file Chapter 13). Chapter 11 is also used for individual business debtors who want to reorganize but have debts that are too large for them to be eligible for Chapter 13.
Under Chapter 11, a small business proposes a plan of reorganization, which can reduce obligations and modify payment terms. At times a plan could propose to downsize the business, by selling some of all of its assets.
Small Business Debtors in Chapter 11 Cases
There are some special provisions for small business debtors, which can speed up the Chapter 11 process, and reduce its costs.
In most Chapter 11 cases, a committee is appointed to represent the interests of unsecured creditors. The debtor may have to pay the legal fees and other expenses of the creditors’ committee. In a small business case, the bankruptcy court can order that no creditors’ committee be appointed.
Small businesses are subject to additional oversight by the United States Trustee’s office.
In small business cases, the debtor has 300 days to propose a Chapter 11 plan (which can be extended by the bankruptcy court). For the first 180 days, only the debtor may propose a plan.
The Plan in a small business case can use a simplified form, which helps to reduce the legal and other costs.
The court can extend the 300-day deadline, but only if the debtor proves that it will be able to obtain approval of a plan within a reasonable period of time.