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How does Chapter 11 work for small businesses?-Part I

As many Texas business owners might be aware, Chapter 11 bankruptcy, or debt reorganization, is a debt relief option that many commercial entities select when those entities are unable to sustain business profitability and cannot cope with the burden of overwhelming debt. Typically, in the event of a Chapter 11 filing, the United States case trustee appoints a creditors' committee. The committee is usually composed of the seven largest creditors, and it plays an important role in facilitating the debt reorganization process.

According to the Bankruptcy Code, some Chapter 11 filings, which do not have a creditors' committee, are considered "small business cases," provided that the "small-business debtor" passes two tests. First, the debtor must be engaged in business activities and the business's total non-contingent secured and unsecured debt must be a maximum of $2,490,925. Second, the trustee must have been unable to appoint a creditors' committee or the bankruptcy court must have decided that the committee was not sufficiently active.

After the Chapter 11 filing is identified as a small business case, the debtor will be required to submit a petition containing documents like the latest balance sheet, the statement of operations, the statement of cash flow and the latest tax return. If a small business is unable to provide any of those documents, a senior representative of that business must provide a statement under oath, which explains the absence of the documents. Also, the small-business debtor must regularly inform the court regarding business profitability, projected income and expenses, payment of taxes and the filing of returns and compliance with Chapter 11 provisions.

When it comes to small business cases, the rest of the Chapter 11 bankruptcy process is also slightly different. Those provisions will be discussed in the next blog post. That post will address some more queries that many business owners may have about Chapter 11 bankruptcy. However, if the business owners need further clarification, they may wish to consider speaking with a bankruptcy attorney.

Source: United States Courts, "Chapter 11 - Bankruptcy Basics," Accessed on Aug. 19, 2015

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