Many bankruptcy law firms don’t offer clients Chapter 11 options because Chapter 11 cases are complicated. But in this economic climate, it’s very important for small businesses to understand their options. Epiq Bankruptcy, a company that tracks bankruptcy filing data, reported that Subchapter V Chapter 11 cases increased 81% from April 2022 to April 2023.
While Chapter 11 and Chapter 13 bankruptcies are both reorganization type bankruptcies, Chapter 11 cases are more difficult. Chapter 13 is only for individuals and married couples, whereas Chapter 11 can be for them, but also for corporations, limited liability companies and other entities. Chapter 13 reorganization plans are relatively easy to get approved by the Bankruptcy Court, but Chapter 11 reorganization plans must be voted on by creditors. The reorganization plan has to meet certain guidelines to be approved. Consequently, Chapter 11 attorney fees are higher than those in Chapter 13, but there are several situations where it makes sense to file for Chapter 11. For example, cases filed under Subchapter V of Chapter 11 enjoy more streamlined procedures than a normal Chapter 11 case because Subchapter V is designed specifically for small business.
1. Businesses with less than $7.5 million in debts.
A small business with less than $7.5 million in debts needs to be reorganized. The operators of the business wish to save the business and continue operating it or liquidate it in an orderly fashion. The $7.5 million number comes from the threshold to fall under Subchapter V, a leaner and more efficient version of Chapter 11 specifically for small businesses. Individuals who are engaged in business can also file Chapter 11.
2. When a Chapter 13 Bankruptcy is not a good fit.
A high-income individual with a thorny case that doesn’t fit the neat package of Chapter 13. Chapter 13 is a powerful reorganization tool for individuals with debts (of $2.75 million or less), but the Chapter 13 trustees take a commission of around 8% on plan payments made. Chapter 13 plan payments can be very large, especially if they include ongoing mortgage payments, paying off car loans, tax debts and sometimes all or part of unsecured debts. The Chapter 13 Trustee’s fees add 8% to those payments, so in a Chapter 13 case with a large monthly payment, those fees are substantial. Complicated Chapter 13 cases can take months to gain the Trustee’s approval so they can be confirmed by the Court itself, and those plan payments begin 30 days after the Chapter 13 case is filed. In Chapter 11, our clients don’t have to make plan payments within 30 days (as long as creditors are adequately protected) and can use the services of a Subchapter V trustee to try to get a plan unanimously approved by creditors.
3. Small businesses who don’t want Subchapter V or with more than $7.5 million in debt
Most small businesses don’t have more than $7.5 million in debt – at that point, even though it’s not a Fortune 500 company, the business still falls out of Subchapter V eligibility. But a business can still reorganize under Chapter 11, just under the “traditional” route. Debtors who meet the definition of “small business debtors” can still file Chapter 11 with some level of reduced complexity, albeit without the benefits of Subchapter V.
Chapter 11 is not a one size fits all solution. It is costly and comes with risks. Any business contemplating a reorganization under Chapter 11 should be carefully evaluated to see if it has a good chance of survival through the process. But, it can be a very effective tool to help save businesses from unsustainable debt management.
For more information on Chapter 11 in Kansas or Western Missouri, visit our website at www.kansascitybankruptcy.com or call for a free consultation with one of our experience bankruptcy attorneys. At W M LAW, we are “Here to Help”.