The economic bloodbath has taken its toll on small businesses. However, the clouds are clearing and it does seem that some kind of recovery is underway. However, the dust is yet to settle down completely and there are still many small businesses that are on the verge of tipping over.
Small business bankruptcy filings are governed by Chapter 7 and Chapter 11 of bankruptcy laws. Bankruptcy Chapter 7 spells liquidation – the small business has to first file for bankruptcy with the relevant court (that has jurisdiction), and submit the following statements:
- The voluntary petition
- Corporate resolution or the partnership authorization
- Statement of financial affairs
- Attorney’s disclosure statement
- Other schedules as required by the court (including tax records)
- Statement of intent (for secured debts)
- Master list of creditors
- Social Security Number
- Declarations as required by the court
Once these statements are filed and the case is admitted, the court appoints a case trustee who proceeds to determine the company’s non-exempt assets. The case trustee then sells these assets and divides the receipts amongst the creditors. Debts like tax dues, employee benefits, alimony, etc. are priority debts and must be repaid first. Then it’s the turn of the secured debts, partially secured debts and the unsecured debts — in order of their priority. If there’s any money left over after repaying all debts, it goes to the business owner/s. After the Chapter 7 bankruptcy process is complete, the business ceases to exist.
Chapter 11 bankruptcy helps a business reorganize its affairs. It typically grants a business more time to repay its dues. Small business bankruptcy filings under Chapter 11 require the company to first file for bankruptcy with the relevant court and submit a set of documents, which are similar to the documents mentioned above. The business also has to furnish a list of its 20 largest unsecured creditors with amounts due. The business should also submit a reorganization plan that clearly specifies how it will repay all its creditors over the desired time period.
The business owner has to act as a case trustee in a Chapter 11 bankruptcy. The court may appoint an independent case trustee if in certain cases (if it suspects any mal-intentions). A committee of creditors is formed and majority of the creditors (representing 75% of the total amount due) have to agree with the reorganization plan. Once the reorganization plan is approved, the small business must execute it to perfection. Any deviation or default will nullify the Chapter 11 bankruptcy process. Once the plan is executed, the business becomes debt-free and can make a fresh start all over again.
This is what is involved in small business bankruptcy filings. Business bankruptcy is a complicated process and it’s best to seek legal help in the early stages.
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