Most small businesses have two choices in bankruptcy- shut down and liquidate (Chapter 7) or reorganize under Chapter 11. Congress has given small business debtors an easier path through Chapter 11, effective in February 2019. Here are some highlights:
- A plan can be confirmed over the objections of creditors without having to put up new money to “buy back” the business assets, as was previously required. This gives the business owner a lot more leverage.
- A mortgage on residential real estate can be “crammed down” to an amount equal to the equity that lender would have seen in a sale, provided the loan was primarily used for the business and not to purchase the residence. Most business lenders require a mortgage, and this gives relief in many cases.
- No creditors committee will be appointed unless the court orders otherwise for cause. However, a trustee will be appointed to assist and supervise the process.
- Only the debtor is allowed to file a plan, but it must be filed within 90 days unless the court grants an extension (which will require a showing that additional time is needed for circumstances beyond the debtor’s control.
- An individual can qualify as a small business engaged in a commercial or business activity other than ownership of a single real estate asset, so long as total liquidated noncontingent debt is $2,725,625 or less and at least half of that debt arose from the business or commercial activities.