Small businesses experiencing financial problems traditionally seek debt relief through a Chapter 11 bankruptcy. As noted by the United States Courts, the process requires business owners to submit a reorganization plan and disclosure statement.
A reorganization plan includes a business’s secured and unsecured debts. A written disclosure statement must explain how a debtor intends to treat each class of debt. Creditors may review these documents and cast a vote to approve of or object to a restructuring plan.
Debtors may reorganize through Chapter 11 bankruptcy
A reorganization plan may include modified contracts and a payment schedule that could last up to five years. Based on future business earnings and the total amount of an owner’s disposable income, certain creditors may receive payments during the proposed timeframe.
The debtor may continue to hold secured property and obtain financing as long as the business can remain in operation while reorganizing. In the event that a business liquidates, lenders of a debtor in possession may have priority over other creditors.
Creditors may risk a loss when debtors file under Subchapter 5
Congress created the Small Business Reorganization Act of the U.S. Bankruptcy Code in 2019 to reduce expenses for debtors owing less than $2,725,625. Also referred to as a Subchapter 5 bankruptcy, the procedure requires a small business debtor to submit a reorganization plan.
Unlike Chapter 11, however, creditors do not vote to approve a debtor’s restructuring proposal. As explained by the American Bar Association, the court may confirm a debtor’s repayment plan if it includes all of the projected disposable income.
Small business debtors must create a plan of reorganization to repay creditors during a bankruptcy. If creditors vote to reject the plan, the debtor may need to revise its terms. Under Subchapter 5, however, the court may approve of a debtor’s restructuring plan contrary to an unsecured creditor’s objection.
