What is a Small Business Chapter 11?

23 Nov What is a Small Business Chapter 11?

A recessionary economy marked by restrictive consumer spending necessarily translates into a cash-flow problem for smaller businesses. Reorganization under Chapter 11 of the Bankruptcy Code could provide the necessary “breathing space,” allowing a small business to get current with its vendors, lower the company’s costs of goods sold, and right-size the business’s balance sheet for continued viability and preservation its “core business.”

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) enacted several changes to several provisions of the bankruptcy code relating to a “small business” bankruptcy case. Overall, it is clear the new provisions provide smaller businesses the direction needed to successfully emerge from Chapter 11, leaving the core business in tact for continued corporate existence.

Often, a business will get stuck in the vicious cycle of “robbing Peter to pay Paul.” It will pay some creditors to the detriment of others, constantly playing “catch up” month after month. Chapter 11 can break the cycle, since the business can propose a plan of reorganization that will pay all creditors equally, fairly, without discrimination, while preserving the core business. Small businesses in Chapter 11 cases can take up to one hundred and eighty days (180) days after a case is commence to formulate and propose a plan of reorganization.

The Code provides a “roadmap” to a successful business reorganization. Bankruptcy Code § 1112(b)(4) provides the Court with guidance as to when a Chapter 11 case should be dismissed, including therein sixteen grounds for dismissal. So long as the case does not run afowl of the §1112 provisions, then the company should be able to show that it is preserving its core business. Certainly, when implementing cost-cutting measures to preserve the “core foundation” of the business, reorganization will occur within a reasonable time, since cost-cutting measures usually result in increased cash flow.

As unemployment rises, the cost of labor decreases. Materials and inventory may also be abundant in any particular industry, lowering the cost of goods sold. Trade creditors, who rely on a business that has decided to avail itself of a Chapter 11 reorganization, have every incentive to ensure the Chapter 11 case will be successful. These factors translate to a leaner “core business” and a return to profitability.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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