Although filing Chapter 11 bankruptcy is a positive move that allows floundering companies to reorganize and get back on their feet, it is also a complex move that can be expensive to get through. Some struggling small businesses may not have the resources to get through the process to the other side.
According to the American Bar Association, to help the companies that fall into this category, Congress passed the Small Business Reorganization Act.
Some of the costliness of the Chapter 11 filing is due to the monthly reporting requirements. These in-depth reports generally require a company to hire a CPA. The committee of creditors is another source of expense in Chapter 11 because this committee hires professionals, but the filer pays the professionals’ fees. Under the SBRA, the filer may avoid the reporting requirements and the committee requirements.
The disclosure statement that the small business must file in a Chapter 11 case informs the creditors of the debtor’s reorganization plan. The creditors can file alternate plans after the end of the exclusivity period. The SBRA allows the debtor to skip the disclosure statement and just file a reorganization plan. This eliminates the potential for contested hearings that draw out the process and can result in changes to the plan, which also reduces the cost of this portion of the process.
The courts confirm plans under the SBRA more easily than under Chapter 11. The debtors are even able to retain ownership interest in the company as long as the plan is fair. Creditors may still object, but they are less likely to be able to prevent the court from confirming the debtor’s plan if it indicates that the debtor will use all of the company’s projected disposable income to make payments for the duration of the plan.
Whether a small business is eligible for SBRA or Chapter 11 filing depends on its current liability limit and statutory debt limit.