A last resort option can give you the breathing room you need to get a fresh start.

Bankruptcy is intended to give an honest debtor a fresh start, and, if a small business that files for bankruptcy can successfully meet the requirements of the bankruptcy code, it can obtain a discharge, which relieves the small business of having to pay most of its obligations, and operate without debt. Specifically, a chapter 11 bankruptcy allows a struggling business owner or individual, through a court-supervised process, to obtain temporary relief from collection activities through the automatic stay — which prevents any creditor from engaging in any collection activities, — restructure its debts (i.e. reduce interest rate, monthly payments, etc.), reject (or cancel) executory contracts (such as leases) and limit liability for breaching them, and discharge other obligations. Although filing bankruptcy is an option of last resort, and given the challenges of the Corona Virus is an option of last resort, it is an effective means to preserve the value and assets of your business, and can be used to gain leverage.

In 2019, Congress enacted the Small Business Reorganization Act to protect small businesses, the “backbone of the American economy,” because “[b]y their very nature . . . the longevity of theses business is limited, . . . and by the ten-year mark only one-third survive,” and notwithstanding the high failure rate, small business debtors are “the least likely to reorganize successfully” and survive the bankruptcy process. In recognition of the challenges that most small businesses will face, Congress amended the Small Business Reorganization Act to permit businesses with an aggregate debt of up to $7,500,000 to file bankruptcy under the new act. The Small Business Reorganization Act has several advantages, and increases the likelihood for a small business owner to obtain a discharge based on the following advantages:

Streamlined Process

In a Chapter 11 Bankruptcy, a business has the ability to pay its unsecured creditors pennies on the dollar and effectively refinance its secured debt, by submitting a plan to the court, which sets forth amounts to be paid to creditors during a three- to five-year period. Under the Small Business Reorganization act, creditors do not have to agree to the terms of the plan, and plans can only be submitted by small business owners.

Elimination of the Absolute Priority Rule

In a typical Chapter 11, a business must pay unsecured creditors in full, if the business owners wish to retain their equity interests. However, now, a business owner can keep their ownership interest without having to pay unsecured creditors (credit card debt holders, etc.). A small business owner will only need to contribute all of the business’ disposable income, or net profit, to pay creditors, to obtain a discharge.

The Automatic Appointment of a Trustee

The Small Business Act mandates that a trustee be appointed to supervise ...

Start now by downloading our FREE ebook to continue reading this article and learn what you need to know about small business bankruptcy, how it can help, and if it's right for you and your business.