Changes to Chapter 11 provide small business bankruptcy options

On Behalf of | Oct 7, 2021 | Chapter 11 Bankruptcy |

When small businesses in North Carolina face hard times, they may consider filing for bankruptcy. According to the U.S. Chamber of Commerce, up to 43% of small businesses may face difficult enough challenges that force them to close. Larger corporations facing economic difficulties have often opted for Chapter 11 bankruptcy, which allows them to restructure, negotiate their debts and emerge from bankruptcy in better fiscal health. Some of the country’s largest businesses have gone through at least one period of bankruptcy.

New hope for smaller businesses in Chapter 11 expansion

However, in the past, this kind of bankruptcy reorganization was particularly difficult for smaller enterprises. Chapter 11 reorganization bankruptcy was primarily written for large corporations rather than small businesses, and the traditional process can be lengthy and expensive, beyond the reach of many small businesses. The Bankruptcy Code was amended in February 2020, however, and the additions made to Chapter 11 may provide a route to restructuring for many smaller companies facing hard times. Subchapter V of Chapter 11 is intended for companies with less than $2.7 million in debt. In addition, through 2022, the threshold to qualify has been raised to $7.5 million under the CARES Act.

Is bankruptcy the right choice?

Business owners still have much to consider in determining whether bankruptcy is the right option. If a business is facing overwhelming debt, or one part of the business is much more profitable than another, restructuring bankruptcy may provide a route out. It cannot be used to solve problems like a lack of income overall or little customer interest in the product or services being offered.

Companies considering filing for bankruptcy will be expected to develop a business plan for paying back creditors and restructuring the company towards profitability. Owners may want to consider how they will generate sufficient income and create a clear plan that the bankruptcy court can take into account when reviewing the bankruptcy petition.