SMALL BUSINESS BANKRUPTCY REORGANIZATION

Small businesses require special accommodation for their bankruptcy proceedings. Chapter 7 is not designed for small businesses that wish to retain control of operations, and chapter 11 is often too expensive in payback structure. Effective February 23, 2020, there is a middle ground between the two. The Small Business Reorganization Act (SBRA) streamlines the process of declaring bankruptcy for small businesses.

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Chapter 7: This is a "liquidation" bankruptcy for businesses that are no longer viable. You will be required to sell all of your business assets to pay creditors and close the business. In return, you will be debt free. Chapter 11: This is a "reorganization" bankruptcy where you can force creditors to negotiate payment plans while the business stays open. This lets you repay most of your secured debts while continuing to run the business. Some of your unsecured debt may be discharged. Both types of bankruptcy offer an automatic stay to protect you from creditors. This is often the biggest benefit of filing for bankruptcy. The automatic stay keeps creditors from collecting and will stop most court actions against you.

Chapter 11 bankruptcy gives businesses the chance to restructure and reorganize their debt over three and five years while continuing to operate. However, a Chapter 11 filing is often too complex and expensive for many small business owners. Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code in 2019 to make reorganization bankruptcies more accessible to small businesses. The subchapter went into effect in 2020. It gives small businesses that are earning a profit but having trouble paying their obligations, a simplified process for paying down their debt. Businesses that file under Subchapter 5 can force creditors to accept court-approved repayment plans of three to five years. They can also use the plan to shed some of their unsecured debt. Unsecured debt is debt for which you have offered no collateral, like most credit card debt. A mortgage or a car loan are secured debts because the creditor can seize your house or car if you don't pay.