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Small business reorganization under Chapter 11 bankruptcy

Small businesses form the backbone of the Massachusetts economy and inspire many an American dream. However, very few ideas or businesses succeed from day one. Sometimes, debt relief under Chapter 11 bankruptcy is a necessary bridge to greater success.

Chapter 11, commonly known as "reorganization" bankruptcy, is most commonly used to reorganize a corporation, partnership or sole proprietorship. Filings may begin either voluntarily by a debtor or, in certain circumstances, involuntarily by his or her creditors. The filing must include detailed financial information about the debtor's assets and liabilities, income and expenditures, contracts and leases, and a statement of financial affairs. The debtor must also show proof he or she received credit counseling from an approved agency within six months of filing for bankruptcy.

Immediately after filing for Chapter 11, the debtor assumes the title "debtor in possession." This status means the filer keeps possession and control of business's assets during reorganization and exercises many of the functions of a trustee, including accounting for property, examining claims and filing reports. This status lasts until the court approves the reorganization plan, dismisses the case, converts it into Chapter 7 bankruptcy or appoints a Chapter 11 trustee.

Under certain circumstances, the court will designate a Chapter 11 filing as a "small business case." This designation is available for businesses with debts of less than approximately $2.4 million and that meet other requirements. The advantage of small business cases is they normally proceed more quickly than other Chapter 11 cases. For example, an early stage of proceedings known as the "exclusivity period" may last up to 480 days for small business cases, whereas in other cases this stage may last up to 24 months.

One of the disadvantages of small business cases is additional oversight. For example, the trustee will interview the debtor, evaluate his or her business plan and monitor business operations. The debtor must also make ongoing filings with the court regarding profitability, cash flow, compliance with bankruptcy rules and payment of taxes. Many small business filers hire an experienced bankruptcy lawyer to help them with this process.

Although the burdens may be greater in small business cases, the main benefit - quicker reorganization - means the debtor gets back on his or her feet earlier. That's good news for everyone.

Source: US Courts, Reorganization Under the Bankruptcy Code, accessed on March 9, 2015.

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