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Bankruptcy for Small Businesses

The Bankruptcy Code provides special rules for a business filing as a “small business debtor.” A small business debtor may be an individual operating as a d/b/a or an entity such as a corporation or a limited liability company. Generally, to qualify for the “small business debtor” designation, the debtor must be engaged in commercial or business activities and have total fixed debts of not more than $2,566,050. The “commercial or business activities” may not primarily consist of owning or operating real property, and the debt threshold cannot include debt owed to affiliates or owners of the debtor.

On the bankruptcy petition, the debtor checks a box if it qualifies as a small business debtor. It is important to designate a case as a small business case when the case is filed or amend the petition shortly thereafter to avoid losing the ability to be a small business debtor. The most significant difference between small business cases and regular chapter 11 cases is that small business debtors have 180 days to file a plan of reorganization whereas other chapter 11 debtors have 120 days to file a plan. The 180-day period may be extended by filing a motion with the bankruptcy court.

A common challenge to small business debtors at plan confirmation is satisfying the absolute priority rule. The absolute priority rule, in summary, requires that all creditors be paid in full before the debtor’s owners may retain their equity interests. Often times, there is insufficient cash flow for a small business debtor to pay its unsecured creditors in full. When this is the case, debtors are allowed to use the “new value” exception to circumvent the absolute priority rule. This rule provides that the equity holders infuse new value in the form of cash or other valuable consideration in order to retain their interests in the debtor. Generally new value is given in the form of cash or cash equivalents, but courts differ on what types of consideration are sufficient to establish the new value exception to the absolute priority rule.

Authors

Allen M. DeBard

Author

Allen has a broad background in financial restructuring and creditors’ rights matters. Some of his representative matters include serving as counsel to lenders, official creditors’ committees, ...

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