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What Does the Small Business Restructuring Act Mean for My Business? Is Chapter 11 Still the Right Choice?

 

If your small business has faced serious challenges in 2020, you’re certainly not alone. Polling data collected by the United States Chamber of Commerce indicates that over 40% of the 30 million small businesses in the U.S. may need to close their doors in the coming months. According to Amanda Ballantyne, executive director of Main Street Alliance, the pandemic represents “a crisis that will impact our economy for generations.” (Read more here, via Fortune.) As such, many small business owners are faced with the prospect of filing Chapter 11 bankruptcy.

In case you’re not familiar, Chapter 11 bankruptcy involves a process in which the debtor’s business assets and debts are “reorganized.” This reorganization gives the debtor the opportunity to restructure and settle their debt. However, this process can become quite complicated. This is why it is typically only large corporations that file Chapter 11 bankruptcy. The process of collecting and managing all of the required information takes quite a bit of work. According to Fortune magazine, “The original Chapter 11 is more ‘intended for railroads and big business and airlines and Sears.’” That quote comes from Andrew Houston, “a partner focused on bankruptcy at Moon Wright & Houston, based in North Carolina,” according to Fortune.

Furthermore, filing Chapter 11 bankruptcy as a sole proprietorship / LLC involves serious risks for your personal assets. According to the US Courts website, “a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors.” In other words, depending on the financial state of your small business, filing for Chapter 11 bankruptcy could put your house (or other valuable personal assets) at risk of foreclosure.

Thankfully, new developments in bankruptcy law allow small business owners to avoid or mitigate some of these serious risks while still settling their business debts. Passed in August 2019, the Small Business Reorganization Act makes it cheaper, faster and less risky for a small business to file Chapter 11 bankruptcy. How? First of all, it allows for the appointment of a trustee to manage the process on behalf of the business owner. Next, it eliminates many of the costs and requirements involved in the reorganization process. But perhaps most importantly, the act “now allows a small business debtor to modify a mortgage secured by a residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the debtor’s small business.” (Read more here, via Bradley.)

These new provisions apply to any small business with about $2.7 million or less in total debt. Of course, simply because it’s now easier for your small business to reorganize your debt does not necessarily mean it’s the best choice. As experts in business law, including business termination, we’d be more than happy to speak with you about your situation. Contact our offices today to get started!

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