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  • Writer's pictureWandro, Kanne, & Lalor, PC

The Bankruptcy Code Offers New Options for Small Businesses Seeking to Restructure Debt Obligations

Updated: Apr 3, 2020


We are most certainly in unchartered economic times given the impact that the COVID-19 virus has had, and will continue to have, on small business owners as consumers continue to socially-distant themselves and governments order commercial operations to cease their normal business activities to avoid the spread of the virus. It is likely that the second most-affected segment of our society after those that become afflicted with the corona virus will be small-business owners and their employees. Restaurants, bars, service providers and others will be tasked with dealing with the loss of foot traffic and orders, while still being obligated to make payments to lenders, landlords, suppliers and their employees.



If a business falls behind on its debt obligations due to the economic fallout from COVID-19, what options does a small business owner have under the Bankruptcy Code to reorganize and continue its operations? As of earlier this year, a business that qualifies as a “Small Business” can avail itself to a stream-lined version of a Chapter 11 proceeding designed to lower the expense and difficulty in getting a Chapter 11 plan of reorganization confirmed by the Court.



The traditional or standard Chapter 11 proceeding, which is still available as an option to all companies and individuals, involves numerous issues and obstacles that must be overcome by the company filing for protection, and ultimately provided that all creditors not being paid in full on the effective date of the plan had to accept the plan, or the owners of the business could not retain their ownership rights. In addition the traditional Chapter 11 proceeding has no set deadline for a plan to be filed, requires companies seeking to reorganize or liquidate file a ‘disclosure statement’ with the Court that further delayed proceedings, and provided for the possibility of a creditor filing a plan to liquidate or reorganize the company that filed.

The new Small Business Chapter 11 proceeding, which has only been available since February 19th of this year (2020) eliminates most of the delay that is experienced in the standard Chapter 11 proceedings, and provides a streamlined process for companies seeking to reorganize to get their plans before the Court and confirmed in an expedited fashion. Remember, that in any bankruptcy proceeding or litigation, time equals money spent on professionals involved in the case, interest on accruing debts, and presents the possibility of more hearings and need for Court resolution of disputes, which equates to even more money spent on the process rather than the solution.


Some specific answers as to how a Small Business Chapter 11 works:

Do I continue to operate my business during the Chapter 11 proceeding?

Yes, as a Chapter 11 Small Business Debtor you are authorized to operate your business during your bankruptcy proceeding.

Does a Chapter 11 Small Business filing stop collection actions by lenders?

Yes, just like with the more robust and involved traditional Chapter 11 proceeding, as well as all other types of bankruptcy relief, a Small Business Chapter 11 filing results in an ‘automatic stay’ being put in place that stops all foreclosure, replevins, collection lawsuits, or other collection activities from continuing or starting while the Small Business Chapter 11 proceeding is pending.

When do I file my Plan?

A Small Business Debtor must file its plan within 90 days from when the Small Business Chapter 11 case is filed.

What does the Plan have to provide for?

The Plan must provide that all secured creditors receive the value of their collateral rights (value of your inventory, A/R, equipment and other assets that may be pledged to that particular creditor), that all unsecured creditors receive what they would receive if the business were liquidated, and if all claims are not paid in full, that the Small Business Debtor commit its “disposable income” to payments under the Plan during the term of the Plan.

Does Disposable Income include all of my net operating income after payment of operating expenses?

Not necessarily. Disposable income calculations exclude monies that need to be expended to provide for the maintenance of the Debtor, any support obligations owing by the Debtor, and expenditures necessary for the continuation, preservation or ongoing operation of the business (such as purchasing inventory for future sales, new and necessary equipment, etc.).

Do creditors still get to vote on acceptance or rejection of the Plan?

Yes, creditors still either have to accept or reject the plan, but if a class of creditors who are not being paid in full reject the plan, the Court can confirm the Plan over their objection, provided that the Plan is found to be fair and equitable and that the Debtor’s disposable income over the life of the Plan is committed to making Plan payments. There is no prohibition against the equity holders (owners) retaining their ownership interest under the Plan in the even that the unsecured creditors reject the Plan, as is the case in the traditional Chapter 11 proceeding.

Is a Trustee appointed in a Small Business Chapter 11 proceeding?

Yes, a trustee will be automatically appointed in all Small Business Chapter 11 proceedings. The role of the Trustee is NOT to operate the business or to replace management, but instead to review the financial condition of the Debtor, the proposed plan, and to offer comments to the Court regarding the Plan’s provisions and whether or not the Plan commits all disposable income and is otherwise fair and equitable. The Trustee is also authorized to review the claims submitted by creditors and determine the amounts owed and collateral rights of the creditors concerned.

How is the Trustee paid?

The Trustee will be paid either a commission on any monies received and paid out under the Plan, or on an hourly basis for work done by the Trustee prior to Plan confirmation. Again, since the Plan is required to be filed by the Debtor within 90 days of the commencement of the case, the Trustees’ fees should not be too substantial given the brevity of time in which the Trustee will serve prior to Plan confirmation.

Who qualifies as a Small Business for purposes of the Small Business Chapter 11 proceeding?

Individuals and entities that operate a business that has no more than $2,725,625 in noncontingent liquidated secured and unsecured debt will be eligible to file under the new Small Business Chapter 11 bankruptcy provisions. Debts owed to affiliated entities or other insiders is NOT considered when calculating this amount.


Update on March 29, 2020: As part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) which passed the Senate and is expected to pass the House today and be signed by the President provides for a temporary increase in the debt limit to $7,500,00.00, provided that at least half of the debt has to relate to a business activity and can not involve debt owed to insiders.

The professionals at Wandro & Associates are here to assist you during these extraordinary and troubling economic times. Should you and your business face impacts due to the COVID-19 virus and government ordered shutdowns, or for other reasons, we are here to help you understand the options available to you and to guide you to a resolution that best accomplishes your desired outcome. Be sure to get the information you need before making any decisions regarding the resolution of debt obligations or the continued operation of your business. All initial consultations are free, as always, and we pride ourselves in helping small business owners preserve their business operations and manage the restructuring of their debt obligations in a manner that is fair, equitable and sustainable for the long term.


Have questions? We have answers. Call us at (515) 281-1475 or email us at


This Wandro & Associates Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Update without seeking the advice of legal counsel.

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