In Traditional Chapter 11 the owners of the company are not allowed to remain as owners of the reorganized company unless either (i) the creditors accept the plan, or (2) the owners invest new capital of a value at least equal to the net worth of the reorganized company.
It is a complicated and expensive process to fix that value, and usually impossible for the owners to raise that money from their personal funds. In reality the owners of a small business have usually exhausted their personal assets and put them into the business before the even see a bankruptcy lawyer.
The new law for small businesses completely eliminates that process and the need to put new money into the company. Instead the Reorganization Plan must provide that the company’s “disposable income” be paid to creditors for at least three years (but not more than five). “Disposable income” can be less than “profit” because it is necessary to take into account all reasonable costs of running the business.
This change will enable business owners to keep their businesses so long as they make reasonable payments to creditors. That does not mean 100%. The court will make that determination.
This is only one of the many reasons the new Small Business Bankruptcy Chapter 11 may be a real “life-saver” for struggling small business owners.
Paul Hollender is Board-Certified in both Business and Consumer Bankruptcy, and has been helping business owners deal with financial difficulties for 43 years.
If you think this new law might help you, please call at our office to schedule an evaluation and strategy meeting.