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Hidden Risks of filing Subchapter V, Small Business Chapter 11

| Apr 18, 2020 | Bankruptcy, Business Law, Chapter 11, small business reorganization, subchapter v

The New Small Business Bankruptcy Reorganization Act (Subchapter V of Chapter 11) creates great opportunities for an individual or family business to stay in business by using a special type of Chapter 11 which is less expensive, simpler and faster.New Small Business Chapter 11

The main advantages are:
* No Creditor’s Committee
* No Quarterly U.S. Trustee’s Fees
* Court approval even if creditors object
* Owners can keep business without large cash investment.
* Owners can either
-Pay creditors in full over 5 years or
-Pay “disposable income” for 5 years and discharge the unpaid balance

It is important, however, not to jump into this type of bankruptcy without careful risk analysis.

It is wise to consult with a Board-Certified Bankruptcy Lawyer to evaluate your risks. Paul Hollender Board-Certified Bankruptcy Lawyer

If you have taken your name off a deed, bank account, business or investment; or if you have given a large gift to a someone, it might be very risky to start a bankruptcy case at the present time. Different time limits apply to different types of transactions, ranging up to six year for some transactions, and no time limit for others.

There are two clear reasons why filing could be a problem.

Each debtor must sign under penalty of perjury, and file with the Court a written questionnaire and disclose if

  1. they have made payments to friends or family within one year
  2. they have transferred any assets within two years (this includes gifts, taking your name off deeds, bank or other financial accounts, changing of ownership of businesses or investments such as corporations or LLC’s),

There are three not so obvious reasons to plan carefully.

These are embodied in Three Players in a chapter 11 case
-The U.S. Trustee’s Office
-The Chapter 11 Trustee
-The individual creditors and their attorneys

The Office of the U.S. Trustee supervises the process and has the right and obligation to report and make recommendations to the Court.  These recommendations could include:

– Whether the debtor should have more time to file and confirm a plan

– Whether a plan should be confirmed

– Whether the Debtor should be removed from control of the business

– Whether an independent Operating Trustee should be appointed to take over the business.

– Whether a case should be converted to a case under Chapter 7, allowing a different type of Trustee to recover assets.

– Whether a case should be dismissed, allowing creditors to pursue the debtor in state court

– Whether there are any potential lawsuits that could be brought that could increase the money available to pay creditors, such as:

  • a suit to turn over assets to the bankruptcy estate
  • a suit to recover payments made to preferred creditors
  • a suit to recover property transferred to others before the bankruptcy filing.

– whether the Debtor should be denied a discharge

– whether the case should be referred to the U.S. Attorney’s office for criminal prosecution.

The Chapter 11 Trustee not only collects provisional Plan payments and assists in structuring and negotiating the Reorganization. In addition, the Trustee has certain statutory obligations:

The Chapter 11 Trustee, is charged with the duty to
– “investigate the acts, conduct, [and] assets, … of the debtor… and any other matters relevant to the case or to the formulation of a plan”

– “file [with the Court] a statement of any investigation… including any fact ascertained pertaining to fraud, dishonesty.. or to a cause of action available to the estate.

Individual Creditors and their attorneys have the right to:

appear at a Trustee’s meeting to ask the Debtor questions and request production of documents to the Creditor’s attorney, the U.S.Trustee and to the Chapter 11 Trustee.

-ask the court to remove the Debtor as “Debtor-in-Possession” i.e. as operator of the business and request the Court to appoint an Operating Trustee.

conduct a separate, full-length “deposition” of the Debtor,  request documents, and provide a transcript to the Chapter 11 Trustee and the U.S. Trustee.

-ask the Court to dismiss the case, allowing creditors to continue State Court pursuit.

-ask the Court to convert the case to a Chapter 7 case, where a different Trustee will be appointed to pursue lawsuits against anyone who received a gift or other property from the Debtor before the case was filed

-ask the Court to deny the debtor a discharge of that creditor’s specific debt

-ask the Court to deny the debtor a discharge of all debts.

AS YOU CAN SEE, ANY TYPE OF CHAPTER 11 IS A COMPLICATED PROCESS. IT MUST BE THOUGHT OUT THOROUGHLY, AND IMPLEMENTED CAREFULLY.

FURTHERMORE, THE GREATER THE TIME SPENT ON PREPARATION, THE LESS TIME YOU WILL HAVE TO BE IN BANKRUPTCY COURT, THE LESS UNCERTAINTY AND RISK  YOU WILL HAVE, AND THE LOWER YOUR TOTAL COSTS WILL BE.

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