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What is a "small business bankruptcy"?

Many of the Kentucky businesses that file bankruptcy petitions under Chapter 11 of the Bankruptcy Code are colloquially known as "small businesses." Some of these small businesses are so small that they are governed by a separate provision of the Bankruptcy Code known as the "small business bankruptcy."

Sometimes, the trustee may not be able to find the necessary number of creditors to form a committee of unsecured creditors, or the committee may not be actively involved in the case. (See accompanying post for a description of the committee's role.) If the debtor meets certain requirements, the case can be treated as a "small business case." First, the debtor must be engaged in a business or commercial activity other than the exclusive ownership or operation of real estate. Second, the debtor cannot have unsecured debts that exceed $2,556,050. Finally, the trustee cannot have appointed a creditors' committee, or the court must have determined that the committee has not been sufficiently active to provide effective oversight of the debtor's business.

In a small business case, the trustee usually exercises more control than in a standard Chapter 11 proceeding. If a case is designated a small business case, the debtor must attend an "initial interview" with the trustee. The trustee will use information obtained during the interview to evaluate the viability of the debtor as an ongoing business and its ability to prepare a plan for reorganization. In another difference from a standard Chapter 11 proceeding, only the debtor can file a plan of reorganization during the first 180 days after filing of the petition; this deadline can be extended by the court but only for a maximum of 300 days. Other extensions of statutory deadlines are more difficult to obtain in a small business case, and for this reason, such cases usually proceed more rapidly than normal bankruptcy cases.

Anyone wishing a greater understanding of how a small case proceeds may wish to consult an experienced bankruptcy attorney. A knowledgeable lawyer can provide advice on whether designation as a "small business case" will be advantageous to the debtor.

Source: US Courts, "Chapter 11 - Bankruptcy Basics, The Small Business Case and the Small Business Debtor," accessed on June 2, 2017

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