Bankruptcy: Debtor's Rights
Our New Jersey business attorneys represent all sorts of small businesses. One barrier that debt laden small businesses face to continuing to operate is the difficulty and expense of the Chapter 11 bankruptcy reorganization process. However, Congress has addressed this by creating the Subchapter 5 bankruptcy reorganization.
SUBCHAPTER 5 BANKRUPTCY REORGANIZATION
Congress created the Subchapter 5 bankruptcy in the Small Business Reorganization Act. In a Subchapter 5 bankruptcy, the debtor, which can either be a sole proprietor or small business entity, is allowed to maintain its business operations and enter into a plan of reorganization to make payments to existing creditors. In many cases, the amount paid back to creditors through the plan of reorganization may either be less than what is owed or on more favorable terms including lowered interest rates or extended times to pay back the debt. This gives distressed small businesses the breathing space they need to survive.
WHAT TYPES OF BUSINESS DEBTORS ARE ELIGIBLE TO FILE A SUBCHAPTER 5 BANKRUPTCY?
A debtor is eligible to file a subchapter 5 bankruptcy if it is either an individual or small business engaged in commercial or business activity that has no more than $2,725,625.00 in secured or unsecured debts, excluding debts that may be owed to insiders or affiliates.
HOW DOES A TYPICAL SUBCHAPTER 5 BANKRUPTCY WORK?
First, it is highly recommended that you first meet with a New Jersey bankruptcy attorney to determine which type of bankruptcy will serve you best. Subchapter 5 bankruptcy is appropriate for a small business that meets the debt cap and is looking to continue its business operations. It is important to meet with a bankruptcy attorney to provide information and documents regarding the business’s revenue, assets, debts, and expenses. These documents typically include federal tax returns, balance statements, and other related financial documents which establish the debt owed and current business operations. This information is necessary for preparing the bankruptcy petition – which is the initial document that is filed with the United States Bankruptcy Court for the District of New Jersey that starts the bankruptcy proceeding.
Once the petition is filed, an “automatic stay” is imposed, and your creditors are required to cease all collection actions such as collection calls, lawsuits, and bank levies. However, this also starts the 90-day period in which you are required to submit a plan of reorganization to the Court for approval. A plan of reorganization outlines for the Court and creditors: (1) how you plan on paying certain creditors by establishing your net month revenue; (2) how much you plan on paying back to all creditors – secured creditors are entitled to at least the value of the collateral while unsecured creditors are not required to be paid back in full; and (3) under what terms you will paying back these creditors – plans can last between three to five years.
The plan, and the confirmation of that plan, is the most vital part of a successful subchapter 5 bankruptcy. Therefore, pre-petition planning with your bankruptcy attorney for your subchapter 5 plan of reorganization is key to ensure that there are no unnecessary delay or expenses. This is especially true because of the 90-day period in which the plan needs to be filed by.
WHAT CAN AND CAN’T A SUBCHAPTER 5 BANKRUPTY DO FOR ME?
A subchapter 5 bankruptcy can:
· Temporarily cease creditors’ collection actions;
· Reorganize your debts through a plan of reorganization with more favorable payment terms;
· Allow your business to maintain business operations; and
· Get rid of portions of your business’s unsecured debts.
A subchapter 5 bankruptcy generally cannot:
· Get rid of secured claims;
· Get rid of unsecured debts entirely; and
· Wipe out other unsecured priority debts such as recent tax obligations.
MCLAUGHLIN & NARDI’S NEW JERSEY BANKRUPTCY ATTORNEYS CAN HELP
Our New Jersey bankruptcy lawyers are experienced and aggressive in helping small business who are struggling with a wall of debt. We can help your business get back on its feet, come up with a plan of repayment it can afford, and build towards a more stable financial future. Please call us at (973) 890-0004 or fill out the contact form on this page to speak with one of our experienced bankruptcy attorneys to obtain assistance.