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Chrysler Files for Bankruptcy; Small Business vs Big Business Chapter 11

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By Caleb Groos on April 30, 2009 12:33 PM

After marathon efforts to renegotiate its debts, Chrysler declared bankruptcy today. Though their reorganizations don't garner massive government or media attention, many small businesses use Chapter 11 in attempts to become viable after tough times. Some small businesses receive different treatment under our bankruptcy procedures. Knowing the differences can factor into an evaluation of whether reorganization through bankruptcy might benefit a small business.

Reuters reports that Chrysler's Chapter 11 filing is the first bankruptcy by a major U.S. automaker. No doubt its reorganization, including an alliance with Fiat, will prove a massive undertaking. In Chapter 11 bankruptcy cases, a creditors' committee (typically the 7 largest unsecured creditors) plays a key role in consulting on the administration of the case, investigating the debtor's operation of the business and participating in the formulation of a reorganization plan.

Because creditors willing to serve on the committee can be harder to find in some small business Chapter 11 cases, the Bankruptcy Code provides special procedures for designated "small business cases."

To qualify as a "small business case":

  1. The debtor must be engaged in commercial or business activities (beyond simply owning or operating real estate) with less than $2,190,000 in non-contingent liquidated secured and unsecured debts; and
  2. The U.S. trustee has not appointed a creditors' committee, or the court finds the creditors' committee insufficiently active and representative to perform its function.

What are some differences in how "small business cases" are handled?

  1. They move faster. A small business debtor has 180 days to file its reorganization plan, extendible to 300 days on showing that the court is likely to quickly approve it. Other Chapter 11 debtors can get extensions up to 18 months to file their plan.
  2. They involve more scrutiny by the U.S. trustee. Though no creditors' committee investigates the business' operations or plans, the U.S. trustee will monitor business activities to identify as promptly as possible whether the debtor will be unable to confirm a plan. Early in the case, the debtor will need to meet with the U.S. trustee for an "initial interview" in which the trustee inquires about the business' viability, plans and informs the debtor as to fiduciary and reporting obligations.
  3. They often don't require the disclosure statement which normally must be filed along with the reorganization plan (provided adequate information is in the plan).

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