There are many situations where businesses may have trouble paying debts and meeting other financial obligations while continuing to operate. In some cases, a business may seek to reorganize its operations and pay off as much of its debts as possible by pursuing Chapter 11 bankruptcy. However, this can be a long and involved process, and many small businesses may not have the resources to complete this type of reorganization while meeting all reporting requirements and paying the related costs. Fortunately, a recent change to the law has allowed some businesses to complete a Chapter 11 bankruptcy through a process that is faster and more efficient.

Small Business Debtor Reorganization

The Small Business Reorganization Act, which went into effect in 2020, created new procedures for a Chapter 11 bankruptcy. Because these procedures are outlined in Subchapter V of Chapter 11 of the U.S. Bankruptcy Code, this type of bankruptcy is often referred to as a “Chapter 5” case. Initially, Chapter 5 bankruptcy was available for businesses with aggregate debts up to around $2.7 million. However, the CARES Act of 2020, which provided relief for Americans affected by the COVID-19 pandemic, increased the qualifying amount of debt to $7.5 million.

One of the primary differences between a Chapter 5 bankruptcy and other Chapter 11 bankruptcy cases is that a creditors’ committee will not be created in a Chapter 5 case. A debtor’s plan for the reorganization of their business will not need to be approved by creditors. However, a business’s plan for reorganization must include information about the history of the business, an analysis that details payments that could be made to creditors in a potential liquidation of the business’s assets, and the amount of the expected payments that will be made to creditors under the plan. A bankruptcy court will generally confirm a reorganization plan if it treats creditors fairly and equitably, and creditors must receive an amount equal to or greater than what they would be able to recover in a Chapter 7 bankruptcy.

If you prefer NOT to pay back wages to a present or prior employee, bankruptcy can help you use the law to prevent it being a priority debt.

Imagine that in the near future you’re closing down a business and filing bankruptcy. You owe an employee or independent contractor back wages or commissions. But you’d rather not pay that debt because you believe that employee had a major role in the business failing. You’d much rather have your scarce money go towards, for example, paying your income taxes. How do you use the law to your advantage to accomplish this?

If you prefer to pay back wages to a present or prior employee, you can do so in Chapter 13 especially well if that debt is a priority one.

Our last three blog posts have been about debts you owe to your employees or independent contractors. Specifically, we discussed the conditions under which past wages, commissions, or benefits qualify as a“priority” debt. These posts covered:

If you prefer to pay back wages to a present or prior employee, bankruptcy can help you do so if you use the law in that employee’s favor.

Our last two blog posts were about debts owed to your employees or independent contractors. Specifically we discussed the conditions in which past wages, commissions, or benefits qualify as “priority” debt. Two weeks ago we got into the conditions that apply to both employees and independent contractors. Last week the focus was on a special additional condition that only independent contractors must meet.

If you owe sales commissions to an independent contractor when you file bankruptcy, it may be a priority debt. Here’s what determines this.

Our last blog post was about conditions in which wages, commissions, or benefits owed to an employee are “priority” debt.