Friday, September 22, 2006

Small Business Debtors in Chapter 11 Bankruptcy

Dear Clients:

As you may know, the Bankruptcy Abuse Prevention and Consumer Act of 2005 ("BAPCPA") went into effect on October 17, 2005 and has changed bankruptcy law significantly. The new legislation impacts not only personal bankruptcies but chapter 11 filings as well, particularly in regard to the Small Business Debtor ("SBD").

1. Qualification as a "SBD": The law defines a "SBD" as one who is engaged in commercial or business activities other than owning or operating real estate and whose debt exceeds $2 million. Prior to BAPCPA, a chapter 11 debtor having such characteristics had the option of filing as either a SBD or as a regular chapter 11 debtor. Today, however, any chapter 11 that qualifies as a SBD will be subject to the new small business provisions.
2. Additional Duties/Reporting Requirements: A SBD now has to maintain appropriate insurance policies customary to the industry and, after prior written notice, a SBD must allow the US Trustee to inspect the business' premises, books & records. New reporting requirements under the BAPCPA no longer allow a SBD to merely submit its financial and other reports to the US Trustee but instead must file these reports with the clerk of the bankruptcy court.
3. Expanded Role of US Trustee: The US Trustee is now required to hold an initial interview of the SBD in which the Trustee will investigate the debtor's viability and its ability to confirm a business plan.
4. Plan & Disclosure Statement: Under the BAPCPA, a SBD has an exclusive right to file a plan for 180 days after the petition date. The deadline for filing a plan is 300 days after the petition date.
5. Exceptions to Automatic Stay: Under the new law, the automatic stay doesn't apply in certain instances, such as where the debtor was a small business debtor in a case that was dismissed within 2 years of the current filing.

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