Navigating a Small Business Bankruptcy Case — The Benefits and Perils

State Bar of Texas: Nuts & Bolts of Business Bankruptcy
By: Jonathan L. Howell (Co-author)
September 2009

I. INTRODUCTION

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA") ushered in a number of amendments to the Bankruptcy Code with the goal of requiring additional oversight and restrictions for debtors in order to reduce the occurrence of fraud and abuse in the bankruptcy system. Along those lines, BAPCPA introduced certain small business bankruptcy provisions in an attempt to strike a practical balance between the need for transparency, on the one hand, and practicality, on the other. In particular, BAPCPA significantly increased the amount of reporting requirements and disclosures that must be made by "small business debtors" in order for such debtors to successfully reorganize under chapter 11 of Bankruptcy Code. This article will explore these amendments, as well as the practical approach practitioners should take when dealing with small business debtors.

II. DEFINITIONS

In introducing certain small business provisions, BAPCPA made several changes to section 101 of the Bankruptcy Code. Prior to BAPCPA, the Code defined "small business" as any person "engaged in commercial or business activities" whose total debts did not exceed $2 million. BAPCPA repealed this definition and added two new terms in its place: "small business debtor" and "small business case." A "small business debtor" is essentially any person, including an individual, which is engaged in "commercial or business activity," with debt no greater than $2.19 million. Potential debtors should realize that the new definition does not modify "commercial or business activity" with the word "substantial." This implies that an aggressive creditor may be able to use the language to label any debtor with debt less than, or equal to, $2.19 million as a "small business debtor." The definition does carry two exceptions: those persons whose primary activity is operating real property, and persons in cases for which the U.S. trustee has appointed a committee for unsecured creditors, unless otherwise ordered by the court.

The definition of "small business case" essentially includes any "small business debtor" already in chapter 11.3 Thus, small business debtors in other chapters of bankruptcy are not within the definition of "small business case," but all "small business cases" will involve "small business debtors."

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