Small Business Bankruptcy

Small business bankruptcy is a process in federal court designed to help a person's business eliminate or repay its debt under the protection of the bankruptcy court. Depending on the type of bankruptcy petition filed, the small business bankruptcy is described as either "liquidation" or "reorganization."

There are three types of bankruptcy proceedings for small businesses. The structure of a business will determine which bankruptcy proceeding the business owner will file under.

A sole proprietorship is a legal extension of the owner because the owner is responsible for all assets and liabilities of the business. For a sole proprietorship, a business owner can file bankruptcy under Chapter 7 or Chapter 13.

A corporation or partnership is a separate legal entity that is distinct from its individual owners, partners, or members. A corporation or partnership may file for bankruptcy protection under Chapter 7. The entities members or directors must sign a resolution authorizing the filing of a bankruptcy petition.

Attorneys for Small Business Bankruptcy in Dallas, TX

Business bankruptcy reorganization is most often filed under Chapter 11. These types of bankruptcy cases can include any matter in which the debtor was engaged in business before filing. Special rules apply for a small business Chapter 11 reorganization case.

We represent clients in bankruptcy courts throughout the greater Dallas-Fort Worth area including in the Northern District of Texas at the Earle Cabell Federal Building in Dallas. We also represent clients in the US Bankruptcy Court for the Eastern District of Texas in Plano, TX.

A business bankruptcy attorney in Dallas, TX, can help you decide which type of bankruptcy you should file or whether you should file for bankruptcy at all. We can help you understand the difference between a Chapter 13 and a Chapter 7 bankruptcy and the requirements for each.

Small business owners should consider all of their options before filing for bankruptcy. If you are a small business owner in Dallas, TX, then contact our experienced business bankruptcies lawyers in Dallas, TX, at Littlefield Law Firm.

Call (972) 812-0900.


Small Business Reorganization under Chapter 11

Business owners have several alternatives to Chapter 7 relief. For business owners with a corporation, general partnership, an "S" corporation, a Limited Liability Company, a Limited Partnership, or a sole proprietorship, the business owner may prefer to remain in business and avoid liquidation. Such business owners should consider filing a petition under Chapter 11 of the Bankruptcy Code.

Under Chapter 11, the business owner can seek an adjustment of debts, either by reducing the debt, by extending the time for repayment, or by seeking a more comprehensive reorganization. 

With Chapter 11 bankruptcy, the company reorganizes its debts under a court-appointed trustee as the business continues to operate. In some cases, the owner of the company acts as the trustee. In these cases, the company files a plan of reorganization to explain how it will pay debts owed to its creditors.

The creditors are given the option of voting on the plan, and the court will determine if the plan is fair and equitable. Reorganization plans provide for creditors to be paid back over a period of time, which may not exceed 20 years. The process to confirm a plan can take more than a year. Chapter 11 bankruptcies are incredibly complicated and not all succeed.

If you file under chapter 11, you must also submit a Chapter 11 Statement of Your Current Monthly Income (Official Form 122-B). If you qualify as a small business debtor, then you must file your bankruptcy forms within 14 days to open your case. You must also file your most recent:

  • Balance sheet;
  • Statement of operations;
  • Cash-flow statement; and
  • Federal income tax return.

First, a court will make a determination of an individual's  "Small Business Debtor" status. The debtor makes a statement in its bankruptcy petition regarding whether it meets the definition of a "small business debtor" under §101 (51D) of the Bankruptcy Code. 

If any party objects to the Chapter 11 debtor's statement in its petition regarding whether it meets the definition of a "small business debtor," then that party must file a Motion to Determine Small Business Debtor Status.

A party seeking to challenge the effectiveness of an official committee of unsecured creditors for the purpose of imposing the designation of a "small business debtor" under §101 (51D), the party must file a Motion for Determination of Status of Unsecured Creditors' Committee. A party may challenge the effectiveness of an official committee under §1102(a)(1) of the Bankruptcy Code. 

The court will consider the disclosure statement in a small business case. A plan proponent in a small business case may seek conditional approval of a disclosure statement, subject to final approval after notice and hearing, by filing a request with the court contemporaneously with the filing of the proposed plan of reorganization.

An individual proposes a plan in a small business case may seek to waive the disclosure statement requirement because the proposed plan of reorganization itself provides adequate information. A person may also request a waiver by filing a motion contemporaneously with the proposed plan of reorganization.

The deadlines for a bankruptcy case filed under Chapter 11 are different than those filed under Chapter 7. For example, under 11 U.S.C. § 1121(e), only the debtor may file a plan during the first 180 days of a small business case (often called the "exclusivity period"). This deadline may be extended by the court, but only up to 300 days.

The court is also more reluctant to grant extensions to the small business debtor. For example, to be granted an extension of the exclusivity period, the small business debtor must prove, by a preponderance of the evidence, that the court will confirm a plan within a reasonable period of time. For bankruptcy cases filed under Chapter 11 that are not classified as a small business case, the court is permitted to extend the exclusivity period "for cause" up to 18 months.

For all of these reasons, the small business bankruptcy case normally proceeds through the process more quickly than other types of Chapter 11 cases.


Small Business Bankruptcy under Chapter 7

According to the Bureau of Labor Statistics, about 20% of small businesses fail in their first year, 66% of small businesses fail in their second year, 50% of small businesses fail in their fifth year, and 30% of small businesses fail in their tenth year. For a business that has no future because it is not feasible to restructure the debt, or the business has no substantial assets, the Chapter 7 bankruptcy may be the best choice.

Under a Chapter 7 Business Bankruptcy, liquidation occurs. In these cases, the bankruptcy court appoints a trustee after the bankruptcy petition is filed. The trustee takes possession of the assets of the business and distributes them to the creditors. After the assets are distributed, and the trustee is paid, the sole proprietor receives a "discharge" at the end of the bankruptcy case.

The discharge means that the owner of the business is released from any other obligation for the debts. A discharge is not available for a partnership or a corporation.


Personal Bankruptcy under Chapter 13

Although the Chapter 13 bankruptcy is a reorganization bankruptcy typically reserved for consumers, it can be used for sole proprietorships. Under Chapter 13, the sole proprietor in the bankruptcy action can file a repayment plan with the court explaining how the debts will be repaid.

When you own a sole proprietorship, your assets are mixed in with the business's assets, so filing a Chapter 13 bankruptcy may be the best way to avoid losing your home.


2017 Statistics on Business Bankruptcies in the United States

The recent statistics on the number of business bankruptcy and non-business bankruptcy filings show that 789,020 cases were filed in 2017, compared with 794,960 cases in 2016. Although the overall number of bankruptcy filings is the lowest for any calendar year since 2006, the percentage decline is only .07 percent. The decline represents the smallest decline for a 12-month period since bankruptcy filings reached a peak in 2010.

The overall number of business bankruptcies also dropped in 2017. The recently released data shows that 23,157 business bankruptcies were filed in 2017, while 24,114 business bankruptcies were filed in 2016.

Business and Non-Business Filings,
Years Ending
December 31, 2013-2017
  Year   Business   Non-business   Total
  2017       23,157   765,863   789,020    
  2016   24,114   770,846   794,960
  2015   24,735   819,760   844,495
  2014   26,983   909,812   936,795
  2013   33,212   1,038,720   1,071,932

Additional Resources

Business Bankruptcy Filings Fall in 2017 - Visit the website of the United States Courts to find Judiciary News about why business and non-business bankruptcy filing continue to decline year over year. Find a break down of the number of business and non-business filings for each calendar year and the total number of bankruptcy filings by chapter over the past five (5) years. The article also links to a report showing the number of bankruptcy filings by district and county during the 12-month period ending December 31, 2017.


This article was last updated on Friday, April 20, 2018.

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