New Bankruptcy Law Is Good/Bad News for Small Business

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Individuals aren't the only ones likely to find it more difficult to keep creditors at bay under the new bankruptcy law. That is both good news and bad news for small businesses. The good news: the bankruptcy filing process has been streamlined and small business owners will find it easier to collect on debts incurred by individuals and other businesses that have filed for bankruptcy. The bad news: tougher rules apply and it may be harder to reorganize under Chapter 11.

President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act on April 20. It goes into effect in about six months. The new law contains special small-business bankruptcy provisions. These provisions define a small business debtor as “a person (including a debtor affiliate) with not more than $2 million in aggregate non-contingent, liquidated secured and unsecured debts as of the date of the petition or the order for relief (excluding debts owed to affiliates or insiders).” In addition, the provisions define the factors courts can use in determining the adequacy of reorganization plans, establishes uniform reporting requirements nationwide, and calls for both more study by the Small Business Association (SBA) and proposals from the Advisory Committee for adopting the provisions in the law.

In practical terms, this means small businesses, or those individuals are considered small businesses according to the definition above, will find it more difficult to reorganize under Chapter 11, work out payment plans with creditors and continue business operations during bankruptcy. Some experts predict fewer small businesses will survive bankruptcy with tighter deadlines and more scrutiny.

“You'd have additional paperwork and reporting burdens,” Samuel Gerdano, executive director of the American Bankruptcy Institute told the Associated Press (AP). “You'd have to have your books and records examined by the bankruptcy trustee to ensure the company has a plan to succeed.”

“Entities with little long-term chance of successfully emerging from bankruptcy should be identifiable much more quickly under the new changes and weeded out,” Thomas W. Repczynski, a shareholder of Bean Kinney & Korman who heads the Northern Virginia Bankruptcy Bar Association told the Baltimore Business Journal.

At the same time, small businesses may have reason to praise the new law, which gives them increased influence as creditors. The biggest advantage may be a provision allowing courts to add small businesses to the committee of creditors that make many of the decisions in a business bankruptcy as long as the debt owed to the small business represents a disproportionately large percentage of the small business' gross annual income.

“As a business creditor you may have more leverage in a few ways,” Shelly Crocker a bankruptcy attorney with Seattle's Crocker Kuno Ostrovsky LLC told the Puget Sound Business Journal.

“The new bill is very creditor-friendly,” the AP quotes Gerdano as saying. “And small businesses are often creditors.”

According to the AP, Alan Resnick, interim dean of Hofstra University and co-editor of “Collier on Bankruptcy,” agrees saying: “This benefits all vendors and many small businesses are vendors.”

Last year, 34,317 businesses filed for Chapter 11 bankruptcy while 1.56 million personal bankruptcies were filed. According to the U.S. Chamber of Commerce, nearly $40 billion of debt goes unpaid because of bankruptcy filings.

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