Emerging from Chapter 11 bankruptcy will be more difficult for
entrepreneurs if Congress passes the bankruptcy reform bill
it's considering. Both House and Senate versions of the bill
would establish a 150-day deadline for a small business to complete
a business reorganization plan and have it approved by a federal
bankruptcy judge. Currently, there is no deadline.
If a small business were unable to meet that 150-day time frame,
it could apply for an extension. But the Senate bill says the
entrepreneur would have to show "clear and convincing"
evidence that he or she could get the business back on its feet.
The House bill requires a "preponderance of
evidence."
The bankruptcy reform bills are being pushed by the likes of
Visa USA, MasterCard International Inc., the American Bankers
Association (ABA) and the National Retail Federation. They are
motivated by an increase in U.S. bankruptcies, from 331,264 in 1980
to 1.4 million in 1997, according to the American Bankruptcy
Institute.
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Philip Corwin, a lobbyist who represents the ABA, says fewer
than 10 percent of all small businesses emerge successfully from
Chapter 11. "Let's not pretend Chapter 11 is working for
small business now," he says. He argues that the 150-day
expedited process will cost entrepreneurs less in legal fees and
the like.
The Chapter 11 reforms are just one section of a bill (H.R.
3150) the House passed in June by a vote of 306 to 118. The Senate
broke the House bill into two pieces, one a consumer bankruptcy
bill (S.1301), the other a business bankruptcy reform bill
(S.1914). So far, only the consumer bill has moved forward.
When he testified before the Senate Judiciary Committee in May
on S.1914, Jere Glover, the SBA's chief counsel for advocacy,
assailed the bill for its discriminatory treatment of
entrepreneurs. "S.1914's new duties, new reports,
shortened time frames and higher thresholds for obtaining
extensions represent less flexibility and much higher hurdles for
small businesses than the current Chapter 11 provisions," he
argued.
Despite Glover's complaints, most prominent small-business
trade groups support the 150-day Chapter 11 provision. "Small
companies are using Chapter 11 to keep creditors at bay,"
contends James R. Taylor, director of Congressional and public
affairs for the U.S. Chamber of Commerce. "They are lingering
there."
Glover has pounded away at the paradox of making Chapter 11
tougher for small business at a time when small business is using
Chapter 11 proceedings less often than ever. He says small-business
bankruptcy filings declined 33.9 percent from 1987 to 1997. During
the same period, new business formations increased by 18.2
percent.
Glover has had no allies among trade groups, however, because
debtors don't usually join trade associations. So creditor
groups are flexing all their political muscle on this issue.
Stephen Barlas is a freelance business reporter who covers
the Washington beat for 15 magazines.
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