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Struggling small businesses could be out in the cold if a bankruptcy reform bill passes.
Magazine Contributor
3 min read

This story appears in the October 1998 issue of Entrepreneur. Subscribe »

Emerging from Chapter 11 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 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 . 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.

Philip Corwin, a lobbyist who represents the ABA, says fewer than 10 percent of all 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 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 . 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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