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Does the Bankruptcy Reform Act of 2001 herald good news? Well, it sounds promising to small-business creditors. And, yes, it seems like recouping money from deadbeat customers will be easier. However, the big picture it offers entrepreneurs is somewhat gloomier. With the introduction of onerous reporting requirements and tighter time frames for reorganization, the proposed law would likely lower the boom on many struggling businesses that previously could have sought shelter from Chapter 11.
|"Any company with liabilities in excess of $3 million will not have to follow the strict guidelines being imposed on small businesses. But small businesses are the companies that can least afford to have more difficult hurdles put in front of them."|
Not that advancing the line between struggling and failing was the original intent of the Act. In fact, the bill's proponents say it's really going after wealthy abusers of the system who've managed to jettison their debts while holding on to their expensive homes and other financial assets. According to the American Bankers Association (ABA), the number of consumer bankruptcy filings reached 1.28 million in 1999, nearly 50 percent higher than the figure stood in 1995. The ABA estimates incremental costs to businesses that never regain money that's owed to them have increased expenses for the average American household by $400 per year. "But the bill targets people who use the code fraudulently," says the ABA's Catherine Pulley. "For the majority of Americans, this bill will have no impact at all."
Unless, of course, you're an entrepreneur collapsing under the weight of maxed-out credit cards and overdue loans, argue opponents of the bill. Various incarnations of the legislation have been shuffled around Capitol Hill for more than four years, but the current version includes provisions that will require small-business owners filing for bankruptcy protection to do a lot more paperwork in a much shorter time frame to prove their businesses' viability and reorganize their operations for a profitable future. Not only will the new legislation drive down the percentage of companies that emerge from Chapter 11, says Deborah Crabbe, director of the bankruptcy practice for Seattle-based law firm Betts Patterson & Mines, but it will also reduce the number of small businesses that even opt to file for bankruptcy protection. "They'll be forced into Chapter 7, or they'll dissolve under state dissolution proceedings," she says.
The justification made by supporters of the bill, according to J. Ronald Trost, chair of the National Bankruptcy Conference and senior counsel at New York City law firm Sidley Austin Brown & Wood is that if lawmakers have to sacrifice some viable businesses to get rid of the nonviable ones faster, then they should do it. But that logic is flawed, Trost says, adding that he attributes the new law to credit card companies that simply had more lobbying funds, and therefore the attention of influential legislators. "[The small-business provisions] got very little attention, so we told Congress we thought it was a very bad idea," he says.
of small businesses will bank online by 2003.
SOURCE: Meridian Research
But regardless of who does and doesn't get forced out of business, some say too many companies have been lingering in Chapter 11, stretching out the process of reorganization while creditors go unpaid. "Reform was badly needed," says Ken Guenther, president and CEO of the Independent Community Bankers of America, an advocate for community banks in the United States. Guenther says he represents an important segment of the small-business community-5,400 community banks. "We felt the balance needed to be altered somewhat; this bill does that."
For some, however, the big question remains, Does the new bill tip the scales in favor of big business? "Any company with liabilities in excess of $3 million will not have to follow the strict guidelines being imposed on small businesses," explains Crabbe, who is also chair of the small-business subcommittee of the ABI. "But small businesses are the companies that can least afford to have more difficult hurdles put in front of them." The new legislation wouldn't make it any easier for small-business creditors to collect what's owed them. "It's not that small businesses don't want to pay; they simply don't have the funds," she adds. "And passing legislation that says you have [less time] to file isn't going to help."
At press time, the bill, which had been passed in both the House and the Senate, was hung up over discrepancies about home exemptions. Some Republicans have vowed to fight the bill if a Senate addition-a $125,000 cap on the amount of home equity that could be shielded from creditors-isn't removed.
"I think it's going to pass," says Crabbe, "and I think we're going to be stuck with it."
C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.
- American Bankers Association, 1120 Connecticut Ave. N.W., Washington, DC 20036
- Betts Patterson & Mines, 1 Convention Pl., 701 Pike St., #1400, Seattle, WA 98101-3927, (206) 292-9988