Bankruptcy: 1990s style - bankruptcy law revisions - includes related article

Nation's Business, May, 1995 by Joan C. Szabo

Revisions in federal laws make it easier and faster for businesses and individuals to settle up.

Declaring bankruptcy is never a walk in the park. But a bankruptcy-reform law enacted late last year promises to improve the process for both debtors and creditors.

The new statute--the Bankruptcy Reform Act of 1994, signed into law last October--represents the first comprehensive revision of the bankruptcy code in 16 years. The reform act amends more than 45 sections of the code.

The changes include key revisions in Chapter 11, a section that regulates business bankruptcies, and in Chapters 7 and 13, which govern bankruptcies declared by individuals. (For details, see the box on Page 39.)

"Overall, the changes will speed up the bankruptcy process for small businesses, strengthen creditors' rights, and allow more individuals to reorganize their debt, rather than forcing them to sell assets to satisfy creditors," says Michael C. Runde, chairman of the Bankruptcy, Insolvency and Creditor's Rights Section at the Milwaukee law firm of Davis & Kuelthau.

Bankruptcy filings have more than doubled since 1978, when the last major overhaul of the code was completed.

About 94 percent of bankruptcy filings each year are made by individuals, and the remaining 8 percent by businesses, says Samuel J. Gerdano, executive director of the American Bankruptcy Institute. The ABI, based in Alexandria, Va., is a nonpartisan research organization that focuses on insolvency.

While the bankruptcy-code amendments cover a wide range of matters, the changes most important to small companies include the following:

A Fast Track For Small Firms

One of the most significant changes, says Runde, is the creation of a "fast-track" procedure for small-business bankruptcy filings under Chapter 11.

In the past, the law treated all Chapter 11 reorganizations alike regardless of a company's size. Now, under the fast-track option, the court can order that a creditors' committee not be appointed, a change that should trim the time and expenses of going through bankruptcy.

When a creditors' committee is formed, it usually is drawn from among the bankrupt company's 20 largest unsecured creditors. Such panels typically hire a lawyer and other professionals to look after the creditors' needs. The debtor is required to pay the committee's professional expenses plus his or her own legal fees and other costs.

Elimination of this process means that "the amount of time it takes to go through bankruptcy and the cost for small debtors will be considerably reduced," says Joel Lewittes, co-chairman of the bankruptcy department for the New York law from of Parker Chapin Flattau & Klimpl.

Another benefit of the fast-track option is that it may improve the company's chances of survival by enabling it to reorganize and remain in business, says Jeffrey W. Kelley, a bankruptcy expert and a partner in the Atlanta law firm of Powell, Goldstein, Frazer & Murphy "Previously, Chapter 11 was so complicated and expensive that small firms couldn't afford to go bankrupt," he notes. "As a result, all the assets were sold, and the business didn't survive."

The fast-track option is available to small firms---except those in real estate--if their secured and unsecured debts amount to less than $2 million. A secured claim is one in which the creditor has collateral, or a lien, securing payment of the claimed amount. An unsecured claim is one in which the creditor has no collateral and that is not in a priority category to receive payment.

How Fast-Track Works

A company selecting the fast-track option has the exclusive right to file a bankruptcy reorganization plan within 100 days of the date of the bankruptcy filing instead of 120 days, as the time limit had been. The plan contains the terms of the repayment promises by the debtor. All plans must be filed within 160 days of the date of bankruptcy filing. (In Chapter 11 cases, creditors have the right to file a plan as well. The additional 60-day period is for creditors who want to file a plan.)

One drawback of the change, say experts, is that the fast-track option is voluntary for the debtor. Situations could arise, says Gerdano, in which "lawyers begin to advise clients not to elect the fast-track option because it will push them through the process too quickly. If you are using Chapter 11 as a device to stave off creditors and you don't have a plausible shot at reorganizing, then you won't select the fast track."

A Real-Estate Provision

Also affecting small companies is a change relating to circumstances in which a single parcel of real estate is owned as an investment by an individual, a partnership, or a corporation. The real estate could be an office building, for example, or an apartment project or a shopping center; it would be property generating substantially all the gross income of the debtor.

Under the new provision, a holder of so-called single-asset real estate-- provided that the secured debt on the property is no more than $4 million--can still use Chapter 11.