A bankruptcy bill making its way through Congress would make it harder for small companies to settle their debts, and some bankruptcy attorneys and academicians say it could force many out of business.
While most of the legislation, which has passed both the House and Senate and is headed to conference committee, focuses on individual consumers, some provisions would set stringent new standards for small businesses.
The new rules are intended to prevent businesses from dragging out cases to avoid paying debt, but critics say they would hurt honest companies that need a reprieve during difficult times.
"If a society has decided that we want to help businesses survive, this isn't the way to do it," said Joel Sher, a Baltimore bankruptcy attorney. "If you look behind the bankruptcy code, it's not to punish people, but to give them a fresh start, to help them survive and keep people employed."
The legislation, an overhaul that has prompted intense debate, would apply to small businesses with $3 million in debt or less. The federal government hasn't tallied those small businesses, but last year 35,472 businesses filed for bankruptcy, according to the Administrative Office of the United States Courts.
If the legislation passes, small businesses that file for Chapter 11 bankruptcy protection would have 175 days to devise a court-approved finance plan. Chapter 11 allows companies to put legal and financial claims against them on hold until they can come up with such an outline for recovery.
Failure to produce a plan would allow a judge to dismiss the case, a decision that would cause many businesses to close, critics say. The other option would be to file for Chapter 7 bankruptcy, which forces a company to liquidate assets.
Stephen Case, a New York bankruptcy attorney and former senior adviser to the National Bankruptcy Review Commission, said the new rules are supposed to weed out businesses that abuse the system. Companies that use an organized creditor group to monitor the bankruptcy proceedings are exempt from the 175-day time limit.
"When there's no monitoring group, nobody pays attention and the case drags out for two or three years," Case said. "If this passes, yes, some businesses will be shut down. My answer to that is they ... well ought to be."
Many bankruptcy attorneys argue that 175 days isn't long enough when court systems are already overwhelmed and poor record-keeping is probably what landed these businesses in financial difficulty.
