Reforms Could Make Survival Tougher for Troubled Firms
Bankruptcy reform’s expected effect on consumers has received the lion’s share of attention, but the new law could seriously hamper businesses’ attempts to stay afloat, bankruptcy experts say.
Businesses could find it more difficult to reorganize their finances under Chapter 11 bankruptcy protection, due to new rules that would give judges less discretion and creditors more power.
That could lead to more businesses failing and greater layoffs, said UCLA law professor Kenneth N. Klee, who played a key role in drafting the 1978 legislation that created the current bankruptcy code.
The reforms would give creditors greater ability to stop a reorganization plan or force a company into liquidation. For example, a single creditor could halt a restructuring by claiming the company had made false financial statements--a claim that must be investigated even if unfounded and even if the delay causes the business’ demise, said Melanie Rovner Cohen, chairwoman of the nonprofit Turnaround Management Assn.
Businesses in bankruptcy would also be given only 120 days to decide whether to renew their leases--a window that could be too short for many struggling retailers. A retail business that filed for bankruptcy reorganization early in the year could be forced to give up store leases instead of remaining open long enough to benefit from holiday sales.
“If Macy’s had had to file under these rules, it would have gone under,” Klee said.
The new measure could also force small businesses to try to reorganize too quickly, Cohen said. Businesses with debts of less than $3 million would be subject to an expedited process that might not leave companies with complicated finances enough time to put together a turnaround plan.
The changes were prompted by creditors’ concerns that many business bankruptcies take too long and that bankruptcy judges have too much discretion in shaping reorganization plans, said Sam Gerdano, executive director of the American Bankruptcy Institute.
