April 18, 2005 -- In a 302-to-126 vote, the House passed a bill on Thursday that makes it more difficult for individuals to declare bankruptcy, but sets clear guidelines for small businesses.
The main thrust of the new legislation calls for companies with less than $2 million of debt to submit a reorganization plan to the court within six months of filing for bankruptcy that details how they will re-pay their creditors. The court then has 45 days to confirm the plan, which would allow the business to reorganize under Chapter 11, or deny the plan, thus forcing the business into liquidation.
Between a declared plan and a pre-determined timeline, some say small businesses with sound plans will have an easier time getting through bankruptcy court.
"The bill flushes out debtors that don't have their act together. But for those with their act together who do go bankrupt, the reorganization will now be faster and less expensive," said Philip Corwin, an outside Council for the American Bankers Association.
Bankrupt firms must include a projected cash flow statement, a history of receipts and disbursement, and tax filings, when they file their plans to bankruptcy courts. Under the new legislation, the court can also send a trustee to the business to inspect its books. "Debtors are going to really have to have their ducks in a row," said Samuel Gerdano, Executive Director of the American Bankruptcy Institute.
In the past, all businesses, regardless of their size, were clumped into the same category when filing for bankruptcy. Corwin said this lack of classification led many small businesses to languish in Chapter 11, because the courts were tied up with larger, more complex cases.. The new legislation, however, distinguishes between large and small companies, with $2 million of debt being the threshold. According to Corwin, 85% of the companies in Chapter 11 fall below the threshold.
With stricter guidelines on debtors, creditors will have a higher likelihood of collection, which is why banks and credit card companies overwhelmingly supported the bill. According to Gerdano, the majority of small businesses are creditors, making this law favorable to them.
"Creditors often complain because they don't have the staff or resources to be active in a bankruptcy case, so cases usually lead to a loss or a write off. This bill should help creditors get repaid faster," he said.
Opponents of the bill fear that stricter bankruptcy laws will make people less risk averse, thus squelching entrepreneurship. An entrepreneur, for example, might be dissuaded to finance a young business with personal credit.
"This makes it harder for a person to start a business. You have to go through two or three businesses to get it right. Now, one failure and you're out," said Lloyd Chapman, president of the American Small Business League.
Chapman called the legislation "too broad," noting that it doesn't differentiate between an enterprising entrepreneur and a spendthrift twenty-something.
The bill becomes active six months after President Bush signs it, which is he expected to without delay.
The bill passed the Senate last month and is headed for the White House, where President Bush is expected to sign it into law.