Getting a Boost From BAPCPA Bankruptcy Legislation
Assists Small Businesses
By Jim Carr and Lou Perry
The number of Chapter 11 bankruptcy filings by businesses escalated dramatically following September 11, 2001. For the past few years, those numbers have been in a steep decline. Experts project that Chapter 11 filings will begin going back up in 2007, with substantial increases from small business debtors.
In 2005, Congress made it somewhat easier and less expensive for small business debtors to reorganize under Chapter 11 of the Bankruptcy Code. In October of that year, Congress enacted the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA). Although BAPCPA was adopted mainly to counter perceived bankruptcy abuses by consumer debtors, that statute also changed some of the rules for reorganization by small business debtors.
Small business debtors are defined generally as business (as opposed to consumer) debtors with aggregate debts of no more than $2 million. BAPCPA establishes new duties, deadlines and reporting requirements for small business debtors that are generally designed to aid them in successfully and expeditiously reorganizing under Chapter 11.
Starting the process
Soon after filing a Chapter 11 case, a small business debtor must participate in an interview with the United States Trustee, a federal official that oversees bankruptcy cases. After the interview, the trustee may ask the bankruptcy court to dismiss the Chapter 11 case or convert it to a liquidation bankruptcy under Chapter 7 of the Bankruptcy Code. The trustee may take such action if it appears that a small business debtor is attempting to abuse the bankruptcy reorganization process.
This initial interview also provides the trustee with an opportunity to advise the small business debtor of new reporting duties imposed by BAPCPA. This includes periodic filing of financial reports detailing, among other things, a small business debtor’s profitability, reasonable projections of cash receipts and disbursements, and other matters.
One large advantage BAPCPA provides to a small business debtor is that the bankruptcy court may order that a creditors’ committee will not be appointed in the Chapter 11 case. Such an order could save a small business debtor thousands of dollars that would otherwise be paid to compensate attorneys and other professionals employed by a creditors’ committee. Even if a creditors’ committee is appointed, the court may impose restrictions on its activity and protect a small business debtor from being burdened by excessive professional fees. Creditors in such a case may need to be more vigilant than they would be if a creditors’ committee were in place to protect the general interests of unsecured creditors.
Disclosure may not be needed
BAPCPA allows a bankruptcy court to relieve a small business debtor from the obligation to prepare and seek court approval of a “disclosure statement” if the Chapter 11 plan provides creditors with adequate financial information. A disclosure statement is somewhat like a stock prospectus. In a normal Chapter 11 case, the preparation and approval of a disclosure statement can be time consuming and expensive. In deciding whether a disclosure statement is necessary, a court will consider the complexity of the small business debtor, the benefit of additional information to creditors and the cost of providing additional information.
BAPCPA speeds up the reorganization process for small business debtors, limiting the exclusivity period to file a plan of reorganization to 180 days. The small business debtor may be forced to file a Chapter 11 plan within 180 days even though larger companies, like United Airlines, may languish in Chapter 11 for years before they are forced to file a reorganization plan for creditor approval.
To further expedite the reorganization process, the small business debtor must obtain creditor and bankruptcy court approval for its Chapter 11 plan no later than 45 days after the plan is filed. Although this streamlined confirmation process can result in a speedy emergence from Chapter 11, it can also result in the failure of the small business debtor’s reorganization because of an inability to meet these deadlines.
Staying the course
One of the primary benefits afforded to a debtor by a Chapter 11 filing is the imposition of the “automatic stay,” which acts as a federal injunction stopping all creditor activity. BAPCPA does limit the scope of the automatic stay when a small business debtor is an abuser of the Chapter 11 process or a repeat filer. If the small business debtor fits into one of these categories, the automatic stay will not stop creditor action unless it is proven that the filing resulted from circumstances beyond the debtor’s control or that the company will promptly propose a successful reorganization plan.
Although a small business debtor electing to file a Chapter 11 case has some additional hurdles to clear after adoption of BAPCPA and the basic standards that must be met to achieve creditor approval and confirmation of a Chapter 11 plan have not been changed, BAPCPA makes reorganization for small business debtors easier and less costly. It is likely that as Chapter 11 filings increase in 2007, more small business debtors will take advantage of these new rules.
Authors: Jim Carr is a partner and Lou Perry an associate lawyer in the downtown Indianapolis office of Baker & Daniels. Each specializes in bankruptcy and related reorganization issues. Carr can be contacted at (317) 237-1190; Perry at (317) 237-1089 or go to www.bakerdaniels.com
Getting a Boost From BAPCPA
11, 2001. For the past few years, those numbers have been in a steep decline. Experts project that Chapter 11 filings will begin going back up in 2007, with substantial increases from small business debtors.