Easing Chapter 11 Pain For Small Businesses

U.S. lawmakers continue to press for more affordable bankruptcy for small businesses, with Congress reintroducing the Small Business Reorganization Act earlier this month.

Reports in The National Law Review on Tuesday (April 23) said proponents of the bipartisan bill remain optimistic about its eventual passage into law. The bill, first introduced last November and sponsored by Rep. Doug Collins and Senate Judiciary Committee Chairman Chuck Grassley, aims to “take into account the unique needs of small businesses and streamline existing reorganization processes.”

According to the publication, current bankruptcy law often makes the costly process of filing for Chapter 11 too burdensome for a small business owner to benefit from the intended purpose of bankruptcy in the first place. Legislators now want to add a subchapter V to the Chapter 11 of the U.S. Bankruptcy Code that would enable small companies with less than $2,566,050 in liabilities to move through the bankruptcy process at a lower cost, while also providing small business owners with an opportunity to retain ownership of the company.

Small businesses would be required to obtain an appointed “standing trustee” to manage bankruptcy and payment reorganization. The process could condense the bankruptcy timeframe, requiring that a bankruptcy court hold a status conference 60 days after filing.

Other aspects of the bill include making it more difficult for creditors to reject a small business’ repayment plan for a portion of outstanding debts, and prohibit some lawsuits filed against a bankrupt company’s creditors.

Reports noted that the National Bankruptcy Conference, American Bankruptcy Institute and National Conference of Bankruptcy Judges all support the bipartisan bill, though it is unclear if or when the legislation will be passed by Congress.

Last November, when the bill was first introduced, A. Tom Small, a retired bankruptcy judge in North Carolina, told The Wall Street Journal why new bankruptcy legislation is needed for small firms.

“Small businesses haven’t been using bankruptcy as much as they could because it’s too expensive and too cumbersome,” he said. “Chapter 11 is designed for the big corporations, not the little ones.”

“It’s a well-balanced bill that streamlines the process for small businesses that need it, and increases recovery for creditors where it is used,” reflected Brooklyn Law School Professor Edward Janger in another interview with Bloomberg Law last December.

It’s unclear what percentage of bankruptcy filings are made up of small businesses, but Small Business Administration data says one out of five small businesses started in 2016 did not last until 2017, while only about half survive past five years.

The legislation continues to move through Congress at a time when economists have raised concern about rising corporate debt levels and insolvency rates.

Atradius data published in March found that 2019 is likely to be the first year since 2008 in which insolvencies rise. Analysts forecast a 1 percent increase in insolvency rates among advanced markets, looking at trade and monetary policy volatility and uncertainty as key factors. In the U.S., the insolvency rate is expected to hold steady this year, though separate data from Coresight Research found certain sectors in the U.S. – particularly retail – are seeing insolvency rates surge.

“The number of [bankruptcy] filings in the first six weeks of 2019 [are] already at one-third of last year’s total,” researchers warned about the U.S. retail market, as USA Today reported earlier this year.

While those figures do not analyze small business insolvency rates specifically, the bankruptcy filings of major retail chains like Toys R Us and Sears have raised concerns over how their bankruptcy paths will impact their smaller suppliers down the supply chain.

Further, reports in February from CNBC revealed that the majority of U.S. small businesses expect an economic recession to hit in the next year.