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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MARCH 26, 2001 FINANCE The Final Reckoning for Small Businesses? Experts see cash-strapped entrepreneurs getting little sympathy and less justice once the new bankruptcy bill is signed into law
Although the changes affecting individual consumers are getting a lot of attention, the rules applying to small businesses are the "worst provision in the bill," says Elizabeth Warren, professor at Harvard Law School and adviser to the National Bankruptcy Commission. "I'm appalled by this section. It is deliberately designed to liquidate small businesses." The most onerous aspects of the legislation are stricter time limits for proving the business can reorganize and the addition of a layer of oversight by the U.S. Trustees Office, which will determine whether a troubled business is viable. Although the 175-day time frame for getting Chapter 11 financial reorganization plans approved by the court remains unchanged, the new legislation will make it much more difficult to extend that deadline -- something that is routine today. As a result, more small businesses will be pushed into liquidation, through either Chapter 7 or a more informal means. Only 50% of small businesses currently get court approval for their reorganization plans -- the blueprint for getting back on their feet -- before the 175-day deadline. PRODUCE YOUR PAPERS. The deadline is arbitrary and unrealistic, says Deborah Crabbe, director of the bankruptcy practice at law firm Betts, Patterson & Mines in Seattle. "Each debtor is very unique," she notes. "There are some good reasons why some can't reorganize in this time. Debtors that could have paid will end up...just walking away from their business." The pending law also requires small businesses to file paperwork showing assets, liabilities, secured debts, cash flow, a balance sheet, and other financial statements within days of their bankruptcy petition. "One of the reasons they are in trouble is because they don't have this kind of stuff," says Crabbe, who is the chairwoman of the small-business subcommittee of the American Bankruptcy Institute, the largest organization of bankruptcy attorneys in the U.S. Some 10,000 businesses filed for Chapter 11 bankruptcy protection last year, according to the institute. Generally, about 25% reemerge as financially viable companies. This legislation will reduce that figure, says Crabbe, who represents creditors but still believes the bill is unfair to small companies. It places "a terribly onerous reporting requirement for small businesses that isn't there for large businesses," Crabbe adds. "These mom-and-pop operations are the backbone of our country, but are being treated more harshly than large businesses." The fact that Joe's Appliance Repair will have to file more paperwork, under shorter deadlines, than, say, LTV Steel, if it needs to reorganize under Chapter 11 is especially ironic, says Warren, who points out that U.S. bankruptcy laws originally were written for the benefit of small merchants and farmers. "The principle was: We want entrepreneurs to roll the dice and, if they get into trouble, give them a way to get stabilized and free them up to roll the dice again," says Warren. "This bill says, 'Get rid of 'em!'" OUTSIDE OVERSIGHT. President Bush has said he will sign the legislation, which is currently in conference committee to resolve differences between the House and Senate versions. It defines a small business as one with $3 million or less in debt, and includes both incorporated and unincorporated companies. The provision awarding bankruptcy-petition oversight to the U.S. Trustees Office came in for criticism from insolvency experts, who say federal bureaucrats lack the expertise to determine if a business is financially viable. "The idea that a government agency can field a team of experts on restaurants, beauty shops, auto repair, and on and on is just amazing," Warren marvels. How did this happen? Lawmakers have been widely criticized for tailoring the section on consumer bankruptcy to favor credit-card companies, which just happen to make big campaign contributions. The section on small business came about, critics say, because lawmakers were overly influenced by complaints about companies languishing too long in bankruptcy reorganization and depleting resources that should go to creditors. "The practicalities, with respect to small businesses, really haven't been considered fully," says Crabbe, who doubts the new small-business rules will benefit either creditors or debtors. GOOD AND BAD. Senator John Kerry, a Massachusetts Democrat, tried to strike the small-business section from the bill, but his amendment was voted down. "This bill fails to ensure the viability of small businesses in the future and does not foster entrepreneurship in our economy," he said several days after it passed. "It may be good politics, but it's bad public policy." Details of the legislation have been difficult to digest, acknowledges Damon Dozier, director of government and public affairs for National Small Business United (NSBU). Bankruptcy reform was No. 5 on NSBU's list of legislative priorities this year because some of its 70,000 members have been burned by other small businesses going into bankruptcy, he says. Even so, the fact that it will be tougher for small companies to emerge from bankruptcy disturbs Dozier, who takes a measure of consolation in the fact that small businesses will gain a place on creditors' committees -- a change he sees as improving their chances of collecting money owed. Still, small-business creditors, who generally find themselves waiting in line behind lenders and larger, secured creditors, are not likely to collect much from their bankrupt counterparts, says Michael Kopelman, an insolvency attorney in Hackensack, N.J. "JUST TERRIBLE." The membership of the National Federation of Independent Businesses is so divided on the issue of bankruptcy reform that the group is not taking a position on the legislation, says spokesman Ed Frank. "We're staying out of it." When the organization last conducted a survey on the issue in the mid-'80s, opinions were sharply split. The pending law also has been assailed by the National Bankruptcy Conference, a nonprofit group of 60 lawyers, judges, and academics. It "reflects everything that's wrong in our political process," says Douglas Baird, a University of Chicago law professor and conference vice-chairman. "It is shameful. It was shaped to a very large extent by the people who make campaign contributions." Says Englewood (N.J.) lawyer Gary K. Norgaard, a bankruptcy specialist who represents banks: "My clients get helped by this bill, but it's not right. It's just terrible." In this jittery economy, more than a few small businesses are no doubt going to find out just how terrible.  By Theresa Forsman in New York Edited by Robin J. Phillips  | | |
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