Business Adviser: Filing Bankruptcy Getting Harder for Businesses
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Business Adviser: Filing Bankruptcy Getting Harder for Businesses

March 13, 2012


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Since before its passage in 2005, consumer advocates have been lamenting the changes introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made filing for bankruptcy more expensive for consumers. A recent article in the New York Times highlights the less-publicized negative effects BAPCPA has had for businesses in need of bankruptcy protection.

According to the Times, business adviser Chuck Benjamin, who has been offering financial counsel to financially struggling businesses for 23 years, claims that it is today almost impossible for a business to survive a Chapter 11 bankruptcy filing.

Prior to the changed laws, Chapter 11 cases could be extended indefinitely, it seems, and filers often submitted numerous extensions, meaning that some bankruptcies lasted as long as seven years. Sources note, though, that these drawn-out bankruptcy filings were ultimately beneficial to companies and creditors alike: companies remained in business, continued employing their employees, and emerged from bankruptcy as viable customers for creditors.

Today, however, businesses that file for Chapter 11 bankruptcy protection have a period of only 18 months to submit a workable debt repayment plan. If, after that time, no suitable plan has been accepted by the court, a creditor can submit an alternative repayment plan.

The creditor-sponsored plan may (and apparently often does) include provisions for the creditor to purchase the company or its liquidated assets, meaning that the company dissolves and is no longer able to either employ its workers or act as a client for its creditors.

More Power to Unsecured Creditors

Since the implementation of BAPCPA, unsecured creditors (that is, those to whom a filer owes debts that are not connected to any property) have had more power in the Chapter 11 bankruptcy process.

Benjamin critiques this power, insisting that unsecured creditors understand the risk they take on when issuing loans, and shouldn’t continue to lend to companies that are clearly troubled financially. Today, though, unsecured creditors can file a reorganization plan (after the 18-month mark) that takes the filer out of the picture.

And when the filer is eliminated, Benjamin points out, so is the company the filer owns and the jobs provided by that company.

As a result of the changed face of business bankruptcy, sources note, more businesses are seeking bankruptcy alternatives, including merging with other struggling businesses to create one financially viable operation.

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