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Congress May Get Tough on Busted-Small Firms

Barry Shanoff

June 1, 2001

4 Min Read
Congress May Get Tough on Busted-Small Firms

As if operating a small waste management firm wasn't already a perilous task, Congress now is considering amendments to the federal bankruptcy law that are likely to make business failures even more agonizing.

The proposals would make it more difficult for financially troubled businesses to escape outright liquidation, particularly where owners have used their personal credit cards to finance the company's growth.

An especially worrisome provision would limit the time that a small business could continue under the protections of Chapter 11 of the Bankruptcy Code. Chapter 11 currently allows a shaky business to continue operating under a statutory umbrella that, among other benefits to a company owner, prevents creditors from immediately seeking and collecting court judgments. The creditors and the business are obliged to work out a mutually beneficial solution.

Under the pending bill, businesses with less than $3 million in debt would be subject to time limits. Critics say that a deadline tips the balance in favor of creditors during negotiations. If a financial restructuring plan is not fully negotiated within the specified time frame, the business is liquidated. The secured creditors would get first crack at available assets. Then, whatever remained would be available to other creditors. By comparison, large businesses could remain in Chapter 11 if the bankruptcy court thinks they are making reasonable efforts to honor the debt management plan.

The proposed legislation represents a dramatic turnaround in debtor rehabilitation, according to experts. The proposed Chapter 11 deadlines “change the whole dynamic … for small firms,” says Elizabeth Warren, a Harvard law professor. “The history [of bankruptcy law] has been to do one of two things: Either small and big business are treated alike, or small business gets better access to reorganization than big business.”

Meantime, proposed changes in personal bankruptcy rules surely will affect small businesses. Struggling owners who pay company expenses using their personal credit cards may be unable to erase their debts through involuntary bankruptcy under Chapter 7. Instead, these debtors would be herded into Chapter 13 payment plans.

Not surprisingly, key business groups support the bill and oppose efforts by lawmakers such as Sen. John F. Kerry, D-Mass., to eliminate the tougher small business provisions.

For the most part, groups representing independent and small businesses, which include thousands of waste hauling firms throughout the country, recognize that at one time or another, their members have been both small-business debtors and small-business creditors. When their constituents extend credit to individuals and small businesses that don't pay and then file for bankruptcy, expecting to walk away from their obligations, it hurts the entire membership's businesses and all businesses.

But, filing for bankruptcy isn't the only solution.

Some companies — large and small — are going out of business using a cheaper and faster method that predates the bankruptcy laws: an assignment for the benefit of creditors.

State laws dating back to Henry Ford's first automobile allow such assignments. Under the procedure, the party in financial jeopardy transfers all of its assets to an individual who acts like the formal trustee in bankruptcy. In turn, the recipient or assignee sells the property, deposits the proceeds into a special account, and disburses money from the account to pay creditors.

Who gets paid when and how much depends on a pecking order set by statute, which can be similar to priorities in federal bankruptcy laws. State law also establishes the rights and obligations of the assignee.

Perhaps the best reason for a debtor to shun a bankruptcy filing and choose an assignment is to maintain control. Significantly, state assignment laws typically allow a debtor to select the assignee. Lawyers, accountants and business advisors usually serve in this role. Surprise, surprise — these assignees tend to be more responsive to the debtor's goals than a randomly chosen bankruptcy trustee.

Grateful for the nice fee for the work, the assignee will make every effort to accommodate the debtor's desires. This is not to suggest behind-the-scenes wheeling and dealing. Notice of any sale is given to all creditors, and the highest and best offer generally prevails. A potential buyer receives relatively quick action, compared to a protracted bankruptcy proceeding, and can pick up an asset without accompanying debt and other liabilities.

State procedures tend to be less complicated and rigid than the Bankruptcy Code, and state filing fees are considerably less than the costs of a bankruptcy proceeding. Keep in mind: Less costs for the debtor and the assignment process leaves more money for creditors.

To view additional legal articles, visit www.wasteage.com.

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