US Lawmakers Want Cheaper Chapter 11 For SMBs

According to The Wall Street Journal (WSJ) on Friday (Nov. 30), two U.S. lawmakers proposed a bill to make filing for bankruptcy easier, faster and more affordable for small businesses (SMBs) with $2.5 million or less in debt.

The Small Business Reorganization Act of 2018, introduced Thursday (Nov. 29) by Sen. Chuck Grassley (R-Iowa) and Sen. Sheldon Whitehouse (D-Rhode Island), would introduce incentives for small business owners that want to maintain ownership of their companies. The bill includes protections for creditors, too.

Businesses filing for bankruptcy would have to develop a repayment plan within 90 days and make it simpler for judges to approve of it. Reports said these measures aim to make the process faster for small businesses, and for creditors that want to be repaid more quickly. The legislation also cuts the requirement to appoint an unsecured creditors committee, which would lessen bankruptcy costs for small businesses.

Under current rules, small business owners must repay their debts in full to retain ownership of their firms. The new bill proposes requiring creditors to accept a small business’ repayment plan if it agrees to repay a portion of its debts using future profits for up to five years.

According to reports, filing for bankruptcy protection can cost as much as $300,000 or more for small businesses. The initiative followed reports from earlier this year in which corporate bankruptcy experts warned that SMBs often avoid filing for Chapter 11 bankruptcy because of the costs, and the concerns that business owners would be forced to sell, the publication said.

“Small businesses haven’t been using bankruptcy as much as they could because it’s too expensive and too cumbersome,” said A. Tom Small, a retired North Carolina bankruptcy judge, in an interview with the WSJ. “Chapter 11 is designed for the big corporations, not the little ones.”

That’s despite experts warning that economic hardship often disproportionately affects small businesses, which often lack resources and negotiating power to secure better deals with their vendors, according to reports.