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News Room

Revised Proposal of the Small Business Working Group

I. EXECUTIVE SUMMARY

The structure of chapter 11 is fundamentally sound. Chapter 11 has not, however, consistently

worked well for "small business" bankruptcies.

.Summary of Need for Reform

When it works, chapter 11 is very effective in preserving jobs and going-concern values.

¶When creditors do not participate, however, as is generally true in smaller cases, there isn’t effective oversight of the debtor-in-possession.

¶Preparing the typical drafted-from-scratch plan and prospectus-type disclosure statement is a substantial burden on the debtor, and increases cost and delay in small business chapter 11 cases.

¶A majority of small business chapter 11 debtors have no realistic prospect for rehabilitation.

¶Nearly all of the approximately sixty people who have appeared before the Working Group conceded that reforms are needed for small business cases.

.Summary of Proposal

¶Create new separate-track rules that strengthen the 1994 "small business" amendments to further reduce cost and delay in small business chapter 11 cases.

Expand the definition of "small business" debtors to mean those with liquidated, noncontingent debts of less than $10 million.

Further simplify the plan and disclosure process by:

(i)directing the Rules Committee to develop standard-form plans and disclosure statements. Such forms would be compatible with current statistical database systems and designed to facilitate the collection of reliable data;

(ii)authorizing the court to dispense with disclosure statements altogether in appropriate cases;

(iii)expanding use of the provision permitting a combined hearing on disclosure and confirmation.

Require the debtor to file a plan and disclosure statement within 90 days, and to confirm a plan within 150 days, unless the debtor demonstrates (i) it cannot meet those time limits for reasons beyond its control; and (ii) there is more than a 50 percent likelihood of confirming a plan within a reasonable period of time.

Create uniform rules requiring small business debtors to file financial reports regarding postfiling operations. This will educate debtors about the importance of maintaining proper books and records. Furthermore, the information the reports provide will assist debtors to assess their prospects for reorganization and, where necessary, to carry the burden of proof required to obtain an extension of the plan deadlines.

Expand the grounds for conversion or dismissal under Bankruptcy Code section 1112. Expanded grounds would include [material]: (i) failure to comply with a court order; (ii) failure timely to satisfy filing or reporting requirements; (iii) failure to appear before the court or the U.S. Trustee for scheduled hearings or meetings; (iv) failure to pay postpetition taxes or file postpetition tax returns; and (v) failure to act diligently in proposing a plan.

Require the bankruptcy court to hold a minimum of one on-the-record scheduling hearing on notices to all parties in interest, unless the debtor and U.S. Trustee promptly file an agreed-upon scheduling order.

Postpone application of the section 362 stay to certain repeat small business chapter 11 filers, unless and until they show legitimate entitlement to such protection. [ FN: The Small Business Working Group notes that liaison with the Consumer Bankruptcy Working Group may be necessary on this point about serial filings by individuals.]

 

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