What the commission to study the reform of chapter 11 means to you

December 3, 2012

empty pockets image: bankruptcy or debt settlement?This post was written by Peter Lippmann, national account representative, Large Law Firm segment

We are constantly and continuously inundated with information about the current state of our economy and the need for further reform to prevent potential economic issues. And nothing impacts the business market more than bankruptcies, something we often see evidenced in the news and world around us. Sometimes, the bankruptcy process leads to a stronger, restructured business that benefits customers and creditors alike. However, more often, these bankruptcies lead to lost jobs, locked buildings and creditors’ losses in the millions of dollars. It comes as no surprise that there have long been calls for changes to the bankruptcy code to prevent these scenarios and better protect both debtors and creditors.

In October, a new 22-member “Commission to Study the Reform of Chapter 11” began hearings in the hopes of defining the current state of Chapter 11 and determining where to focus efforts to bring impactful changes to this law. As the bankruptcy code finds its roots in a marketplace that was based on the manufacturing and sale of goods – seen by the number of protections designed for small farms – the law may need to change to reflect today’s marketplace, including intellectual property that won’t be found in any field. Moreover, today’s financial transactions can be more complicated than the original Chapter 11 authors imagined. We will learn in 2014 if this “new normal” can fit into the current framework or if a complete overhaul is needed.

What might alterations to Chapter 11 look like?

First and foremost, looking at the legal proceedings themselves, there is likely to be some language against “venue shopping,” which many national businesses are taking advantage of. Congress has already attempted to mitigate this by proposing changes in this area with the Chapter 11 Bankruptcy Venue Reform Act of 2011 (H.R. 2533) which requires Chapter 11 debtors to file their case in the district where their main offices are located.

Secondly, there may be additional protections afforded to creditors that have obtained a structured settlement prior to the filing of bankruptcy protection, ensuring that none of these funds will be lost. Creditors frequently are forced to prove these transfers were within the “ordinary course of business” in order to receive those settlements.

Lastly, it’s very possible there may be a change to the types of credit used for restructuring stemming from the credit market’s recent tightening.

However the commission rules, the intersection of law and business is too substantial to keep the status quo and greatly increases the need for and chances of Chapter 11 reform. We will stay on top of any and all shifts in policy and procedure, and continue to keep you up-to-speed on product enhancements based on these changes.