Katrina and the New Insolvency Law

Debtor-friendly provisions in the new bill-such as the provision that makes the perennially extended Chapter 12 permanent and expands it from family farm bankruptcies “to apply specifically to fishermen”-means that “an overall delay would delay those debtor-friendly provisions as well,” he noted.

New Time Frames

However, Richard G. Smolev, a partner in Kaye Scholer's business reorganization and creditors' rights department in New York, said that time limits that the new law imposes on businesses will play a significant role in decisions to file for Chapter 11 protection sooner rather than later. The law imposes an 18-month exclusivity period to file a reorganization plan, and a 210-day cap on the time businesses get to decide whether to assume commercial leases.

“In light of the much more restrictive time frames, a business thinking of going through a bankruptcy is well served to file before the new law goes into effect,” said Smolev.

In addition, the effects of the hurricane multiply the difficulties of a business facing financial restructuring. Those difficulties include having to physically rebuild businesses. For instance, because it easily could take more than 18 months for a casino to get back on its feet-including a legislative process to decide whether it will reopen on land or on the water-filing now would better position such an enterprise to control its own destiny, Smolev said.

Robert M. Lawless, a bankruptcy and corporate law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas whose recent research shows that bankruptcy filings increase in areas hit by major hurricanes, said that the new legislation “is going to be a big problem for small businesses that file.”

The law makes it more difficult for small businesses to navigate Chapter 11 because it imposes stringent reporting requirements for documents that small businesses typically don't generate-such as a statement of profitability-and it expands the grounds for dismissal for failing to meet these and other requirements, Lawless said.

In addition, small businesses in the new Chapter 11 face a “presumption of dismissal” built into the law. A small business that does not have the level of creditor participation of a larger enterprise, and that cannot create a reorganization plan within the new 18-month exclusivity period, could give the court grounds for dismissing its case, Lawless said.

“The small business amendments are a stealth provision in the new bankruptcy bill. I think a lot of people outside the bankruptcy field are going to be surprised at these new provisions,” he said.

Peter H. Lawson, director of congressional and public affairs for the U.S. Chamber of Commerce, said the chamber does not expect changes in the bankruptcy law to have much of an effect on those left in the wake of the hurricane.

“We've been hearing people say 'the sky is falling' in terms of the effect of the new law,” Lawson said, but the chamber thinks courts and creditors will do what they can to accommodate debtors wiped out by the disaster.

Though Hurricane Katrina may flood bankruptcy courts with new filings from its victims, experts differ over whether the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which took effect in October, will blow away small businesses in the Gulf Coast region.

Bankruptcy attorneys don't expect Congress to amend the law to respond to the disaster. Also, they warn that strict, new provisions in the law-which may make it tougher on small businesses in particular-make it advisable for companies in trouble to file sooner rather than later. John D. Penn, president of the American Bankruptcy Institute and a commercial bankruptcy lawyer in Dallas-based Haynes and Boone's Fort Worth, TX, office, said he does not expect any significant changes in the law as enacted.

“What I'm hearing is that consideration is being given to giving courts more flexibility in dealing with issues on the consumer side, but not making any changes to the business provisions,” Penn said. He added that despite widespread speculation, he doubts that Congress will change the law's effective date.

Debtor-friendly provisions in the new bill-such as the provision that makes the perennially extended Chapter 12 permanent and expands it from family farm bankruptcies “to apply specifically to fishermen”-means that “an overall delay would delay those debtor-friendly provisions as well,” he noted.

New Time Frames

However, Richard G. Smolev, a partner in Kaye Scholer's business reorganization and creditors' rights department in New York, said that time limits that the new law imposes on businesses will play a significant role in decisions to file for Chapter 11 protection sooner rather than later. The law imposes an 18-month exclusivity period to file a reorganization plan, and a 210-day cap on the time businesses get to decide whether to assume commercial leases.

“In light of the much more restrictive time frames, a business thinking of going through a bankruptcy is well served to file before the new law goes into effect,” said Smolev.

In addition, the effects of the hurricane multiply the difficulties of a business facing financial restructuring. Those difficulties include having to physically rebuild businesses. For instance, because it easily could take more than 18 months for a casino to get back on its feet-including a legislative process to decide whether it will reopen on land or on the water-filing now would better position such an enterprise to control its own destiny, Smolev said.

Robert M. Lawless, a bankruptcy and corporate law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas whose recent research shows that bankruptcy filings increase in areas hit by major hurricanes, said that the new legislation “is going to be a big problem for small businesses that file.”

The law makes it more difficult for small businesses to navigate Chapter 11 because it imposes stringent reporting requirements for documents that small businesses typically don't generate-such as a statement of profitability-and it expands the grounds for dismissal for failing to meet these and other requirements, Lawless said.

In addition, small businesses in the new Chapter 11 face a “presumption of dismissal” built into the law. A small business that does not have the level of creditor participation of a larger enterprise, and that cannot create a reorganization plan within the new 18-month exclusivity period, could give the court grounds for dismissing its case, Lawless said.

“The small business amendments are a stealth provision in the new bankruptcy bill. I think a lot of people outside the bankruptcy field are going to be surprised at these new provisions,” he said.

Peter H. Lawson, director of congressional and public affairs for the U.S. Chamber of Commerce, said the chamber does not expect changes in the bankruptcy law to have much of an effect on those left in the wake of the hurricane.

“We've been hearing people say 'the sky is falling' in terms of the effect of the new law,” Lawson said, but the chamber thinks courts and creditors will do what they can to accommodate debtors wiped out by the disaster.