While its work on consumer debt attracted the most heat, last week's report by the National Bankruptcy Review Commission recommends several changes that would help creditors deal with insolvent corporate customers.
The group urged Congress to streamline small-business cases, prevent developers from dragging out bankruptcies for years, eliminate U.S. district courts from the appeals process, and give creditors greater say over how funds from a bankrupt firm are spent.
"This is a fairly workable product," said Joseph Giampapa, lead attorney at Banc One Corp. "It attempts to deal with stall tactics in business bankruptcies."
"These really make a great deal of sense," agreed Cory Lipoff, managing director of Gordon Brothers, a bankruptcy workout firm. "There is nothing I see from a business standpoint that is offensive."
The small-business changes would affect 85% of all Chapter 11 filings and apply to any business that has less than $5 million in debt.
This change appears to be on the fast track for approval. Several sources said they expect Sen. Charles E. Grassley, who chairs the Judiciary subcommittee with jurisdiction over bankruptcy issues, to introduce a small-business reform bill in January.
Under the commission's proposal, small-business owners would have 90 days to submit a reorganization plan. Judges would be required to either approve that plan or devise an alternative within 150 days of the initial bankruptcy filing.
The commission would prevent judges from granting deadline extensions unless the company showed by a "preponderance of the evidence" that a delay would permit it to complete a reorganization. Judges also could exempt small companies from numerous filing requirements.
"This would put a great majority of Chapter 11s on the fast track," said Philip S. Corwin, a lobbyist at Federal Legislative Associates who represents the American Bankers Association. "The ones that don't have a shot at recovery would be forced out of the system immediately. It is a very good proposal."
The panel also recommends clamping down on developers of a single buildings, giving them 90 days to submit reorganization plans. Currently, only companies with less than $4 million in debt must use streamlined procedures.
"This would be a great benefit for commercial real estate lending because it would cover just about all commercial real estate projects," Mr. Corwin said. "Developers could no longer hide in Chapter 11 for months and milk the property."
The proposal also would make it easier to challenge bankruptcy court decisions, permitting direct appeals to the federal appeals court. Lenders have complained that it is a waste of money to have to take appeals first to the local U.S. district courts.
The commission also would permit judges to add lenders to a creditor's committee, which oversees repayment of secured and unsecured debts. Currently, the bankruptcy trustee decides who gets a seat.
The plan also attacks repeat filings. Firms that filed for Chapter 11 within two years of completing a reorganization would no longer automatically be protected from creditors. Instead, they would have to prove beyond a preponderance of evidence that the new bankruptcy is a result of different problems than the earlier insolvency.
Congress created the review commission three years ago to recommend an overhaul of the bankruptcy code. It delivered the report Oct. 20.