Reform of Chapter 11 of Bankruptcy Code could benefit businesses

The aim of filing for Chapter 11 bankruptcy is to give financially distressed businesses in Chicago and around the country a chance to reorganize and continue operations under a fresh start. Although Chapter 11 still provides significant benefits to businesses, some bankruptcy experts have argued that the Bankruptcy Code is no longer neatly tailored to achieve that goal. They assert that the business realities expressed in the Code, now nearly 35 years old, do not align with those of today.

In response, a number of experts from the American Bankruptcy Institute have convened a commission to discuss what changes need to be made to the Chapter 11 bankruptcy process. Members of the commission met for the first time last week, but did not go into great detail concerning what modifications they would recommend. One member suggested, however, that bankruptcy courts be given greater power to remove underperforming executives.

The commission's review of the Code will touch on a variety of important subjects, including how best to deal with employee benefits and union contracts, paying creditors and the company valuation process.

The commission must synthesize solutions to these issues in a Code reform that fits small businesses and closely held corporations as well as the country's largest public companies. Many commission members acknowledged that businesses of any size face additional financial challenges in the current bankruptcy process that can be alleviated through alterations to the Code's provisions.

The commission also indicated that it would limit its recommendations to portions of the Code dealing with business bankruptcy. While some legislators called on the commission to address the debt individuals face from student loans and mortgages, the commission's members stated that its focus at the moment was on Chapter 11.

Source: The Wall Street Journal, "Bankruptcy Leaders Call for Chapter 11 Overhaul," Katy Stech, April 19, 2012.

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