Help Center

Winter Leadership Conference | December 5-7 | Rancho Palos Verdes , CA Register Today View Schedule

Summer Law Review Article Proposes Simplifying the Bankruptcy Codes Small Business Debtor Definition

Alexandria, Va. — The definition of a “small business debtor” as currently written in the Bankruptcy Code should be simplified to more efficiently identify viable small business debtors so that they can receive special treatment under the Code as Congress intended, according to an article in the American Bankruptcy Institute (ABI) Summer 2013 Law Review (Volume 21, No. 1). In her article “An Argument for Simplifying the Code’s ‘Small Business Debtor’ Definition,” Prof. Anne Lawton of the Michigan State University College of Law (East Lansing, Mich.) recommends simplifying the Code's "small business debtor" definition by eliminating all but two criteria—formation of an official creditors' committee and size of a debtor's liabilities—from the current definition. “A complex and ambiguous definition, like the one adopted by Congress, increases the possibility of confusion and litigation, which delay debtor identification and increase costs,” Lawton writes. Previous small business reforms to the Bankruptcy Code arose out of concerns that small business debtors fared poorly in chapter 11; their cases languished while their administrative costs increased and their prospects for plan confirmation decreased. In response, Congress enacted a series of reforms in 1994 and then again in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) requiring increased reporting by and monitoring of small business debtors, as well as extending time requirements for plan proposal and confirmation. “The definition that Congress enacted in BAPCPA, however, fosters uncertainty and creates a breeding ground for litigation,” Lawton writes. “Time better spent on negotiating a plan or evaluating a debtor’s prospects for success in chapter 11 is diverted to threshold questions about the applicability of the Code’s small business provisions.” The complex format of debtors’ schedules and statements make it difficult for the U.S. Trustee to easily verify the liability calculations required by the Code, according to Lawton. Simplifying the calculation of a debtor’s liabilities by eliminating the current requirement to deduct “contingent,” “unliquidated,” “affiliate” and “insider debt” in order to determine whether a debtor’s liabilities exceed the current $2,490,925 cutoff for small business debtors will be more efficient. “Debtor liabilities predict plan success regardless of whether liability totals include or exclude contingent, unliquidated, affiliate and insider debt,” according to Lawton. By retaining only two of the Code’s current criteria for identifying a small business debtor—official creditor committee formation and the size of the business’s liability— Lawton asserts that the simplified definition will better predict both plan confirmation and successful plan performance. “The modified definition not only simplifies the task of sorting small from non-small businesses, but it also makes the sorting process less reliant on judicial interpretation and more [reliant] on objectively verifiable facts,” Lawton writes. To obtain a copy of “An Argument for Simplifying the Code’s ‘Small Business Debtor’ Definition,” published in the Summer issue of the ABI Law Review, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org. ### ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.