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Bankruptcy Reform May Bring 'Unintended Consequences,' Experts Warn

A group of credit and finance experts has warned the U.S. House of Representatives that a pending bankruptcy reform bill contains numerous flaws and says a rush to enact it may bring "unintended consequences."

The bill, known as the Bankruptcy Abuse Prevention and Consumer Protection Act, was passed by the U.S. Senate March 10 and is now under consideration by the House.

The experts are members of the Commercial Law League of America, whose bankruptcy division consists of about 1,200 bankruptcy lawyers and bankruptcy judges from nearly every state in the country, according to the CLLA Web site.

"The nation's bankruptcy laws must strike a balance that is both fundamentally fair and practically sound for all parties involved," the CLLA said in a March 15 letter to the House Judiciary Committee. "Unfortunately, the [Bankruptcy Abuse Prevention and Consumer Protection] Act is neither and, worse still, the act fails to fulfill its oft-stated purpose of eliminating abuse."

The CLLA says defects in the act are numerous, but the group names two as "major" flaws: the so-called "fast track" Chapter 11 procedures for small businesses and the continued allowance of corporate "forum-shopping."

Fast track expands the rights of commercial landlords too much, according to the CLLA.

"Already preferred under [existing bankruptcy law], commercial landlords are given the power to force a debtor's decision regarding assumption or rejection of a commercial property lease before it is possible for the debtor and other parties to know which is more appropriate to the circumstances," the CLLA says.

"The creditor body ultimately pays for premature decisions, either in value lost from rejected leases that should have been retained or in the administrative expense involved in maintaining a lease that only later proves to be burdensome to the estate," the group continues.

In addition, lax forum-shopping rules should be tightened, the CLLA says. Current law permits corporate bankruptcies to be filed in the state where the debtor is incorporated even if the business has no other nexus with that state, according to the CLLA.

"Permitting a bankruptcy filing in a distant forum effectively bars many creditors — especially those who are most vulnerable such as consumers, workers, retirees or small trade creditors — from participating in the bankruptcy process based on nothing more than their inability to afford the travel expenses," the CLLA says.

The group warns Congress that the proposed legislation will disturb the "delicate and complicated" bankruptcy process because the reform measures fail to recognize and balance the "multi-party dynamic" at work.

The CLLA calls the proposed legislation "disappointing" given that bankruptcy reform has been under consideration in Congress since at least 1998.