By Stephen Cooper, CCH Washington Staff Writer

The U.S. Small Business Administration would be required to study the impact of bankruptcy reform on the nation's small businesses, under a measure approved by House lawmakers on June 10, 1998. The legislation, H.R. 3150, the Bankruptcy Reform Act of 1998, which passed by a vote of 306-118, would make it tougher for businesses and affluent individuals to file bankruptcy.

More individuals would be required to go into a Chapter 13 bankruptcy and pay off some of their debts over time, rather than a Chapter 7 bankruptcy, under which the court wipes out all their debts. For small businesses, the measure would require uniform national reporting requirements in Chapter 11 cases. It also outlines a series of infractions a debtor may commit that may result in his or her Chapter 11 case being converted to Chapter 7.

Under the bill, the SBA would conduct a small business bankruptcy study, in cooperation with the U.S. Attorney General, the Director of the Administrative Office of U.S. Trustees, and the Director of the Administrative Office of the U.S. Courts. The study would examine the internal and external factors that cause small businesses to file bankruptcy, as well as why some businesses are able to successfully complete their bankruptcy cases.

The study was requested by Rep. Nadia Velazquez (D-N.Y.) and will also determine how federal laws relating to bankruptcy can be made more effective and efficient in assisting small businesses to remain viable. Velazquez said she would have preferred the House to delay implementing the provisions of the bill that affect small business until after the study was completed and presented to Congress.

Small Business Provisions of the Bill

Here's how the bill would impact small business debtors, which are defined as entities that have aggregate, noncontingent, liquidated, secured and unsecured debts of $5 million or less at the beginning of a case. The bill authorizes bankruptcy courts to consider the complexity of a small business debtor's case and the cost of providing information to creditors. If the judge finds a debtor's plan provides adequate information about details and consequences, the judge may allow the debtor to solicit acceptance or rejection from creditors without performing the extra step of preparing and communicating a disclosure statement.

The measure would also require the Advisory Committee on Bankruptcy Rules of the Judicial Conference of U.S. Courts to create standardized disclosure statements and reorganizations plans for small business debtors to use for their cases.

The bill would also require small business debtors to file monthly financial reports containing profitability, projected cash receipts and disbursements, and comparisons of actual receipts and disbursements. The monthly reports must also tell whether timely tax returns are being filed and paid. The U.S. Attorney General would be directed to issue standard reporting rules.

The bill would require small business debtors to include financial statements and balance sheets in their petitions, as well as require senior management to attend court scheduling conferences, initial debtor interviews and the first meeting of creditors. Small business debtors would also be required to maintain customary and appropriate insurance, file necessary tax returns, and pay postpetition taxes.

The measure would reduce the time period in which a small business debtor must file a reorganization plan to 90 days and seek confirmation for the plan to 150 days.