ABI Review Article Proposes Simplifying "Small Business Debtor" Definition in Bankruptcy

An article in the Summer 2013 edition of the American Bankruptcy Institute (ABI) Law Review argues that policymakers should simplify the definition of a "small business debtor" in bankruptcy.

In her article, "An Argument for Simplifying the Code's 'Small Business Debtor' Definition," Professor Anne Lawton of the Michigan State University College of Law recommends 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," said Lawton.

Small businesses have historically performed poorly in Chapter 11, with cases languishing for months while administrative costs piled up and a debtor's chances for a successful exit dwindled. Congress enacted reforms in 1994 and again in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that required increased reporting by and monitoring of small business debtors. These reforms also extended time requirements for plan proposal and confirmation.

Still, the Code's current definition of a small business debtor diverts time that could be spent on plan negotiation and debtor evaluation to threshold questions about the applicability of small business provisions. Lawton argues that the calculation of a debtor's liabilities to determine whether they exceed the current $2,490,925 cutoff should be amended to eliminate the requirement that "contingent," "unliquidated," "affiliate" and "insider debt" be deducted.

"Debtor liabilities predict plan success regardless of whether liability totals include or exclude contingent, unliquidated, affiliate and insider debt," said Lawton, noting that the simplified definition would 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."

- Jacob Barron, CICP, NACM staff writer

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