Will Congress Ban Bankruptcy Court

Democratic Rep. John Conyers Jr. of Michigan and Republican Rep. Lamar Smith of Texas sent Washington a proposal to change the bankruptcy law so that businesses seeking bankruptcy protection must do so in the state where they primarily operate their business.  Currently, bankruptcy law allows business debtors to file bankruptcy in the state which they are incorporated.  The current bankruptcy rules have had an effect where most high-profile cases take place in Delaware or New York.  If the legislation is approved that would change drastically, leaving some bankruptcy professionals on edge.

Here’s a summary of the proposed rule change:

The rule would remove the language loophole that allows companies to file for bankruptcy protection where they’re incorporated or where they operate much-smaller affiliates. If passed, corporations would have to file in a court near their principal place of business or where most of their assets are located.

Many opponents of the proposed change say that if the rule is approved it could have the unintended effect of driving up bankruptcy costs while making unsecured creditors less able to get a piece of asset distributions. Their argument is that attorneys with the most experience on high-profile corporate bankruptcy cases work in Delaware and New York and the rule change would force them to travel and increase their fees.  Those who support the rule argue that because so many bankruptcy cases are filed in only two states it causes the costs for both creditors and debtors to increase.  They also argue that there are more than enough qualified bankruptcy attorneys in other states who can represent corporate debtors and successfully negotiate settlements without the high costs usually associated with high-profile cases in Delaware and New York.

No consensus has been reached regarding the rule change; but it’s important to note that past attempts to change the bankruptcy rule have failed.