Magazine article American Banker

Bankruptcy Cases Move Faster Than Ever

Magazine article American Banker

Bankruptcy Cases Move Faster Than Ever

Article excerpt

Proposed bankruptcy legislation now in Congress, which includes parts designed to expedite bankruptcy proceedings, is flawed by the presence of special interest proposals that would impinge on the efficacy of the 1978 reforms.

A review of the past 15 years of proceedings under the Bankruptcy Reform Act of 1978, against the background of its predecessor statute, Chapter 10 of the Bankruptcy Act of 1898, shows how far we have come in expediting bankruptcy proceedings.

Before 1978, Chapter 10 required that the assets of a financially distressed business be turned over to an "outside trustee." The "debtor in possession," a feature of the Bankruptcy Reform Act of 1978, has shortened, not lengthened, the duration of bankruptcy cases.

Under the current system, Chapter 11 proceedings in major cases are concluded in two to three years, on average. This is in contrast to the seven to 10 years or longer under the old chapter 10 system. (Inland Gas, for example. lasted 41 years).

In enacting the Bankruptcy Reform Act of 1978, Congress was critical of the fact that the old Chapter 10 and its "outside" trustee system not only prolonged bankruptcy proceedings unduly, but resulted in liquidations costing jobs and capital and, in many cases, wiping out creditors altogether.

In introducing the current bankruptcy system in 1978, Rep. Don Edwards, D-Calif., said, the new Chapter 11 system would "protect the investing public, protect jobs, and help some troubled businesses." He added at the time that one "cannot overemphasize the advantages of speed and simplicity to both creditors and debtors."

Streamlining Proceedings

The Chapter 10 system was extremely cumbersome and was replaced by the current Chapter 11 system in order to streamline and expedite bankruptcy proceedings.

While eliminating the outside trustee and installing the debtor in possession, creditors participating in the 1978 reform processes, mindful of the mischief that could be wrought by continuing management in possession, insisted on certain safeguards.

First of these was a provision for the removal of management for dishonesty or incompetence and replacing it with a court appointed trustee.

Second, the debtor was required to file a plan within 120 days unless that time was extended by the court for "cause. …

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