Exorbitant bankruptcy costs hurt small businesses

Even when small businesses would benefit from bankruptcy, the cost of filing for such protection is often cost-prohibitive, according to The Wall Street Journal.

Roughly 90 percent of companies that file for Chapter 11 bankruptcy have less than $10 million in debt and property, and their costs are at least $100,000 to $300,000 even if there are no disputes. Fears of losing the business and personal assets during the process keep most from even starting the process.

Recently, hearings in Washington with the Senate Judiciary subcommittee on Oversight, Agency Action, Federal Rights, and Federal Courts met to discuss the problems small business owners face as well as to propose changes that could be made to the law in the future to make the situation easier. One idea is to alter the filings to be more similar to the Chapter 13 process for consumers. In this case, the business owner might be able to keep their assets in exchange for repaying the debt over several years. Under the current system, debts must be repaid in full up front.

Even without changing the foundation of the Chapter 11 system, there are still many ways in which the costs to the filer can be lowered. Reducing the amount of information and paperwork that businesses are required to assemble and providing a financial professional to help navigate the process would save everyone both time and money. Another change could be eliminating the requirement for an unsecured creditors committee for every filer. This committee uses the bankrupt business’ money to hire lawyers and advisers to ensure that as much money as possible is going to creditors. This is a lengthy process that could be solved with simple mediation and arbitration.