ABI Chapter 11 Commission: 1978 Bankruptcy Code in Need of Modernization

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An American Bankruptcy Institute (ABI) Commission has found that the current Bankruptcy Code, enacted in 1978, is in need of modernization.

In a conference call this week, ABI examined the progress of their Commission to Study the Reform of Chapter 11 and discussed the ways in which the 1978 Code is outdated. Such issues were identified by practitioners and academics who participated in the five public hearings held by the Commission throughout 2012.

"The community recognizes that the Bankruptcy Code is strong and durable and works, but, as I've often said, it's somewhat like using a typewriter," said Commission Member Richard Levin of Cravath, Swaine & Moore LLP. "It could be improved, it could be more efficient and more balanced in many ways, while providing the kinds of protections that creditors and debtors alike need to preserve jobs and preserve value."

While the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) partially revised the Code, the 1978 Bankruptcy Reform Act established its current iteration, completely replacing the last version of the Code established by the Nelson Act in 1898.

The two most pressing developments in the bankruptcy process that the Commission believes the 1978 Code is ill-equipped to handle are "the prevalence of secured credit and the explosion of claims trading," according to Commission Co-Chair Robert Keach of Bernstein Shur, who was quick to note that while these have been identified as issues, the Commission isn't necessarily opposed to them. "There's been an assumption by some, an incorrect one, that because we identified those two externalities—claims trading and the growth of secured debt—that we were identifying them as problems to be solved," said Keach. "Those are events and enterprises that were not present in the 1978 Code."

Still, Levin noted how drastically these developments have altered the Chapter 11 process. "They've changed the entire dynamic of the process," he said. "There's no longer a situation where the creditors who lent the money or sold the goods are sitting at the table negotiating the restructuring, and that just changes how people approach these things."

Other ways in which the 1978 Code lacks the tools necessary to properly govern today's bankruptcies are more fundamental to the process. "One of the other major externalities has been the changes in communication and information technology," said Keach. "When the 1978 code was passed, one of the only ways for unsecured creditors to get information about the company or about what debt was trading for was through the vehicle of the creditors' committee. That's far less true today."

"Those are all the kinds of changes that have to some degree undercut the basic premises of the 1978 Code and led us to this effort to modernize," he added.

- Jacob Barron, CICP, NACM staff writer

The ABI Commission will host one of its 2013 hearings on Chapter 11 reform at NACM's 117th Credit Congress in Las Vegas. For more information on next year's Credit Congress program, or to register, click here.

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