Proposed bankruptcy venue law receives mixed reception

This article looks at how a U.S. Senate bill could end forum shopping for corporations filing for bankruptcy.

The U.S. Senate is currently considering an important piece of legislation that could have a significant impact on where businesses choose to file for bankruptcy. As The News Journal reports, the bipartisan Senate bill, called the Bankruptcy Venue Reform Act, would require companies to file for bankruptcy in the state where they are headquartered or hold most of their assets, rather than where they are incorporated. The bill has received a mixed reception, including from creditors in bankruptcy proceedings who the bill is designed to better protect.

Why so many bankruptcies happen in Delaware

If passed, the Bankruptcy Venue Reform Act would have an especially profound impact in the State of Delaware. Thanks to a court system there that is favorable to businesses declaring bankruptcy, a long history of bankruptcy case law, and judges and attorneys who are well-versed in bankruptcy law, the tiny state has been the venue of choice for many companies declaring bankruptcy.

Federal bankruptcy law allows companies to choose to file for bankruptcy in the state where they are incorporated, which may be different from the state where they are headquartered or do most of their business in. Indeed, incorporation is the main reason cited for most Delaware bankruptcies and Delaware is where 65 percent of Fortune 500 companies are currently incorporated.

Preventing bankruptcy venue shopping

However, many legal and financial experts see Delaware's status as the business bankruptcy capital of the nation as giving businesses and the state an unfair advantage. The Bankruptcy Venue Reform Act, a bipartisan piece of proposed legislation, would end this practice of forum shopping by requiring businesses to declare bankruptcy either in the state where they are headquartered or where they hold most of their assets. Businesses would no longer be able to cite the state where they are incorporated as a justification for declaring bankruptcy in that state.

Supporters of the bill say it will make the bankruptcy process fairer, especially for creditors who are often at a disadvantage in Delaware bankruptcies due to that state's laws tending to favor companies that declare bankruptcy. However, as WHYY News reports, opponents say that creditors could also be hurt by the bill if more bankruptcies end up being filed in jurisdictions that have less experience handling complex bankruptcy cases than Delaware does.

Creditor representation in bankruptcies

Creditors face some hard decisions when a debtor company declares bankruptcy. That's why they need an attorney on hand who will fight hard to uphold their rights when a debtor does go bankrupt. Without a tenacious attorney on hand, creditors risk losing their assets and needlessly expose themselves to financial risk.