If there was ever a reason for bankruptcy reform the two recent headline-grabbing cases are prime examples as why there should be an overhaul to our bankruptcy code.

If you have been vacationing on an island in the Pacific with no media, I’m alluding to Enron, the largest bankruptcy filing in U.S. history and K Mart the largest retail bankruptcy filing to date. Both of these companies have filed for protection under Chapter 11 reorganization and therein lies the problem.

Millions of dollars will now be dolled out by these companies not to creditors, employees, stockholders or landlords but to firms and individuals acting as either attorneys or “advisors” to pave the way through the reorganization process that does not hold any guarantees that they will be successful if and when they emerge from bankruptcy protection.

Unsecured creditors have constantly questioned why there are never sufficient assets to pay against their pre-petition claims. The filing by K Mart this week seeking approval of payment to outsiders to assist them through bankruptcy may answer this question. The following schedule of fees was filed with the bankruptcy court for approval:

Accountants:  $495 per hour; Attorneys: $740 per hour; Bankruptcy consultants: $350 per hour; Automation consultants: $225 per hour; Clerical: $95 per hour; Real estate advisors: $150,000 per month plus $75,000 per month if they dispose of any real estate; Investment bankers: $335,000 per month.

The schedule did not include the salaries of any “in house” professionals that K Mart presently has on staff. Enron’s schedule has not been filed or was unavailable at the time this article went to print, however, it is known that in addition to outside professional fees there will be additional requests for severance packages for its officers and directors.

In light of this there are creditors who cannot wait to continue to do business with these companies. One credit manager I spoke with this week informed me that their company is eager to resume shipments because K Mart contributes over a million dollars to their annual revenue. The pre-petition balance owed them in excess of six hundred thousand that represents purchases made before December will, no doubt, eventually be written off. This credit professional was dumbfounded when informed their company would have to generate an additional fifteen million in revenues just to offset the write off.

Congress should be looking at restructuring Chapter 11 along the lines of the Chapter 13 provisions applied to individuals. In Chapter 13 the petitioner devises a plan where all pre-petition creditors receive an orderly payout out of their claims either in full or on a pro-rata basis. Under this plan there is no need for a creditors committee, as all creditors usually receive something. The present law that allows Chapter 11 petitioners to pick and choose which creditors receives payment and which do not is an injustice to those creditors who honored their commitments. If a company is unable to repay pre-petition debt through reorganization then they should be required to convert to a Chapter 7 liquidation.

What do you think? We’d like to hear from you.

I wish you well.