Excerpt- By Martin J. Moylan

Knight Ridder Newspapers 

In just two months, sweeping changes in business bankruptcy laws take effect. They're intended to curb past dillydallying and abuses by businesses that land in bankruptcy — debtors in legal-speak.  The changes also offer more protection to creditors, the people and firms owed money.

"It would be a big mistake for anyone facing bankruptcy in the near term to wait until Oct. 17," said Jon Schneider, a Boston attorney who was counsel to bondholders in the 1989 Eastern and 1990 Continental airline bankruptcies. "Some of the [new] provisions are very unattractive for a large company like an airline."

The new laws are likely to cause more companies to be sold or liquidated, many bankruptcy experts believe.  Bankruptcy is no fun under the current rules. But with the new bankruptcy laws, companies will be pushed to work their way through bankruptcy faster, and control of the process could even be wrested from management.

Other provisions include restrictions on executive pay, security deposits for utilities and full payment for vendors providing goods shortly before a company files for bankruptcy.  For companies that know bankruptcy is inevitable, filing before mid-October is a no-brainer.

In airline and other corporate bankruptcies, judges have tended to indefinitely extend the debtor's exclusive right to propose a reorganization plan. During this period of "exclusivity," no other party can directly propose a sale of the company or ownership reorganization.

The ability of a debtor to drag out proceedings gives it great leverage with unsecured creditors who are not being paid or accruing interest.

"Eastern languished for several years in Chapter 11 before a judge realized it was time to boot them out and liquidate them," said Anthony Sabino, a professor of law at St. John's University.  Come December, United Airlines will have been in bankruptcy for three years.

The new laws limit a bankrupt company's exclusive right to file a reorganization plan to 18 months. If it files a plan, then exclusivity is extended automatically to see if it can win the required support from creditors and other parties. But if a plan isn't proposed within 18 months, unions, bondholders, creditors and other parties can file a plan.

Debtors will be under great pressure to move cases forward quickly.

"If a company can't solve its problems within this period of time, the creditors can swoop in and say, 'If you don't have a plan to solve your problems, we do,' " Sabino said.” That is a very powerful weapon that has long been denied to creditors."