Over the past few months, the media has doggedly reported on the progress and final passage of the new federal bankruptcy law, focusing on its effects on individuals. The impact that it will have on business has gotten little attention.

Yet the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, adopted on April 20, will make seeking Chapter 11 protection a more onerous process, according to legal and turnaround management experts.

In some cases, it will force struggling companies to liquidate assets rather than focus on restructuring, says bankruptcy attorney Jon Schneider of Goodwin Procter LLP. That's because provisions in the new law, which amends parts of the U.S. Bankruptcy Code, have the effect of requiring bankrupt companies to generate more upfront cash to pay administrative claims.

Other provisions narrow the timeframe for making decisions about whether to assume or break existing real estate leases, points out William Lenhart, a turnaround expert with BDO Seidman's Financial Recovery Services. That's likely to hurt retailing and other industries that need flexibility in planning locations, he notes.

At the same time, the provisions of the act, most which go into effect in late October, cut a wide swath across many aspects of corporate bankruptcy law. The new law is bound to introduce complications for bankrupt companies in such diverse areas as administrative-claim status, retention pay, inventory, utility payments, and relations with investment bankers.

Here, from a corporate-finance perspective, are some of the practical implications of the changes.

• Quicker decisions on leases. One of the more troublesome changes of the new law, an amendment to Section 365(d)(4) of the bankruptcy code, pertains to real estate leases and the amount of time a bankrupt company has to decide whether to retain or break them. Before the law's enactment, companies that filed for Chapter 11 had 60 days (from the filing date) to make their decision. As a matter of practice, says Lenhart, bankruptcy judges routinely granted as many extensions to the 60-day period as necessary.

But companies must now make their lease decisions within 120 days, and are only permitted one 90-day extension, for a maximum of 210 days. The new cap is sure to cause problems for retailers, restaurant chains, or any kind of operation that relies on multiple locations for success, says Lenhart.

In the past, legitimate extensions served as a testing period for reorganization plans, he explains. The time was used to track and analyze sales data so that management could figure out which locations were profitable and which ones to shutter. For the analysis to be effective, however, businesses had to operate at least during one heavy selling season, such as the Christmas rush.

Speeding up the testing period could force management to make rash decisions, reckons Lenhart. As a result, companies may emerge from bankruptcy with ineffective plans and end up either liquidating assets, or — in what lawyers lightheartedly refer to as Chapter 22 — a second bankruptcy.

If a company decides to break a lease, it would be on the hook for the greater of one year’s rent, or 15 percent of the remainder of the lease — which could be a significant payout on a 30-year lease, the turnaround expert says. Under the old law, debtor liability was limited to one year on a broken lease.

Perhaps more important, the new law reclassifies back rent as an administrative claim rather than as an unsecured debt. As an administrative claim, back rent takes a priority position in the bankruptcy-creditor hierarchy, landing behind secured debt in the payout queue but leapfrogging ahead of unsecured creditors. Since unsecured debt is paid after the reorganization plan is finalized, reclassifying rent as an administrative claim will force bankrupt companies to shell out a whole lot more in upfront funding.

• More upfront funding. Generally, administrative claims are the costs incurred to run a business while it's in Chapter 11. Those expenses include wages, taxes, and legal costs. By hiking the number of claims that qualify as administrative, the amendments essentially force insolvent companies to generate more upfront cash, according to Schneider. For bankrupt companies, generating cash almost always requires selling off assets, which can deplete a company’s value and potentially hurt its chances of emerging from bankruptcy, he says.

Several provisions of the act will require insolvent companies to pony up more money or return inventory before reorganization plans are set. For example, a change to Section 503(b)(9) of the code will grant administrative-claim status to any goods shipped within 20 days of a company's filing for bankruptcy, as long as the shipment was made during the normal course of business. Although "the normal course of business" is a subjective term, attorneys agree that the criterion is very broad and includes any regular commerce between a vendor and the insolvent company.

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