The federal government is seeking an overhaul of corporate bankruptcy fees to help the court system pay for its oversight.
The U.S. Trustee Program that oversees bankruptcy administration is proposing adjustments to quarterly fees for the largest Chapter 11 debtors, a Department of Justice spokesman confirmed in an email. The new structure would switch most payments to percentage of disbursements instead of the current flat rate scheme and would significantly increase costs on the biggest-ticket cases.
The proposed fee structure would increase quarterly fees paid by Chapter 11 debtors with quarterly disbursements of at least $1 million to an amount equal to 1% of disbursements or $250,000, whichever is less. Beginning in 2021, the director would be permitted to adjust the fee once a year.
Quarterly fees are currently set at a fixed amount, with the highest a debtor can owe being $30,000 per quarter for those whose quarterly disbursements top $30 million. The adjustment under Trump that shifts to a percent-based scheme increases the limit of the amount owed to $250,000, eight times where it's at right now.
"Anyone that you've heard of who files for bankruptcy, this would trigger," said University of Michigan law professor John Pottow. "These big Chapter 11s, they're spending a million dollars just paying their lawyers right out of the gate."
Fees for past bankruptcies for companies such as Kmart, now owned by Sears (SHLD) , United Airlines and Caesars Entertainment likely would have been affected.
The U.S. Trustee Program estimates the fee increase would result in $289 million in revenue in 2018, $150 million more than what it would be under the current system.
The DOJ spokesman said that cases with quarterly disbursements under $1 million are excluded from the proposed adjustment to ensure small businesses don't pay additional fees. "About 95% of debtors who voluntarily identify themselves in the bankruptcy system as meeting the Bankruptcy Code's definition of a small business have quarterly disbursements of under $1 million," he said.
"It seems to go a pretty good way of making sure it's not affecting small businesses and organizations," said Anthony Casey, a professor of law at the University of Chicago Law School and former associate at Wachtell, Lipton, Rosen & Katz.
Under the current structure, those paying disbursements of under $1 million are subject to quarterly fees that top out at $4,875.
"They're holding fees steady at the low end, and they're cutting off increases at the high end, and in between, they're increasing them," said Lynn LoPucki, UCLA law professor and founder of the UCLA-LoPucki Bankruptcy Research Database.
Companies would have to pay $25 million or more in quarterly disbursements in order to hit the $250,000 limit.
A sketch of the fee structure proposal was mentioned in the "skinny budget" blueprint rolled out by the Trump administration in March. It was not included the complete 2018 budget unveiled this week but is still in the works.
Experts say increased fees are unlikely to deter bankruptcy filings.
"In the world of taxes that change behaviors significantly, I don't think this would be one of them," Casey said. "I've never heard someone talking about these fees as a meaningful part of their calculation in thinking about bankruptcy."
Targeting disbursement fees is a politically safe move for a Trump administration that is facing its fair share of turmoil. There is no political affiliation it attacks or broad constituency it angers.
"There are people who will be unhappy about it, but it's not going to catch a lot of controversy," Casey said. "A large company in bankruptcy is not your most sympathetic group."
The Trump administration is not alone in proposing such an idea. A similar payment scheme is also included in legislation recently passed by the House.
Of course, Trump is well familiar with the bankruptcy process—his companies have filed for Chapter 11 bankruptcy protection six times and may very well have been affected by this new scheme.
Editors' pick: Originally published May 26.