Irrespective of the views on the merits of the Bankruptcy Abuse Prevention and Consumer Protection Act, it is now the law of the land. Although focusing primarily on consumer bankruptcy cases, the BAPCPA also makes significant changes to the rules governing business bankruptcies. Features of the new law that are likely to be of greatest general interest are the following:
Consumer Cases
Means Testing. The overriding theme of the new law is that people who have some ability to pay their creditors should do so and should not be allowed to obtain a quick discharge of their debts, as is generally the case under Chapter 7. Accordingly, if an individual's income is greater than the median income for the state in which the bankruptcy is filed1 and the income available for payment of pre-bankruptcy debts is greater than $166.66 per month, the individual cannot obtain a Chapter 7 discharge over the objection of the bankruptcy trustee or creditors. Instead, the debtor must make payments to creditors through a five-year Chapter 13 (or Chapter 11) plan.
If the debtor's income available for creditors is between $100 and $166.66 per month and, when multiplied by 60, the total is equal to at least 25% of the individual's general unsecured debts, the individual also must make payments to creditors through a five-year Chapter 13 (or Chapter 11) plan.
Credit Counseling/Debtor Edu-cation. No individual may be a debtor in bankruptcy unless he or she has received "credit counseling" from an approved non-profit agency within 180 days prior to the bankruptcy filing date. Moreover, no individual can receive a Chapter 13 discharge unless the debtor also has completed an education course in personal financial management approved by the U.S. trustee.
Homestead Exemption. A debtor may use his state's homestead exemption, provided he has resided in that state for the two years preceding the bankruptcy filing. If the debtor has moved into the state within the two-year period, his state of domicile will be the state in which he resided for the majority of the six-month period preceding the two-year period. The intent is plainly to prevent debtors from moving to states such as Nevada, Texas and Florida, which have unlimited homestead exemptions.
Submission of Financial Documents. Debtors must file proof of employer payments, statements of income and tax returns. Failure to do so requires automatic dismissal. Proponents assert that stricter disclosure requirements, like means testing, will deter at least some people from filing, especially those who might otherwise be inclined to hide assets or abuse the system.
Limits on Chapter 13 Relief. The "super discharge" of Chapter 13 has been substantially limited. Claims based on, for example, fraud, misappropriation by a fiduciary, drunk driving and other acts will no longer be dischargeable by Chapter 13 debtors, even if they complete all payments under their plans. Claims based on such acts have never been dischargeable under Chapter 7 or Chapter 11, but were made dischargeable under former Chapter 13 as a means of inducing debtors to elect a repayment plan rather than a straight Chapter 7 discharge.
In addition, Chapter 13 debtors can no longer retain ownership of an automobile purchased within 90 days of filing - as well as certain other collateral subject to a purchase money security interest - merely by paying the secured lender the current value of the vehicle or collateral (commonly referred to as "lien stripping"). Debtors must repay the entire debt amount.
Chapter 11 for Individuals. Individuals (like businesses) have always been permitted to file personal bankruptcy cases under Chapter 11. Under the new law, however, individual Chapter 11 cases have now essentially been made to conform to the requirements of Chapter 13 cases.
Successive Filings. Individuals will now be allowed to discharge their debts through a Chapter 7 bankruptcy only once every eight years, instead of once every six years. In addition, the new law denies a Chapter 13 discharge to any debtor who has received a discharge in a Chapter 7, 11 or 13 case within the preceding four years or in another Chapter 13 case within the preceding two years (thereby eliminating the so-called "Chapter 20" bankruptcy).
Domestic Support Obligations. Support obligations receive a high priority for payment and failure to make such payments following the filing of a case is grounds for dismissal of the bankruptcy. A debtor may not receive his discharge if such obligations are not paid in accordance with the debtor's plan.
Business Cases
Small Business Cases. Business debtors with less than $2 million in debt must follow the special streamlined procedures established for small business cases. Electing the small business provisions was formerly an option, not a requirement.
Single Asset Real Estate Cases. The $4 million debt cap that previously limited the special rules applicable to single asset real estate debtors has been eliminated. Much larger real estate projects will now likely become subject to the rules requiring single asset real estate debtors, on an expedited basis, to commence making payments to their secured creditors and to file a plan of reorganization.
Exclusivity Period. The period in which the debtor alone can file a Chapter 11 plan (the "exclusivity period") cannot be extended beyond 18 months. In complex cases, this may encourage creditors to hold out on plan negotiations and thereby acquire additional leverage as their ability to file a competing plan nears a fixed date.
Leases. Courts may extend by a maximum of 10 days the time limit for a debtor to assume or reject its leases of non-residential real property, unless the landlord agrees to an additional extension of time. This time limit will have a substantial effect on Chapter 11 bankruptcies of businesses that operate through multiple leased retail outlets.
A debtor also can assume a lease of non-residential real property without having to cure defaults that relate to a pre-bankruptcy breach of a non-monetary obligation, such as a temporary pre-bankruptcy cessation in operation (a "going dark" clause). There also is a cap of two years' rent on a landlord's administrative claim for breach of a lease that had initially been assumed in the bankruptcy, but was subsequently rejected.
Utility Service. There are strict requirements for providing "assurance of payments" to utility companies that provide post-bankruptcy utility services to debtors in Chapter 11 cases.
Employee Retention Programs. There are significant limits on a debtor's ability to pay insiders who continue their employment with a Chapter 11 debtor after the bankruptcy case is filed. The law also limits severance payments.
Employee Wages. The priority claim of employees for wages earned within the 180 days prior to the earlier of the bankruptcy filing date or the date the debtor ceased business has been increased to $10,000.
Cross-Border Cases. Washington businesses should be aware that the law also adds a completely new chapter (Chapter 15) to deal with cross-border insolvency cases. The new chapter addresses such subjects as the administration of cross-border cases, the recognition of foreign proceedings, the role of foreign representatives and the effect of concurrent proceedings. n
1 A state's "median income" is based on the most recent U.S. census data adjusted for subsequent years by the consumer price index. For example, Washington's median income in 1999 for a family of four was $61.389 and from January 2001 to January 2005, the CPI increased 8.9%.
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