Analysis of provisions in the bankruptcy law 2005

¶ … New Bankruptcy Law 2005

The Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 have been signed into law by President Bush on April 20, 2005. The Act is considered to be a most extensive review of the Bankruptcy Code ever since its inception in 1978. Irrespective of the fact that several provisions like general structure of liquidation under chapter 7, provisions for reorganization under chapter 11 and other elementary attributes like imposition of the automatic stay and other order of priority for different types of claims and requirements for confirming a plan, remain as it is, the 2005 Act is considered to have significant impact on the rights and interests of both creditors and debtors in consumer and business bankruptcy cases. The modifications brought in under this Act to the Bankruptcy Code are considered to be largely evolutionary rather than revolutionary. (United States: Congress Overhauls the Nation's Bankruptcy Laws)

The new law comes into force on October 17, 2005. It has been indicated that any bankruptcy filed before October 17 will be administered by the present law. The new law is adjudged not to be completely new but have its origin a decade earlier, when President Clinton vetoed the bill. However, by 2005 it could able to gain political support both from Democrats and Republicans to get through. The primary objective of such legislation is to discourage bankruptcy filings and to turn some debts not subject to a bankruptcy discharge. The new law was widely patronized by both banks and the credit card industry. The inherent hypothesis upon which the entire law is based on is that citizen's trying to file bankruptcy is dishonest and lazy. The proposed law accords creditors; particularly the credit card companies more valid reasons to challenge the bankruptcy and some cases places credit card debt on equal terms as that of child support. The credit card companies are attempting to prevent people from discharging credit card debt in their bankruptcies. (New Bankruptcy Law Passed on April 20, 2005 - Goes Into Effect on October 17, 2005)

The elementary objectives of the laws of bankruptcy are to provide an honest debtor a 'fresh start' in life by making free the debtor from most of the debts and to make payments to the creditors in a systematically manner to the extent up to which the debtor has property available for payment. Bankruptcy in the United States is a federal statutory law and is entrusted upon the Constitutional necessity for 'uniform laws on the issue of bankruptcy throughout the nation. The general category of bankruptcy embodies several types of proceedings. The U.S. Bankruptcy Code incorporates multiple chapters, each prescribing varied procedure for debt resolution. To illustrate, the Chapter 7 filing is the most general form of bankruptcy. (Encyclopedia: Bankruptcy)

Liquidation entails appointing a trustee that collects the non-exempt property of the debtor, disposes it and distributes the proceeds to the creditors. Declaration of bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is considered more complex and involves permission to the debtor to use even the future earnings to settle the debt liability to the creditors. The Chapter 9 bankruptcy was applicable only to the municipalities and is considered to be only a form of reorganization rather than liquidation. Bankruptcy may be resorted to voluntarily by the debtor or it can also imposed upon involuntarily by as few an one creditor if the debt owned is large enough and being used as a collection tool but its use can be very risky and if managed inappropriately may entail the creditor to large damages. (Encyclopedia: Bankruptcy)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256) normally recognized as Bankruptcy Reform Act, modifies the Title 11 of the United States Code. The prominent feature of the Law is the institution of a need-based formula that turns the debtors to Chapter 7 or Chapter 13 on the basis of their ability to repay. The Act imposes a means test that finds out whether a debtor is eligible for Chapter 7 relief, that normally discharges all unsecured debts or subject to Chapter 13 that entails the debtors to repay certain creditors in installments over three to five years. The main objective behind this is to force the debtors who are capable of repaying at least a fraction of their debts to do so. Normally, a Chapter 7 filing will be converted to Chapter 13 if the debtor can pay the lesser of (i) $10,000 or (ii) the higher of (1) 25% of non-secured, non-priority debt or (2) $6,000. A debtor can avoid the means test by indicating 'particular circumstances' and certain 'safe harbor' exemption may apply. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)

The major provisions of the Act can conveniently be grouped under the heads of Consumer Bankruptcy, Commercial Bankruptcy and Agricultural Bankruptcy. The Consumer Bankruptcy provisions include - New compulsory credit counseling that forces the debtor to seek credit counseling within three months from the date of filing of petition and must successfully complete a personal financial management education course prior to obtaining a discharge; A debtor receiving relief under Chapter 7 discharge is disqualified to receive another for at least eight years and cannot receive a Chapter 13 discharge within four years of the Chapter 7, 11 or 12 discharge or within a couple of years of a prior Chapter 13 discharge; the law made it mandatory to submit the copies of tax returns, payroll stubs, and other documents with the petition along with the documents necessitated under the prior law; the debtors are compelled to send notices to creditors of the bankruptcy filing and creditors not in receipt to such notices are not subject to penalties for violation of the automatic stay; the Chapter 13 debtors with income exceeding the state median are to make payments over a five-year period normally exceeding the total amount they must repay and the debtors with income that is less than the state median will repay over the period of three years; the Chapter 13 debtors are allowed to deduct from plan payments the costs of health insurance, domestic support commitments, expenditure to operate a business and charitable donations of up to 15% of gross income; the exemption of retirement savings held in tax retirement accounts expanded up to $1 million; the savings accounts for education are exempted up to $5,000; Debtors opting for a state homestead exemption over the federal exemption are forced by a prior state of residence for two years after moving to a more generous state; the landlords are allowed to surpass the automatic stay and initiate or continue eviction proceedings; the scope of non-dischargeable debts expanded to include state and local taxes; the presumption of non-dischargeable limits expanded to include expenditure for luxury goods and services exceeding $500 made within 90 days of filing, and cash advances exceeding $750 made within 70 days of filing; domestic supports like alimony, maintenance and child support obligations are considered prioritized among unsecured debts and are non-dischargeable and are not applicable for automatic stay; the debtor seeking relief under Chapter 7 are bound to reaffirm or redeem loans secured with personal property or surrender the property within 45 days after filing of the petition; Chapter 13 debtors are bound to continue making secured loan payments as originally obligated. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)

The provisions relating to Commercial Bankruptcy include creation of expedited Chapter 11 for small business that entails businesses with less than $2 million in debts to file an expedited form of Chapter 11 reorganization. This also includes the shortening of the period of exclusivity under Chapter 11 that allowed only 18 months to propose a reorganization plan prior to creditors are allowed to propose their own plans. The provisions relating to Agricultural Bankruptcy made the Chapter 12 family farmer reorganization permanent and expanded to include family commercial fishing operations and aquaculture. This also raised the Chapter 12 eligibility debt limits. The family farmers presently must have aggregate debts of less than $3.37 million of which 50% must come from farming operations, to be considered competent to file under Chapter 12. Moreover, the Act necessitates the bankruptcy attorneys to make reasonable inquiries to confirm that information provided to the court is well founded. Attorney is required to be responsible for misleading statements and misinformation and may subject to penalties and sanctions. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)

Such reformation in terms of major modifications in the corporate bankruptcy law is expected to lead to a rush to the courts by loosing companies to find out easier treatment. The new bankruptcy law embodying the new creditor protections in the law will make the bankruptcy reorganizations more stringent and also more costly for companies in search of shelter under Chapter 11. The formulators of the Law have made it stringent in reply to the concerns that management has been too fast to use bankruptcy like another financial device to affect creditors and shareholders. The recent impositions on personal bankruptcies attracted the attention but the legal experts opined that new rules could have extensive effects. In common, in the words of a bankruptcy lawyer Jon Schneider of Goodwin Procter in Boston, "There is probably going to be a raft of filings in September to avoid this new law." (Law could trigger Chapter 11 surge) D.J. Baker of Skadden Arps a New York lawyer, representing supermarket chain Winn-Dixie in its reorganization opined that these changes will make some companies to fail in Chapter 11.