On Wednesday, April 20, 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256).This legislation is considered by many experts to be the most far-reaching overhaul of U.S. bankruptcy law since 1978. While the most prominent changes affect individual (consumer) bankruptcy cases, the law also contains significant provisions affecting Chapter 11 business bankruptcies, small business bankruptcies and cross-border insolvency cases. Most provisions are slated to go into effect on October 17, 2005.

Title IV of the Bill, “General and Small Business Bankruptcy Provisions,” includes most of the amendments that impact Chapter 11 business bankruptcies. Outlined below are some changes of particular interest to commercial credit professionals. For in-depth information on the new law, see the additional sources listed at the end of this article.

Creditor’s Committees

The bankruptcy court will now be permitted to dispense with a meeting of creditors, after notice and a hearing, if the debtor has filed a plan and solicited acceptance of the plan prior to the commencement of the case.
The bankruptcy court is empowered to direct the U.S. trustee to adjust the makeup and number of members of the creditor’s committee.
A small business concern (as defined by the Small Business Act) can be included on the creditor’s committee if the claim of the small business creditor is disproportionately large compared to its annual gross revenue.

Time Limits

Debtor rights to propose a plan of reorganization will no longer be extended beyond 18 months.
Nonresidential real property leases must be assumed or rejected by the debtor within a maximum of 210 days, after which the debtor must receive the landlord’s written consent to any extension.

Preferences

See 8/23/2003 article on Preferences

The “ordinary course of business” defense is now proved if the payment under question was either “in the ordinary course of business” or in accordance with ordinary business terms. Previously, the defendant would have had to prove both.
The minimum amount for a preference action is now $5,000.
Preference actions against non-insider trade vendors, where the payment is less than $10,000, must now be held in the district where the defendant resides.
The “reach back” period to avoid fraudulent preferences has been expanded from one year prior to the petition date, to two years prior.

Reclamation Rights

See 7/17/2003 article on Reclamation Rights.

The period in which a seller may demand reclamation of goods has been expanded to within 45 days of the buyer taking possession of goods. If the debtor files its bankruptcy petition within this 45-day period, then demand must be made no later than 20 days after the petition date.

Involuntary Bankruptcy Filings

Creditors with claims subject to bona fide disputes as to liability or amount are precluded from being petitioning creditors in an involuntary bankruptcy.

Cross-Border Insolvencies

A separate Chapter 15 has been added to the Bankruptcy Code to cover cross-border, or transnational insolvencies.

Privacy Protections

Under the current law, practically every piece of information supplied by a debtor in connection with its bankruptcy is made available to the public. Under the new law, if a business debtor has a policy prohibiting it from selling “personally identifiable information” about its customers in effect at the time of the bankruptcy filing, such information cannot be sold by the trustee unless specific conditions are satisfied.

Conversion and Dismissal

The court must commence a hearing on a conversion/dismissal motion within 30 days of the motion’s filing. It must decide the motion not later than 15 days from the commencement of the hearing.

Additional Sources for Information on Bankruptcy Bill S.256

President Bush Signs S.256 - Enacting Bankruptcy Reform Legislation (Financial Services Alert - Special Edition), April 25, 2005 article submission by Goodwin Proctor Law Firm to Mondaq’s Article Service

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, American Bankruptcy Institute

Govtrac.us provides information regarding the enactment of this bill along with the full text

Legal Information Institute of Cornell University provides full text of the old Title 11 bankruptcy law.

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Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.

This information is provided by ABC-Amega Inc. -- providing commercial debt collection services in more than 200 countries worldwide. For further information, contact info@abc-amega.com.