Bankruptcy Reform—Did It Work? What are the effects of the new bankruptcy laws?
By Martin Bauer, Juliann W. Graves and W. Rick Griffin
Last October, a new law became effective that made it more difficult for people to file Chapter 7 bankruptcy, or straight liquidation cases where a consumer discharges all unsecured eligible debt. This would include credit card debts, medical bills and most consumer debt not secured by collateral.
BAPCPA—Notable Changes The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) created several changes:
The time frame between filing Chapter 7 cases and Chapter 13 cases has been extended to limit repeat filings.
Debtors have less protection for credit card debt.
The method of determining collateral value also has been changed in the creditors' favor.
The BAPCPA also limited the ability of the debtor to strip liens on certain collateral, such as consumer goods purchased within one year or vehicles purchased within 910 days of bankruptcy filing.
A means test is required to determine whether the debtor has excess monthly income to pay unsecured creditors. If so, the debtor must file a Chapter 13 case to repay all or part of the debt.
Another significant change relates to the trustee's ability to avoid preference payments. In the past, the trustee could force creditors to return payments they received prior to the bankruptcy filing if the payments met certain criteria. The trustee's power has been restricted to make it easier for creditors to defend a preference action and keep payments they received prior to a bankruptcy filing.
BAPCPA Effect Clearly, these changes were designed to make it more difficult for consumers to file a Chapter 7 case and not pay anything to their creditors. Has this worked?
Since it has been only a year, it is hard to determine what the long-term results of BAPCPA will be. However, current statistics show some definite trends. In the Western District of Missouri, there were 3,371 cases filed from January 1, 2006, through June 30, 2006. Ten cases were Chapter 11 cases and 1,147 were Chapter 13 cases. For the same time period in 2005, a total of 9,888 cases were filed. Twelve cases were Chapter 11 cases and 1,579 were Chapter 13 cases. The number of Chapter 11 and 13 cases as a percent of the total bankruptcies went from 16 percent last year to 35 percent this year. The number of bankruptcy filings has decreased by more than half, and Chapter 13 cases account for more than a third of the cases filed. A similar trend exists with Kansas filings. The shock from many of the changes is beginning to wear off, and there are more cases being filed each month.
Your Customer or Client Files Bankruptcy How do you deal with a customer or client who files for bankruptcy protection? First, stop all collection efforts immediately, including regular billing. Next, determine what type of bankruptcy has been filed, who are the debtors and the nature of your claim. Are you owed money on account or pursuant to a contract? Do you hold a personal guarantee or do you have collateral? Your status as a creditor will dictate how you proceed.
Because more cases will be filed under Chapters 11 and 13 under BAPCPA, you will be notified to file a proof of claim.
You need to do this to participate in any distribution under the debtor's confirmed plan. You should seek legal advice in determining what rights you may have within the bankruptcy.
For instance, if you are a secured creditor in a Chapter 13 bankruptcy, you may be able to obtain relief from the automatic stay to regain possession of your collateral. In a Chapter 7 case, you may be able to negotiate a reaffirmation of the obligation with the debtor(s) so the debtors remain personally liable for the debt. Similarly, Chapter 11 bankruptcies involve numerous complex determinations that warrant legal advice to protect your rights, such as issues relating to the debtor's assumption or rejection of executory contracts such as leases, and issues relating to evaluation of the debtor's proposed plan of reorganization or liquidation for plan treatment and voting purposes.
The worst course of action is no action. If you fail to properly analyze your treatment within the bankruptcy, you may be giving up rights to collateral or rights to collect money, which is owed to you as a creditor.
Martin Bauer is a partner, Juliann W. Graves is a senior attorney and W. Rick Griffin is an associate attorney with Martin, Pringle, Oliver, Wallace & Bauer LLP, specializing in commercial litigation and bankruptcy. You can reach Bauer at (316) 265-9311 or , Graves at (913) 491-5500 or and Griffin at (316) 265-9311 or .
