New Bankruptcy Law
By: Paul Loraas
Date of Publication: July 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) makes it tougher to file for bankruptcy. Whether you find the new law economically practical or believe it places undue burden on unfortunate debtors, the result is clear – individuals filing for bankruptcy are subject to stricter scrutiny and additional requirements. While the changes under the Act are far more extensive than what can be discussed in this article, the following are some of the key factors affecting individuals and small business owners.
Important Changes to Chapter 7
Individuals could formerly elect to file Chapter 7 bankruptcy without a determination of income, but under the new Act, there is a“means test” which must be passed to qualify for Chapter 7 relief. If the “means test” is failed, the case is converted to a Chapter 13 case (which requires a repayment period), or dismissed. The “means test” assesses average income less reasonable monthly living expenses (as defined by the IRS). The new Act also has additional filing requirements, including:
• an instructional course concerning personal financial management;
• credit counseling from an approved nonprofit credit counseling agency; and
• additional document filing, including tax returns, a certificate stating the debtor received certain information about bankruptcy, evidence of payments received from employers in the 60 days prior to filing, a monthly net income statement, and any anticipated increase in income or expenses post-filing.
Affect on Small Business Owners
Small business owners (businesses with debts of $2M or less, excluding debts to affiliates and insiders) now have their own set of rules for business reorganization under Chapter 11 of the new Act. The list of grounds for dismissal or conversion to Chapter 7 for reorganization was significantly expanded. The time frame for filing a Chapter 11 reorganization has been accelerated, and the procedure is more rigorous. For example, additional reporting requirements are imposed to better determine the likelihood of a successful reorganization.
While the new Act arguably makes it more difficult for a small business to file for bankruptcy, supporters of the Act argue that small business owners “win” because the Act makes it more difficult for individuals to file. Others suggest any such victory is hollow, inasmuch as small business owners are unlikely to obtain personal guarantees from their customers, making them an unsecured creditor to be paid only after all secured creditors are paid.
In sum, the Act makes it tougher for individuals to file bankruptcy and start fresh. Small businesses wanting to file under Chapter 11 are subject to tougher requirements, but may benefit because of tougher filing requirements affecting consumers.
For more information on Bankruptcy , please contact Paul Loraas or call 218-722-0861.
The information in this article is not intended as, and does not constitute either legal advice or a solicitation of any particular prospective client. The reader should not rely on any information contained herein regarding your specific situation until you have consulted with a qualified attorney.
Circular 230 Disclaimer - Advice, articles and commentary included herein do not constitute an opinion and are not intended or written to be used, and they cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
