President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Act"). This affects both consumer and business bankruptcies. Following are the most significant changes:
Amendments Affecting Consumer Bankruptcies
- Reforms the bankruptcy system to be "needs based," meaning that the extent of the relief afforded to individuals is based upon their ability to repay creditors. The formula that determines ability to pay uses each state's median income and is called the "means test;"
- Provides for full payment of the amount owed or surrender of motor vehicles to creditors that placed liens on vehicles within three years of the bankruptcy filing;
- In the case of serial filers, severely limits the automatic stay prohibiting all actions against a debtor and their property that is typically granted in each bankruptcy case. For example, such stay will not exist if a debtor has had two or more cases pending during the year. However, the stay may be imposed by specific court order after a showing of good faith;
- Automatically terminates the automatic stay as to personal property that secures a claim, such as a motor vehicle, if the debtor fails to declare and perform his intention to surrender, reaffirm or redeem such property within 45 days (Chapter 7);
- Establishes the value of personal property as "replacement value," meaning the price that would be paid for the property if it was purchased from a retail merchant in its present condition (Chapter 13);
- Limits the exception for retirement funds to $1 million, in most cases;
- Provides more strict limitations on the equity debtors can retain in their homes (homestead exception);
- Increases the period between filing and discharge in successive Chapter 7 cases from six to eight years;
- Disallows Chapter 13 super-discharges to debtors that filed other bankruptcy cases within the previous two to four years; and Requires debtors to pay for and complete a financial education course as a condition to discharge.
Amendments Affecting Business Bankruptcies
- Unexpired leases of nonresidential real estate in which the debtor is the lessee are deemed rejected and must be immediately surrendered by the earlier of 120 days after commencement of the case, or the confirmation of a plan. The Bankruptcy Court may, however, extend the 120-day period for an additional 90 days, but any subsequent extensions can only be granted if the lessor consents;
- Effectively expands the exception to preference recoveries, especially in those jurisdictions that require proof that the pre-petition transfers were both made in the ordinary course of business and according to ordinary business terms; The 120-day exclusivity period in which the debtor enjoys the exclusive right to propose a plan cannot be extended beyond 18 months from the date of the order for relief;
- Provides for strict limitations on the payment or the allowance of claims for retention bonuses and/or severance pay to key personnel of the debtor;
- Adds several additional grounds as cause for conversion or dismissal of Chapter 11 cases;
- Caps the amount of an administrative expense claim resulting from rejection of an unexpired lease of non-residential real estate to the monetary obligations for a period of two years from the later of the rejection of the lease or the turnover of the leased premises.
The Act's amendments are applicable only to bankruptcy cases filed on or after October 17, 2005 (180 days from approval of the legislation). There are, however, several exceptions to the general 180-day effective date. Of particular note:
- Matters involving the homestead exemption (effective on April 20, 2005);
- Expansion of the look back period for fraudulent transfers from one to two years (applies only to bankruptcy cases filed one year after April 20, 2005); and
- Avoidance of certain transfers to or for the benefit of insiders under employment contracts not in the ordinary course of business (effective on April 20, 2005).
Supreme Court Update
In a separate but related matter, the United States Supreme Court in Rousey v. Jacoway recently unanimously ruled that creditors may not seize Individual Retirement Accounts (IRA's) when individuals file bankruptcy. As a result, IRA's now join pension plans, 401(k) plans, Social Security and other similar benefits tied to age, illness or disability, which are protected under bankruptcy law.
If you have questions regarding this alert, please contact one of the following Gust Rosenfeld attorneys:
Sean O'Brien (Business) - 602-257-7460 - firstname.lastname@example.org
Madeleine Wanslee (Consumer) - 602-257-7430 - email@example.com
Gerard O'Meara (Tucson) - 520-388-4787 - firstname.lastname@example.org