Bankruptcy's Dirty Dozen or The 12 Biggest Changes to Bankruptcy Under BAPCPA, and How They'll Affect Creditors

By Nancy L. Allf

1. The Automatic Stay Is Limited. Under new Section 521, the consumer debtor must declare within 30 days after the date set for the meeting of creditors whether he or she will redeem or reaffirm secured debt. Failure to do so results in an automatic termination of the automatic stay. Courts can extend the stay on request, in limited circumstances. Where there are serial filings, the automatic stay is even more limited. For anyone who has had a case dismissed within one year, the stay automatically terminates 30 days after a new bankruptcy under Chapter 7, 11 or 13. If two or more cases were dismissed during the prior year, the automatic stay will not go into effect unless the court so orders after a good faith hearing.

2. Chapter 11 Plans Must Be Filed. There is a new, absolute limit on the filing of a Plan of Reorganization pursuant to § 1211 of the Bankruptcy Code, which caps exclusivity extensions to 18 months from the date of the filing of the petition.

3. Executory Contracts and Unexpired Leases Must Be Assumed. 11 U.S.C. § 365(d) was amended to provide that unexpired leases of non-residential real estate (where the debtor is the lessee) are deemed rejected and must be immediately surrendered by the lessor the earlier of 120 days after the petition is filed, or the date of confirmation of a plan. The court can extend this period for an additional 90 days, but any further extension requires the consent of the lessor.

4. Post-Petition Disclosures and Solicitations Are OK. A new section, § 1125(d) has been added to the Code which allows solicitation of acceptances or rejections post-filing from creditors who were properly solicited pre-filing. This appears to be intended to allow debtors to continue the process in pre-packaged bankruptcies to obtain plan acceptances without first obtaining approval of disclosures statements. In a pre-packaged case, the court may even order that the Meeting of Creditors need not be held.

5. There Are New Defenses to Preferences. The new law contains provisions that will greatly enhance defenses to avoidance actions brought by debtors and trustees. The current "ordinary course" defense is broadened to include the ordinary course of both parties or according to business terms in the industry.

6. Sellers of Goods Have Expanded Rights. Historically, sellers of goods could only reclaim goods received by the debtor while insolvent delivered 10 days or less before the filing of the petition. Under new § 354C(c) this right is extended to 45 days.

7. Trustees Have Expended Avoidance Powers. New 11 U.S.C. § 548(e) allows a trustee to avoid a transfer of an interest of the debtor in property that is made within 10 years of the petition to a self-settled trust done for the benefit of the debtor. This provision became effective on April 20, 2005; most provisions of the BAPCPA did not become effective until October 17, 2005.

8. The Debtor's Homestead May Be Limited. BAPCPA says that debtors may elect state exemptions in the state where they have lived for the 730 days prior to the bankruptcy. If they moved during that 730 day period, the state exemptions for the state where they lived for the majority of the time for the 180 days before the 730 day period will apply. Regardless, the debtor may exempt up to $125,000 of interest in a homestead acquired within 1,215 days of filing bankruptcy, but calculation of that amount does not include equity rolled over from one house to another in the same state. If the debtor engaged in certain illegal activities, the cap is $125,000 regardless of state law. If a homestead was obtained by fraud or by conversion of non-exempt assets, the exemption can be challenged. Nevada's homestead was raised to $350,000 on July 1, 2005. Local bankruptcy judges have interpreted the cap broadly as applying to all states, and not merely those that permit an election between state and federal exemptions.

9. More Chapter 13 Cases Will Return More to Creditors. Adoption of the means test will result in more Chapter 13's being filed. File your claims! All Chapter 13 Plans must be for 60 months. The Super Discharge is reduced, so that 523(a)(2), (3) and (4) debts are now excepted from discharge. All tax returns must be filed for a Chapter 13 to be approved, and the debtor must file all returns from 4 years prior to the Chapter 13 filing. When a Chapter 13 debtor buys a car within 910 days of filing, he cannot strip the lien. The Chapter 13 debtor will not receive a discharge in Chapter 13 if he obtained a prior discharge within 4 years. The Chapter 13 discharge will not be entered until debtor completes an education course in personal financial management.

10. Notice to Creditors Must Be Right.Notice is ineffective until it complies with § 342. Notice is effective when received, but notice must contain the debtor's home address and the last 4 digits of the taxpayer's identification number. If the debtor receives two communications from the creditor within 90 days of filing, then notice to the creditor should be at that address and include the account number. Also, creditors can designate where they receive notices. Notice is ineffective without compliance.

11. There's a New Chapter 15.This new chapter incorporates the Model Law on Cross Border Insolvency completed by the UN's Commission on International Trade Law (UNCITRAL) in 1997. It replaces former section 304, and is designed to incorporate cooperation between the U.S. and foreign countries with respect to transnational cases. Cases brought under this Chapter are ancillary to cases brought in the Debtor's home country.

12. And Last, But Not Least, "Miscellaneous" Revisions. Debtors in small business cases must fulfill seven duties, including: filing financial statements and tax returns within seven days of the order for relief; meeting with the U.S. Trustee prior to the Meeting of Creditors; timely filing tax returns during the case; timely filing other documents and permitting the U.S. Trustee to inspect the debtor's premises and books and records. Creditors' Committees must provide access to information they receive to creditors and take comments from creditors. Chapter 11 debtors may not pay their officers and directors to induce them to "remain with the debtor's business" unless the payment is essential to the retention of the person and his/her services are essential. When such inducements are allowed, they must not be more than ten times the mean of similar payments made to non-management employees. Severance for executives is also limited. BAPCPA also exposes executives to avoidance of payments made outside the ordinary course within three years of the petition. Rights of utilities to adequate assurance are enhanced. The US Trustee can modify the composition of official committees if necessary to ensure adequate representation. Investment bankers can now be "disinterested" persons. The $9 million cap on the value of single asset real estate cases has been deleted. Small Business Debtors must have debts of less than $2 million. Professional persons can now be employed on a fixed or percentage fee basis under section 327. In awarding compensation, courts can consider whether a professional is board certified. Trustees' compensation is now treated as a commission under section 326. Proceedings to determine tax liability before the US Tax Court are not stayed, nor are set offs, provided there is no pending action to determine tax liability. In single asset real estate cases, the debtor can use rents or income from the property to make monthly payments to the secured creditor, notwithstanding the requirements of section 363 (c)(2) of consent or court approval to use cash collateral. New grounds for relief from stay include intent to hinder, delay or defraud and transfer of property without consent, or multiple petitions. The cap on priority claims for employee wages and pension benefit contributions was increased from $4,925 to $10,000, effective April 20, 2005. Trustees may be appointed in the best interest of creditors of the estate. Chapter 11 cases will be dismissed or converted for cause. Chapter 11 debtors can not modify retiree benefits within 180 days of filing unless equity favors modification. Chapter 11 confirmation does not discharge debts incurred under false pretenses.

Nancy L. Allf is a shareholder with Parsons Behle & Latimer. She is past president of the CCBA (1999) and serves as Vice-President of the State Bar of Nevada. Notwithstanding BAPCPA, she continues to represent creditors in Bankruptcy.

The Protection of "Domestic Support Obligations" under the New Bankruptcy Code: What Family Lawyers Should Know

By Amy N. Tirre

A local family lawyer called me in a panic last week because his client's former spouse had filed a Chapter 7 bankruptcy petition seeking to discharge the obligations owed to his client that he (the lawyer) had so painstakingly documented in the parties' property settlement agreement. While the situation was not as dire as he thought because bankruptcy laws protect and except alimony, child support and other family support obligations from a bankruptcy discharge, his call prompted me to write this article so that family lawyers will not be caught unaware. Fortunately, the potential landmines for family lawyers have been significantly reduced under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which rigorously expands the protections afforded to marital dissolution obligations under the Bankruptcy Code, 11 U.S.C. 101, et seq. BAPCPA is effective for those bankruptcy cases commenced on or after October 17, 2005.

The history of family support obligations and discharge in bankruptcy Prior to BAPCPA, the Code drew a distinction between a debt that is in the nature of alimony, maintenance or support and a debt that is a "property settlement obligation" incurred in the course of a divorce or separation. Self-explanatory examples of the former are alimony or child support and examples of the latter are the debtor's obligation to pay the mortgage for the family residence in which the non-debtor former spouse and the children reside or the former spouse's entitlement to half of the debtor's pension. The distinction between the two types of debts was critical in evaluating the dischargeability of the debt under Section 523(a) of the Bankruptcy Code: the debt in the nature of alimony, maintenance or support was simply not discharged under Section 523(a)(5) (unless it had been assigned to a governmental entity); however, the property settlement obligation would be discharged unless the non-debtor former spouse filed a complaint to except the debt from discharge and satisfied a balancing of the hardships test under Section 523(a)(15).

"Domestic Support Obligations" under BAPCPAThe former distinction between a nondischargeable support obligation and a dischargeable property settlement obligation is abolished by the BAPCPA. The BAPCPA creates a new defined term, a "domestic support obligation," in Section 101(14A) of the code: "[D]omestic support obligation" means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is--
(A) owed to or recoverable by--
(i) a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child's parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of--
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative for the purpose of collecting the debt. The definition of a domestic support obligation is designed to encompass all alimony, maintenance or support obligations regardless to whom they are owed; the amendment to Section 523(a)(5) simply states that domestic support obligations are not discharged.

Property settlement obligations under BAPCPA are now nondischargeable The amendment to Section 523(a)(15) omits the balancing of the hardships test and makes nondischargeable what were previously considered dischargeable property settlement obligations. It provides that a debtor is not discharged from any debt owing: to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit. Under Section 523(a)(15), the former spouse will still be entitled to the obligations owed by the debtor under the property settlement agreement, e.g. ½ of the pension. In sum, if it is a marital dissolution obligation in the nature of support, it is nondischargeable under Section 523(a)(5) and if it is a marital dissolution obligation not in the nature of support, it is now made nondischargeable by Section 523(a)(15).

What other protections exist under BAPCPA for domestic support obligations?

Priority: Domestic support obligations are now at the top of the list of claims that take priority in the distributions to creditors. In first position is support payable to a spouse or child and in second position is support assigned to a governmental entity. 11 U.S.C. 507(a)(1)(A).
Exempt assets liable: The debtor's otherwise exempt assets are now apparently liable for domestic support obligations "notwithstanding any provision of applicable bankruptcy law to the contrary." (There's a constitutional challenge in the making.) 11 U.S.C. § 522(c).
Protection from lien avoidance: A judicial lien for a domestic support obligation is not avoidable by the debtor. 11 U.S.C. § 522(f)(1)(A)
Protection from avoidance as a preference: A payment made to a former spouse for a domestic support obligation is not avoidable and therefore, recoverable by the trustee as a preferential payment to a creditor. 11 U.S.C. § 547(c)(7).
Delay in confirmation of plan: Multiple new provisions delay the confirmation of plans in Chapters 11, 12 or 13 until the debtor is current on domestic support obligations. 11 U.S.C. §§ 1129(a)(14), 1225(a)(7) 1325(a)(8) (plan cannot be confirmed if support is not current).
Ground for conversion to Chapter 7 from Chapter 13: The failure to pay post-petition domestic support obligations is a ground for conversion to chapter 7. 11 U.S.C. § 1307(c)(11). Of course, there is probably more for the family lawyer to know, but this article provides the basics under the BAPCPA. If you need to know more, please call a bankruptcy lawyer!

Amy N. Tirre is a lawyer with Kummer Kaempfer Bonner Renshaw & Ferrario, who specializes in commercial litigation and bankruptcy with an emphasis on creditor's rights.