by Kirsten Roe, Associate

On October 17, 2005, massive changes to the United States Bankruptcy Code (the “Code”) took effect as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”).   As its title suggests, the purpose of the Act is to add and modify provisions of the Code to prevent bankruptcy abuse, with a focus on individual and consumer bankruptcies.  Despite the emphasis on individual bankruptcies, some of the changes that have taken effect will also impact commercial bankruptcies.  This, in turn, could affect the construction and surety industry, where personal guarantors and indemnitors are often pursued into bankruptcy for construction debt pursuant to contractual financing arrangements.  The purpose of this article is to briefly discuss certain changes to the Code brought about by the 2005 Act, and to focus on a few key changes that may be of interest to the construction and surety industry, especially from the standpoint of creditors.

One of the most substantial changes to the Code was the addition of several presumptions of bankruptcy abuse.  These presumptions are based upon mathematical formulas that calculate the debtor’s income and assets, or based on certain known fact patterns suggestive of abuse.  For example, the Act has implemented a “means test,” which is a calculation based upon the debtor’s income and assets over a period of time prior to the bankruptcy petition designed to detect presumed cases of abuse.  The newly established presumptions are generally rebuttable by the debtor, but often only by “clear and convincing” evidence.  Where abuse is found, the penalty is dismissal of the bankruptcy, conversion to another chapter, or denial to the debtor of a discharge in bankruptcy altogether.

For those bankruptcy proceedings affected by the Act, creditors and interested parties will also see a marked change in the amount of documentation and financial information that debtors are required to disclose upon filing a bankruptcy petition.  Debtors have always been subject to severe penalties and sanctions for failure to accurately and fully disclose financial information.  Under the Act, however, debtors are required to disclose significantly more financial data at the outset of the bankruptcy proceeding, including financial data for a period of time reaching back before the filing of the bankruptcy petition.  For instance, under section 521 of the Act, upon filing a bankruptcy petition, a debtor must now file with its other schedules and statements a schedule of “current monthly income,” which is an average of the debtor’s income over the six-month period preceding the petition date, as well as calculations which determine whether a presumption of abuse arises under the “means test.” Failure to meet these new disclosure requirements may result in denial of a discharge, dismissal or conversion to another chapter of the Code.

Other changes to the Code that will be of interest to creditors include modifications to the provision of the Code that implements the automatic stay on creditors’ debt collection efforts and litigation.  The changes are wide-sweeping, and effect such varied proceedings brought by the IRS and amendments lifting the automatic stay for residential lease disputes.  One of the more interesting amendments relates to the new “statement of intention” that the debtor must file with respect to property that secures a debt.  If the debtor fails to file this statement of intention, as required by the Act, or fails to indicate in the statement that he or she either will redeem the property or enter into a reaffirmation agreement, or fails to timely surrender, redeem or reaffirm, the automatic stay is automatically terminated and the property is no longer property of the bankruptcy estate.

Another new provision is a clause that limits the duration of the automatic stay where the debtor has filed a prior bankruptcy and a further provision that makes the automatic stay inapplicable when the debtor has filed multiple prior petitions.  The Act even creates a presumption, rebuttable only with “clear and convincing evidence,” that a bankruptcy was “not filed in good faith” where certain circumstances exist, including if the debtor was the subject of a Chapter 7, 11, or 13 bankruptcy case filed within the preceding one-year period, or if a debtor’s prior case was dismissed within a one-year period for failing to perform the terms of a plan confirmed by the court, or if there has been no substantial change in the financial or personal affairs of the debtor since a previous bankruptcy case of the debtor.

Creditors and trustees have also been accorded greater rights under the Act to challenge fraudulent transfers by debtors.  The Act revises the Code to extend the “look-back” period for recovery of fraudulent conveyances from one year to two years.  Transfers eligible for avoidance also now include transfers made to or for the benefit of an insider and not made in the ordinary course of business.  The changes to the fraudulent transfer provisions will apply to cases filed on or after April 20, 2006.

Finally, another interesting change to the Code, is that a confirmed plan of liquidation or reorganization may now be modified any time prior to the completion of payments made under the plan in order to increase or reduce the amount of payments to a particular class, or to reduce or expand the time for such payments.  The good news, however, is that a debtor is no longer accorded a discharge upon plan confirmation, but is not accorded a discharge until the debtor completes all payments under the plan.  Overall, the changes to the Code occasioned by the 2005 Act will likely work to the benefit of creditors, especially in individual bankruptcies.  There will be greater disclosure by debtors, as well as tests and calibrations set by Code to help courts prevent abuse of the bankruptcy process.  As a result, creditors will undoubtedly benefit from the greater access to information regarding debtors, and more expansive means to challenge and remedy possible abuses of the bankruptcy system.  Debtors beware.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.