Bankruptcy reform is here: at one time a Chapter 7 filing let debtors off the hook - no more.EXECUTIVE SUMMARY * CPAs NEED TO UNDERSTAND THE IMPACT of the Bankruptcy Abuse Prevention and Consumer Protection Act The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub.L. 109-8, 119 Stat. 23, enacted 2005-04-20), provided for significant changes in Bankruptcy in the United States, was passed by the 109th United States Congress on April 14, 2005 and signed into law of 2005 so they can advise clients how their relationships with or as debtors is altered. The two most important changes are the terms of access to Chapter 7 and changes to the homestead exemption Homestead exemption is a legal regime designed to protect the value of the homes of residents from property taxes, creditors, and circumstances arising from the death of the homeowner spouse. provisions. * IN CHAPTER 7 DEBTORS NOW HAVE TO undergo financial counseling and a budget analysis from a court-approved, nonprofit agency. The court appoints a trustee to accumulate all assets and distribute monies. Paid first are secured parties, administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. , unpaid wages and pension obligations, alimony alimony, in law, allowance for support that an individual pays to his or her former spouse, usually as part of a divorce settlement. It is based on the common law right of a wife to be supported by her husband, but in the United States, the Supreme Court in 1979 , child support and taxes; then general unsecured parties are paid pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. . Exempt assets vary by state. * THE THREE MAIN BANKRUPTCY LAW CHAPTERS are 7, 11 and 13. Under the new law individual debtors have to undergo a means test means test n. An investigation into the financial well-being of a person to determine the person's eligibility for financial assistance. means test Noun to qualify for Chapter 7 relief but businesses do not. Chapter 11 lets a business develop a recovery plan and holds off creditors while it is implemented. Chapter 13 lets wage earners develop a recovery plan without discharging much debt. Both 11 and 13 help debtors develop payment plans, become financially stable and repay their debt. * CHAPTER 13 ALLOWS FINANCIALLY DISTRESSED individuals to create a court-supervised five-year repayment plan. Before debtors can complete either a Chapter 7 or 13 bankruptcy action and receive a discharge, they will be required to complete a financial management course. * DEBTORS CAN'T EVADE RESPONSIBILITY by moving to a state with a better homestead exemption; they must live in the state for at least two years before filing for bankruptcy. ********** The ease with which debtors have been able to walk away from debt has frustrated frus·trate tr.v. frus·trat·ed, frus·trat·ing, frus·trates 1. a. To prevent from accomplishing a purpose or fulfilling a desire; thwart: creditors for years. But all that changed last April when President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. Most provisions became effective last month. The legislation--in the works for eight years--is the result of intense lobbying, mainly by banks and credit card companies. Now debtors with severe financial problems will find it harder to secure relief, and many consumer-protection groups fear that restricted access to Chapter 7 will unfairly hurt individuals whose impoverishment results from calamities like Katrina and Rita. CPAs need to understand the changes so they can advise clients. This article will bring them up to date. THE KEY CHAPTERS To grasp the impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it helps to understand the characteristics of the three most common forms of bankruptcy: Chapter 7 (liquidations), Chapter 11 (reorganizations) and Chapter 13 (adjustments). Traditionally Chapter 7 discharged most debts completely, allowing debtors to secure a flesh start. Many creditors have viewed it as an invitation to abuse. Chapters 11 and 13 essentially are unchanged under the new law. Chapter 11 lets a troubled business reorganize re·or·gan·ize v. re·or·gan·ized, re·or·gan·iz·ing, re·or·gan·iz·es v.tr. To organize again or anew. v.intr. To undergo or effect changes in organization. and develop a recovery plan; it holds off creditors while the plan is implemented. Chapter 13 lets wage earners develop a recovery plan but doesn't discharge significant debts. The goal of 11 and 13, which are more creditor-friendly than Chapter 7, has been to help troubled debtors develop realistic payment plans, become financially stable and repay their debt. THE CHAPTER 7 PROCESS The primary feature of the new legislation is that distressed individuals no longer have free access to Chapter 7's easy discharge of debt. Now, debtors must undergo a "means test" and credit counseling Credit counseling (known in the United Kingdom as debt counselling) is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education. to assess whether to permit them to choose Chapter 7 relief. As a result, many individual debtors likely will be funneled into Chapter 13, which requires them to repay their debt over time. To obtain Chapter 7 relief, a debtor files a petition with the bankruptcy court bankruptcy court n. the specialized Federal court in which bankruptcy matters under the Federal Bankruptcy Act are conducted. There are several bankruptcy courts in each state, and each one's territory covers several counties. . For eligible debtors (formerly both businesses and individuals, now businesses and some individuals) the process is not much changed. The court appoints a trustee to represent creditors and act as an independent party responsible to the court. The debtor is required to turn over all nonexempt assets to the trustee and to list all creditors so they can be notified of the bankruptcy filing (see "No Privacy in Bankruptcy," page 61). The creditors have to file a claim for the amount they are owed. Trustees have a number of powers to protect creditors. They can request the return of preferential payments to favored vendors and can set aside fraudulent transfers intended to hide assets. Trustees also can seize inheritances to which the debtor becomes entitled within 180 days of a Chapter 7 filing. After accumulating all assets, trustees distribute any monies obtained according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. priority-distribution rules. Paid first are secured parties, administrative costs, unpaid wages and pension obligations, alimony and child support and taxes; finally, general unsecured parties are paid pro rata. Debtors are allowed to keep exempt assets to help them start over. The exemptions vary from state to state, but generally include a homestead exemption and an exemption for a car, tools and specified personal property. CHAPTER 11 RELIEF Businesses undergoing hard times can file under Chapter 7 or 11. While Chapter 7 provides for a liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy Chapter 11 is designed to protect businesses whose distress can be corrected. It assumes a business can be rehabilitated given a viable recovery plan and a modified payment schedule. Once a business files for Chapter 11 with the bankruptcy court creditors must temporarily refrain from attempting to collect debts. For the first 120 days after filing, the business has the right to work out a viable recovery plan proposal. If it does not succeed, the creditors step in to submit one. The bankruptcy judge has the authority to approve a plan. Typically the court won't appoint a trustee to manage the business, and the same people continue under the new plan except that the bankruptcy judge supervises and approves certain expenditures and business decisions. The judge has the power to convert to a Chapter 7 bankruptcy if there is no hope of saving the business. Many large entities have gone into Chapter 11 and come out strong vibrant businesses. CHAPTER 13 RELIEF Chapter 13 allows financially distressed individual debtors to create a court-supervised five-year repayment plan (formerly a three- to five-year program). During the specified period the debtor pays a portion of his or her disposable income disposable income Portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also to the trustee, who then pays the creditors. Payment schedules can be modified under Chapter 13, and some obligations can be fully discharged. Debtors get to keep some property rather than turning it all over to a trustee. Creditors have always preferred Chapter 13 since the debtor strives to repay a significant portion of his or her obligations. Chapter 13 is better for creditors than Chapter 7, but almost two out of three Chapter 13 fliers ultimately fail to fulfill their plan according to the American Bankruptcy Institute The American Bankruptcy Institute (ABI) is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide the United States Congress and the public with unbiased analysis of . NEW LEGISLATION: CONSUMER BANKRUPTCIES The two most important changes to the U.S. Bankruptcy Code Bankruptcy Code may refer to:
Access to Chapter 7. Under the new legislation businesses still can seek Chapter 7 relief without undergoing a means test; individual debtors must undergo a means test to qualify. People who don't qualify go into Chapter 13 plans, and most will have a five-year period to repay debts. Only a limited group of debtors can obtain a discharge and a fresh start as easily as before. A person in financial trouble now has to undergo financial counseling and a budget analysis from a court-approved nonprofit agency within six months of filing for bankruptcy protection. In some cases counseling may enable debtors to develop their own informal rehabilitation rehabilitation: see physical therapy. plan. If debtors still wish to proceed into bankruptcy court, the next step is determining whether their income exceeds the state median. Debtors with income below the median for their home state can proceed to Chapter 7 (assuming creditors don't challenge and there are no existing issues or actions regarding potential fraud). Previously debtors and bankruptcy judges could choose the chapter of the code under which to file. Now if a debtor has an above-median income, he or she must proceed to a means test. The law presumes "abuse" is likely if a debtor's current monthly income (as determined by the previous six-month average) less secured payments divided by 60, less priority debts divided by 60, less the allowed expenses per region permitted by the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. , less certain other allowed expenses is greater than $100 a month. The means test, which takes place under the supervision of the debtor's attorney, deducts standardized living and housing payments from the debtor's monthly income; then transportation costs based on IRS tables; then monthly health insurance costs; then secured payments on automobiles over 60 months. If the gross monthly income minus those deductions leaves $100 or more, the debtor will be denied Chapter 7 relief. That is, if debtors can pay $6,000 over five years toward creditors' claims they must set up a payment schedule under Chapter 13. Debtors can rebut To defeat, dispute, or remove the effect of the other side's facts or arguments in a particular case or controversy. When a defendant in a lawsuit proves that the plaintiff's allegations are not true, the defendant has thereby rebutted them. TO REBUT. the presumption of abuse only by demonstrating special circumstances special circumstances n. in criminal cases, particularly homicides, actions of the accused or the situation under which the crime was committed for which state statutes allow or require imposition of a more severe punishment. that justify expenditure or income adjustments. The legislation doesn't define those special circumstances, so it isn't clear how much latitude courts will give debtors to challenge a monthly income calculation that is skewed skewed curve of a usually unimodal distribution with one tail drawn out more than the other and the median will lie above or below the mean. skewed Epidemiology adjective Referring to an asymmetrical distribution of a population or of data or in which ongoing catastrophic health expenses have in effect become "usual." In calculating a debtor's secured debt obligations, bankruptcy courts formerly divided the debt so that only the fair value (generally the depreciated Depreciated may refer to:
Unintended consequences are situations where an action results in an outcome that is not (or not only) what is intended. The unintended results may be foreseen or unforeseen, but they should be the logical or likely results of the of leaving the debtor insufficient income to proceed under Chapter 13. Before debtors can complete either a Chapter 7 or 13 bankruptcy action and receive a discharge, they have to complete a financial management course. Homestead exemption changes. Exemptions are very important; under Chapter 7 debtors can keep exempt property Exempt property, under the law of property in many jurisdictions, is property that can neither be passed by will nor claimed by creditors of the deceased in the event that a decedent leaves a surviving spouse or surviving descendants. but must turn over all nonexempt property to the trustee. Although bankruptcy law is federal, each state is allowed to specify exemptions. The most important exemption is the homestead because typically it is the debtor's biggest asset. Debtors under Chapter 7 can keep their home, subject to the size of the state homestead exemption, which can vary dramatically. For example, the homestead exemption is $5,000 in Alabama, but it's unlimited in Florida and Texas. A $5 million Florida home is fully protected from creditor claims, while an Alabama home is protected only up to $5,000. Debtors must keep mortgages on the homestead current or the lender will foreclose fore·close v. fore·closed, fore·clos·ing, fore·clos·es v.tr. 1. a. To deprive (a mortgagor) of the right to redeem mortgaged property, as when payments have not been made. b. . Under the new law debtors can't evade obligations by moving to a state with a better homestead exemption. A person is eligible for a state homestead exemption only if he or she has lived in that state for at least two years before claiming bankruptcy; if not, the former state's exemption likely will apply. If the debtor has engaged in specified criminal acts, the exemption will be capped at $125,000 even if the state homestead exemption is higher. Longer Chapter 13 plans. Previously Chapter 13 debt-repayment plans ranged from a three-year minimum to five years; now they are a mandatory five years. Debtors prepare and submit their payment schedules to the judge, who reviews and approves them. The new system takes longer and is more cumbersome to administer. It may require significant new resources such as appointment of more bankruptcy judges to handle the increased caseload case·load n. The number of cases handled in a given period, as by an attorney or by a clinic or social services agency. caseload Noun and additional supervision. New documentation requirements. Debtors need to provide a certificate of credit counseling, evidence of recent wages, a statement of monthly net income and expenses, a tax return for the most recent year and a photo ID. A controversial new requirement of the act is that attorneys must verify debtor information is correct and "grounded in fact." Because there are liability implications in this requirement, some practitioners think many attorneys will cease to represent individual debtors and that those who do will raise fees substantially. Attorneys also are required to generate additional notices to clients about bankruptcy procedures and recordkeeping responsibilities. Longer Chapter 7 filing interval. Under the old law a person was permitted to file for Chapter 7 relief every six full years. The interval under the new act is eight. More nondischargeable debts. The debts that could not be discharged formerly were child support/alimony, some tax obligations, debts incurred by fraud or malicious activities, most student loans, judgments incurred due to driving under the influence of alcohol and government fines. New provisions expand the list. Included are student loans from private as well as government bodies; last-minute debts incurred right before filing for bankruptcy; credit purchases of $500 or more for luxury goods or services made within 90 days of filing; and loans of more than $750 taken within 70 days before filing. Evictions of residential tenants in bankruptcy. The new act affects clients who are landlords. Under the old law, a bankruptcy petition stopped eviction The removal of a tenant from possession of premises in which he or she resides or has a property interest done by a landlord either by reentry upon the premises or through a court action. proceedings. Now a landlord may be able to evict tenants who are not in compliance with the rental agreement A rental agreement is a contract, usually written, between the owner of a property and a renter who desires to have temporary possession of the property. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. even if the tenant files for bankruptcy. Eviction proceedings can continue if the landlord obtained a judgment of eviction prior to the debtor's bankruptcy filing. A landlord that doesn't have a prior eviction judgment may evict if the property is endangered or if drug activities occurred on the premises within 30 days before the debtor filed for bankruptcy. NEW LEGISLATION: BUSINESS BANKRUPTCIES The new law also creates a number of changes for businesses seeking bankruptcy protection. Nonresidential real property leases. Old rules gave businesses 60 days after commencing a bankruptcy to assume or reject nonresidential property leases. The new legislation changes the time limit for the debtor's decision: Nonresidential property leases must be assumed or rejected within 120 days after commencement of the case. An extension of 90 days is permitted, but further extensions require the written consent of the landlord. The net result is that businesses have only 210 days to decide whether to retain leased nonresidential real property. Retail businesses will be severely affected by this change. Exclusivity period. The new rules place a limit on the time period during which a debtor has exclusive rights to propose a Chapter 11 bankruptcy plan. Old rules had no limitations on the number of extensions a court could grant a debtor. Under the new rules the exclusivity period may not extend beyond 18 months from the date of the bankruptcy petition. After that any interested parties may propose a bankruptcy plan, which could give creditor committees more power to dictate terms as the 18-month time limit approaches. Executive compensation. The new bankruptcy rules attempt to curtail a business debtor's ability to pay key employees retention bonuses, severance payments and other payments that could be construed as unethical unethical said of conduct not conforming with professional ethics. . Retention payments to insiders (officers and directors) of the debtor are subject to a number of constraints, including the requirement that they're needed to retain people who have received a bona fide [Latin, In good faith.] Honest; genuine; actual; authentic; acting without the intention of defrauding. A bona fide purchaser is one who purchases property for a valuable consideration that is inducement for entering into a contract and without suspicion of being job offer. Businesses need to check the rules before committing to any payment promise to executives and other key insiders. Utilities. The new rules increase the likelihood that utility companies will be paid for services provided after a business files for bankruptcy. The old rules prevented a utility from discontinuing service to a business in bankruptcy protection. The business had to provide only "adequate assurance" that it would pay utility bills, a phrase courts liberally interpreted in favor of the debtor. The new rules limit "adequate assurance" to cash deposits and letters of credit or a form of assurance upon which both the utility and debtor agree. Businesses will have to budget for their postpetition utility bills. REMEDIAL ACTION A remedial action is a change made to a nonconforming product or service to address the deficiency. Rework and repair are generally the remedial actions taken on products, while services usually require additional services to be performed to ensure satisfaction. ? The new bankruptcy reform legislation changes the psychology of debt in addition to the law. About 1.6 million people filed for Chapter 7 relief last year, and it will be interesting to see whether legal reforms bring that number down when debtors no longer can easily access Chapter 7 and its discharge of debts. Consumer protection groups say the reform legislation is slanted slant v. slant·ed, slant·ing, slants v.tr. 1. To give a direction other than perpendicular or horizontal to; make diagonal; cause to slope: in favor of the credit industry and doesn't protect consumers. The credit industry shares blame, they say, for unsolicited marketing of preapproved credit that may lure people into living beyond their means. Many are concerned that vulnerable groups such as the poor, the elderly and the sick no longer will be able to obtain bankruptcy protection. Additional changes are likely if the reforms prove unjustly burdensome and the cure turns out to be worse than the condition it was meant to correct. PRACTICAL TIPS * Make sure you and your clients understand the changes in bankruptcy law under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. * Inform client landlords how eviction procedures differ under the new law. * Tell business clients not to mare payment promises to executives and other key insiders without checking the new rules. RESOURCES AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Resources Publications * AICPA Professional Standards, paperback, # 005105JA; loose-leaf, # PS_XX12JA; CD-ROM CD-ROM: see compact disc. CD-ROM in full compact disc read-only memory Type of computer storage medium that is read optically (e.g., by a laser). , # DPSXX12JA; online, # WPS-XXJA. * Bankruptcy and Insolvency Accounting: 2 Volume Set by Grant W. Newton and Gilbert D. Bloom, John Wiley John Wiley may refer to:
See Dow Jones Averagesr (DJA). ). * Bankruptcy and Insolvency Taxation (3rd ed.) by Grant W. Newton and Robert Liquerman, John Wiley & Sons, 2005 (# WI228087JA). * Consulting Services Noun 1. consulting service - service provided by a professional advisor (e.g., a lawyer or doctor or CPA etc.) service - work done by one person or group that benefits another; "budget separately for goods and services" Practice Aid 02-1, Business Valuation in Bankruptcy (# 055296JA). * Consulting Services Special Report 03-1, Litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. Services and Applicable Professional Standards, 2002 (# 055297JA). For more information or to order, call the Institute at 888-777-7077 or go to www.cpa2biz.com. Other Resources Publications * Bankruptcy Code, Rules and Official Forms (2005 edition), West Publishing, 2005. * Understanding Bankruptcy Reform 2005: What Consumer Bankruptcy Attorneys Need to Know About the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, LRP LRP Lipoprotein Receptor-Related Protein LRP Low Density Lipoprotein Receptor-Related Protein LRP Loan Repayment Program LRP Linux Router Project LRP Livestock Risk Protection LRP Laparoscopic Radical Prostatectomy Lrp Leucine-responsive Regulatory Protein Publications, 2005. Web sites * www.abiworld.org. The American Bankruptcy Institute home page links to news and forms. * www.bankruptcyaction.com. This site lists bankruptcy lawyers by state and city and offers general information on chapters 7 and 13. General bankruptcy information * www.findlaw.com/01topics/ 03bankruptcy/index.html. LAWRENCE S Lawrence. 1 City (1990 pop. 26,763), Marion co., central Ind., a residential suburb of Indianapolis, on the West Fork of the White River. It has light manufacturing. 2 City (1990 pop. 65,608), seat of Douglas co., NE Kans. . CLARK, JD, LLM LLM abbr. Latin Legum Magister (Master of Laws) LLM Master of Laws [Latin Legum Magister] Noun 1. , is dean of the Cameron School of Business at the University of North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. (UNC (Universal Naming Convention) A standard for identifying servers, printers and other resources in a network, which originated in the Unix community. A UNC path uses double slashes or backslashes to precede the name of the computer. ) in Wilmington and lead author of the McGraw- Hill Law and Business textbook series. His e-mail address See Internet address. e-mail address - electronic mail address is clarkl@uncw.edu. RANDALL HANSON, JD, LLM, chairman of the department of accountancy and business law at UNC, has practiced law and has written more than 70 articles. His e-mail address is hansonr@uncw.edu. JAMES K. SMITH, CPA, JD, PhD, is an associate professor of accounting at the University of San Diego San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. . He has practiced as a tax attorney and CPA and has written more than 30 articles. His e-mail address is smithj@sandiego.edu. |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion