2005 Bankruptcy Act: What Your Company Needs To Know

On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act). The Act made significant modifications to the United States Bankruptcy Code (11 U.S.C. Section 101, et seq.) (the Code) and related federal statutes. The Act, its Congressional history, and its changes to the Code can be found at http://thomas.loc.gov/cgi-bin/cpquery/R?cp109:FLD010:@1(hr031).

While initial focus centered on the Act’s consumer bankruptcy provisions, the Act also contains provisions that significantly impact businesses and their representatives, including officers, directors and employees. Most of the Act’s consumer-related provisions are not effective until 180 days after its passage (Oct. 17, 2005); however, some of the more significant provisions affecting businesses and their representatives were effective on April 20, 2005. One particularly significant provision  ‘ related to conduct addressed in the Sarbanes-Oxley Act of 2002  ‘ is retroactively effective as of July 30, 2002, the enactment date of Sarbanes-Oxley.

This article discusses some of the more significant changes to the Code made by the Act that are likely to affect businesses and their representatives.

Why Every Lawyer Needs to Know About Bankruptcy

Bankruptcy is the legal “end-game” for substantially all areas of commercial law. It is generally a question of “when,” rather than “if,” lawyers representing persons engaged in commercials relationships (and/or their clients) will have contact with the bankruptcy system. For lawyers who provide counseling to businesses and their representatives, it is critical to have an understanding and working knowledge of the provisions of bankruptcy law that could impact their constituencies.

What Business Counselors Need to Know About Bankruptcy Law Changes

This article analyzes only some of the more significant changes resulting from the Act that have bankruptcy-related consequences for business representatives, as well as certain challenges and opportunities for businesses confronting bankruptcy, either as debtors or creditors. The Act has made many changes to the Code affecting businesses and/or their representatives that are not addressed in this article. The main point to consider is that bankruptcy is a complicated subject matter, with many potential pitfalls that could snare the wariest of counselors, and should be approached with a healthy respect ‘ and an experienced tour guide.

Changes Affecting Business Representatives

Most of the Act’s changes to the Code that impact individual business representatives were driven by factors similar to those that drove passage of Sarbanes-Oxley. These factors involve claims of securities fraud or other conduct alleged to have been committed in furtherance of business excesses. Consistent with Sarbanes-Oxley, these changes are intended to make it more difficult for individuals to shield personal assets from creditors, or to discharge debts in bankruptcy proceedings for pennies on the dollar.

Non-Dischargeability of Debts Resulting from Violations of Securities Laws, Regulations, or Orders

Section 1404 of the Act amends Code Section 523 to make certain debts resulting from violations of federal securities law, state securities law, or any regulation or order issued under such laws, non-dischargeable in bankruptcy. Being non-dischargeable, such debts will not be affected by bankruptcy, and will remain enforceable. Regardless of whether such debts arise before, on, or after the date of a debtor’s bankruptcy filing, they will be non-dischargeable if they result from any judgment, court or administrative order or decree, or settlement agreement relating to damages or other specified payments owed by the debtor. This amendment is effective as of July 30, 2002.

In other words, bankruptcy will not afford protection to individuals who incur such obligations as a result of fraudulent activities. While collection activities as to a particular debt might be suspended while a bankruptcy court determines whether such debt is non-dischargeable, if an affirmative decision is made, collection activities will likely continue.

Limitations on Effectiveness of “Asset Protection” Measures

The Act also contains a number of provisions that substantially limit a debtor’s ability to “shelter” assets from creditors, regardless of whether the underlying debts owed are dischargeable or non-dischargeable in bankruptcy.

Section 308 of the Act amends Code Section 522 to generally cap at $125,000 the aggregate value of certain property that a debtor (other than a “family farmer”) can claim as “exempt” from creditor claims. The following property acquired within 1,215 days prior to the debtor’s bankruptcy case is included in the aggregate value: