Legal Perspective

What the New Rules of Bankruptcy Mean for Your Business
By Mark Hanson & Todd Guerrero | June 01, 2005
In a rising industry like biodiesel, it may seem out of place to be discussing bankruptcies. But the truth is, almost all businesses-creditors in particular-are affected by them. In April, President George W. Bush signed into law the most comprehensive change to the nation's bankruptcy laws in more than 25 years. The new law makes it more difficult for consumers and businesses to use bankruptcy to rid themselves of their obligations. At the same time, it creates some new opportunities for creditors. Here are some of the more notable changes you should be aware of.

Means testing
Individuals seeking to discharge their debts in bankruptcy will be required to satisfy a more rigorous "means test" before they can claim bankruptcy. The new test will make it more difficult for debtors to avail themselves of bankruptcy relief, particularly that type of relief affected by Chapter 7 of the code. It is also anticipated that many unsecured creditors, who typically receive nothing in bankruptcies, may now be able to recoup a portion of their claims.

Debtor counseling/education

All debtors, prior to filing for bankruptcy, will be required to undertake credit counseling from an accredited non-profit organization. The counseling may result in the development of more repayment plans aimed at avoiding bankruptcy altogether. In addition, as a condition to obtaining bankruptcy discharge, debtors will be required to complete an instructional course on personal financial management.

Under the new law, the deadline within which sellers of goods can demand to reclaim those goods delivered to buyers has been lengthened from 10 days to 45 days. This provides creditors with a longer period of time to reclaim goods delivered to companies shortly before a bankruptcy filing.

Small businesses
Special rules have been created for small businesses, which are generally defined as companies with debts of $2 million or less, excluding debts owed to affiliates and insiders. The change in the law will result in more oversight of small business debtors by the bankruptcy trustee; it will also streamline the process of plan confirmation and minimize ill-conceived attempts to reorganize companies that have no realistic prospect of success.

Fraudulent transfers
The new law makes a number of changes to the fraudulent transfer rule. First, the law has been expanded to allow for increased recovery in the event that it is discovered that the debtor made asset transfers with intent to hinder, delay or defraud creditors. Second, bankruptcy trustees will be able to recover transfers made within two years of a bankruptcy filing (rather than one year under the current law). Third, the new law modifies the fraudulent transfer rules to make it more difficult to protect executive compensation, severance payments and employee retention plans.

Real estate leases
Debtors have new limits placed on their ability to assume or reject their obligations related to commercial property leases that have not expired. The new law deems all leases rejected, with immediate surrender of property required unless the obligation is specifically assumed within 210 days of the filing. Landlords will now have increased leverage, as it will force debtors to deal immediately with their lease obligations.

Family farmers
Chapter 12 of the Bankruptcy Code provides a mechanism that enables "family farmers" to reorganize their debts without having to satisfy sometimes insurmountable obstacles found in Chapter 11. Enacted as "temporary" legislation in the 1980s in the midst of significant financial distress in the agricultural economies, the new law makes Chapter 12 permanent. Debt has also been liberalized to allow for greater eligibility.
The changes create more hurdles to overcome in declaring bankruptcy, yet at the same time, creditors will be able to reap more value from their portfolios and increase collections and potentially alter charge-off rates.

Mark Hanson and Todd Guerrero are members of the agribusiness and alternative energy practice group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. George Singer, a partner in the firm's Bankruptcy and Creditors' Remedies group, contributed to this article. They can be reached at (612) 371-3211.
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