As you may already have read, or at least heard, Congress enacted legislation which substantially revised the Bankruptcy Code. The new law is generally effective as to bankruptcy cases filed on or after October 17, 2005. The Bankruptcy code is divided into Chapters. Chapter 1 contains the general provisions which are applicable to all the other Chapters; Chapter 3 contains the case administration provisions, which again, are applicable to all the other Chapters; Chapter 5 provides for the determination of creditors, claims, debtors and the bankruptcy estate; Chapter 7 is commonly known as the liquidation provisions; Chapter 11 is for business reorganization; Chapter 12 is for reorganizations of family farms; and Chapter 13 contains the provisions for consumer reorganization. The revisions bring back a new Chapter 15 which relates to cross-border insolvency cases.

Some of the more prominent issues which have been modified by the Consumer Protection Act of 2005 include:

  • Chapter 7 consumer bankruptcies may be converted to a Chapter 13 wage earner plan if “abuse” of the bankruptcy laws is found to exist, such abuse being an irrefutable presumption if net current monthly income exceeds certain “trigger points,” as low as $100.00;
  • Extends the time periods between successive bankruptcy filings;
  • Requires more detailed document filings by the consumer debtor in bankruptcy, including a copy of federal tax return for the period for which a return was most recently due, and in some instances returns for the last three filing periods;
  • Subjects consumer bankruptcy filers to audit by the U.S. Trustee’s Office;
  • Requires both Chapters 7 and 13 filers to certify having received both credit counseling and personal financial management prior to receiving a discharge in bankruptcy;
  • Modifies the availability of Section 362’s “automatic stay;”
  • Generally requires a debtor to be a resident of a state for two years to take advantage of that state’s exemptions;
  • Allows self-settled trusts established with the intent to defraud within ten years of a bankruptcy filing to be subject to satisfying liabilities of the bankrupt’s estate;
  • Substantially modifies the “strip-down” provisions which formerly allowed debtors to separate the secured portion of consumer debt with unsecured debt based upon values at the time of filing, as with motor vehicles; and
  • Expands the list of debts which are non-dischargeable to include certain tax returns and debts arising through fraud, including credit card misuse, which now has a threshold presumption of fraud if $500 in luxury goods are purchased within 90 days, or $750 in cash advances are obtained within 90 days, prior to the bankruptcy filing.

The following summary discusses changes in the various Chapters of the Bankruptcy Code, specifically consumer bankruptcy law affected by the revisions of 2005. Next month, a summary of revisions affecting small business bankruptcies will be highlighted.

I. Changes Affecting Consumer Bankruptcies

A. Chapter 7-Dismissal or Conversion
One of the major revisions to the Code is found in Section 707(b), Dismissal. Prior to the revisions, the Bankruptcy Court or the U.S. Trustee could move for the dismissal of a Chapter 7 case filed by an individual debtor whose debts were primarily consumer debts if it was found that the granting of relief would be a substantial abuse of the provisions. Further, there was a presumption in favor of granting a discharge to a debtor.

Under the amended Section 707(b) a petition can still be dismissed or now converted to another Chapter based upon abuse. However, now abuse can be found in one of two ways: first, through an unrebutted presumption of abuse, arising under a new “means test”(Section 707(b)(2); and second, on general grounds, including bad faith, determined under the totality of the circumstances (Section 707(b)(3)(basically the old Section 707(b)).

The new “means test” has three elements: (1) current monthly income, which measures the total income a debtor is presumed to have available; (2) a list of allowed deductions from currently monthly income, for purposes of support; and (3) defined “trigger points” at which the income remaining after the allowed deductions would result in the presumption of abuse.

Current monthly income is defined as a monthly average of all income received by the debtor, including regular contributions to household expenses made by other persons (this comes into play where only one spouse is filing for relief, but household has two incomes) during a defined six month period.

Presumed deductions are (a) living expenses specified under standards of the IRS, both national and local standards, reduced by whatever portion of the allowance reflects repayment of debt i.e. repayment of car loan would be deducted from IRS standard allowance for acquiring transportation; (b) the actual expenses of the debtor in categories recognized by the IRS but as to which no specific allowance has been specified i.e. reasonably necessary health insurance; (c) expenses for protection from family violence; (d) continued contributions to care of nondependent family members which includes children, grandchildren, step-children and step-grandchildren; (e) actual expenses of administering a Chapter 13 plan; (f) expenses for grade and high school, up to $1,500.00 annually per minor child and these expenses must be documented; (g) additional home energy costs, which must be documented (h) 1/60th of all secured debt that will become due in the five years after filing; (i) 1/60th of all priority debt; and (j) continued contributions to tax-exempt charities, no limit is placed on the amount of the contributions.

Two distinct “trigger points” for the presumption of abuse are set out in Section 707(b)(2)(A)(I): (1) if the debtor has at least $166.67 in current monthly income available after the allowed deductions ($10,000.00 for five years), abuse is presumed regardless of the amount of the debtor’s general unsecured debt, and (2) if the debtor has at least $100.00 of such income ($6,000.00 for five years), abuse is presumed if the income is sufficient to pay at least 25% of the debtor’s general unsecured debt over five years. The presumption can be summarized as follows: If current monthly income after deductions is less than $100.00 the presumption does not arise; if current monthly income is $100.00, presumption arises unless debt exceeds $24,000.00; if current monthly income is $150.00, presumption arises unless debt exceeds $36,000.00; if current monthly income is $166.66, presumption arises unless debt exceeds $39,998.40; and if current monthly income is greater than $166.66 presumption always arises.

To rebut the presumption, Section 707(b)(2)(B) requires that a debtor swear to and document special circumstances that would decrease income or increase expenses so as to bring the debtor’s income after expenses below the “trigger points”.

The other basis for finding abuse, applicable under Section 707(b)(3), is that the debtor filed the petition in bad faith or that the totality of the debtor’s financial circumstances indicates abuse. Only the U.S. Trustee or judge can assert this basis for finding abuse.

If abuse is found, then the Court or Trustee under 707(b)(2)(B) can either dismiss the Chapter 7 petition or upon consent of a debtor, convert the case to Chapter 13. If abuse is found under 707(b)(2)(A), then any party in interest can move to have the case dismissed or, with the consent of the debtor, converted.

B. Time Periods between Filing of Petitions
Under the previous law, a debtor had to wait six (6) years after receiving a discharge in Chapter 7 before filing another petition under Chapter 7. Section 727(a)(8) extends this time to eight (8) years. The revisions also include a new subsection to 1328, discharge provisions for Chapter 13. Section 1328(f) provides that a Chapter 13 debtor will be denied a discharge if the debtor received a discharge (1) in a case filed under Chapter 7, 11 or 12 during the four (4) year preceding the filing date of the pending Chapter 13, or (2) in a case filed under Chapter 13 during the two (2) year period preceding the filing of the pending Chapter 13 case. The new discharge provisions are summarized as follows:

Prior Case Chapter Current Case Chapter
Chapter 7 Chapter 11 Chapter 13
Chapter 7 Eight years None Four years
Chapter 11 Eight years None Four years
Chapter 13 Six years None Twp years

These revisions effectively do away with what was called a Chapter 20. This occurred where a debtor filed a Chapter 7 and received a discharge and then immediately turned around, upon receipt of the discharge, and filed a Chapter 13 petition to clean up problems left over from the Chapter 7, i.e., non-dischargeable student loan debt, secured car loan.

C. Document Production by Debtor
The revisions also impose a number of new document production requirements on a debtor, which the debtor must meet in order to receive a discharge. New Section 521(a)(1)(B) provides that a debtor must file with his or her schedules a certificate of an attorney or petition preparer that the debtor was given certain informational notices. Furthermore, the debtor must file with the schedules, proof of all payments received within sixty (60) days before the filing of the petition from any employer of the debtor. The debtor now must also file with the schedules a statement of the amount of the monthly net income, itemized to show how the amount was calculated. Finally, the debtor must include with his or her schedules a statement disclosing any reasonably anticipated increase in income or expenditures over the twelve (12) month period following the date of the filing of the petition.

The revisions also require each debtor, at least seven (7) days prior to the meeting of creditors, to provide both to the trustee, and to any creditor making a timely request, a copy of the federal tax return for the period for which the return was most recently due. Furthermore, the debtor must file with the court, at the same time filed with the IRS, copies of all income tax returns for a tax year ending while the case is pending. Finally, if requested by any party in interest, the debtor must file with the court the tax returns filed for the three (3) years before the case was filed, as well as any amendments. A failure of the debtor to produce the returns requires dismissal of the case, unless the debtor can demonstrate that the failure to produce the return was beyond the debtor’s control.

Finally, all debtors may be subject to an audit by the U.S. Trustee’s Office or Attorney General’s Office. The revisions require an audit of all information provided by debtors in at least 0.4% of individual cases filed under Chapter 7 and Chapter 13, randomly selected. Furthermore, an audit is to be done on any case where the schedules of income and expenses reflect greater than average variances from the statistical norm to determine the accuracy, veracity and completeness of petitions, schedules and other information. Section 727(d)(4) creates as a ground for denial or revocation of discharge the failure of a debtor to cooperate with the auditor or to explain satisfactorily a material misstatement. There is no deadline for motions to revoke a discharge based on this new Section 727(d)(4). The Attorney General is given two (2) years from enactment to develop bankruptcy auditing standards. However, the auditing provisions themselves become effective October 17, 2005.

D. Credit Counseling and Debtor Education
Under new Section 109(h), individuals are ineligible for a discharge under any chapter of the Code unless, within 180 days preceding the filing of the petition, the debtor receives an individual or group briefing from a nonprofit budget and credit counseling agency. The nonprofit agency must be approved by the U.S. Trustee’s Office under the standards as set forth in Section 111 of the Code. The required briefing, which may take place by telephone or internet, must outline the opportunities for credit counseling and assist in performing a related budget analysis. The debtor is required to file a certificate from the credit counseling agency describing the services provided, and file any debt repayment plan developed by the agency.

Debtors in both Chapters 7 and 13 will be required to complete an instructional course concerning personal financial management in order to receive a discharge. Failure to complete the instructional course would be grounds for denial of the Chapter 7 discharge under the new Section 727(a)(11), and a Chapter 13 discharge under the new Section 1328(g). Telephone and internet courses will be permissible. As with the credit counseling agencies, educational courses will be approved for each district by the U.S. Trustee’s Office under standards set out in the new Section 111.

E. The Automatic Stay-Section 362
The old Section 362 was one of the most powerful weapons in a debtor’s arsenal to keep creditors from getting to the debtor’s assets. Once a debtor filed for relief, the stay went into effect automatically, stopping cold any and all collection proceedings. Moreover, a creditor could not continue the collection proceeding until the creditor received relief from the stay, which was granted only under limited circumstances, i.e. debtor consent. Furthermore, even if a debtor was a serial filer of bankruptcy petitions, the stay still assisted the debtor in quashing collection proceedings. The revision to Section 362 effectively ends what was called serial filing and eliminates the stay altogether for certain collection proceedings.

New Section 362(c)(3) provides that if a Chapter 7, 11 or 13 case is filed within one year of the dismissal of an earlier case, the automatic stay in the second case terminates thirty (30) days after the filing, unless a party in interest demonstrates that the second case was filed in good faith with respect to the creditor sought to be stayed. If a second repeat filing takes place within the one-year period, the automatic stay will not go into effect, and the court is required to promptly enter an order confirming the inapplicability of the stay on request of a party in interest. However, a party in interest may obtain imposition of the stay by demonstrating that the third filing is in good faith with respect to the creditor sought to be stayed. For both second and third filings within one year, circumstances are described which generate a presumption that the new filing was not made in good faith, and such presumption would be required to be rebutted by clear and convincing evidence.

“In Rem” relief from the automatic stay is authorized by a new Section 362(d)(4). In cases involving either transfers of real property collateral without the consent of the secured creditor or court approval, or multiple bankruptcy filings involving the same real property, the court may issue an order of relief from the automatic stay, which order, properly recorded, is binding on all owners of the property for two (2) years from the date of entry. Furthermore, new Section 362(b)(20) creates an exception to the automatic stay for lien enforcement activity in later filed cases. These new provisions are especially important to creditors who are attempting to foreclose on real property and the debtor continues to file Chapter 13 but gets dismissed for failing to make the required Chapter 13 plan payments. Under prior law, every time the debtor filed for Chapter 13, the foreclosure process had to cease until relief from the stay was granted. Now the stay is not effective to the later filings and the creditor can continue with foreclosure.

Two new exceptions from the automatic stay are established for landlords seeking to evict tenants. The first, Section 362(b)(22), allows the continuance of any eviction proceeding in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition. The second, Section 362(b)(23), deals with eviction based on endangerment of the rented property or illegal use of controlled substances on the property. Paragraph (b)(23) excepts the eviction proceeding from the stay if the proceeding was commenced before the filing of the bankruptcy case or if the endangerment or illegal use occurred within thirty (30) days before the bankruptcy filing. In either situation, the landlord would be required to file with the court and serve on the debtor a certificate setting out the facts giving rise to the exception.

The debtor is allowed to contest the applicability of both of these new exceptions by filing timely certifications under penalty of perjury. As to (b)(22) lease exception, the debtor would be able under Section 362(l) both to keep the stay in effect for an initial thirty (30) days after the bankruptcy filing by certifying that applicable nonbankruptcy law allowed the lease to remain in effect upon the debtor’s cure of the default that was the basis of the eviction order, and to keep the stay in effect after thirty (30) days by filing further certification that the cure amount had been paid within the initial thirty (30) days. This exception comes into play for rent and possession situations. Under rent and possession, a landlord is either seeking rent or possession. If the tenant cures, along with paying all late fees and collection costs, then the tenant is allowed to remain in possession. The exception under Section 362(l) allows this to still be the case, giving the tenant the thirty days after the filing of the petition to cure the arrearages. As to (b)(23), a new Section 362(m) provides that if the debtor files a certificate denying the assertions in the landlord’s certificate, the court is required to conduct a hearing within ten (10) days to determine if the situation giving rise to the landlord’s certification existed or has been remedied.

A new subparagraph (h) has been added to Section 362. This new subparagraph terminates the automatic stay with respect to, and removes from the estate, personal property that is collateral for any secured claim in the event that the debtor fails to either file the statement of intention required, or fails to take timely action specified in such statement, either to redeem the collateral or to reaffirm on the debt. Section 521(a)(6) requires the debtor, not later than forty five (45) days after the first meeting of creditors, either to redeem the property by paying the full amount of the allowed secured claim at the time of redemption, or enter into a reaffirmation agreement with respect to the debt secured by the property.

Finally, Section 342(c) is amended to remove the provision that a failure by the debtor to supply proper notice to creditors does not invalidate the notice. Under the old law, if the debtor listed the creditor in the debtor’s creditor’s matrix, the creditor was presumed to have gotten notice of the petition and the consequences of the automatic stay applied, along with the possibility of monetary damages for violation of the automatic stay. Instead, a new Section 342(g) provides that no monetary penalty may be imposed on a creditor for violating the automatic stay or for failing to turn over property, unless notice is given in a form effective under amended Section 342. Now notice is not effective to a creditor unless it is served at an address filed by the creditor with the court or at an address stated in two (2) communications from the creditor to the debtor within ninety (90) days of the filing of the bankruptcy case. To be effective, the notice must also include the account number used by the creditor in the two relevant communications. An otherwise ineffective notice will only subject the creditor to liability if the notice was brought to the attention of the creditor, which is defined as receipt by a person designated by the creditor to receive bankruptcy notices.

F. Exemptions
Under the Code and prior to the revisions, an individual filing for relief was presumed to be a resident of the state where the individual resided for the 180 days prior to the filing. Moreover, state law controlled the exemptions an individual was entitled to use in his or her bankruptcy case. Missouri was, and is considered, an opt-out state, in that if an individual for relief in the State of Missouri, the individual was limited to the exemptions provided for under Missouri law and not the federal exemptions provided for in the Code. The revisions do not change the opt-out concept, however, the revisions to the Code do change some requirements for exemptions.

A new Section 522(b)(3) specifies that to qualify for state exemptions, a debtor must be domiciled in that state for 730 days before the filing of the petition, and if the debtor did not maintain a domicile in a single state for that period, the governing exemption law is that of the place of the debtor’s domicile for the majority of the 180 day period preceding the 730 days before filing (that is, between 2 and 2-1/2 years before the filing). If this new residency requirement would somehow render the debtor ineligible for any exemptions, then the debtor is allowed to choose the federal exemptions. This new provision keeps a debtor from exemption shopping and setting up residency in a state that has more liberal exemptions.

A new Section 522(o) reduces the value of a debtor’s homestead if the debtor made any additions to the value of the homestead, by selling other assets with the intent to hinder, delay or defraud creditors, and using those sale proceeds to increase the value. The look back period is ten (10) years prior to the bankruptcy filing and the homestead exemption is reduced by the amount of the additional value.

Under a new Section 522(p), any value in excess of $125,000.00, without regard to the debtor’s intent, that is added to a homestead during the 1215 days (about 3 years and 4 months) preceding the bankruptcy filing may not be included in a state homestead exemption unless it was transferred from another homestead in the same state. Moreover, under new Section 522(q), an absolute $125,000.00 homestead cap applies if either (a) the court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was an abuse of the provisions of the Code, or (b) the debtor owes a debt arising from a violation of federal or state securities law, fiduciary fraud, racketeering or crimes or intentional torts that caused serious bodily injury or death in the preceding five (5) years. However, this limitation is inapplicable if the homestead property is “reasonably necessary” for the support of the debtor and any dependent of the debtor. These two provisions were the result of individuals, such as doctor’s avoiding malpractice judgments by relocating to states with unlimited homestead exemptions, such as Florida or Texas, as well as the officers and directors of companies such as Enron and MCI, who were filing bankruptcy, but allowed to retain huge and expensive homes in Florida and Texas. The courts may delay the granting of a discharge if there is a proceeding to determine homestead limits.

Finally, a new Section 522(f)(4) limits household goods as to which a nonpossesory, nonpurchase money security interest can be avoided. The new definition limits electronic equipment to one radio, one television, one VCR and one personal computer with related equipment. The new definition excludes, as household goods, works of art created by someone other than the debtor or a relative of the debtor, jewelry worth more than $500.00, except a wedding ring, and motor vehicles.

G. Property of the Bankruptcy Estate
A new section 548(e) allows a trustee to avoid a transfer by the debtor to a self-settled trust or similar device made within ten (10) years of filing the petition, with the actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted. This provision would allow recovery of funds transferred by the debtor to an asset protection trust, but apparently only if the trustee could establish that the transfer was made in connection with avoiding a particular claim, rather than simply as a general asset protection device.

A new paragraph 541(b)(5) is added to the Code, providing that funds placed in an educational retirement account at least 365 days prior to the bankruptcy filing, within limits established by the IRS, and for the benefit of a child or grandchild of the debtor, are excluded from the debtor’s estate, with a $5,000.00 limit on funds contributed between one and two years before the filing. A new paragraph 541(b)(6) similarly excludes contributions to qualified State tuition programs.

Another new exclusion from the estate property, Section 541(b)(7), applies to employee contributions to ERISA-qualified retirement plans, deferred compensation plans, tax-deferred annuities and health insurance plans. There seemed to be a split within the circuits whether under the prior Code, whether property of this type was excluded from the debtor’s estate, this provision seems to clarify that these funds are in fact excluded in their entirety.

H. Secured Claims
Under prior bankruptcy law, a debtor was allowed to strip down or bifurcate a secured creditor’s claim into a secured claim and an unsecured claim, i.e. car loans where debtor owed more on the loan than the car was worth. Moreover, under the prior Code the debtor was only required to pay 100% of the secured portion with interest and the unsecured portion shared pro rata with the other unsecured creditors. The revisions amend Section 1325(a) to limit the power of Chapter 13 plans to strip down secured claims to the value of the collateral. It appears that no strip down would be allowed for purchase money security interests in motor vehicles purchased within 910 days of the bankruptcy filing (nearly 2-1/2 years). Nor will a debtor’s plan be allow to strip down purchase money security interests in items other than motor vehicles purchased within one (1) year of the bankruptcy filing.

Under the revisions the valuation of a secured claim will be based upon the cost to the debtor of replacing the collateral, without deduction for costs of sale or marketing. If the collateral was acquired for personal, family or household purposes, this replacement cost is the retail price for property of similar age and condition. Moreover, an amendment to Section 1325(a)(5)(B)(I) precludes a Chapter 13 plan from providing for the release of a lien upon the payment of a stripped-down secured claim. Rather, the creditor retains the lien in the collateral until the full amount of the claim is paid or the Chapter 13 plan is completed by the debtor.

I. Discharge
Both the discharge provisions regarding Chapter 7 and Chapter 13 have been revised and amended to enlarge the non-dischargeable classification of debts. Prior to the amendments, under Chapter 13, an individual debtor was granted what was called a superdischarge as to certain taxes and other debts. This superdischarge is basically no longer available to Chapter 13 debtors. As a consequence of non-dischargeability, interest will continue to accrue on these debts.

The list of debts excepted from a Chapter 13 discharge under the current Section 1328 is expanded to include debts defined by Section 523 (a)(1)(B) and (C) which are unfiled, late filed and fraudulent tax returns. Also now included under non-dischargeable debts in Chapter 13 are those under 523(a)(2) which are fraud, including credit card misuse. Moreover, the presumption of non-dischargeablity for fraud in the use of a credit card, set out in Section 523(a)(2)(c), is expanded and included in Chapter 13 cases as well. The amount that the debtor must charge for “luxury goods and services” to invoke the presumption is reduced from $1,225.00 to $500.00, and the amount that the debtor must withdraw in cash advances in order to invoke the presumption is reduced from $1,225.00 to $750.00. The period of time prior to the bankruptcy filing in which these charges must be made in order for the presumption to apply is increased from sixty (60) days to ninety (90) days for luxury goods, and from sixty (60) days to seventy (70) days for cash advances. Debts under Section 523(a)(3) are now included under Chapter 13 cases this subparagraph applies to debts of creditors where a debtor’s failure to notify a creditor of the bankruptcy in time to allow the creditor to assert a claim. Debts under Section 523(a)(4), for embezzlement and breach of fiduciary duty are no longer dischargeable in a Chapter 13. Finally, debts arising from willful or malicious injury are non-dischargeable. However, this new section only applies to restitution or damages awarded in a civil action against the debtor.

The list of debts non-dischargeable under a Chapter 7 case includes the new definition of credit card fraud discussed above under Chapter 13. Also included in Chapter 7 cases are domestic support obligations and non-support marital debts. Section 523(a)(5) was expanded as to student loans to include any student loan where the interest paid on the loan is deductible for federal income tax purposes. The prior Code only made government loans non-dischargeable, the expansion now makes any student loan non-dischargeable. Finally, the revisions delete the former Section 523(a)(18), debts owed to a State or municipality that was in the nature of support, and replace it with a new Section 523(a)(18), pension plan loans, making these loans non-dischargeable.

II. Changes Affecting Business Bankruptcies

Although the revisions to the Bankruptcy Act are not generally as severe in the business context as under the consumer provisions, the Act nonetheless makes an impact. In particular, the following provisions may likely impact a small business:

  • A “small business” is defined as having less than two million dollars in debt, excluding debt to insiders and affiliates;
  • A debtor has the exclusive right to file a plan of reorganization within 180 days after filing the bankruptcy petition;
  • The plan of reorganization and disclosure statement must be filed within 300 days after filing, in any event;
  • Failure to file the plan of reorganization and disclosure statement may constitute grounds to convert a Chapter 11 (business reorganization) case to a Chapter 7 (liquidation case);
  • Availability of the automatic stay is generally limited to those debtors who have not previously filed for bankruptcy protection within the past two years; and
  • The venue for preferential transfer actions is changed to the defendant’s home locality, instead of the district where the bankruptcy is filed, in cases where a non-consumer debt is in excess of $10,000 (in consumer debt cases, where the debt is less than $15,000).

The thrust of the majority of the changes to the Code dealing with business reorganization was to make it easier and less expensive for small businesses to reorganize. Some of the revisions apply to all business reorganizations, while some apply only to small business reorganizations.

A. Amendments that Apply Generally to “Small Business” Reorganizations
The revisions set out a definition of a small business. A “small business” is a person or entity engaged in commercial or business activities, other than owning or operating real estate, and the commercial or business activity must have no more than $2 million in debt (excluding debt to insiders or affiliates). Furthermore, for the debtor to be a “small business debtor,” either the U.S. Trustee has not appointed a creditors’ committee in the case, or if a creditors’ committee was appointed, the committee is not sufficiently active and representative to provide effective oversight to the debtor. What this definition means will be left up to the Courts to decide due to the ambiguity in the language. A debtor could file as a small business because it qualifies under the dollar limit. However, the U.S. Trustee could still appoint a committee, therefore, losing the small business status. If thereafter the creditors’ committee becomes sufficiently inactive and ineffective, the debtor might revert back to small business status.

The revisions set new deadlines for plan exclusivity and the filing and confirmation of a plan in a small business case, as well as providing a flexible mechanism for the confirmation of such plans. The exclusive period for the debtor to file a plan is 180 days after the order for relief is entered, and the plan and disclosure statement, in any event, must be filed within 300 days after the order for relief. The plan must then be confirmed not later than 45 days after the plan has been filed, as long as the plan complies with the applicable provisions of the Bankruptcy Code.

The deadlines for the exclusivity period, filing of the plan and confirmation can only be extended for a reasonable time, at the end of which confirmation of a plan will result. Any requests for an extension must be filed prior to the expiration of the existing deadline. The passage of the deadline would be grounds for conversion or dismissal of the case. Finally, under the 2005 Act, the court may determine that the plan contains sufficient information such that no disclosure statement is required. Additionally, disclosure statements can be submitted on standard forms and can be conditionally approved, with final approval to be given at the confirmation hearing. This should allow the case to proceed to confirmation with fewer hearings and less cost to the participants.

As in Chapter 7 and Chapter 13, the 2005 amendments place new limits on the availability of the automatic stay if a small business has previously filed a bankruptcy case. Under the 2005 amendments, the automatic stay would not apply in a small business case if the debtor’s prior case was dismissed within two (2) years of the filing of the petition in bankruptcy in the second case, or if the debtor had a plan confirmed in a small business case within two (2) years of the filing date of a new case.

The new provision also applies if an entity acquired all or substantially all of the assets in a small business. A debtor can overcome this denial of the automatic stay by showing by a preponderance of the evidence that the second bankruptcy filing resulted from circumstances beyond the debtor’s control, and that it is more likely than not that the court will confirm a plan, other than a liquidating plan, in a reasonable time.

Finally, the reporting requirements and duties for small business debtors have become less burdensome under the 2005 amendments. Small business debtors must file periodic reports setting out their profitability, reasonable approximations of their projected cash receipts and disbursements, comparisons of actual receipts and disbursements to their earlier projections, stating that the debtor has complied with all the Bankruptcy Rules, tax and other governmental filing obligations and the payment of all taxes due.

Under the old Code, all business debtors were required to file monthly reports concerning the operation of the debtor in possession which were extremely time consuming. The revisions set out a list of seven (7) duties with which a debtor in possession in a small business case must comply. Among the duties are the filing of financial statements and tax returns within seven (7) days of the date of the order for relief, meeting with the U.S. Trustee’s Office prior to the meeting of creditors, timely filing other documents and tax returns during the case and permitting the U.S. Trustee’s Office to inspect the debtor’s premises and books and records. The obligation to meet with the U.S. Trustee’s Office prior to any creditor’s meeting is new. This meeting is to evaluate the debtor’s financial viability and business plan and to set up an agreed scheduling order. The 2005 amendments require the U.S. Trustee to promptly move for conversion or dismissal whenever there are grounds for such a motion.

B. Amendments Generally Applicable to all Business Reorganizations
The following is a summary of the various revisions and amendments made to the Bankruptcy Code and are applicable to all business reorganizations.

1) Amends Section 341 by adding subparagraph (e) which allows the court, after notice and hearing, to suspend with a meeting of creditors if the debtor has submitted a prepackaged plan.

2) Amends Section 365(d)(4) to provide that the unexpired leases of nonresidential property are deemed rejected and must be surrendered by the earlier of 120 days after the commencement of the case, or the date of confirmation of the plan. The court can extend the 120 day period by an additional 90 days, but any subsequent extension to the additional 90 days is available only with the consent of the landlord.

3) Amends Section 547(c)(2) and expands the ordinary course of business exception to a finding of a preferential transfer. Prior to 2005 amendments, a creditor had to prove all of the prongs to except the transfer from a preference avoidance action. Now a creditor only has to prove one prong to prove ordinary course of business and avoid returning payments to the bankruptcy estate.

4) Amends the venue provisions that are applicable to preference avoidance actions. Under the old Code, preference actions were filed and maintained where the debtor filed its petition. Now these actions must be brought in the defendant’s home district for any action to collect a consumer debt of less than $15,000.00, or any other debt in excess of $10,000.00.

5) Amends Section 1121 of the Code to provide that the 120 day exclusivity period cannot be extended beyond 18 months from the date of the order for relief. Under the prior law the court could extend or reduce the 120 day period on a showing of good cause and there was no limit on the extent to which the court could reduce or extend the period.

6) Amends Section 362(d)(3) in a couple of aspects. The section sets out the requirement that as to a single asset real estate case, the debtor must either have filed a confirmable plan or have commenced making monthly payments to the secured creditor to keep the automatic stay in effect. The amendment also clarifies that the debtor may make payments to the creditor from the rents or other income generated by the property. Finally, the amendment changes the amount of payment necessary to continue the stay. Under prior law, the debtor was required to pay an amount equal to interest at a current fair market rate on the value of the creditor’s interest in the real estate. Under the amendment, the payment must be in the amount of the non-default contract rate of interest on the value of the creditor’s interest in the real estate.