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Bankruptcy gets more complicated with Oct. 17 law changes
by Elizabeth Martin Bankruptcy is an unwanted topic. If you’re a debtor, it may get uglier in the coming months. If you’re a creditor, it’s going to get a little nicer.
Although President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law in April, the majority of the changes don’t go into effect until October 17.
While lawyers are still poring over the new law and trying to determine its impact, most agree that the changes will be sweeping. But will it be good or bad for small-business owners?
“It depends on who you are,” says Ken Corey-Edstrom, attorney with Larkin, Hoffman Daly & Lindgren in Bloomington. “If you’re a small-business owner in trouble and contemplating bankruptcy, then the new law puts some hurdles in the way of filing bankruptcy.”
On the other hand, if you’re a small business with a client that has filed for bankruptcy, your chances of getting your money are better.
But, Corey-Edstrom cautions, the full impact of the legal changes hasn’t been discovered. “Every time I read a new synopsis of it, I find out new things about it,” he says, noting that there are more than 1,000 sections of the law.
“This is a sweeping rejection of a lot of the changes that were made 25 years ago,” he says. “There is some mystery out there about this whole thing.”
“My understanding is that where those changes are for businesses is really in the small business area with debt that’s less than $2 million,” says Joe Kenyon, a forensic accountant with Minneapolis-based Schechter Dokken Kanter Andrews & Selce. “There’s a special track now for small business. It’s supposed to be streamlined but people are saying there’s more paperwork.
“This new law is what they call ‘creditor friendly’, and it has some things that are very good for businesses,” he says. “But for a business where the owner and the business are the same and they go into bankruptcy you have a real risk that the judge is going to look at it and say that this is a personal bankruptcy.”
‘Uncomfortable’ features
Says Tom Miller, a Wayzata-based attorney with Thomas F. Miller P.A.: The law has been changed “so that there is a lot of a embarrassment and friction and self-disclosure that has been injected into the law expressly to make it uncomfortable.”
Miller says that those who file for bankruptcy protection will now be required to attend financial counseling sessions and that the scope of relief that is obtained by filing bankruptcy will be less than in the past.
“There’s going to be essentially no Chapter 7” bankruptcy option, says Miller, adding that Chapter 13 bankruptcy will be made so difficult that few will be able to find protection under it. That leaves only Chapter 11, under which the entity filing for bankruptcy must adhere to a repayment plan.
Miller believes the changes to bankruptcy law will be disastrous for small-business owners and will discourage potential business owners from taking the plunge into entrepreneurship. He also predicts that debtors may go into hiding rather than file bankruptcy because the terms of the repayment plans will be unmanageable.
“As we all know, a very good percentage fail or have difficulty at some time,” says Miller of small businesses, “and if they are forced to liquidate and are forced to hold personal guarantees, they’re no longer going to have the bankruptcy remedy.”
Corey-Edstrom doesn’t entirely agree: “I think that the first year or two that this law is in place, there is going to be a lot of chaos in the system. To say that it’s going to lead to a lot of people going underground rather than filing bankruptcy could happen, but that happens now.”
He cites an example of one young client who had been the CFO of a small company that filed for bankruptcy protection. The client suddenly found himself liable for half a million dollars. He couldn’t reorganize his debts because the amount of his debt was too large. This client now must live and work in the “gray-market economy,” says Corey-Edstrom.
Kenyon says that the new law will limit the offering of retention bonuses as incentives for key employees to stay with the company during a reorganization.
“If I have to go in and help somebody with their plan, we have to figure out who’s going to stick around,” he says. “You may not want to pay them, but you need them. It’s not unusual for people to leave a sinking ship, so you oftentimes need to have these golden handcuffs.”
Kenyon also believes that bankruptcy judges will hold much more control of the fate of debtors than they did previously.
“I’m always careful in talking about law because I’m an accountant, but the bankruptcy judges have a tremendous amount of power” under the new law, says Kenyon. “Partly, you’re going to have to see what the interpretations are going to be from the judges.”
In addition, bankruptcy trustees (a court-appointed administrator who oversees the debtor’s bankruptcy estate) will now have the power to force a bankruptcy filing from Chapter 11 to Chapter 7 if they don’t feel that the operating company will have a significant chance of paying off its debts, says Kenyon.
These changes don’t just affect those who are filing bankruptcy; they also affect attorneys who handle those cases.
“I think that the biggest change that’s going to happen in the bankruptcy system, the biggest practical decision, is that it will be harder for consumers to find lawyers to file bankruptcy for them,” says Corey-Edstrom. That’s because the new law holds attorneys liable if clients misrepresent their finances.
“Holding the lawyer responsible for your client’s finances is something new in the bankruptcy code and there are a lot of lawyers who will not be in the practice after October 17,” says Corey-Edstrom.
Both Miller and Corey-Edstrom agree that those for whom bankruptcy is the only option should take action prior to October 17.
“Just the uncertainty of the new law and what it’s all going to mean would make me say file beforehand,” says Corey-Edstrom.
[contact] Ken Corey-Edstrom, Larkin, Hoffman Daly & Lindgren: 952.896.3380;***********@**dl.com“> kc***********@**dl.com; www.lhdl.com. Joe Kenyon, Schechter Dokken Kanter Andrews & Selce: 612.332.9300; jk*****@****pa.com; www.sdacpa.com. Tom Miller, Thomas F. Miller P.A.: 952.404.3896; th****@*******aw.com; www.millerlaw.com
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