Bankruptcy law makes liquidation more difficult

CNY Business Journal (1996+), Jul 22, 2005 by Dickinson, Casey J

SYRACUSE - A new federal-bankruptcy statute makes discharging debt more difficult. The law imposes a " means test" on filers to gauge their ability to pay off debts in the future. The change takes effect in October.

To help its clients understand how the changes will affect their businesses, Harris Beach PLLC presented a seminar June 8 at the Marx Hotel's conference center. Lee Woodard, a partner at Harris Beach, appeared on a panel with Syracuse University law professor Gregory Germain and Samuel Gerdano, executive director of the American Bankruptcy Institute. Each panel member presented views on how the new law will change bankruptcy protections and legal practices.

After many years of debate, and several failed attempts, President Bush signed the 2005 Bankruptcy Act into law April 20. The Act goes into effect Oct. 17.

The new law Is already having a substantial impact since its passage in April, says Woodard. Bankruptcy filings across the nation are up in anticipation of the switch to a means test. The Northern District of New York Bankruptcy Court reports 779 Chapter 7 filings in Utica for May compared to 679 filed in May 2004.

"Everyone who ever thought about filing in the past, is filing now," says Woodard, head of the Financial Restructuring, Bankruptcy, and Creditors' Rights practice group at Harris Beach.

Attorneys in other federal-bankruptcy court districts have reported an increase in unusual filing practices, such as off-hour filings of consumer-bankruptcy petitions, he adds.

The law provides more creditor-friendly provisions and reduces the discretion of judges, says Gerdano. In addition to prompting debtors to file before October 17, the law will limit judges' discretion to grant Chapter 7 liquidation discharges, he adds.

The "means test" uses the debtor's income and a "state-median" income to calculate whether the debtor could repay under a Chapter 13 reorganization plan, explains Woodard. The median-income figure used is taken from census figures. Allowable living expenses used in the formula come from Internal Revenue Service (IRS) figures that calculate costs on a county-by-county basis.

The IRS living-expense figure varies widely across New York State. In Lewis County, a two-person household is allowed $795 per month toward housing, utilities, and living expenses, while in Manhattan the monthly allowance is $3,547.

If a debtor's income and expenses match certain metrics, Woodard explains, the court will presume abuse and dismiss or convert the bankruptcy petition to a repayment plan.

A one-word change in the bankruptcy code will lower the standard that allows judges to reject or convert Chapter 7 liquidation cases into Chapter 11 or Chapter 13 cases. The new act eliminates the "substantial abuse" test in consumer cases, replacing it simply with "abuse." The change, Woodard explains, will give judges less discretion to find that a consumer petition was not filed to abuse the bankruptcy code's protections. A judge will examine all circumstances surrounding the filing, he adds.

Parts of the "automatic stay" that stops collections and legal actions against a debtor upon the filing of a bankruptcy petition have changed. The new law eliminates automatic stays of child support, stays in certain cases of subsequent bankruptcy filings, and stays in cases of pre-filing eviction proceedings. Professor Germain explained the complex changes in the automatic stay including one that allows for the eviction of tenants involved in substance abuse. Germain teaches courses in bankruptcy, federal income tax, and other commercial subjects at Syracuse University College of Law.

"If you're a creditor, there's something in this law for you," says Gerdano.

The more complex regulations may actually increase the number of filers representing themselves, he adds. New regulations regarding debtor counseling, education, and attorney liability for clients' bankruptcy petitions may cause some attorneys to abandon the market or raise fees. The end result, Gerdano explains, would be more filers who choose to try their own legal work in order to save money.