Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: significant business bankruptcy changes in store for trade creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was recently passed, by the United States Congress and signed into law by President Bush. This legislation contains the most significant changes to federal bankruptcy law since the enactment of the Bankruptcy Code in 1978.

The primary focus of, and much of the publicity surrounding, the legislation is in the consumer provisions and, in particular, the means test that debtors must pass in order to qualify for Chapter 7 and the ultimate prize for debtors: the bankruptcy discharge. The trustee of any creditor can obtain dismissal of an individual debtor's Chapter 7 case, or with the debtor's consent, conversion to a Chapter 11 of 13 case, based on the showing that the bankruptcy filing was an "abuse" of the provisions of the Chapter 7. "Abuse" is presumed if an individual debtor's income exceeds the median income of the debtor's state and either: (i) the debtor has available net income (after deducting specified sums) for repayment to creditors totaling at least $10,000 over 5 years; of (ii) if available net income for repayment to creditors over 5 years is between $6,000 and $10,000, such available net income is more than 25% of nonpriority unsecured claims. There are also mandatory creditor counseling and debtor education provisions, additional restrictions on a debtor's ability to obtain a bankruptcy discharge, limits on the homestead exemptions and other hurdles that would make a Chapter 7 filing by individuals more difficult.

However, the little secret of the legislation, at least to the general public and to lots of pundits, are the changes in store for business bankruptcy cases. Many of these changes, pushed by trade organizations such as NACM, will have a significant impact on unsecured trade creditors. This article discusses a number of these changes.

Preferences And Venue

Most credit grantors will agree that the two areas in the legislation most welcomed by trade creditors evolve around the expanded protections in the areas of preferences and reclamation. Credit grantors have long been frustrated, believing that how they did business with a debtor was "ordinary", only to be confronted with a second test to prove what ordinary is or is not. More than one section of the legislation addresses preferences.

Section 1201--Definitions

The definition of the term "transfer" has been clarified. (1) It is now codified that a transfer includes the creation of a lien or security interest.