SC Lawyer, May 2007, #4. The Bankruptcy Reform Act's Impact on Commercial Debtors and Their Creditors.

Author:By Michael M. Beal and Michael H. Weaver
 
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South Carolina Lawyer

2007.

SC Lawyer, May 2007, #4.

The Bankruptcy Reform Act's Impact on Commercial Debtors and Their Creditors

South Carolina LawyerMay 2007The Bankruptcy Reform Act's Impact on Commercial Debtors and Their CreditorsBy Michael M. Beal and Michael H. WeaverThe Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat 23 [hereinafter "BAPCPA" or the "Reform Act"] was signed into law on April 20, 2005. However, the vast majority of the Reform Act's provisions did not go into effect until October 17, 2005 (general effective date). While BAPCPA was enacted in an effort to curb perceived abuses of the bankruptcy system by consumer debtors (see Helen Elizabeth Burris et al., You Say You Want a Revolution, South Carolina Lawyer, July 2005, at 40 for a discussion of BAPCPA's effects on consumer debtors), a number of its provisions affect commercial debtors as well as the creditors who do business with them. This article discusses some of the major changes Congress made to the Bankruptcy Code through the Reform Act and how these changes have impacted commercial debtors and creditors more than one year after the general effective date.

I. Impact of BAPCPA on case filings in general

If you ask the bankruptcy bar, they will tell you that BAPCPA's most obvious impact has been on the number of case filings. In the months and days leading up to the general effective date, an unprecedented number of cases were filed in South Carolina and nationwide, and a precipitous drop in the number of filings occurred immediately thereafter. For example, according to the U.S. Bankruptcy Court for the District of South Carolina's records, between January 2003 and September 2005, the average number of Chapter 7, 11 and 13 filings was approximately 1,300 per month. In October 2005, more than 3,550 cases were filed; however, in November 2005 (just after the effective date), only 218 cases were filed. While the average number of Chapter 7, 11 and 13 filings each month has increased gradually since the general effective date (e.g., in 2006 there were, on average, 500 cases filed each month), the number of filings is still well below pre-Reform Act levels.

Nationwide, the number of commercial debtors filing for either Chapter 7 liquidation or Chapter 11 reorganization has been down since the general effective date as well. The significant reduction in Chapter 11 filings is not entirely attributable to BAPCPA. A combination of historically low interest rates, unprecedented liquidity in the capital markets and a fairly strong economy have helped some marginal businesses survive outside of Chapter 11. However, as oil and gas prices, interest rates and insurance premiums continue to rise across the country, the housing, automotive and manufacturing industries, among others, will be faced with formidable cash-flow challenges. These factors have led some analysts to predict that the number of commercial bankruptcy cases will increase significantly in 2007. Consequently, companies that are teetering on the edge of insolvency and companies that do business with them need to be aware of many notable changes in the Reform Act and how each may impact them.

II. Preferential transfers

Perhaps one of the most unpopular provisions of the Bankruptcy Code with creditors is § 547, which deals with a bankruptcy trustee's ability to avoid (i.e., recover) transfers or payments that a debtor made to or for the benefit of a creditor on account of an aged debt on or within 90 days before the debtor filed for bankruptcy (this period is expanded to one year for insiders of the debtor), which enabled the creditor to receive more than it would have received if the transfer had not been made and the debtor had filed for Chapter 7 relief. As a practical matter, this section almost always means that any unsecured creditor who was paid on account of an aged invoice within 90 days of the debtor's bankruptcy filing received a preferential...

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