Highlights of the Bankruptcy Reform Act of 1994 Part Ii

• Publication year: 1995
• Pages: 7
• Citation: Vol. 8 No. 4 Pg. 7

Highlights of the Bankruptcy Reform Act of 1994 Part II Vol. 8 No. 4 Pg. 7 Utah Bar Journal April, 1995

David E. Leta, J.

The first segment of this two part article (see, Utah Bar Journal, March 1995) focused on the commercial bankruptcy and related administrative issues of the Bankruptcy Reform Act of 1994 (the "Act").^[1] This second part will highlight some of the major consumer and related administrative issues under the Act. As noted in Part I, with a few limited exceptions, the new amendments only apply to cases filed on and after October 22, 1994.

CONSUMER AND RELATED ADMINISTRATIVE BANKRUPTCY ISSUES

A. Expedited Procedures for Reaffirmation of Debts.

Before the Act became effective, there was a split of authority about whether a separate hearing was required for a debtor to reaffirm a debt, even when the debtor was represented by an attorney who stated that the reaffirmation was voluntary and would not impose a hardship on the debtor.^[2] Section 103 of the Act amends section 524(c) of the Code to now require that reaffirmation agreements contain "a clear and conspicuous statement which advises the debtor that (the reaffirmation) agreement is not required under . . . title [11], under nonbankruptcy law, or under any agreement not in accordance with the provisions of this subsection." (Emphasis added.) The amendment also requires that the debtor's attorney fully advise the debtor "of the legal effect and consequences" of the reaffirmation agreement including "any default under such agreement." These changes are designed to ensure adequate notice to debtors of their right to discharge the debt before they reaffirm the obligation and to make sure that debtors understand that a reaffirmation will continue the obligation as though the bankruptcy had not been filed. Section 524(d) of the Code also was amended to clarify that a hearing is required on reaffirmation agreements only if the debtor "was not represented by an attorney during the course of negotiating [the reaffirmation] agreement."

B. Additional Compensation For Trustees.

1. Additional incentive compensation for trustees under Chapters 7 and 11.

Section 107 of the Act amends section 326(a) of the Code by increasing the percentage compensation from current levels to 25% on the first $5, 000 or less, 10% on amounts greater than $5, 000, but less than $50, 000, 5% on amounts greater than $50, 000, but less than $1, 000, 000, and "reasonable compensation not to exceed 3%" on amounts in excess of $1, 000, 000. These percentages are a ceiling not a floor. The actual compensation awarded to a trustee in a case under Chapter 7 or 11 must be "reasonable, " and must not exceed the above percentage limitations on all monies disbursed or turned over in the case.

2. Additional regular compensation.

In addition to increasing incentive compensation, section 117 of the Act also increased regular compensation for Chapter 7 trustees. Section 330(b) of the Code now permits trustees to be paid $15.00 more per case beginning October 22, 1995.^[3] The Judicial Conference of the United States may prescribe additional fees under 28 U.S.C. § 1914(b) and also may prescribe "notice of appearance fees and fees charged against distributions in cases" to generate revenue for the payment of this additional compensation. These changes apply to all of the cases that were pending as of October 22, 1994, as well as to new cases filed thereafter.

C. New Dollar Limitations and Automatic Future Adjustments.

The debt limits established in the Bankruptcy Code have not undergone any significant adjustment since the Code was enacted in 1978. Section 108 of the Act revises the current debt limits applicable under various sections of the Code. These adjustments affect the eligibility of an individual to be a debtor under Chapter 13, the qualification of creditors to file involuntary cases, the priority claims under section 507 of the Code and the dollar amount of certain federal exemptions.

1. Qualification to be a debtor under Chapter 13.

Section 109 of the Code has been amended to increase the maximum amount of unsecured debt from $100, 000 to $250, 000, and to increase the maximum amount of secured debt from $350, 000 to $750, 000, in connection with qualification t o be a debtor under Chapter 13. In part, these changes were made to encourage more individual debtors to elect Chapter 13 repayment plans over Chapter 7 liquidations. Obviously, a broader spectrum of individual entrepreneurs and sole proprietors will now be able to use Chapter 13 to obtain debt relief.

2. Involuntary cases.

Section 303(b) of the Code has been amended by increasing the aggregate amount of petitioning creditor claims from $5, 000 to $10, 000. This change should not be a barrier in the typical involuntary case.

3. Priority claims.

Section 507(a)(3) of the Code has been amended to increase the amount of an allowed unsecured priority claim from $2, 000 to $4, 000 for each individual or corporation, provided the obligation arises within 90 days before the date of the petition or the date of cessation of the debtor's business, whichever occurs first. In addition, section 507(a)(3)(B) also grants priority claim status to "sales commissions earned by an individual or by a corporation with only one employee." The same dollar change also was made in section 507(a)(4)(B)(i) for allowed unsecured priority claims for contributions to an employee benefit plan. Sixth priority claims for deposits of money in connection with the purchase, lease or rental of property that was not delivered or provided before the filing of the petition also has been increased from $900 to $1, 800.

4. Federal exemptions.

The federal exemptions under section 522(d) of the Code have been increased, in each instance, by doubling the dollar amount of the allowed exemption. These changes will not affect Utah debtors, however, who must claim their exemptions under Utah law.^[4]

5. Future adjustments.

In an attempt to stay current with the effects of inflation, section 104 of the Code was amended to add a new subsection (b) which now provides that on April 1, 1998, and at each three-year interval ending on April 1 thereafter, the dollar amounts under sections 109(e), 303(b), 507(a), 522(d) and 523(a)(2)(C) of the Code shall be adjusted "to reflect the change in the Consumer Price Index for all urban consumers, published by the Department of Labor for the most recent three-year period ending immediately before January 1 preceding such April 1, rounded to the nearest $25.00." The changes will be published in the federal register not later than March 1, 1998, and at each three-year interval ending on March 1 thereafter. The adjustments, however, will not apply to cases commenced "before the date of such adjustments."

D. Trustees Must Advise Debtors About Consequences of Bankruptcy.

Congress apparently believed that many debtors seeking relief under Chapter 7 had not been effectively or fully advised about the effects of filing bankruptcy. As a result, section 115 of the Act amends section 341 of the Code to add a...