What the law means for small businesses.

• Author: Shilliday, Holly

Now that the ink has dried on the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, many are discovering that the changes go well beyond simply trying to prevent consumer bankruptcy abuse.

The new law contains several major changes that will affect the way businesses deal with their business customers that file bankruptcy and the relationship between landlords and their commercial tenants in bankruptcy. Ultimately, it will be more difficult for small businesses to reorganize under the new law.

Bankruptcy is intended to give a failing business a breathing spell so that it may attempt to work out its financial problems in an orderly fashion. Upon the filing of a bankruptcy petition, an automatic stay generally prohibits creditors from attempting to collect pre-petition claims from the debtor and from taking any action to obtain other business property. The bankruptcy petition, schedules and statement of financial affairs are intended to freeze or create a snap-shot of the debtor's assets and liabilities as of the date of the bankruptcy petition, the so-called "petition date."

THE ACT HAS EXPANDED THE RECLAMATION RIGHTS OF SELLERS OF GOODS

The best way to understand the expanded reclamation rights under the new law is to provide an example of a seller's rights and remedies before and after the Act became effective on Oct. 17, 2005.

Let's say that Company A manufactures and sells computer chips. Company A enters into a contract with a customer and Company A delivers, on credit, computer chips to the customer with a retail value of $250,000. Thirty days later, the customer files a Chapter 11 bankruptcy petition. What are the rights and remedies of Company A with respect to the computer chips delivered to Customer?

Under the old law, Company A enjoyed a limited right to reclaim goods delivered to the debtor in the ordinary course of the vendor's business if the debtor was insolvent. To exercise its rights under the old law, the vendor need only make a written demand to the debtor to reclaim the goods (i.e., return of the goods) within 10 days after the goods were delivered to the debtor, 20 days after receipt of the goods by the debtor if the initial 10 days expired after the petition date.

The old law said the bankruptcy court could deny reclamation to a seller only if the court granted the seller a priority administrative claim (i.e., one that must be paid before distributions to unsecured creditors) or secured the claim by a...