What to Know About the New Bankruptcy Laws
This is the first part of a two-part impact review of the new Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 that goes into effect on October 17.
On April 20, 2005, President Bush signed into law The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Predictably, the media spin on the new law has been just in one direction: that BAPCPA will make it more difficult for consumers to shed their debts via a bankruptcy filing.
While the media spin is correct for the most part, BAPCPA's impact on small-business owners has generally been underreported. This month's article will paint the "big picture" on BAPCPA for small businesses. Then next month we'll review the important details of BAPCPA from the perspective of a small-business owner.
An Avalanche of Bankruptcy Filings
The last time the United States government made a major revision to its bankruptcy laws was in the late 1970s. The then-new Bankruptcy Code replaced the ancient Bankruptcy Act and, in ways large and small, eventually redefined the term "bankruptcy" in our common consciousness from a somewhat tawdry act signifying personal or business failure to an intelligent debt-planning tool for business and personal use.
In BAPCPA, Congress has attempted to eliminate or minimize many of the "abuses" that have arisen during the past twenty or so years under the Bankruptcy Code. Although BAPCPA will definitely make it more difficult for both consumers and small businesses to use the Bankruptcy Code to shed their debts, Congress attempted to ameliorate the impact by giving everyone a six-month heads-up by not making the law effective until October of 2005.
It's important to note now that the death of "That '70s Bankruptcy Law" is fast approaching.
So far, the media's take on the passage of BAPCPA has been that it'll be a catastrophe for consumers. Given the fact that consumer catastrophe stories sell news, my prediction is that you'll start to see a massive media blitz from both the media and bankruptcy attorneys beginning in late summer about the "evils" of BAPCPA.
Given even a moderate media blitz, it may well be that this will create a feeding frenzy of bankruptcy filings from anyone who's even slightly in debt. And people and businesses with large amounts of debt and less-than-perfect futures will start to think "It's now or never" which, in turn, will trigger a massive surge in consumer and business bankruptcies before BAPCPA takes effect.
But even if a media-generated tidal wave of bankruptcy filings doesn't occur, it's still a safe bet there'll be a large burst of bankruptcy filings just before the deadline in October. To protect against this possible surge in filings, the following is a list of intelligent things business owners can do to protect themselves:
- Keep an eye on your receivables. Particularly if your customers are consumers or other small businesses, you should take a hard look at your current accounts receivable and then watch the large ones closely through October to determine which customers may be vulnerable to the siren song of an "easy" bankruptcy filing.
Obviously, not every customer with a large account receivable balance will file for bankruptcy. But the impact of even one large customer filing bankruptcy can be a significant hit to any small business. If you suspect that one or more major customers may file before BAPCPA becomes effective, it's a good idea to discuss these accounts with a bankruptcy specialist to determine your options.
- Be on guard for large orders from customers. It's happened in the past that consumers and businesses that are in dire financial straits will try to load up on goods or services just before filing for bankruptcy in the hopes that the bankruptcy case will force the vendors to accept pennies on the dollar for the goods or services provided.
One way to protect against this type of "load-up order" is to be very cautious about delivering large orders or providing large amounts of services to financially iffy customers, particularly in the months of August, September and October this year. Other ways you can protect your business include: spacing the deliveries or services over a longer period of time; insisting on full payment for overly-large or unusual deliveries or service requests; or demanding larger deposits or initial payments prior to making these types of deliveries or providing these types of services.
- Look out for large orders from new customers. Another way to be fleeced is to have a big, brand-new customer place a large order with your business "just to see how well you can handle it." Overwhelmed at the prospect of landing such a wonderful customer, you don't check their financial or credit situation very closely and, whammo, right after delivery, your big, brand-new customer files for bankruptcy protection, leaving your business with a big bill that may never be repaid.
Ways to prevent this type of disaster include conducting a rigorous credit check even for "blue chip" new customers who want large orders to be delivered quickly, or insisting on the same types of protections noted in the previous section such as protective spacing of deliveries and/or large deposits before shipping and/or cash upon delivery.
- Be wary of unusually large payments from customers. One extremely annoying word in the current Bankruptcy Code for many businesses is called "preference." Simply stated, the preference law allows the bankrupt company in many instances to take back any moneys they paid to your company within 90 days of the date of the filing of their bankruptcy case.
Here's an example of how a preference situation can work to hurt your business:
Your business has an extremely slow paying, large customer that you finally require to start paying off their past-due receivables or else your company will cut off their credit for future purchases. The slow-paying business then sends your business a check for $10,000 to be applied against their oldest bills. Because the business has started to pay as agreed, you continue to ship on credit. The next thing you know, the slow-paying business files for bankruptcy and then demands that its $10,000 payment be returned to them as a "preference."
The good news is, there are defenses to claims of preferences, so you should consult with a bankruptcy specialist if you find your business in this type of situation. The better news is that BAPCPA gives businesses additional defenses to fight preference claims which I'll discuss in next month's column detailing some of the specific ways BAPCPA will affect small-business owners and their businesses.
To read the second part of this two-part impact review, click here.