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
Content Continues Below
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.
Chris Kelleher is Entrepreneur.com's "Legal"
columnist and an award-winning small-business advisor and
attorney. He's also a sought-after speaker and the founder and
resident legal guru of The Law Firm For Businesses, a boutique law
firm that helps business owners creatively solve their business and
legal problems.