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Five Things You Should Know About Bankruptcy

Bankruptcy filings increased in February 2008 by 18% from January, and by 28% from a year earlier. In fact, February was the busiest month for filings since Congress overhauled bankruptcy law in October 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA").  This increase in filings also increases the chance that you will be faced with bankruptcy issues. Some of the revisions contained in BAPCPA that you may encounter are set forth below.

Pre-Petition Shipments Of Goods. BAPCPA created substantial additional rights for suppliers that sold goods to a debtor prior to the bankruptcy filing.  Section 503(b) of the Bankruptcy Code allows administrative-expense status to all claims for "the value of any goods" received in the ordinary course of business by a debtor within 20 days before the bankruptcy filing. The supplier must request administrative-expense status. By doing this, the supplier is in a better position than unsecured creditors to be paid, since a Chapter 11 plan of reorganization cannot be confirmed unless administrative claims are fully paid in cash on the effective date of the plan. Unsecured creditors typically receive only a fraction of their claims.

Reclamation Claims.Suppliers may now exercise their right to reclaim goods 45 days after the debtor's receipt of the goods under Section 546(c) of the Bankruptcy Code. Prior law limited the period for reclamation to 10 days after receipt of the goods. A written demand for reclamation of such goods must be made not later than 45 days after delivery. Suppliers must move quickly or their right to reclaim will be lost. If the 45-day period has not expired as of the filing of a bankruptcy case, a supplier will have an additional 20 days after the filing of the case to demand reclamation of the goods sold. A reclamation demand is "subject to the prior rights" of a holder of a security interest in the goods sold.

Preferences:  Small Claim Threshold and Venue. Creditors of a debtor who received small payments during the 90-day pre-bankruptcy preference look-back period are protected by BAPCPA.  Aggregate payments received by a creditor not exceeding $5,000 are now exempt from preference liability.  Also, creditors who have received potential preference payments in an amount less than $10,000 will no longer have to defend themselves in the home bankruptcy court of the debtor, which could be located in another state.  Instead, such preference actions must now be commenced in the creditor's home district.  

Preferences: Ordinary Course Defense. Prior to BAPCPA, to avoid preference liability, a creditor had to prove that the payment it received from the debtor was made in the ordinary course of business of both parties and that the payment was made in accordance with "ordinary" industry terms.  In other words, a creditor had to establish both defenses to prevail.  BAPCPA made it easier to defend a preference action, since a creditor now has to prove only one of the two defenses, thereby reducing the creditor's burden of proof.

Full post as published by New Jersey Law Blog on April 01, 2008 (boomark / email).