Expert Commentary

Provisions in the Proposed Bankruptcy Reform Act of 2001 of Interest to Sureties

In 2000 more than 1.2 million people filed for bankruptcy—an increase of nearly 70 percent from 1990—and more are expected with the recent economic downturn. Marilyn Klinger examines those provisions of the Act that may be of interest to a surety in connection with its principal's or indemnitor's bankruptcy filing.

November 2001

More than 1.2 million people filed for bankruptcy in 2000, an increase of nearly 70 percent from 1990. With the recent economic downturn, the number of bankruptcy filings is expected to grow. The proposed Bankruptcy Reform Act of 2001 modifies the Bankruptcy Code and is intended, among other things, to make it more difficult for individuals to erase unsecured debts under Chapter 7. It is also intended to increase the number of Chapter 13 filings, requiring individuals to repay at least some of their debt. The Act also contains provisions applicable to small business Chapter 11 reorganizations.

On March 1, 2001, the House of Representatives passed H.R. 333, its version of the Act, while, on March 15, 2001, the Senate voted to pass its version, S.420. The versions are slightly different. President George W. Bush has indicated that he will sign the Act, which would take full effect 180 days thereafter.

This article focuses on those provisions of the Act that may be of interest to a surety in connection with its principal's or indemnitor's bankruptcy filing.

Credit Counseling for Individual Debtors

Within 6 months prior to a bankruptcy filing, an individual must receive debt counseling from an approved nonprofit credit counseling agency. Counseling must include outlining opportunities for available credit counseling, assistance in the preparation of a budget analysis, and, to the extent possible, preparation of a debt repayment plan. The U.S. Trustee is responsible for approving a list of the nonprofit credit counseling agencies. An individual debtor is required to file a certificate from the credit counseling agency describing the counseling received and a copy of the debt repayment plan, if any. The court will deny an individual Chapter 7 and 13 discharge if the debtor does not complete, post-petition, an instructional course concerning personal financial management.

Debtor Certifications/Disclosures

Bankruptcy Code Section 521(a)(1) Certifications/Disclosures. The Act provides that all debtors shall file a certificate from legal counsel, a bankruptcy petition preparer, or his or her own certification stating that the debtor was (1) provided a description of Chapters 7, 11, 12, and 13 and the general purpose, benefits, and costs of proceeding under each chapters, (2) advised of the credit counseling agency services, (3) provided notice that a person who knowingly and fraudulently conceals assets or makes a false statement in connection with a bankruptcy case shall be subject to fine and/or imprisonment, and (4) given notice that the information the debtor supplies in a bankruptcy case is subject to the Attorney General's examination.

The Act also provides that a debtor must file copies of all payment advices or other evidence of payment that the debtor has received from any employer in the 60 days preceding the bankruptcy filing, as well as a statement of monthly net income.

If an individual debtor, under Chapter 7 or 13, fails to file all of the required certifications and disclosures, in addition to the already required list of creditors, schedule of assets and liabilities, schedule of current income and expenditures, and statement of debtor's financial affairs, within 45 days from the petition date, the court shall automatically dismiss the case effective the 46th day after the petition unless the court grants an extension for not longer than 45 days. Any party in interest may request this dismissal, which the court shall enter within 5 days thereafter.

Other Bankruptcy Code Section 521 Disclosures. The court will dismiss a case if, not later than 7 days prior to the first meeting of creditors, the debtor has not provided a tax return for the latest taxable period prior to the bankruptcy filing, unless circumstances beyond the debtor's control prevented the filing. The court, U.S. Trustee, or party in interest can require individual debtors in a Chapter 7, 11, or 13 case to file federal tax returns during the bankruptcy proceeding. The U.S. Court's Administrative Office Director is to establish procedures for safeguarding the confidentiality of the tax information.

In a Chapter 13 filing, the debtor must disclose its income and expenditures in the preceding tax year and during the bankruptcy proceeding, including the amount and sources of income and the amount and identity of any person contributing to the debtor's household.

Small Business Debtors

What Is a "Small Business Debtor?" A "small business debtor" is a person engaged in commercial or business activities (excepting those involved with real property ownership/operation) having aggregate noncontingent, liquidated secured and unsecured debts of not more than $3 million. A small business debtor does not include a member, such as a subsidiary, of a group of affiliated debtors whose aggregate noncontingent liquidated secured and unsecured debts exceed $3 million.

Reporting Requirements of the Small Business Debtor

Small business debtors must file periodic post-petition reports setting forth its (1) profitability, (2) projected cash receipts and disbursements, (3) comparisons of actual cash receipts and disbursements, (4) compliance with post-petition requirements, (5) tax returns and payment of taxes and other administrative claims, and (6) "other matters that are in the best interests of the debtor and creditors."

A Chapter 11 small business debtor must also include its balance sheets, statements of operations, cash-flow statements, and federal income tax returns, and, upon reasonable notice, must allow the U.S. Trustee access to its business premises and books and records.

Bankruptcy Automatic Stay Provisions. The Bankruptcy Code automatic stay provisions do not apply to Chapter 11 small business debtors where that debtor previously filed a Chapter 11 bankruptcy that (1) was dismissed, or (2) had a plan confirmed, within 2 years from the subsequent petition date. There are exceptions to this provision, including an involuntary case or where a voluntary petition was the result of unforeseen conditions and it is likely that the court will promptly confirm a plan.

Chapter 11 Disclosure Statement and Plan; Confirmation. A Chapter 11 small business debtor must file a plan and any necessary disclosure statement no later than 300 days after the petition, with exclusivity only running 180 days after the petition. These time requirements may be extended if the court will confirm a plan within a reasonable time. The time for confirming the Chapter 11 plan is 45 days from filing, although it is possible to obtain an extension.

Chapter 7 Provisions

Determination Re Dismissal/Conversion. Within 10 days following the first meeting of creditors, the U.S. Trustee must file a statement as to whether the debtor's case constitutes an abuse of discretion. The U.S. Trustee will make the determination through a formal process of means testing of assets, debts, and average monthly income. The means test generally establishes a formula for determining how much will be available to repay debt after certain allowable expenses are deducted. Under the formula, remaining income of more than $10,000 over 5 years (or $166.67 per month) would result, in most instances, in a dismissal of a Chapter 7 filing. The debtor would thereafter need to choose between Chapter 13 or forego bankruptcy protection.

In the event that the U.S. Trustee determines that a particular case is an abuse of discretion, the U.S. Trustee must file a motion to dismiss or convert the proceeding or, alternatively, set forth the reasons such a motion would not be appropriate, such reasons being articulated in the Act.

During the course of the bankruptcy proceeding and after notice and a hearing, the court, on its own motion or pursuant to the trustee's or any party in interest's, may dismiss an individual's Chapter 7 proceeding or, with the debtor's consent, convert the case to Chapter 11 or 13. In making that determination, the Act provides a formula, similar to the threshold formula, for determining a debtor's ability to repay his or her debts. The court may also consider whether (1) the debtor filed the petition in bad faith, or (2) the totality of the circumstances of the debtor's financial situation.

Chapter 11 Provisions

Conversion or Dismissal. The court may convert or dismiss a Chapter 11 proceeding, upon a showing of cause. Cause has been modified to include:

  • Substantial or continuing loss to or diminution of the estate
  • Gross mismanagement of the estate
  • Failure to maintain appropriate insurance
  • Unauthorized use of cash collateral
  • Failure to comply with a court order
  • Repeated failure to satisfy any filing or reporting requirement
  • Failure to attend the section 341(a) meeting of creditors or a Bankruptcy Rule 2004 examination
  • Failure to provide information to or attend meetings with the U.S. Trustee
  • Failure to pay taxes or file tax returns after the order for relief
  • Failure to file a disclosure statement or file or confirm a plan
  • Failure to pay required fees or charges
  • Revocation of an order of confirmation
  • Inability to effectuate substantial consummation of a confirmed plan
  • Material default of a confirmed plan
  • Termination of a confirmed plan by reason of the occurrence of a condition specified in the plan
  • Failure of the debtor to pay any domestic support obligation that first becomes payable after the date on which the petition is filed

Unless the movant consents or the court orders otherwise, the court shall hear a motion to dismiss or convert not later than 30 days after filing and issue a decision not later than 15 days thereafter.

Chapter 13 Provisions

Chapter 13 Plan Periods. The plan period of a Chapter 13 debtor, whose current annual income (factoring in the income of the debtor's spouse) is equal to or greater than the median family income of an applicable household as reported by the Bureau of the Census, cannot exceed 5 years. A Chapter 13 debtor whose current annual income is less than the median income may not provide for payment over a period longer than 3 years unless the court, for cause, grants a longer period, not to exceed 5 years.

Timing of Plan Confirmation. A plan confirmation hearing must occur not earlier than 20 days and not later than 45 days after the first meeting of creditors setting. Nonetheless, a debtor shall commence making payments pursuant to the proposed plan to the trustee not later than 30 days after the plan is filed or the order of relief, whichever is earlier. The trustee will hold the payments until confirmation or denial of the plan. If confirmed, the trustee shall distribute the payments in accordance with the plan. If the plan is not confirmed, the trustee shall return to the debtor any funds received for claims not yet due.

Chapter 13 Discharge. Under the Senate version, a Chapter 13 debtor may not be discharged of debts if the debtor had received a discharge in a case under (1) either Chapter 7, 11, or 12 during the 3-year period preceding the date of the pending Chapter 13 petition, or (2) Chapter 13 during the 2-year period preceding the date of the pending Chapter 13 petition. Under the House version, a Chapter 13 debtor may not be discharged if the debtor received a discharge in any bankruptcy case within 5 years before the Chapter 13 petition.

Miscellaneous Provisions

State Homestead Exemptions. Under the Senate version, a debtor selecting state exemptions may not exempt the debtor's equity in real property that the debtor, or a dependent of the debtor, uses as a residence that exceeds $125,000. Under the House version, a debtor may not exempt under state law the debtor's equity in real property that the debtor, or a dependent of the debtor, uses as a residence and that the debtor acquired during the 2-year period preceding the bankruptcy filing that exceeds $100,000. This limitation does not apply to any interest transferred from a debtor's previous residence acquired prior to the 2-year period into the current residence, where the debtor's previous and current residence are located in the same state.

1Thank you to James Diwik of Sedgwick, Detert, Moran & Arnold's San Francisco Surety Practice who performed the research and analysis for this article.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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