The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) aims to tighten previous bankruptcy laws through stricter practices and more frequent reviews. In many cases, businesses will benefit from BAPCPA because it affords them greater protection against customers or partners who file for bankruptcy.
Prior to the passage of BAPCPA, the law allowed companies that were filing for bankruptcy to file a preference claim in order to “claw back” any monies that had been paid out to another business within 90 days of declaring bankruptcy. (Read BAPCPA Impact on Preference Mediation for more information on this topic.) Even though preference claims are still a part of the bankruptcy law, there are now much stricter standards for their use.
For example, under the new standards a business can dispute a preference claim by proving that the money was exchanged during “the ordinary course of business,” thus voiding the claim. Additionally, the preference claim has to be filed in the area where the business is located rather than where the bankruptcy case is being handled. This is significant because it protects small business owners from the travel and legal expenses they would incur in going to a different area to defend themselves against the claim. Under the old law, small business owners often found it cheaper to pay the claim than to incur travel costs to fight the claim.
In addition to the preference claim changes, there are now stricter standards for recovering goods from a recently bankrupt business. In the past, if goods were shipped on credit and a business went bankrupt, the sender had only 10 days to file a claim. Under BAPCPA, companies have 45 days to make a written reclamation-of-goods demand. In addition, if for some reason the written reclamation is not filed in that time frame, a company can receive an administrative expense claim for the value of the goods, pending proof that the goods had shipped within 20 days of the bankruptcy filing and that they were shipped in the ordinary course of business.
BAPCPA allows businesses the opportunity to better defend themselves against bankruptcy filings and can be crucial in protecting your business’s financial situation when a customer files for bankruptcy. It is important to note, though, that these same benefits will work against your business if you’re in the position of filing for bankruptcy.
If you need to make a bankruptcy claim for your business, be sure you understand the impact of the new rules, specifically in regards to which goods and monies you’ll be able to access versus those you will not. On the other hand, if you’re in a position where a customer or partner is going bankrupt, your rights to goods and monies exchanged have been expanded and you should consult a professional in your area to ensure you are taking full advantage of the new Act.
For more information on BAPCPA, check out What Is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)? and visit the U.S. Department of Justice Web site.