In April, President Bush signed into legislation the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as the Bankruptcy Reform Act.At least eight years in the making, the legislation marks the most significant bankruptcy legislation in decades, and will most likely wend its way to accounting firms.
Many accountants address bankruptcy issues from the commercial side, dealing with businesses that are filing for bankruptcy protection, and there are aspects of the new act that fall under this purview. The new legislation is geared more toward consumer bankruptcies, as the name of the act implies, and even in this arena there may be services accountants can offer.
The new act requires that individuals who contemplate filing for bankruptcy must receive a certificate from an approved nonprofit credit counseling agency, and those who ultimately file for bankruptcy must also participate in financial management training.
"If you're a local practitioner, that sounds like a real boon opportunity," said Ed Ordway, a CPA and senior executive with Capstone Advisory Group.
The legislation calls for the director of the Executive Office for United States Trustees to oversee the development of training material and to consider and provide approval for the qualifications of credit counseling agencies and the instructional materials they provide.
"There probably is an opportunity," said Barry Lefkowitz, a partner at Midwestern super-regional firm Virchow Krause and leader in the firm's bankruptcy and restructuring group. "Most of the bankruptcy attorneys are going to be setting up those shops. I think that there'll be an opportunity out there for the accounting professional to offer those services if the attorneys are open to it," he said. "It's a logical thing for the accounting professional to get involved in."
Perhaps the most significant area of the new legislation, at least as far as accountants are concerned, is the section dealing with audit procedures. As a spokesperson from the American Institute of CPAs pointed out, this area, at least initially, will produce the primary impact on CPA firms. The act requires that the petitions, schedules and other required information offered by the debtor in a bankruptcy proceeding be audited.
According to the language of the bill, "Such audits shall be in accordance with generally accepted auditing standards and performed by independent certified public accountants or independent licensed public accountants."
Such audits will be required to focus on identifying material misstatements of income or expenditures, or of assets. The audit requirement becomes effective in October 2006.
Because much of the new bankruptcy legislation is designed to protect creditors, many businesses that have claims against debtors will benefit from the new rules, which go into effect in October 2005.
"One of the changes relates to the rules regarding rejecting a lease," explained Lefkowitz. The new law requires debtors with real estate holdings to assume leases within 210 days of the filing of a bankruptcy claim or face rejection of the lease. Under prior law, many debtors under protection of the bankruptcy courts had the ability to extend the decision to assume or reject a lease indefinitely. "This is very relevant to retail bankruptcies. After October it will be more difficult to exit leases as inexpensively, relatively speaking, as you can currently."
Michael S. McManus, chief U.S. bankruptcy judge for the Eastern District of California, agreed. In an interview, he stated, "In a big Chapter 11, sometimes the real estate leases are one of the primary assets."
Another significant feature of the new law is an increase in the amount of protection for preference claims.
Preference action cannot be brought against payments made by debtors of less than $5,000, and creditors who receive such payments need only establish that the payments were made either in the ordinary course of business or that the payments were ordinary in the debtor's industry to protect the payment received from claims by other creditors.
What consumers can expect
The chief beneficiaries of the legislation are the credit card companies that have been lobbying for it for years. Overall, it will be more difficult and more expensive for consumers to file for bankruptcy in order to get relief from debts. Many individual consumers who at one time would have filed a Chapter 7 bankruptcy plan - relieving themselves of most, if not all, of their debt - will be required instead to file a Chapter 13 plan, preserving the debt but extending the time over which it must be paid.
Debtors whose family income over the previous six months exceeds the median family income for their state will most likely be required to file the Chapter 13 and make payments on their debts over a period of 36 to 60 months.
Due to the new education and audit requirements, bankruptcies in general will be more expensive. Some speculate that the cost of hiring a lawyer to file a bankruptcy proceeding could as much as triple. It remains to be seen whether or not the cost of the counseling will be borne directly by the debtor, but that is a potential area for additional cost.
Under current law, debtors filing a Chapter 13 list their actual monthly expenses and calculate an amount that they are able to pay toward the liquidation of their debts based on that budget. The rules have changed under the new law. The Internal Revenue Service National and Local Standard Expense Guidelines will be used for comparison purposes, and the court will have some say in dictating what a debtor is allowed to spend on items deemed to be non-necessities.
On a more positive side, at least from a debtor's point of view, the new bankruptcy act provides additional protection for funds held in retirement, pension and profit-sharing accounts. And some jurisdictions provide special protection for homeowners. In five states - Florida, Iowa, Kansas, South Dakota and Texas - debtors are entitled to a homestead exemption that allows them to keep the entire equity in their homes, as long as they have owned the homes for at least 40 months prior to filing for bankruptcy. Some other states limit the amount of homestead exemption to $125,000, but most states cap the homestead exemption at $15,000 or less.
Opponents of the legislation are quick to point out this inequity, and describe what is being called a loophole in the legislation that enables certain debtors to stash assets in the form of home equity while relieving themselves of other assets in the courtroom.
Yet another complaint about the legislation, and an area where accountants are again most likely to participate, is the fact that the law keeps intact the ability of debtors in eight states - Alaska, Delaware,
Missouri, Nevada, Oklahoma, Rhode Island, South Dakota and Utah - to keep money in asset protection trusts and out of bankruptcy proceedings. The new legislation keeps this state-level initiative intact. Called the millionaire's loophole by some, the provision applies to anyone who can afford to hire a professional to establish the pricey trusts. It doesn't matter where the owner of the trust lives, as long as the trust is established in one of the five named states.
The law, which some claim is harsh to poor people who may have legitimate reasons for requesting protection from the courts that go beyond the stereotypical unbridled credit card spending, places debtors in a position of facing possible eviction from landlord creditors, possible loss of vehicles that are not fully paid for, and a possible loss of the ability to reaffirm debt on property that they want to keep, such as electronic equipment.
Accountants representing small businesses that are attempting to file for Chapter 11 bankruptcy will notice some other changes in the law. New rules for businesses with debt under $2 million change the timetable for filing a plan under Chapter 11. During the first 180 days, only a debtor can file a reorganization plan. After that time, creditors can submit plans as well. The new law, in effect, limits the possibility of extensions that a court may grant for filing plans. If no plan is filed within 300 days, the corporation may lose its Chapter 11 protection. Under such a circumstance, the case will either be dismissed or the corporation will be forced into a Chapter 7 liquidation.
"This reduces the time that Chapter 11 debtors stay in Chapter 11. It has the potential to affect the accounting profession, as cases should be shorter," said Lefkowitz. "Chapter 11 is expedited, cases will be quicker. I think that's better for accounting all around."
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