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BANKRUPTCY CODE NOW FAVORS CREDITORS
by Bob Brooke

 

Going Out of Business"Neither a borrower nor a lender be." Some wise old sage once said this and it's as true today as it was then, for in bankruptcy neither side wins. Bankruptcy, a word spoken in soft tones with a sigh of sympathy, is mysterious to some and baffling to most. Last year, Congress tried to clear up some of the federal Bankruptcy Code's ambiguity by adding 60 amendments, the first in 16 years. Only a select few understand the changes. Unfortunately, debtors and creditors aren't among them.

The main purpose in enacting a new code was to shorten the time it takes to adjudicate a case. But it also attempts to clarify the rights and obligations of various parties under the Code. It now seems to favor creditors, rather than debtors. Vague portions, which were previously decided by the Court, have now been legislatively defined. In effect, most delays have been legislated out of the code, affording creditors a faster payback time, according to Claudia Z. Springer, a bankruptcy partner of Duane Morris & Heckscher of Philadelphia.

"The purpose of filing for bankruptcy is to afford the debtor a fresh start," said Matthew Krekstein of Abraham Pressman & Bauer. "The original Bankruptcy Code of 1898 was devised to protect debtor's rights. The Bankruptcy Code of 1978 totally revamped the bankruptcy system, but it still protected the debtor. Congress, persuaded by lobbyists, was determined to prevent this, and the Reform Act of 1994 is a backlash to this concept. The Reform Act helps to make bankruptcy clear, since laws aren't black and white but shades of gray. Up to this point, judges had to make many decisions on parts of the Code that should have been more specific but weren't."

The Reform Act, in many cases, has streamlined the bankruptcy process, but now favors creditors, at least by the letter of the law. It authorizes an immediate appeal to the district court of orders extending or reducing the debtor's exclusive period for filing a plan, one of the debtor's most important rights. Impatient creditors, therefore, have recourse to another court where they perceive too much flexibility is being provided to the debtor by the bankruptcy court.

According to Marvin Krasny, partner of Wolf, Block, Schorr and Solis-Cohen, and a member of the Pennsylvania Bar Institute, one of the biggest reforms is sovereign immunity. "Government agencies, especially the IRS, now have to abide by the bankruptcy code," he said. "Before, they could do what they wanted because they were government. The Reform Act forces governmental agencies to wave their sovereign immunity and be treated equally with all other creditors."

Another big reform involves avoidance powers, the right of the debtor to avoid certain creditors. When a company files for bankruptcy, it's assumed that its board of directors has done some pre-bankruptcy planning, that is shifting funds or inventory so that they can be protected. This is called a preference. The members of the board of directors or anyone else in the company that may have given their guaranty for a loan are called insiders. Certain types of transactions can be undone.

Krasny likens bankruptcy to a photograph in which everything is frozen at that moment. Automatic stay, a major principle of bankruptcy, gives the debtor breathing room--to have time to plan--and halts collections. "The new law says a final hearing on relief from stay has to occur 30 days after the first hearing, which occurs 30 days after filing for bankruptcy," said Krekstein. "In essence, the Court could determine everything in 30 days, favoring creditors, but giving the debt or little time to get his act together. Most debtors want automatic stay through extensions to go on as long as possible to avoid having to pay anyone."

But the news isn't all bad. There are some advantages for debtors. Significant benefits conferred upon secured creditors under the Reform Act were accompanied by some amendments which favored debtors.

The period for curing (repaying) default amounts relating to the debtor's principal residence has been extended under the new law. Debtors are now permitted to pay back defaults in connection with a Chapter 13 plan, including default payments on a home mortgage loan at least up to the time of the foreclosure sale. In other words, the debtor can live in his house until it's sold.

"The Reform Act encourages debtors to participate in the bankruptcy process," said Krasny. "Unfortunately, the laws are written in language that neither creditors nor debtors understand, making our job doubly difficult."

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