New bankruptcy law has requirements that will harm even large corporations

The Bankruptcy Abuse and Consumer Protection Act, passed into law last April with huge bipartisan support, is intended to clean up the supposedly sloppy Federal Bankruptcy Code. According to the credit industry, our bankruptcy courts are clogged with cases involving deadbeat spenders who simply do not care to pay their bills, along with drug addicts, compulsive shoppers and chronic gamblers.

The truth is more complicated, however. Studies show that most people who file for personal bankruptcy are actually victims of job loss, illness, or some disaster, such as Hurricane Katrina. In cases like these, a bit more compassion would seem to be warranted, but the new law is tough. It has stricter filing requirements, higher fees, and holds attorneys more responsible for the information presented in court. And in a big surprise, it also has some harsh provisions for corporate bankruptcy filings, as well.

Bankruptcy filings have surged in recent months as the new law prepares to take effect. In most states, filings are up some 25% over last year. The bankruptcy courts that handle corporate cases are no different, and a number of large companies have chosen to file for bankruptcy prior to the implementation of the new law, including Delta Airlines and Northwest Airlines . These companies, particularly Delta, have been in financial trouble for several years. Why the rush to file?

The new law reduces the length of the “exclusivity period” to 18 months. The exclusivity period is the time that companies are allowed to reorganize and try to right themselves without the involvement of the courts or their creditors. At the moment, that period is more or less without limit, and some companies have operated under Chapter 11 of the Federal Code for years. Creditors have tired of not knowing when, or if, they will receive any of the money they are owed. That will change under the new law, and executives will have but 18 months in order to turn things around. After that, the court has the right to settle, liquidate, or do whatever it deems best with the corporation and its assets.

There are additional ramifications for corporations involving employee salaries and access to assets by creditors that make it worthwhile for companies who may be in financial trouble to file now, rather than later.

With tourism lagging, popular destination New Orleans under water, and fuel at record high prices, Delta and Northwest have decided that it’s worth filing now. Timing is everything, and the situation for airlines likely won’t get much worse. Other corporations will undoubtedly follow suit, and the courts could become quite clogged for both individual consumers and large corporations once Fall arrives.

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