Four New Bankruptcy Bills Passed by Trump on August 23, 2019
Family Farmer Relief Act: This Act increases the debt cap for a Family Farmer from $4,411,400 to $10,000,000 under Chapter 12 of the Bankruptcy Code. This is an important change because farm size and debt load has dramatically increased since 1986 when Chapter 12 was created and the prior debt cap made the specific restructuring that can be obtained through a Chapter 12 impossible for many family farmers to qualify for because they were over the debt cap.
Honoring American Veterans in Extreme Need Act: This Act changes the definition of current monthly income (used for the Means Test which is a formula to determine whether a Chapter 7 or Chapter 13 is available for a debtor in bankruptcy) to specifically exclude veteran’s benefits in the calculation. This change should enable veterans who receive these types of benefits to qualify for Chapter 7 more easily. Before this change, governmental assistance like Social Security Disability and Social Security Income were excluded from the Means Test, so it makes a lot of sense to exclude veteran’s benefits as well.
National Guard and Reservists Debt Relief Extension Act of 2019: This Act created an exception so that service people who served on active duty or in a homeland security activity for at least 90 days before the Chapter 7 bankruptcy or 540 days after leaving active duty do not need to complete the Means Test. Because the pay to service people on active duty is typically higher than when they are in their regular jobs, requiring service people to perform the 6 month look back required by the Means Test unfairly calculates their disposable income, so this change was needed, even if it only affects a small amount of the population.
Small Business Reorganization Act of 2019: Creates a new type of Chapter 11 case which can be elected for a small business debtor (corporate or individual) with total debts of less than $2,566,050 of which at least 50% are business debts. A Trustee is automatically appointed to every case, and the Trustee has duties to be accountable for all property received, while the Debtor can continue to operate their business.
Among other duties and obligations divided between the Debtor and the Trustee, the Debtor alone has 90 days to put together a Plan of Reorganization with the Trustee’s oversight in formulating the Plan. The Plan must include, among other things, projections which demonstrate the feasibility of making the payments proposed. The Debtor can still cram down creditor objections to confirm the Plan under certain circumstances, but the absolute priority rule has been removed meaning that the Debtor can retain some property even if all classes of creditors are not paid in full if the other criteria for confirmation are met. This is a critical change that will allow individual Chapter 11 bankruptcies for entrepreneurs who don’t qualify for Chapter 7 or Chapter 13.
The Act also allows small business debtors to modify a mortgage on their personal residence, as long as the mortgage wasn’t used to acquire the residence and the loan was primarily in connection with their small business. Again, a critical change as this type of modification is not available in a Chapter7 or a Chapter 13.
The Act also made changes to Section 547 of the Bankruptcy Code (applicable to all debtors, not just small business debtors) which governs the recovery of preferences, which are claims by a trustee to recover payments made by a debtor to creditors within 90 days prior to filing bankruptcy. The Act requires a trustee to perform due diligence and examine the creditor’s potential defenses, and also requires a trustee to bring a preference suit in the jurisdiction where the creditor is located if the preference demand is less than $25,000 (increased from approximately $13,000). The likely result is less preference litigation as the cost is pushed onto the trustee to examine potential defenses and bring suits in courts which may not be convenient for the trustee.