The New Bankruptcy Law and the Business Creditor
While much of the publicity surrounding the new bankruptcy legislation focuses on consumer bankruptcy changes and the means test for filing a chapter 7 liquidation bankruptcy, significant changes also exist affecting the business creditor.
Creditors Secured by Real Estate
Creditors with loans secured by real estate have been given certain protections that relate specifically to the actual real estate, regardless of who owns it. All too often these creditors are prevented from foreclosing on the real estate collateral because of an owner’s multiple bankruptcy filings, usually occurring just before the date of a scheduled foreclosure sale. Under the new law, in cases of multiple bankruptcy filings or where the real estate is transferred without the consent of the secured creditor, the court can issue an order granting a secured creditor relief from the automatic stay that otherwise would prohibit creditor action. This order, when properly recorded, would be binding on all owners of the property for 2 years. While the debtor could request the imposition of the automatic stay in a subsequent bankruptcy after the entry of such an order, the court may only grant a stay if the debtor can demonstrate that the case was filed in good faith as to the creditor sought to be stayed.
Landlords of a residential property seeking to evict tenants have been given certain exceptions from the automatic stay, which previously prevented them from taking action to remove a tenant. The first exception allows a landlord who has already obtained a court order authorizing possession to continue to remove the tenant. The previous law would have prevented this without first taking action in the bankruptcy court. The second landlord exception to the automatic stay allows the landlord to evict a tenant based on endangerment of the property or the illegal use of controlled substances.
Commercial landlords also may benefit from the new legislation. Under the current law, the debtor has 60 days after the filing to assume or reject unexpired leases of business property. This time period was often routinely extended, particularly in larger bankruptcies involving numerous leased premises, leaving landlords uncertain about the long term viability of the lease. Under the new law, a commercial lease is deemed rejected within 120 days after the filing. While an extension of this 120 day period may be granted, the extension may only be for an additional 90 days, absent consent of the landlord.
Creditors are often frustrated in their collection efforts by a debtor’s repeated bankruptcy filings. Often, creditors proceed with their collection efforts only to be stayed by the debtor’s bankruptcy filing, which is subsequently dismissed because the debtor did not comply with the necessary requirements. The creditor then incurs additional costs and expenses in reinstituting its collection efforts, only to again be thwarted by another bankruptcy filing, which again is not completed. These serial filings can greatly increase the creditor’s collection costs and, when the creditor is forced to give up for financial reasons, ultimately allows the debtor the benefits of a completed bankruptcy filing, without having to be responsible for all of its burdens.
The new law addresses this problem by providing that if a bankruptcy is filed within one year of the dismissal of an earlier bankruptcy, the automatic stay preventing creditor action terminates thirty days after this second bankruptcy filing unless the debtor can demonstrate that the second bankruptcy was filed in good faith. Furthermore, for a second filing within one year of a prior bankruptcy dismissal, the automatic stay will not go into effect at all. However, the debtor again may seek to obtain a stay by demonstrating that this third filing was done in good faith.
While a spirited debate continues over the fairness of the new bankruptcy law as it affects consumer debtors, there is a general consensus that this legislation has provided business creditors with much-needed reform.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.