Bankruptcy Abuse Prevention and Consumer Protection Act

There’s another hurricane headed towards Wall Street. On October 17, the new bankruptcy law goes into effect. The old law is considerably more liberal, so many companies are expected to file before the deadline. Both Northwest Airlines and Delphi have said that they’re contemplating filing under the old law. The new law is aimed at reducing abuses of bankruptcy proceedings and it makes declaring bankruptcy more difficult. But like all laws, there will be unexpected side effects.

Certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act will give airlines and other troubled companies less breathing room than in the past to settle their debts and continue in business, rather than liquidate. Among other things, they will have a harder time deferring payment of utility bills to conserve cash. In addition, new restrictions on executive compensation will make it tougher to retain or hire the top-notch managers required to pull off a corporate turnaround.
Some of the provisions may seem esoteric, but they are sweeping in their implications. For instance, the law imposes an 18-month limit on the incumbent management’s exclusive right to propose a reorganization plan. This ability to control the ball is the debtor’s most powerful means of persuading contending groups of creditors to compromise. Under the new arrangement, one faction might obstruct negotiations until it gets a shot at proposing its own, self-serving plan.

One of the fears is that distressed companies will dump their real estate holdings to raise money. That could put undue stress on the overheated real estate market.

The new law’s consumer-related provisions stirred considerable controversy. The no-less-important corporate rule changes received negligible attention, outside the circle of bankruptcy specialists. Now investors must live with the consequences. That will mean dealing with dramatically increased uncertainty, at least until the bankruptcy courts handle a fair number of cases under the new rules.

Posted by on August 29th, 2005 at 9:05 am


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