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More Positive Feedback for Creditors from the 2005 Bankruptcy Act

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March 14, 2006
Author: , Esquire

Owed payments or wages from a debtor? New amendments mean you may get more of what's owed-and faster

The new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective for most provisions on October 17, 2005, continues to benefit creditors in many ways. Those dealing with unpaid invoices or owed wages should consult with their attorneys to take advantage of the new pro-creditor amendments.

Treatment of Trade Claims?
Two significant amendments to the Bankruptcy Code are very helpful to clients who have just sold goods to a customer who filed bankruptcy. Previously, unless a creditor had a security interest in the goods, there was little that could be done. The new Code allows the creditor to file an administrative expense claim in the amount of the value of goods sold in the ordinary course of business to the debtor and received by the debtor within 20 days before the bankruptcy is filed. This is significant because the trade claim must be paid in full in order for the debtor to have a confirmable Chapter 11 Plan. Administrative claims are very high priority and are paid in full before unsecured claimants receive anything. Under the old Code, this trade creditor would simply be an unsecured creditor.

In addition, the new Bankruptcy Act enhances reclamation rights by protecting a vendor that has delivered goods to the debtor within 45 days before the filing date if the vendor makes a written demand for return of the goods either within 45 days after the debtor has received the goods or within 20 days after the bankruptcy was filed (if the 45-day notice period expires after the bankruptcy petition was filed). This means that the trade creditor can demand the return of the goods, and the debtor must either return them or petition the bankruptcy court for authority to pay the pre-petition trade creditor in full if he or she needs the goods.

Wage and Benefits Priorities
The new amendments increase the wage claim priority from $4,925 to $10,000 for each individual for wages earned within 180 days (previously limited to 90 days) before the earlier of the filing date or the cessation of the debtor's business. The priority claim for contributions to employee benefit plans arising from services rendered within 180 days before the earlier of the filing date or cessation of the debtor's business was also changed by increasing to $10,000 per person the amount entitled to priority reduced by the amount actually paid to such employees on account of their wage priority claims and on account of any other employee benefit plan.

The new Act bestows administrative claim status for wages and benefits awarded pursuant to judicial or National Labor Relations Board (NLRB) proceedings as back pay attributable to any period occurring after the commencement of a case, regardless of when the violation occurred on which the award is based. The new law seems to require that a wage or benefits award be made in either a judicial proceeding or in an NLRB proceeding. An unconcluded proceeding or an award made by a different tribunal will not give rise to the coveted administrative claim status, but only to an unsecured claim.

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