Advisories & Insights

"At last the garbage reached so high
That finally it touched the sky. . .
And finally Sarah Cynthia Stout said,
"OK, I'll take the garbage out!"
But then, of course, it was too late...
The garbage reached across the state,
From New York to the Golden Gate."
- Shel Silverstein, Excerpt from "Sarah Cynthia
Sylvia Stout Would Not Take The Garbage Out" 1974

On April 20, 2005, President Bush signed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. The Act represents the most significant reformation of bankruptcy law in over a decade and, with few exceptions, became effective on October 17, 2005. As the deadline approached, an unprecedented number of consumers from across the country were prompted to file for bankruptcy protection before the new law took effect.

According to Mark Hatcher, Clerk of the Bankruptcy Court for the Western District of Washington, the court saw an astronomical increase in cases filed during the final days before October 17th. Indeed, the statistics are staggering. During the period of September 1 – October 16, 2005, the Western District had at least 14,790 bankruptcy filings; during the same period in 2004, only 3,365 petitions were filed. On a typical day in March, before the Act was signed into law, the Western District saw 140 filings. During the seven day period before October 17, 2005, approximately 8,680 cases were filed, with nearly 3,000 petitions filed on October 14th alone. While the court might typically see 10-15 walk-in filings per day in Seattle and Tacoma, the final days saw 240-340 walk-ins, taxing the court staff and requiring new methods for processing bankruptcy petitions. Court staff rose to the challenge; "spirits are high and everyone has a good attitude," said Hatcher. Late Friday afternoon, Chief Bankruptcy Judge Karen Overstreet estimated that the tremendous volume of filings would likely shut down the electronic case filing system from October 17th – October 20th, in order to complete processing of cases under the old law. Once that processing is complete, software designed for the new Act will be loaded and applied to all cases filed after October 16th. Most attorneys representing debtors were working very long hours to get clients' cases filed before the deadline. Many were planning a well-deserved vacation the week following bankruptcy "D-Day."

However, the impact of so many filings is not limited to the court and attorneys. Every bankruptcy filing will impact at least one or more creditor. Whether you are the owner of a business that provided credit to a customer, or someone that merely loaned money to a friend or family member, learning that they have filed for bankruptcy protection requires immediate action on your part. With very few exceptions, cases filed before and after the Act require creditors to immediately cease any activity for the enforcement or collection of debt under the Automatic Stay of 11 USC §362. Thereafter, pursuing a debtor without first obtaining relief from the bankruptcy court could result in an award of damages against you. While there are exceptions to the Automatic Stay, they can be confusing and counter-intuitive to someone unfamiliar with the bankruptcy code. When in doubt, do nothing that could violate the stay without first obtaining advice from a bankruptcy attorney.

If you are a creditor that got paid just before the debtor filed, then beware: it may be a little early to celebrate. A bankruptcy trustee may be entitled to recover the money or property you received from the debtor, referred to as a "preferential transfer" under 11 USC §547, in the 90 days before the bankruptcy filing, if you were an ordinary creditor; or within one year before the bankruptcy, if you were a family member or other "insider." Thus, while there are certain exceptions and defenses, you could actually be required to return money or property you obtained from the debtor even if it is no longer in your possession. If you receive a demand for return of a preferential transfer, do not ignore it. Immediately seek advice from a bankruptcy attorney for an analysis of your options.

While the new Act will apply to all filings after October 16, 2005, fallout from the large number of bankruptcies it prompted will continue for several months or years to come.

John R. Bachofner is a shareholder in the Vancouver office of Bullivant, Houser, Bailey, PC, a west coast regional, multi-practice law firm with six offices in four states. Mr. Bachofner practices bankruptcy, creditor's rights, commercial litigation, and business law in both Oregon and Washington. He can be reached at (360) 906-6340, (503) 499-4637 or john.bachofner@bullivant.com.