The number of people filing for bankruptcy relief has more than quadrupled since 1981, with over 1.35 million filings in 1997. With this dramatic increase in individuals seeking relief, it is increasingly likely that some of a CPA's clients will need to consider this option. These clients frequently look to their CPAs as the first line of advice on the process. Although CPAs ultimately will refer them to a bankruptcy attorney, it is imperative they know the fundamentals of the present bankruptcy system as well as changes being considered in Congress.
BANKRUPTCY SYSTEM OVERVIEW
The bankruptcy system has drawn widespread criticism. Credit associations believe the current laws make it too easy to file for bankruptcy. Others blame lenders for extending credit recklessly. Most agree the system needs reform. With this in mind, Congress created the National Bankruptcy Review Commission (NBRC) to study bankruptcy law and recommend improvements. In October 1997 the NBRC submitted its final report which contained 172 recommendations. Although not intended to spur radical changes, they had some controversial aspects.
The NBRC report induced Congress to give bankruptcy reform high priority in 1998. The House passed its bankruptcy reform bill (HR 3150) on June 10, 1998; the Senate followed not long after, passing its version (S 1301) on September 23. The two bills had a number of differences that a conference committee addressed, issuing a compromise bill. The House passed this final reform bill on October 9, but the session ran out of time and the bill stalled in the Senate. However, the apparent agreement between Congress and the Clinton administration on the need for bankruptcy reform makes it probable the legislation will pass this year.
The bills considered in the last Congress adopted many of the NBRC recommendations, but went much further in protecting creditor claims. To counsel clients properly, CPAs need to grasp the fundamental provisions of this legislation, with particular emphasis on consumer bankruptcy, small business and tax recommendations. Clients affected by these areas are the most likely to seek a CPA's advice.
The provision that will have the biggest impact on individual consumers is the means-testing that will determine whether an individual is eligible to file for bankruptcy under Chapter 7, which grants an immediate discharge of most debts. The proposed means-testing legislation would require debtors with income levels sufficient to repay part of their unsecured debts to file under Chapter 13--which says debtors must repay their debts over a three- to five-year period. Other significant consumer changes include revisions to property exemptions, new rules on credit card fraud and restrictions on debts that can be discharged under Chapter 13.
Proposed rules for small businesses reorganizing under a Chapter 11 bankruptcy would increase reporting requirements, heighten supervision, shorten deadlines and apply to all businesses with unsecured debts of $5 million or less. Other tax-related proposals may influence a taxpayer's decision on whether to file for bankruptcy to gain protection from the IRS.
Since bankruptcy reform is probable this year, CPAs should review the proposed rule changes carefully with financially distressed clients, as they may have a major impact on the timing of bankruptcy filings. Certain debtors may prefer to accelerate filings to avoid the rule changes, while others may elect to delay filing until the changes take effect.
CHAPTER BY CHAPTER
There are three principal chapters of bankruptcy law--Chapters 7, 11 and 13. Chapter 7 allows a discharge of debts and a fresh start for debtors who cannot turn their finances around. Chapter 11 provides for a business reorganization to let troubled business debtors develop viable recovery plans. Chapter 13 lets wage earners develop a recovery plan without discharging all debts. …