THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, October 30, 1994 TAG: 9410290159
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: By MYLENE MANGALINDAN, STAFF WRITER
LENGTH: Long : 125 lines
Gordon Gecko, the ruthless protagonist in the movie Wall Street, symbolized the excess of the '80s with his ``Greed is good'' speech.
The consequences of that decade of overspending, speculation and excess were punctuated by a recession. The result: a roster of businesses and individuals shedding debt by going bankrupt.
Driven by the need to update the existing code, last modified 16 years ago, President Bill Clinton signed the Bankruptcy Reform Act of 1994 last week to relieve pressure on an overloaded bankruptcy court system. The aim is to make the process more manageable and equitable.
The surge in bankruptcies nationwide resulted in more than 900,000 filings last year, a 152 percent jump in eight years. Filings in Hampton Roads have climbed dramatically since 1986, hitting their peak in 1992 with 10,100 local filings before dropping to the current level of 6,435 so far this year.
Deceptively, the number of filings have tapered off somewhat but are starting to climb again, said Federal Judge Hal J. Bonney Jr. of U.S. Bankruptcy Court for the Eastern District of Virginia. In the Virginia, 19,957 bankruptcies were filed last year, of which 6.3 percent were businesses.
``The fact that bankruptcy filings are down a little is a fallacy,'' Bonney said. ``They're not down that much and they've started up again.''
Filings are still twice as high as they were before 1986. Furthermore, the number of reported cases, or judges' opinions on lawsuits resulting from bankruptcy court, have increased, demonstrating that vigilance in this area must continue.
``In our area, businesses have had an increase in bankruptcy filings because the softening of the real estate market, the drying up of credit from banks made it very difficult to survive if you were a real estate developer,'' said Frank Santoro, a partner at Marcus, Santoro and Kozak. ``You also had defense spending drying up and downsizing in military.''
The 1994 reforms aim to streamline the bankruptcy process and adjust the balance between creditors and debtors.
Broadening the power of the court, Congress authorized bankruptcy court judges to handle cases more efficiently and enlist help in reviewing their caseload.
They can form appellate panels, composed of three sitting bankruptcy judges, to review court decisions. In a clarification of a recent Supreme Court decision, Congress decided judges can conduct jury trials in civil proceedings.
Finally, a nine-member National Bankruptcy Review Commission will be established to review the bankruptcy code to improve and update the law further.
There are three basic types of bankruptcies:
A chapter 7, or liquidation, bankruptcy is designed for debtors who cannot pay their existing debt. A trustee takes possession of all property and sells it to pay creditors. A person may still be responsible for some debts like certain taxes, student loans, alimony and child support, and debts fraudulently incurred or arising from a court judgment.
A chapter 11 gives a business court protection from creditors while it reorganizes its finances. Usually intended for companies or passive investments, chapter 11 can be used by individuals, sole proprietorships, partnerships, corporations and other entities.
A chapter 13 is designed for individuals with regular income who are temporarily unable to pay their debts. Individuals can repay all or part of their debts in three years, and no more than five years, if they owe money within certain limits.
The greatest impact of the new law appears to be on personal bankruptcies.
More individuals can qualify for chapter 13 bankruptcy, which allows payment plans under the raised total debt limit of $1 million from $450,000. Previously individuals who had more than $100,000 of unsecured debt or more than $350,000 of secured debt exceeded the ceiling for chapter 13.
With the higher limits of $250,000 of unsecured debt and $750,000 of secured debt, more individuals can avoid liquidation of assets in chapter 7 or the expense and confusion of a chapter 11.
``It's less cumbersome and expensive,'' said Jerrold G. Weinberg, a Norfolk bankruptcy lawyer.
The new statute also helps businesses move through court with less hassle although it did little to revise chapter 11 itself.
Small businesses have been redefined as companies owing less than $2 million in total debt. They can reorganize more quickly under chapter 11 with a more simplified, ``fast-track'' system.
Creditors - mostly financial institutions - can receive payments more quickly, because the law shortens the ``breathing spell'' that debtors receive when they file their plan, known as an automatic stay.
``The change that's going to be of greatest interest to commercial concerns like banks and other financial institutions has to do with the recovery of preferential payments, made before the bankruptcy is filed,'' said Virginia Powell, a partner at Hunton and Williams in Richmond.
For example, credit card companies can recoup full payments from debtors who use their cards to pay for taxes and then file for bankruptcy.
At the same time, the law encompasses other issues like more protection for divorced wives trying to secure alimony or child support payments. In past cases, a divorced debtor could give his ex-wife a small amount of alimony and their house, then turn around and bankrupt the house.
One area clarified by the new reforms deals with single asset real estate bankruptcies. Under the code, investors who go broke because of a bad real estate deal can seek relief in bankruptcy court.
Predictions of the 1994 law's impact have been mixed. Most attorneys think the law will have a huge impact on the way bankruptcies are filed and heard.
``It'll benefit everybody,'' Santoro said. ``It'll benefit the system by weeding out the unethical participants, which have always been a minority.''
``I think this (ruling) is a much needed improvement,'' Weinberg said.
On the other hand, Bonney, who plans to retire next year after serving 25 years on the federal bench, thinks the changes will be minor improvements. The reforms are mostly technical improvements to fine-tune the process, he said.
``It was not brought about by compelling reasons,'' he said of the 1994 law. ``This one we have now, I do not consider a major revision of the bankruptcy code.
Both Congress and the courts have done a good job maintaining a fair balance between creditors' rights and debtors' remedies, Bonney said. Even so, bankruptcy laws need to be adjusted occasionally to remain current, he said. ILLUSTRATION: Color photo
JIM WALKER/Staff
``The fact that bankruptcy filings are down a little is a fallacy,''
said Federal Judge Hal J. Bonney Jr. ``They're not down that much
and they've started up again.''
Graphic
Staff
BANKRUPTCIES
SOURCE: U.S. Bankruptcy Court for Norfolk and Newport News.
by CNB