June 18, 2014

New Bankruptcy Act Expands Collection Rights for Utility Providers


By Douglas Cushing

November 2005

In April 2005, the credit card industry lobbied for, and obtained, passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The possible effects of the Act have been much discussed, including benefits for the credit card industry and hardships on consumer debtors. However, one section that has received less attention significantly increases the rights of utility providers — including sanitary sewer, water, and wastewater service — to obtain payment from debtors.

Section 366 of the Bankruptcy Code prevents utility providers from terminating service simply because a customer filed a bankruptcy petition. Instead, the Code previously required debtors to arrange for adequate assurance of utility payments after filing for bankruptcy, such as by providing an additional security deposit to the utility (or an initial deposit if one had not been previously required). The other "adequate assurance" available was for the utility to make an administrative claim for payment. In theory, such administrative claims are to be paid first, but not all bankruptcy estates are solvent enough to provide for actual payment of claims, often making collection of past-due amounts unlikely.

The new Act, which took effect October 17, 2005, retains these provisions in most cases, but adds a very specific definition of "adequate assurance" and clarifies the rights of utility providers. Now, the right to an administrative claim does not qualify as adequate assurance; only cash, a letter of credit, a certificate of deposit, a surety bond or prepayment for services will suffice, unless the utility agrees otherwise (though it is difficult to imagine a reason to take less than what the new statute requires). Furthermore, if the debtor files under Chapter 11, the statute precludes his or her prior payment history or the lack of any pre-petition deposit from being considered mitigating factors, and rules out the option of filing an administrative claim.

As before, if the debtor disputes the amount of the deposit or other collateral to be provided, the court will decide the matter. The debtor must resolve this question promptly, as service can be curtailed or terminated 30 days after filing if the utility is not satisfied in the case of a Chapter 11 filing, and 20 days if it is a Chapter 7 or a Chapter 13.

Finally, under the prior law the utility was required to seek relief from the bankruptcy stay before applying any pre-petition deposits. The new statute allows the utility to set off those deposits against service debts without notice or order of the court.

The debtor does not need to be delinquent in his utility payments for these rights to arise. When a utility receives notice or learns of a bankruptcy filing for a customer who is delinquent in his or her payments, the utility should immediately contact the debtor's attorney if he or she is represented by one, or contact an unrepresented individual directly. If a debtor has filed for bankruptcy but is still current on his utility payments, the utility will not be notified of the filing, and savvy debtors may attempt to skirt the deposit requirement in this way, though it may lead to more dire consequences. Regardless, if a utility that becomes aware of the filing through some other means, it should still contact the debtor or the debtor's attorney to demand "adequate assurances." In either case, the debtor must provide the required adequate assurance within either 20 or 30 days (depending on the type of filing) or their utility service may be terminated.

The amount of the new deposit required is negotiable. Two months' average service cost amount is typical, but usage peaks or rate fluctuations should be considered in determining this amount. The key point is to pay careful attention and react promptly to any filing notices which may be received or learned about, so you can take prompt action to avoid incurring bad debts.

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