I. Introduction
A. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 (also known as the Bankruptcy Reform Act) went into effect on October 17, 2005.
B. October 17, 2005 will go down as a sad day in American History.
1. What is the purpose of bankruptcy law?
a. Is the purpose of bankruptcy law to give individuals a “fresh start”?
b. Do we have bankruptcy laws because we are a comparing and compassionate society?
c. Is bankruptcy a safety valve for society?
C. The name of the law is misleading. The title “Bankruptcy Abuse Prevention” suggests that the old system was abusive? Was it?-1.5 million Americans file for bankruptcy on average each year.
1. Why do people file for bankruptcy?
a. Credit card debt, medical bills, student loans, the cost of housing, business reversal, illness, job loss and divorce.
b. It is estimated that in October 2005 500,000 Americans filed for bankruptcy to beat the effective date of the new law.
i. According to an article in the New York Times business section, various banks and credit card companies said that they were surprised by the volume of the filings-should they have been?
2. There are about two provisions in this poorly drafted 500 page bill that are pro-consumer regarding personal bankruptcy. Those concern (a) Reaffirmation Agreements, which require extensive disclosures, and must outline the rights of the debtor and must specify the amount of the debt being reaffirmed, additional charged or costs imposed upon the debtor, the annual percentage rate, the simple interest rate and, if elected by the creditor, a statement of the repayment schedule. If secured, the disclosure must contain description of the property upon which the creditor’s lien attaches and the original purchase price of the items (if the security interest is not a purchase money interest, the disclosure must contain the amount of the original loan). The disclosure must include a statement that the debtor has the right to consult an attorney, that the reaffirmation agreement must be filed with the court before it becomes effective, and that the debtor has the right to rescind the reaffirmation within 60 days of its filing and (b) Reduction of dischargeable unsecured claims-the Court may reduce a dischargeable unsecured claim by up to 20% if the creditor unreasonably refused to negotiate an alternative payment schedule proposed by an approved credit-counseling agency. The repayment proposal must have offered at least 60% of the debt and must have been made at least 60 days prior to the petition §502(k)-Will this provision be of any use to consumers?
3. What do debtor’s attorneys, creditor attorneys, Judges and US
Trustee say about this law?
4. Will attorneys continue to do chapter 7 bankruptcy filings based on the increased personal exposure?
5. Legal fees for those attorneys who continue to do personal bankruptcy work are expected to double.
6. Malpractice rates are predicted to increase in the next year for those attorneys who do personal bankruptcy work and/or malpractice insurers will refuse to provide coverage for liability from BAPCPA-Is this what the banks and credit card companies expected or wanted to happen?
D. Why did President Bush sign the bill so that it takes effect on a Monday, rather than on a Tuesday, Wednesday, Thursday or Friday? The Bankruptcy Courts are closed on Saturday and Sunday therefore limiting the ability of people to file for bankruptcy -was this accidental or intentional?
E. Why did the bill increase the chapter 7 filing fee from $209 to $274?
1. This is a $65 increase or a 31% increase-this increase is unconscionable for people that need to file for bankruptcy protection.
F. Would a better name for the bill have been the “Bankruptcy Bill that Was Bought and Paid for by Credit Card Companies and Banks”?
1. The banks and credit companies have lobbied for this bill for about 8 years and it is said that they spent about $40 million dollars lobbying for this bill.
2. Who speaks for debtors or poor people in this country?
i. Professor Elizabeth Warren a professor at Harvard Law School and an expert on personal bankruptcy has been vehemently opposed to this bill.
G. In analyzing this bill there are 2 driving factors: (1) increase the cost and level of effort or aggravation to file for clients and attorneys and (2) decrease the number of people that file for chapter 7 bankruptcy protection.
H. How did the old system work? Was the old system broken?
1. Under the old system there were no restrictions on the ability of an individual or corporation to file for chapter 7 bankruptcy protection.
a. The only limitation was section 707(b) of the Bankruptcy Code dealing with “substantial abuse.” If a debtor’s after tax income was greater than there ordinary and necessary personal and business expenses then their case would be converted to chapter 13 of the Bankruptcy Code which was a 3-5 year payment plan creditors.
2. How does the new system work for national emergencies such as Hurricane Katrina?
a. U.S. Trustee’s Office has waived the pre-bankruptcy filing credit counseling requirement for victims of Hurricane Katrina-will this set a precedent for future national catastrophes?
II. New Definitions in the Bankruptcy Law:
A. Section 101(10A) defines a new term of art, “Current monthly income,” with reference to the 6 months preceding the petition month. Current monthly income is the platform for the new “means test” in § 707(b) and for calculating disposable income for median income debtors in § 1325(b) of the Bankruptcy Code.
B. Section 101(12A) defines a “debt relief agency” to include many bankruptcy practitioners.
C. Section 101(14A) broadly defines “domestic support obligation” to include alimony, maintenance and support accruing before or after the petition and owed to various individuals or entities. This new definition is used in many sections dealing with dischargeability, priorities, confirmation of plans, etc.
D. Section 101(39A) defines “median family income” by reference to census data, adjusted by the Consumer Price Index. Many sections of the new Code–including the means test in § 707(b) and the disposable income test in § 1325(b)–use median family income as a measuring stick to trigger important consequences.
III. New Bankruptcy Code Provisions:
A. Multiple bankruptcy filings-The minimum time between filing Chapter 7 cases has been raised from 6 years to 8 years.
1. If a discharge has been granted in a Chapter 7 case, a Chapter 13 case apparently may be filed, but before a discharge can be entered in the Chapter 13 case, the debtor’s Chapter 13 plan must continue until at least 4 years from the date of the Chapter 7 discharge.
B. Credit Counseling Requirement:
No individual may be a debtor under the Bankruptcy Code unless, within 180 days before filing the petition, the debtor received an individual or group briefing (including by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the debtor in performing a personal budget analysis. The court may grant an exemption based on the debtor’s sworn statement but exemption expires 30 days after the petition. The briefing is not required if the court determines that debtor is incapacitated (mentally), disabled (physically), or is an active member of the military in a combat zone. § 109(h)(1)
C. Representation of Creditors:
The representation of a creditor holding a consumer debt at a Chapter 7 or Chapter 13 meeting of creditors need not be by counsel but may be through an employee or agent of the creditor, and that agent is permitted to represent multiple creditors. This authorization may not be limited by any local or state rule governing the unauthorized practice of law. § 341(c)
D. Notice of address of Creditors:
Any entity may file with any bankruptcy court a “notice of address” for all notices in all cases under Chapter 7 or Chapter 13 in all bankruptcy courts. This “notice of address” must be used for all noticing by a court 30 days after filing unless the entity files a (different) “notice of address” in a specific case. A notice of address filed in a specific case must be used by the court or by the debtor five days after filing. § 342(e) and (f)
E. Notice to a Creditor:
1. Notice provided to a creditor–by the debtor or by the court-inconsistent with the new rules in § 342 shall not be effective until the notice has been “brought to the attention” of the creditor. If the creditor “designates a person or organizational subdivision” to receive bankruptcy notices and has a reasonable procedure to deliver notices to such person or subdivision, then a notice has not been “brought to the attention” of the creditor until the designated person or subdivision receives the notice. § 342(g)(1)
2. Notice to be given by a debtor to creditors must be to the address designated by the creditor, either in communications to the debtor or by the creditors preferred address as provided to the court. Such notice to creditors must include account numbers.
F. Valuation of Personal Property. In individual Chapter 7 and 13 cases, the value of personal property securing an allowed claim shall be replacement value on the date of the petition without deduction for sale or marketing costs. For goods acquired for personal, family or household purposes, replacement value means the price a retail merchant would charge for property of that kind given its age and condition. §506(a)(2)
G. Payment Advices. Debtors must file copies of “all payment advices or other evidence of payment” received by the debtor from an employer in the 60 days prior to the filing. The failure to file payment advices is one of the grounds for “automatic dismissal” on the 46th day under §521(i). § 521(a)(1)(B)(iv)
H. Changes in Budget Must Be Filed With Court. Debtors must file a statement showing any “reasonably” anticipated increase in income or expenditures within the year after filing. §521(a)(1)(B)(vi)
I. Mandatory Pre-Petition Credit Counseling. Before a person can file bankruptcy a debtor(s) must receive and file a certificate from an APPROVED, non-profit budget and credit counseling agency that describes the services and opportunities for available credit counseling and assistance in performing an individual budget analysis provided to the debtor and the debtor must file a copy of the debt repayment plan, if any created prior to filing. §521(b).
1. What is the value of these services other than to increase the cost of bankruptcy filings and delay bankruptcy filings?
2. In September 2005, the Internal Revenue Service denied tax-exempt status to several credit counseling agencies, partly because they relied too heavily on banks and credit companies for their funding.
i. Are these credit counseling services more than shills for the credit card companies?
3. The US Trustee’s Office provides a list of Credit Counselors.
J. Tax Returns.
1. “Not later than 7 days before the date first set for the first meeting of creditors,” Chapter 7 and Chapter 13 debtors “shall provide” to the trustee a copy (or transcript) of the federal tax return for the tax year ending before the petition, for which a return was filed.
2. The debtor must provide a copy (or transcript) of the return to any creditor that timely requests it. The court “shall dismiss” the case if the debtor fails to comply. §521(e)(2)(A),(B) and (C)
3. New §1308 of the Bankruptcy Code contains many new tax return responsibilities for Chapter 13 debtors, including that all returns “required” for the 4 years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
K. Possession of Property. Chapter 7 debtor shall not retain possession of personal property subject to a purchase money interest (collateral) unless within 45 days of the first meeting of creditors the debtor either reaffirms or redeems the property. §521(a)(6)
L. Asset Protection Trusts. Under new §548(e), a trustee can avoid the debtor’s transfer in an interest in property made within 10 years of the filing if the transfer as made to a self-settled trust or similar device by the debtor for the benefit of the debtor and the transfer was made with the actual intent to hinder, delay or defraud any creditor.
IV. Limitations on the Automatic Stay:
A. Serial Filing-no automatic stay arises if the debtor had two or more cases pending within the previous year, but were dismissed. Upon request of any party, the court shall enter an order confirming that no stay is in effect. Within 30 days of the filing of the petition, any party can request the court to impose a stay only if the party demonstrates that the later filing is in good faith.
B. Child and spousal support obligations must be brought current and kept current during the pendency of a bankruptcy. The automatic stay does not apply to the withholding of income that is property of the estate or property of the debtor for the payment of a domestic support obligation pursuant to a judicial or administrative order or statute.
C. Licenses. The automatic stay does not apply to the withholding suspension or restriction of a driver’s, professional, occupational or recreation license upon nonpayment of support. § 362(b)(2)(D)
D. Tax Refunds for Support Obligations. The automatic stay does not apply to the interception of tax refunds to collect support obligations. § 362(b)(2)(F)
E. Pension Plan Loan Repayments. The automatic stay does not apply to the consensual withholding of income from a debtor’s wages to repay a loan incurred by a debtor from a qualified pension, profit sharing, stock bonus or thrift savings plan.
F. Eviction. If a lessor obtained a judgment for possession (warrant of eviction) before the bankruptcy petition was filed, the automatic stay does not apply to the continuation of an eviction.
V. Exemptions
A. A debtor’s exemptions are determined by examining state law for the state where the debtor has been domiciled for 730 days prior to the filing of the petition. If the debtor has not been domiciled in a single state for 730 days, exemptions are determined by the debtor’s domicile for the majority of the 180 days that preceded the 730-day period. §522(b)(3)(A). If you’re living in a state for less than two years that has more favorable provisions than the one you previously lived in, you can’t use the more favorable provisions.
B. The maximum amount of a qualified IRA that may be exempted is $1,000,000. §522(n)
C. Homestead exemptions would be capped at $125,000 if the debtor acquired the property during the 1215-day period preceding the date of filing. Note that New York State recently increased the homestead exemption to $50,000 per debtor, so a married couple under New York law can exempt $100,000 of equity in a residence.
VI. Nondischargeability of Debts
A. The presumption of nondischargeability for unsecured debt is lowered to debts incurred within 90 days of the filing that aggregate at least $500 for luxury goods or services and cash advances aggregating more than $750 within 70 days. §523(a)(2)
B. The exception to discharge for student loans is expanded to encompass all student loans as defined by the IRC §221(e)(1), expanding nondischargeable student loans to for profit and nongovernmental entities. §523(a)(8)(B)
C. Loans to a pension fund are nondischargeable in Chapter 7. §523(a)(18)
D. The nondischargeability of a non-support domestic obligation under §523(a)(15) would no longer be dependent upon the initiation of a timely adversary complaint under §523(c). Under Chapter 7, the non-support domestic obligation would survive the discharge. The “greater hardship” exception to the exception has been eliminated. §523(c)
VII. Debt Relief Agencies
A. “Debt relief agencies” may include attorneys that provide bankruptcy assistance to persons with consumer debt and nonexempt assets worth less than $150,000. DRAs are required to do what they promise to do, are prohibited from making statements or counseling statements that are untrue (and that “upon the exercise of reasonable care, should have been known” by the agency), are prohibited from making misleading statements about the services offered by the agency and are prohibited from advising an assisted person to incur more debt if they are thinking of filing a bankruptcy. State consumer protection agencies are empowered to enforce these provisions and if a Debt Relief Agency violates these provisions, actual damages can be recovered on behalf of the assisted person. Attorneys’ fees can be awarded in actions brought against Debt Relief Agencies. §526
B. Debt relief agencies must disclose the costs of services, must provide to all clients a written notice of their rights and obligations (statements must be true, debtors must disclose all assets and liabilities, debtors must reveal their “Current Monthly Income,” and the cases are subject to audit), must provide a copy of the contract to the client, must disclose that an attorney may not be necessary to file a bankruptcy, and must maintain copies of disclosures given to any person for two years. §527
C. A Debt Relief Agency must disclose in advertising: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” Advertising must not mislead a consumer to believe that credit counseling is offered rather than bankruptcy assistance. §528
D. However, on October 17, 2005, the date BAPCPA went into effect, the Chief United States Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Georgia ruled “that attorneys regularly admitted to the Bar of this Court or those admitted pro hac vice are not covered by the provisions of the Code regulating debt relief agencies, including without limitations §§ 101(12A), (4A) 526, 527 and 528, and are excused from compliance with any of these requirements or provisions, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise.”
VIII. The Median Income and Means Test
A. Using your state’s median income (in NY, $42,896 for 1 earner, $51,994 for 2 people, $62,815 for 3 people, $74,501 for 4 people (add $6,300 for each individual in excess of 4)), your attorney determines whether your income, determined by averaging the past 6 months is above or below that median.
B. If your income is above the state median income, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where your debts are eliminated, unless the Bankruptcy Court rules that your circumstances are extraordinary.
C. If you are required to file a Chapter 13 case under the Median Income or Means test, then your monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment. BAPCPA limits the amounts you can claim as expenses.
D. The person preparing a bankruptcy petition must give assurances about the accuracy of the contents of the petition. In the case of attorneys, they must make “reasonable inquiry to verify that the information contained in such documents is well grounded in fact.”- Debtor’s attorney may have to reimburse trustee’s and creditors prosecution costs, including attorney fees, if §707(b) motion is granted and attorney violated rule 9011 in filing the case under Chapter 7. Civil penalties may also be imposed. §707(b)(4)
1. This provision of the law may be unconstitutional and may be challenged by the American Bar Association.
E. Abuse is presumed if the debtor’s Current Monthly Income:
- less “scheduled” contract payments due to secured creditors over five years divided by 60,
-less arrearages or “any additional payments” which would be necessary in a Chapter 13 plan for the debtor to keep possession of a house, car or other necessary property, divided by 60,
-less priority debts divided by 60,
-less the expenses specified by the IRS in its financial analysis standards–National and Local and Other Necessary Expenses,
-less other actual expenses as permitted by the IRS, less health and disability insurance expenses and a health savings account,
-less “family violence” expenses,
-less up to 5% additional expenses for food,
-less up to 5% additional expense for clothing,
-less the actual monthly costs of caring for an elderly, chronically ill or disabled household or family member, even if not a dependent,
-less the actual expenses of administering a Chapter 13 case not to exceed 10% as determined by the U.S. Trustee,
-less up to $1500 per year actual expenses for each dependent child under 18 in school, divided by 12,
-less additional costs for home energy expenses
is equal to or greater than $100 and greater than 25% of the debtor’s non-priority, unsecured debts. §707(b)(2).
Stated differently, one must first calculate the debtors Current Monthly Income, deduct expenses permitted by the Statute, and multiply that amount by 60. That figure is the debtor’s “Net Monthly Income”. Then calculate what amount equals 25% of the debtor’s unsecured nonpriority debt. If this amount is less than $6,000, then the debtor’s Net Monthly Income cannot exceed $6,000. If this amount is greater than $6,000 but less than $10,000 the debtor’s Net Monthly Income can not exceed $10,000. If a debtor has $40,000 of unsecured debt then their Net Monthly Income cannot exceed $10,000 and any debtor with $24,000 or less of unsecured debt cannot have Net Monthly Income which exceeds $6,000.
1. This provision is so complex that it is unclear whether debtors will be able to file without the assistance of attorneys.
2. The U.S. Bankruptcy Court for the Middle District of Florida has created a means test calculator at: http://www.flmb.uscourts.gov/calculator.htm and the United States Trustee has means testing information at
http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm
3. All of the bankruptcy software programs now include a Means Test Calculator.
IX. Chapter 13
A. If a Chapter 13 debtor’s current monthly income combined with spouse’s current monthly income is greater than the applicable median income, the plan proposed by the debtor must be for at least five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses. §1322(d)(1)
B. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property. §1326(a)(4)
C. Chapter 13 discharges
1. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13. §1328(f)(1)
2. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case. §1328(f)(2)
3. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee. §1328(g)
4. The Chapter 13 “super-discharge” that is obtainable under current law is greatly reduced under the Bankruptcy Reform Act. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a0(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
X. Dismissal for Failure to file Documents and Schedules
In addition to the list of creditors, schedules of assets, liabilities, income and expenses, debtors must provide:
a. certificate of credit counseling
b. evidence of payment from employers, if any, received 60 days before filing
c. statement of monthly net income and any anticipated increase in income of expenses after filing
d. tax returns or transcripts for the most recent tax year
e. tax returns filed during the case including tax returns for prior years that had not been filed when the cases began and
f. a photo ID, among other items.
Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case after the time period has passed.
XI. Where do we go from here?
A. There are 6 bills before Congress which are attempting to overrule or void various provisions of the bill.
B. Speak to your Congressman and voice your opinion to get this Bankruptcy Bill repealed or amended.
C. What will happen to chapter 7 bankruptcy?
1. It is estimated that filing volume will decrease by 20 to 25%
2. Will attorneys do chapter 7 filings?
3. Can individuals file without attorneys due to the complexities in the law?
D. Will this bankruptcy bill aid credit card companies and banks? See the attached article which indicates that credit card companies may make out work under this bill.
E. Will technology make it possible to continue to practice in this area of the law?
1. On line credit counseling services
2. On line websites that will enable attorneys to search for assets and liabilities for clients prior to filing-“due diligence”
F. The impact of the law will also depend on how the U.S. Trustee’s Office enforces the law and how bankruptcy judges interpret the law.
G. The Shenwick & Associates website has detailed information regarding personal bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act.
JHS
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