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Highlights of the new Bankruptcy Reform Act which Effect Consumer Bankruptcy
The “Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005”, which can be referred to as the Bankruptcy
Reform Act, or just the “Act”, is the first major revision of the bankruptcy
laws since 1978. The Supreme Court summarized the intent of modern bankruptcy
law, including our current laws, when it said that they are intended to give
debtors a “fresh start”, “a new opportunity in life, unhampered by the pressure
and discouragement of pre-existing debt.” The new bankruptcy law will not give
consumers a "fresh start" and in many cases will force filers to continue to
make payments to debtors under Chapter 13 repayment plans for many years after
first filing. The summary below is a brief summary of some of the changes make changes which will affect your capacity to discharge your debts in bankruptcy. The new law is complex and can't be easily summarized. You should seek the advice of counsel who can apply the new Act's requirements to the facts of your specific situation:
Pre-Petition Counseling Requirement A Debtor must file with the Court a certificate from an approved nonprofit budget and credit counseling agency describing the services provided to the debtor along with a copy of the debt repayment plan, if any. [Note that having to meet this requirement to be a Debtor may effectively protect individuals from involuntary petitions being filed by creditors.] If a case under Ch 7, 11, or 13 is dismissed due to creation of a debt repayment plan, any subsequent case under such chapter shall NOT be presumed to be filed not in good faith. An individual may be allowed to file bankruptcy without a briefing by a credit counselor if there are exigent circumstances that merit a waiver of the requirements. To obtain a waiver the individual must submit a certification to the Court describing the exigent circumstances, and stating that they requested credit counseling services from an approved credit counseling agency, but were unable to obtain the services within 5-days. If a waiver is granted the Debtor must attend a briefing within 30 days (plus 15 more if granted by the Court) after the petition is filed. Post-Petition Counseling - In addition to pre-bankruptcy counseling, all Ch. 7 & Ch. 13 Debtors must complete a Financial Management Course before they receive a Discharge of Debts. The Financial Management Course is intended to help Debtors identify and correct the financial mistakes that led to bankruptcy. Many Ch 13 Trustees already offer some form of financial education. The goal is to evaluate different programs and then develop uniform materials that will maximize the chance for Debtors to obtain financial stability. Multiple Filings – The number of years after a Ch 7 case that an individual must wait before filing another Ch 7 case has been increased from 6 years to 8 years. A Debtor may not receive a discharge in a Ch 13 case if they received a discharge in a case filed under chapters 7, 11, or 12 during the 4-year period preceding the date of the order for relief in the Ch 13 case. A Debtor may not receive a discharge in a Ch 13 case if they received a discharge in a case filed under chapter 13 during the 2-year period preceding the date of the order for relief in the Ch 13 case. Automatic Stay and Support Obligations – The Act allows continuation of voluntary and involuntary wage and other income deductions for domestic support obligations. Furthermore, the automatic stay does not stay the commencement or continuation of a proceeding to establish paternity; to order or modify domestic support obligations; concerning child custody or visitation; for the dissolution of a marriage, except determination of division of property of the estate; regarding domestic violence; to collect a domestic support obligation from property that is not property of the estate; to withhold income, under a nonbankruptcy order or statute, that is property of the estate or the debtor for payment of a domestic support obligation; under the SSA to withhold, suspend, or restrict a driver's, professional (physician, attorney, etc.), occupational, or recreational license; under the SSA to reporting overdue support owed by a parent to a consumer reporting agency; to intercept a tax refund; or to enforce a medical obligation under the SSA. Domestic Support Obligations are defined as a debt under non bankruptcy law that is owed to a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, responsible relative, or governmental unit in the nature of alimony, maintenance, or support without regard to whether such debt is expressly so designated, and not assigned to a nongovernmental entity [not a governmental unit], unless assigned voluntarily for the purpose of collecting the debt. Means Testing in Ch 7 Cases – Another key feature of the Reform Act is the “means test”. The Act provides for dismissal, or (with the Debtor’s consent) conversion to Ch 11 or 13, on a finding that granting relief would be an “abuse” of the provisions of Chapter 7 by an individual consumer debtor. A finding of abuse may be based on a determination that the debtor filed the petition in bad faith or based on the totality of the circumstances of the debtor's financial situation. Abuse can be found without applying an income and expense “test” and may be based on non-economic factors. [NOTE that in the Reform Act a case is dismissed for “abuse” while the old law required “substantial abuse”]. There are two objective tests applied to income and expense to determine if a presumption of abuse exists on which a Motion to Dismiss can be based. Median Income Test - The First test is to see if the Debtor’s Current Monthly Income exceeds the State Median Income for a family of the same size. “Median” income means that there are an equal number of incomes in the state that are higher and an equal number that are lower than the median income. Basically this test looks to see if the Debtor’s family is better off than half of all the other families around them. Congress rather arbitrarily decided that there would be no presumption of abuse for those people who are in the bottom 50% of state incomes. Means Test – The Second test checks to see if the Debtor’s Current Monthly Income reduced by allowed expenses exceeds an amount allowed under the Act for a family of the same size. The Means Test is essentially an excess income test that determines if what is left over out of monthly income after deducting reasonable expenses leaves enough money to be able to give a meaningful dividend to unsecured creditors. If the Debtor’s Current Monthly Income is less than the State Median Income, NO presumption of abuse exists on which a dismissal can be based. If the Debtor’s Current Monthly Income is more than the State Median Income, but the Debtor’s excess income is LESS than the amount allowed under the Means Test, NO presumption of abuse exists on which a dismissal can be based. If the Debtor’s Current Monthly Income is more than the State Median Income, AND the Debtor’s excess income is MORE than the amount allowed under the Means Test, a presumption of abuse exists on which a Motion to Dismiss can be based. It is important to remember that a motion to dismiss for abuse can be brought by the Court or the U.S. Trustee in cases where the Debtor’s income is LESS than the threshold amounts and there is NO presumption of abuse. The results of the objective tests not only determine whether or not a presumption of abuse exists, they also authorize who can bring a Motion to Dismiss. The clerk will notify all creditors if the presumption of abuse exists. Furthermore, the U.S. Trustee must review the case and file no later than 10 days after the meeting of creditors a statement as to whether the presumption of abuse exists, and if it does, must file a motion to dismiss or an explanation why none is being filed. The presumption of abuse does not apply to disabled veterans where the debt was primarily acquired while they were in active service or engaged in homeland defense. The court may not dismiss a case under presumption of abuse if a Debtor establishes by a preponderance of the evidence that the case is necessary to satisfy a domestic support obligation. Current Monthly Income - The first step in determining if the means test has been met is to calculate the Debtor’s “current monthly income” – which is the average monthly taxable and non-taxable income from all sources, including income attributable to a non-filing spouse unless they are separated, except Social Security payments and certain payments to victims of war crimes or terrorism, including amounts paid on a regular basis by other entities for the household expenses of the debtor or the debtor's dependents, that the debtor (or Debtors in a joint case) receives during the 6-month period ending on the last day of the calendar month immediately preceding the date of filing. If the debtor does not file the required schedule of current income then the dates for the 6 month period are determined by the Court. State Median Income – The next step is to determine if the Current Monthly Income for the Debtor’s family exceeds the State Median Income for a family of the same size. The Administrative Office of the U.S. Trustee will provide tables based on U.S. Census data that show median income for each state for households with up to 4 family members. For households with more than 4 members the Act provides for an additional $525 per month per individual. For example, the median income for a family of 4 in New York State is $65,461. The lowest 4 person median income is $47,550 (WV), the highest is $82,406 (NJ), with $62,732 being the national median. If the Debtor’s Current Monthly Income DOES NOT exceed the State Median Income – you DO NOT have to apply the Mean’s Test. If the Debtor’s Current Monthly Income DOES exceed the State Median Income – you DO have to apply the Mean’s Test, and to do so you need to calculate Monthly Expenses.. Means Test, Applying the Formula – The final step that must be met to avoid the presumption of abuse is to take the debtor's current monthly income reduced by the allowed deductions times 60, that result MUST be less than the lesser of 25 percent of the debtor's nonpriority unsecured claims or $6,000, whichever is greater, OR $10,000. If it is more the presumption of abuse is not avoided. Documents - Duties of the Debtor – A debtor must file -
1. A list of creditors; (and unless the Court orders otherwise)
2. Schedules of assets and liabilities (Currently A-F with G,H);
3. Schedules of current income and current expenditures (I-J);
4. A statement of the debtor's financial affairs;
5. A certificate of the attorney or petition preparer or pro se debtor regarding the 342(b) notice;
6. Copies of all “paystubs” received within 60 days before the filing date;
7. An itemized statement of monthly net income;
8. A statement disclosing reasonably anticipated increases in income or expenditures over the 12-month period following the date of filing; and, within the allowed time
9. A statement of intention with regard to secured debt (see below),
If a debtor fails to file all of the required information within 45 days (plus up to an additional 45 days if granted by the Court) after the date of the filing of the petition, the case is automatically dismissed on the 46th day. Remember that in addition to the above, the Debtor must file:
An additional provision states that on request the Debtor’s tax returns (and amendments) for the duration of a Ch 7, 11, and 13 case (and three years of pre-petition returns if not filed on the date of the petition) shall be filed with the Court AND made available to any party in interest for inspection and copying. At least 7 days before the meeting of creditors, a Debtor in a Ch 7 case is required to provide the trustee, AND any creditor who requests one, with a copy or a “transcript” of their Federal income tax return for the most recent tax year ending before the filing date for which a Federal income tax return was filed [does this mean that someone who has not filed for 10 years must produce an 11 year old return?]. If the Debtor fails to provide the return the court must dismiss the case unless the debtor demonstrates that the failure was due to circumstances beyond their control. A Debtor in a Ch 13 case is required to file at least one day before the scheduled 341 meeting, if not already filed, with the appropriate taxing authority, all federal, state, and local tax returns due for all of the taxable periods ending during the 4 year period ending on the filing date. If the required returns have not been filed by the meeting date the trustee may continue the meeting to allow the debtor to file the returns. The Debtor may then be required to file and provide all three years of the pre-petition returns. If a missing return(s) was past due on the filing date the meeting can be continued for no more than 120 days. If the missing return(s) was not past due, the meeting can be continued for 120 days or to the date on which the return is due under the last automatic extension for filing the return, whichever is later. If the debtor demonstrates by a preponderance of the evidence that failure to file is due to circumstances beyond their control, the court may extend the filing period for a short additional period. The penalty for failing to provide returns is not specified, presumably the courts will fill in the Act by providing for dismissal or conversion? If a post-petition return is not timely filed, or filed within 90 days of a request to file, a Tax Authority can move for dismissal or conversion of the case. Limits on the Homestead Exemption [EFFECTIVE NOW] – Among the most publicized features of the Act are the provisions intended to stop forum shopping for unlimited homestead exemptions. First, any addition to the value of a homestead (e.g. – building an addition onto a home – perhaps even including the initial purchase?) made during the 10 year period before filing by the Debtor, funded by nonexempt property, and made with the intent to hinder, delay, or defraud creditors, is NOT protected by the state homestead exemption. Second, any interest acquired in (including value added to) a homestead [usually the Debtor’s principal residence] within 1215 days (around 3 years 4 months) before the filing date is NOT protected by a State homestead exemption in an amount over $125,000, except to the extent that it consists of an interest transferred from a debtor's previous principal residence acquired prior to the beginning of such 1215-day period into the debtor's current principal residence in the same state, or the homestead is the principal residence of a family farmer. Third, there is an absolute $125,000 cap on the homestead exemption if after notice and hearing the Court determines that the debtor has been convicted of a felony which demonstrates bankruptcy abuse, OR the debtor owes a debt arising from violation of Federal or State securities laws; any RICO civil remedy; or any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual during the last 5 years. Student Loans – unless the Debtor proves repayment would create an undue hardship on the debtor and the debtor's dependents, which is very difficult to prove absent a severe disability, all student loans are now non-dischargeable, even where the lender is a non-governmental, commercial, entity. Taxes – It is beyond the scope of this summary to discuss which taxes are and are not dischargeable under the current Title 11 and the Bankruptcy Reform Act. Suffice it to say that under the Act the advantages of Ch 13 are gone, and the dischargeability of taxes will be treated much as they are now in Ch 7 cases. Also, interest will continue to run on priority and non-dischargeable taxes throughout the life of the plan, subject to payment inside plans only where unsecured claims are being paid in full. Luxury Goods & Cash Advances - In a significant tightening of the use of credit prior to filing - consumer debts incurred within 90 days before filing, totaling more than $500, and owed to a single creditor for “luxury goods or services” [not including goods or services reasonably necessary for the support or maintenance of a debtor or dependent], along with cash advances from a single creditor totaling more than $750 obtained within 70 days, are presumed [rebutable] to be nondischargeable. Fraudulent Transfers – The period in which certain transfers are deemed to be fraudulent and recoverable by the Trustee under the Bankruptcy Code is raised from 1 to 2 years (State fraudulent conveyance laws often allow the trustee to go back even further). The 2 year period applies only to cases filed 12 months or more after enactment of the Act. Disposable Income in Ch 13 – The best efforts test under the Act provides that, on objection of an unsecured creditor or the trustee, the plan must pay all allowed unsecured claims in full with interest, or provide that the Debtor(s) pay all of their disposable income into the plan for the minimum term (36 months). Disposable income is current monthly income (other than child support payments, foster care payments, or disability payments for a dependent child reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent, or for a domestic support obligation first payable after the filing date, LESS IRS deductible charitable contributions in an amount not to exceed 15 percent of gross income for the year the contributions are actually made. If the debtor has a business, disposable income is reduced by expenditures necessary for the continuation, preservation, and operation of the business. Ch 13 Plan Length – If a Debtor’s income meets or exceeds the mean’s test, then any Ch 13 Plan must be for 5 years unless the plan provides that all allowed unsecured claims are to be paid in full over a shorter term. Support Obligations, Confirmation, and Discharge – A plan cannot be confirmed if a Debtor is not current with all post-petition domestic support obligations, and, for those who pay support, a discharge will not be granted until a certificate is filed that post-petition domestic support obligations and pre-petition domestic support obligations provided for in the plan have been paid. A case may be dismissed or converted if a Debtor is not timely making post-petition domestic support payments. Pre-petition domestic support obligations owed to an individual must be paid in full as a priority claim in a Ch 13 plan, however if the obligations are to be paid to a governmental unit, the plan can provide for less than 100% payment where the Debtor proposes to pay all of their projected disposable income into a five year plan. Priority for Support Payments and Discharge of Property Settlements – Allowed unsecured claims for domestic support obligations that on the date of filing are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child's parent, legal guardian, or responsible relative, or are assigned, or owed directly to or recoverable by, a governmental unit under applicable non bankruptcy law, are granted a First Priority under the Reform Act. Debts Subject to Property Settlements with Former Spouses - Under the Reform Act debts owed to a spouse, former spouse, or child of the debtor that are not domestic support obligations but that were incurred by the debtor in the course of a divorce or separation or in connection with a divorce are non-dischargeable in Ch 7, 11, and 12 cases. (For Ch 13, see the super discharge section below). Under the current act they were dischargeable if the debtor did not have the ability to pay the debts or if discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor. The change may have a major impact on divorced couples, because it presumably includes provisions where a Debtor agrees to indemnify a former spouse / co-debtor for money they owe to creditors by reason of the Debtor’s failure to pay debts they assumed under a property settlement agreement. In many cases one spouse agrees to pay joint debts, only to find that sometime in the future they are no longer able to make the payments due to a change in circumstances. Some of the changes are voluntary (remarriage), but some are not (disability). If the non-filing former spouse who is a co-debtor does not want to either pay the debts, or file bankruptcy, they may be able to effectively block any meaningful Ch 7 bankruptcy by having a State Court make the Debtor pay them so they can in turn pay the Creditors. This introduces a veto into the bankruptcy code that, given the number of divorces, may have long term, unintended, consequences.
No More Ch 13 “Superdischarge” – Under current law a Ch 13 discharge often covered debts that were not dischargeable in a Ch 7 case – that situation has changed. Under the Act Chapter 13 discharge does not discharge claims resulting from:
1. unfilled, late-filed within two years of the petition date, and fraudulent tax returns (willful tax evasion);
2. liability for “trust fund” taxes, income taxes for 3 pre-petition tax years; and certain other taxes and duties.
3. credit extended under false pretenses or representations or actual fraud other than a financial statement;
4. credit extended under a written financial statement that the Debtor made with intent to deceive that was materially false and reasonably relied on by the creditor;
5. debts that were neither properly listed nor scheduled in the petition to permit timely filing of a proof of claim (and in the case of claims regarding luxury goods, fraud by a fiduciary, and willful injury, sufficient time to challenge dischargeability), unless the creditor had notice or actual knowledge of the case so as to permit a timely filed proof of claim;
6. fraud by a fiduciary, embezzlement, or larceny;
7. a domestic support obligation;
8. educational loans (as expanded by the Act - absent undue hardship);
9. death or personal injury caused by unlawfully operating a motor vehicle, vessel, or aircraft under the influence of intoxicants;
10. criminal restitution or a fine included in a sentence on the debtor's conviction of a crime; and
11. civil restitution or damages as a result of willful or malicious acts resulting in personal injury or death of an individual;
[note that the Act defines the nondischargeable debts above using references to §§ 507 and 1322, however §1328 denies a Ch 13 discharge of civil restitution or damages resulting from “willful OR malicious” acts, while under §507 a discharge is denied when the acts are both “willful AND malicious” – making the Ch 13 discharge more restrictive than the Ch 7?]
Under the Act a Ch 13 Plan can still discharge three types of debt that cannot be discharged in a Ch 7 case, claims resulting from:
1. property settlements [not support obligations] (§523(a)(15) debts);
2. willful and malicious injury to property (§523(a)(6)); and
3. debts incurred to pay non-dischargeable tax obligations (§523(a)(14). Secured Claims – No Strip-down – In Chapter 13 cases – a Debtor MUST pay the secured and unsecured portions of a claim in full [at the contract interest rate?] if a creditor has a purchase money security interest in a motor vehicle (acquired for the personal use of the debtor) securing a debt that was incurred within the 910-day period preceding the date of filing, or if a creditor has a purchase OR non-purchase money security interest in collateral securing a debt that was incurred within 1 year preceding the filing date. This means that instead of paying off the market value of the automobile, the debtor must now pay the full contract price.
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