Table of Contents
I. NEEDS BASED BANKRUPTCY - MEANS TESTING IN CHAPTER 7 CASES
II. DEBTOR EDUCATION/CREDIT COUNSELING
III. NEW FILING REQUIREMENTS
IV. THE NEW ROLE OF THE DEBTOR'S ATTORNEY
V. LIMITATIONS ON THE DEBTOR'S RETENTION OF PERSONAL PROPERTY SECURITY
VI. DEBTOR PROTECTION PROVISIONS
VII. THE DISCHARGE
VIII. TREATMENT OF DOMESTIC SUPPORT OBLIGATIONS
IX. DISCOURAGEMENT OF SUCCESSIVE AND REALLY ABUSIVE FILINGS
X. EXEMPTIONS
XI. INDIVIDUAL CHAPTER 11 CASES
XII. THE AUTOMATIC STAY
XIII. ADDITIONAL CHAPTER 13 PROVISIONS
XIV. EFFECTIVE DATES
ATTACHMENTS:
- Websites Dealing the Bankruptcy Reform Act of 2001
I. NEEDS BASED BANKRUPTCY - MEANS TESTING IN CHAPTER 7 CASES
A. Fence Around Chapter 7
The enforcement mechanism for means testing in chapter 7 cases is Bankruptcy Code 707(b). H.R. 333 and S. 420 (herein after collectively the Bills) provide for all parties in interest to have standing to seek dismissal of the case under Bankruptcy Code 707(b).
Under current practice, standing is restricted to the Bankruptcy Court, acting sua sponte, or the United States Trustee.
Abuse in the mantra of revised Bankruptcy Code 707(b). The means test/abuse formula is as follows:
A case is presumed to be abusive if the balance of:
1.) The debtor's monthly income, reduced by
a.) Monthly expenses specified under the [Internal Revenue Service] National Standards and Local Standards,
b.) and the debtor's actual monthly expenses for categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the entry of the order for relief, for the debtor and the dependents of the debtor.
c.) Other allowable expenses, including:
(i.) payments to support a chronically ill or disabled family member
(ii.) private school tuition of $1,500 per child, for children under 18 years, if the debtor can supply an explanation regarding why such expresses are necessary
Payments on account of secured debts
Payments on priority claims (total priority claims divided by 60)
2.) and multiplied by 60, is not less than the lesser of:
a.) 25% of the debtor's non-priority unsecured claims in the case, or $6,000, whichever is greater; or $10,000 (hereinafter the Minimum Pay-out Provision).
The debtor may rebut the presumption of abuse only by demonstrating special circumstances that justify the additional expenses or adjustments of current monthly income for which there is no reasonable alternative. In such instances, the presumption can only be rebutted where the alternative expenses used by the debtor, when deducted from the debtor's monthly income, and multiplied by 60, is now less than the lesser of:
a.) 25% of the debtor's non-priority unsecured claims in the case, or $6,000, whichever is greater; or $10,000.
If the above test is met, the Bankruptcy Court shall consider: whether the debtor filed the petition in bad faith; or [whether] the totality of the circumstances demonstrates abuse.
B. Median Income Limitation
A motion can not be brought under Bankruptcy Code 707(b)(2) (abuse for violation of means test) when the debtor's income is equal to or less than the median income in the applicable State, as reported by the Bureau of the census.
C. United States Trustee As the Gatekeeper
The United States Trustee (UST) must, within 10 days of the first meeting of creditors, file a statement regarding whether the debtor's case is presumed to be abusive. The Court must transmit this statement to all creditors within 5 days of the time that it is filed.
D. Affirmative Action Required Following Abuse Analysis
Bankruptcy Code 704(a) is amended to require that UST shall, within 30 days of the filing of the above statement, either file a motion to dismiss or convert under section 707(b), or a statement setting forth the reasons why such a motion was not brought. The UST has the discretion to not file motions under section 707(b) if the debtor's income exceeds the median income as set out above, but does not exceed 150% of such median income, and the Minimum Payout Provision is not met.
E. Notice re Abuse
The clerk is required to give notice to all creditors, not less than 10 days after the case has been filed, that the presumption of abuse has been triggered. Congress did not say how the clerk was to have this information at this early date.
II. DEBTOR EDUCATION/CREDIT COUNSELING
A. Pre-filing
Bankruptcy Code 109 (who may be a debtor) is amended to state that an individual may not be a debtor unless that individual has, within 180 days of the filing of the petition, received an individual or group briefing from an approved non-profit credit counseling agency. This can be excused for up to 45 days after the petition by an order of Bankruptcy Court, if the debtor can show exigent circumstances. Telephone and internet courses are possible. The OUST is required to create and maintain a list of approved non-profit credit counseling agencies.
B. Post filing
In order to qualify for a discharge under either chapter 7 or 13, the debtor must complete a course concerning personal financial management.
New Bankruptcy Code 111 sets out the detailed provisions for such courses, and designates the UST to establish standards for and to maintain a list of approved non-profit providers of CDE (continuing debtor education). The trustee is directed to establish a pilot educational program for debtor financial management which would be tested in six judicial districts over an 18-month period and thereafter evaluated for effectiveness and cost. Additionally, all chapter 7 debtors would be subject to denial of discharge under 727, and chapter 13 debtors would not be granted a discharge if they failed to complete an instructional course concerning personal management, unless the UST or Bankruptcy Administrator determined that approved courses were inadequate. Telephone and Internet courses would be permissible.
III. NEW FILING REQUIREMENTS
A. Additional Filings Required
In addition to the current schedules, statement of affairs, statement of intentions, the debtor must file the following items as part of the filing package:
1.) evidence of payment by an employer for the last 2 months;
2.) copies of a tax return or transcript within 7 days before the first meeting of creditors;
3.) if a creditor requests, all tax returns filed after the commencement of the case;
4.) a worksheet setting out the means testing calculations set out above.
B. More and Better Notice to Creditors
If the creditor has supplied the debtor with 2 communications in the last 90 days stating an address for communications, then the debtor must give any notices to the creditor at that address. A creditor's violation of the automatic stay can not be willful unless the creditor receives written notice of the case at that address.
IV. THE NEW ROLE OF THE DEBTOR'S ATTORNEY
A. Reasonable Inquiry Required
Attorneys in bankruptcy cases have always had a duty of candor to the Bankruptcy Court. Current case law, however, has held that an attorney for an individual debtor is not required to engage in due diligence regarding the client's statements made by debtors in their schedules and statement of affairs.
The Bills state that the Bankruptcy Court shall order debtor's counsel to pay all fees incurred by a trustee in bringing a successful motion under Bankruptcy Code 707(b). Further, the attorney's signature on the petition constitutes a certification that the attorney has performed a reasonable investigation into the circumstances that gave rise to the petition, and that the attorney has no knowledge, after inquiry, that the information in the schedules filed with the petition are incorrect.
There is no definition of reasonable inquiry. Does this mean searching property records? Does this mean hiring an investigator to otherwise search for the debtor's assets? This area requires substantial refinement by the courts.
These provisions can be viewed as the codification of a rule. They could also send a message to judges that Congress wants very close attention paid to the role of debtor's counsel when a case is dismissed under Bankruptcy Code 707(b).
B. Debtor's Counsel's Duty to Disclose and Keep Records
Debtor's counsel is subject to loss of fees, damages, injunctive remedies and imposition costs to meet the new disclosure and record keeping requirements.
V. LIMITATIONS ON THE DEBTOR'S RETENTION OF PERSONAL PROPERTY COLLATERAL
A. The Debtor Can Not Simply Retain Personal Property Collateral
Under current practice in this district, so long as the debtor is current regarding an obligation secured by personal property, usually an auto, the debtor is not required to take any action in order to retain the collateral, other than to make the monthly payments when due. In the event that the debtor defaults on the obligation, the lender will eventually repossess the vehicle, and any deficiency would be barred by the discharge.
The Bills both limit the debtor's options in this instance to:
1.) re-affirmation of the obligation;
2.) redemption of the collateral.
If the debtor does neither by the 45th day after the first meeting of creditors, then the automatic stay terminates without further action. The trustee can bring a motion to re-impose the automatic stay.
B. Reaffirmation
In addition to the provisions of current law, (1) a reaffirmation agreement is not effective unless the debtor receives an extensive set of disclosures, and (2) the court may disapprove reaffirmation agreements with creditors other than credit unions if a statement filed by the debtor indicated that the debtor did not have sufficient funds to make the agreed upon payments. Creditors are allowed to receive payments prior to the filing of a reaffirmation agreement, and under agreements which the creditor believes in good faith to be effective. The disclosure requirements are met if given in good faith.
C. Redemption
Redemption requires full payment of the amount of the allowed secured claim at the time of the redemption, and the claim would be based on the retail replacement price of the collateral.
VI. DEBTOR PROTECTION PROVISIONS
A. Reduction of Claims
The Bankruptcy Court may reduce, by up to 20%, the claim of a creditor which unreasonably refused to enter into a reasonable repayment plan proposed by an approved counseling agency, prior to bankruptcy. The offer must have:
1.) been made more than 60 days before the filing of the petition; and
2.) the offer must have called for payment of 60% of the debt over the period not to exceed the repayment period of the debt
The debtor must show the facts surrounding the offer, and its reasonableness, by clear and convincing evidence.
B. Failure to Credit Payments
A creditor's failure to credit payments by the debtor under a confirmed plan (chapter 13 or 11) constitutes a violation of the discharge injunction contained at Bankruptcy Code 524.
C. Criminal Sanctions for Abusive Reaffirmation Practices.
The FBI and the United States Attorney are to allocate recourse and coordinate efforts to investigate abuse reaffirmation practices by creditors, on the one hand, and fraudulent and misleading statements in bankruptcy schedules, on the other hand.
D. Mega-Disclosure Requirements for Reaffirmation Agreements
Reaffirmation of a debt will now require more lengthy standardized forms, and disclosures not unlike a consumer retail sales contract, including the amount of interest that will be paid if the reaffirmed balance is paid according to the schedule.
VII. A. Successive Discharges
A chapter 7 debtor would be subject to denial of discharge under Bankruptcy Code 727 if the debtor received a chapter 7 or chapter 11 discharge in a case filed within 8 years of the current case. The treatment of chapter 13 debtors varies between the Bills. The House bill denies chapter 13 debtors a discharge if their case was filed within 5 years of their most recent discharge under chapters 7 or 11. The Senate bill shortens the time to 3 years after the most recent discharge, subject to a hardship exception. Both the House and Senate versions eliminate Chapter 20.
B. Limitations on Chapter 11 Discharge
Plan payments must be completed before an individual receives a discharge in a chapter 11 case. This differs from current practice where the discharge of Bankruptcy Code 1141(d) is effective upon plan confirmation. The Bills include an unclear provision allowing the court to enter the discharge upon plan confirmation if the best interests test is met, but it is not clear if the payments must have reached the best interests level before a discharge can be entered.
C. Nondischargeability
Added to the ever growing list of non-dischargeable claims are:
1.) amounts owed to a retirement savings plan, pension, or stock bonus plan;
2.) the Senate bill contains a vaguely worded new section 523(a)(19) which means that any claim stemming from personal injury or property damage at abortion clinics shall be non-dischargeable.
VIII. TREATMENT OF DOMESTIC SUPPORT OBLIGATIONS
Definition
A Domestic Support Obligation (DSO) is any support, alimony, or maintenance payable by the debtor, either prior to or subsequent to the order for relief.
B. Super priority for DSOs
DSOs replace administrative claims as the first priority under Bankruptcy Code 507(a).
C. Effect on Plan Confirmation
1.) Chapter 11. Sections 1129(a) is amended to condition plan confirmation by an individual on that individual being current regarding all DSO payments which accrued subsequent to the filing of the petition.
2.) Chapter 13. Failure to pay a past petition DSO is grounds for dismissal or conversion. The plan may, however, provide for the payment of less than the entire amount of a DSO if the debtor commits all of her disposable income for a period of 5 years to payments under the plan. A prerequisite to plan confirmation is that the debtor must be current on all DSO payments which accrued subsequent to the filing of the petition.
D. Exceptions to the Automatic Stay
Bankruptcy Code 362(b)(2) is amended to make exceptions to the automatic stay regarding DSOs, including:
1.) the establishment or modification of an order for a DSO;
2.) the collection of a DSO from property that is not property of the estate; the withholding of income that is property of the estate or property the debtor under a judicial or administrative order; actions withhold, suspend or restrict drivers licenses, professional licenses, or recreational licenses under State law, as specified under the Social Security Act.
E. Nondischargeability of DSOs
DSOs nondischargeable under Bankruptcy Code 523(a)(5) and a(15). No change.
Bankruptcy Code 523(c) is amended to delete non-support family law-related claims (Bankruptcy Code 523(a)(15)) from the requirement of proof through an adversary proceeding. Big change.
The DSO Defense to A Preference Action
The fact that a payment or other transfer was on account of a DSO is a complete defense to a preference action.
F. The Trustee as Data Clearinghouse for DSOs
Bankruptcy Code 704 and 1302 are amended to included a detailed series of notices which the trustee must send to the holder of a DSO, informing the creditor of his rights and informing the claimant certain procedures.
These notices include:
1.) notice to holder to DSO.
2.) notice to the State child support agency of the State in which the holder of the DSO claim resides.
3.) notice to the holder of the DSO and the State child support agency upon the discharge of the debtor, with the notice to include such things as the debtor's last known address, the name and address of all of the debtor's creditors, which either were not discharged or with regard to which the debtor reaffirmed all or part of the claim.
Individual debtors in chapter 11 cases have the same duties as a trustee regarding the reporting provisions regarding DSOs.
IX. DISCOURAGEMENT OF SUCCESSIVE AND REALLY ABUSIVE FILINGS
The Bills codify the proscriptive relief and in rem relief with which the courts have wrestled in recent years.
1.) If the Debtor has had one case pending within one year, which was dismissed. The automatic stay as to actions taken against property when an individual's case was pending within one year and was dismissed, shall terminate for 30 days after the filing of the case. The debtor may seek to keep the stay in place by affirmatively proving good faith.
2.) If the Debtor has had two or more cases pending within one year, which were dismissed. The automatic stay does not go into effect at all if the debtor has had two cases pending in the previous year which were dismissed. On request of a party in interest, the Court shall promptly enter an order that there is no stay in effect in the case. The debtor may seek to keep the stay in place by affirmatively proving good faith.
3.) Transfer of fractional interests or multiple bankruptcy filings affecting the property. An order entered after the Bankruptcy Court determines that the bankruptcy case was part of a scheme to delay hinder or defraud creditors that involved either:
a.) transfer of fractional interests; or
b.) multiple bankruptcy filings affecting the property so long as it properly recorded, will be binding for two years, and during that time the order shall be binding on any case purporting to affect the property. The debtor can seek relief from the order.
X. EXEMPTIONS
A. Domicile Requirement
The domicile requirement for exemptions is rendered more complicated. Debtors must have their domicile in the state for 730 days before the filing of the case in order to use its law for their exemptions. Otherwise, the governing law is the law of the debtors' domicile for the 180 day period preceding the 730 day period.
B. Limitations on Homestead Exemption
The two bills provide different approaches to limiting homestead exemptions. H.R. 333 provides for an exclusion from the exemption of any value added by the debtor to the homestead with the intent to hinder or delay creditors, during the seven years prior to the bankruptcy filing. This would dramatically decrease pre-petition planning opportunities. The Senate bill places $125,000.00 cap on all homestead exemptions. It's interesting to note that this was an amendment that was added prior to passage. It also puts the President in a very difficult position, because his state has traditionally provided an unlimited homestead.
Further, H.R. 333 provides that the value in excess of $100,000.00 added to the homestead during the two years preceding the bankruptcy filing would be deducted from the exemption unless it was transferred from another homestead in the same state.
XI. INDIVIDUAL CHAPTER 11 CASES
A. Hybrid Chapter 11/13 Disposable Income Test
Bankruptcy Code 1129(a) is amended to include, as a floor for repayment of unsecured claim, the disposable income test from Bankruptcy Code 1325(b)(2).
B. Expansion of Time to Modify Plan
The chapter 11 plan in an individual case can be modified at any time prior to the completion of plan payments, regardless of whether the plan has been substantially consummated. The Bankruptcy Court may order another disclosure statement regarding the proposed modification.
C. Shortening of Time For Payment of Priority Tax Claims
The limitation for payment of priority tax claims is that the last payment must be made not less than 5 years after the filing of the entry of the order for relief.
XII. Exceptions
New exceptions to the automatic stay include:
1.) DSO related actions, supra
2.) withholding to repay an obligation to a pension, profit-sharing, stock bonus or other plan.
3.) acts to enforce a lien against real property after an order under new Bankruptcy Code 362(d)(4) (in rem relief);
4.) acts to enforce a lien against real property if the debtor is ineligible to be a debtor under Bankruptcy Code 109(g) or files the case in violation of an order prohibiting the debtor from filing a bankruptcy case.
5.) acts to enforce a lien against personal property security if the debtor does not, by the 45th day after the first meeting of creditors, either reaffirm the obligation or redeem the collateral.
6.) acts to enforce a lien against personal property security if the debtor does not surrender property that he stated that he would surrender in his statement of intentions.
7.) acts to regain possession of residential real property on which the debtor resides as a tenant, and which the debtor fails to pay any rent amount that comes due after the filing of the bankruptcy case, or within 10 days of the filing of the case, or the lease has expired according to its terms.
8.) any acts to regain possession of residential real property which was the subject of a case which was pending within the last year, and the debtor failed to make a rental payment after the filing of the earlier case.
9.) acts to regain possession of residential real property which is being used for illegal use of controlled substances.
B. The stay terminates, without any action, in the following instances:
1.) if a personal property lease is not timely assumed by the trustee or the debtor, upon the expiration of the time to assume the lease under Bankruptcy Code 365(d).
2.) if a personal property lease is not assumed in a chapter 13 plan, then the lease is deemed rejected as of the date of confirmation of the plan.
XIII. ADDITIONAL CHAPTER 13 PROVISIONS
A. Length of Plan, Best Efforts
Current law provides that chapter 13 plans continue for 3 years unless extended by the Court upon showing a good cause by the debtor, but in no event exceeding 5 years. The Bills provide that plan length will be 5 years, unless the debtor is below the median income.
Further, the best efforts requirements currently set forth in 11 U.S.C. 1325 are redefined and will now be the means test for the presumption of abuse under 707(b). This best efforts test removes the allowance for charitable contributions which are currently specifically allowed up to 15% of the debtor's gross income.
B. Limitation on the Use of Bankruptcy Code 506
Current practice allows a procedure, often referred to as lien stripping, where the provisions on Bankruptcy Code 506 are invoked to value secured collateral, with the amount of the creditor's claim in excess of the value being rendered an unsecured claim. This will no longer be possible in chapter 13 cases when:
1.) The collateral is a motor vehicle (personal use) and the claim was incurred within 5 years of the filing of the bankruptcy case;
2.) Any personal property collateral, where the claim was incurred within 1 year of the filing of the bankruptcy case;
C. Implosion of the Super-discharge
One of the incentives for filing a chapter 13 and laboring 3-5 years to pay claims, is the super-discharge wherein claims which are not dischargeable in a chapter 7 case, such as claims relating to fraud, breach of fiducially duty, and willful and malicious injury, are dischargeable in chapter 13. The Bills wipe out the super-discharge. Claims under Bankruptcy Code 523(2)(3)(4) and (6) are as non-dischargeable in chapter 13 as in chapter 7. Claims under Bankruptcy Code 523(a)(15) (non-support obligations resulting from a divorce decree) are still dischargeable in chapter 13.
Websites Dealing With the Bankruptcy Reform Act of 2001
IRS HOUSING ALLOWANCE IN CALIFORNIA
IRS TRANSPORTATION ALLOWANCE FOR LOS ANGELES, VENTURA AND ORANGE COUNTRIES
IRS ALLOWANCE FOR FOOD, CLOTHING, ETC.
IRS ALLOWANCE FOR OTHER NECESSARY EXPENSES