Consumer Bankruptcy Practice Under the New Law

Tuesday, May 3, 2005 at 3:00 p.m. (EST)

Join ABI’s Consumer Bankruptcy Committee co-chairs, along with ABI Resident Scholar Jeffrey Morris and ABI Executive Director Samuel J. Gerdano, on May 3 at 3 p.m. (EST) to discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256), signed into law on April 20. Panelists will answer questions submitted online about the new law and how it will impact consumer bankruptcy practice. All ABI members are welcome to participate free-of-charge. A transcript of the program will be posted at ABI World.

How to Participate:   There is no need to register for this event.   Simply use the form below to submit your question.  To view the LIVE session, simply visit this web page at 3 p.m. (EST) on Tuesday, May 3 to view the questions and answers as they are posted.

Panelists include:

• ABI Consumer Bankruptcy Committee Judicial Co-chair Hon. Dennis R. Dow (Biography)
• ABI Executive Director Samuel J. Gerdano (Biography)
• ABI Consumer Bankruptcy Committee Co-chair Dennis J. LeVine (Biography)
• ABI Resident Scholar Jeffrey W. Morris (Biography)
• ABI Consumer Bankruptcy Committee Judicial Co-chair Hon. Thomas F. Waldron (Biography)
• ABI Consumer Bankruptcy Committee Co-chair Thomas J. Yerbich (Biography)

Click here to go to questions

Overviews:

Judge Dow:
The first impact of the bankruptcy reform legislation may occur before its effective date. Conventional wisdom has it that the enactment of the legislation will result in a significant increase, during the period prior to the effective date, in the number of Chapter 7 bankruptcy filings. The act makes the most significant changes in bankruptcy law since...(Read More)

Dennis LeVine:
From a secured creditor’s perspective, I anticipate the effect of the major changes from the Code to the Reform Act will be: a significant reduction in the effect of serial filings, expedited confirmation hearings in Chapter 13, a reduction in "cram downs" of personal property liens in Chapter 13, codifying "retail value" for personal property valuations, and greater likelihood of adequate protection payments being...(Read More)

Judge Waldron:
From my judicial perspective, the initial major change from the Code to the Reform Act will be the new hearings necessitated by the Reform Act. By new hearings, I mean court proceedings which have never previously been held in the bankruptcy court. [i.e., § 109(h) - eligibility and a possible waiver “satisfactory to the court” of a required credit...(Read More)

Tom Yerbich
From the debtor’s perspective, the Act has created a sea change beginning with pre-filing requirements and extending through discharge, These may be summarized as follows. First, undergo credit counseling before filing the petition and then complete a course in financial management before receiving a discharge. Second, reduced availability of chapter 7 for those with the means...(Read More)

What is the impact that the new law have over creditors?

Judge Waldron:
In contrast to the present Code, the Act provides creditors with new opportunities to prevent a debtor from being able to: successfully file bankruptcy [109(h)], receive the benefit of the automatic stay [362(c)]; avoid a dismissal [521(e)(2)(B)] or obtain a discharge [727(a)(12)]. These, and other provisions, providing new opportunities to creditors often use terms which are undefined it may be far too early to determine the impact, except to note the obvious potential for increased litigation.

How long will the Automatic Stay protect the debtor?

Judge Waldron:
The brief answer is less time under the Act [362(c)] than there was under the Code. The slightly longer answer is, assuming notice has been effective [342], and the automatic stay is in effect [362(c)(4)(A)], depending upon the circumstances of prior filings, 30 to 60 days, unless extended and the possibility of even less time in circumstances involving a lessor.[362(l)].

Jeffery Morris:
There are a number of changes as to the effect of commencing a case and the operation of the automatic stay. You may wish to look at the materials on these issues set out on our website under the “Full Coverage of Bankruptcy Reform” item set out in the center column on our home page. From that link, you can go to several other items including “Major Consumer Bankruptcy Effects of the 2005 Reform Legislation” prepared by the Hon. Eugene R. Wedoff, U.S. Bbankruptcy Court for the Northern District of Illinois, and the “Synopsis of Bankruptcy Bill by Thomas J. Yerbich, Esq. See especially pages 4-6 of Judge Wedoff’s analysis, and pages 28-33 of Mr. Yerbich’s synopsis.

Among the changes to the automatic stay, § 362(c)(3) of the revised Code sets new limits on the applicability of the automatic stay for repeat filers. If you are filing a second within 1 year of a previously dismissed case (other than a case dismissed under § 707(b), then the stay terminates in 30 days unless the court, within the 30 days, determines that the second filing is in good faith as to the creditors to be stayed. The second case is presumptively not in good faith (unless the presumption is overcome by clear and convincing evidence to the contrary) as to all creditors if:

1) the current case is the 3rd or more case in the past year;

2) any of the previous cases were dismissed for failure to amend the petition or other documents as ordered by a court, the debtor failed to provide adequate protection as ordered by a court, failed to perform under a confirmed plan; or

3) the debtor’s financial or personal affairs are unchanged since the most recently dismissed case or there is some reason to conclude that the currently pending case will result in a chapter 7 discharge or a confirmed chapter 11 or 13 plan.

The stay in such a second case does not apply to any specific creditor who commenced an action in the prior case under § 362(d) which either was pending when the prior case was dismissed, or the stay was terminated or modified in the earlier case.

If this is the debtor’s third or greater case that was dismissed within the past year (other than § 707(b) dismissals), then the stay does not go into effect in the case. In that event, a party in interest can seek the imposition of the stay by court order by overcoming the presumption that the latest filing was not in good faith.

If a prior case included an “in rem” order under § 362(d)(4) dealing with specific property, the automatic stay may not be effective as to that property under new § 362(b)(20).

Section 362(b)(22) and (23) also affect the automatic stay by making the stay inapplicable when eviction proceedings are pending at the time of the commencement of the case and when an eviction action is based on the endangerment of the leased property due to the illegal use of controlled substances on the property.

The credit counselors will be regulate; so the system can keep control or monitory them?

Sam Gerdano:
Because the credit counseling industry is under great scrutiny by the Internal Revenue Service, Federal Trade Commission, Congress and state regulatory bodies, it is expected that the U.S. Trustee will carefully select those on the approved list of providers.  This is especially true for the initial list of approved providers.  New section 111 of the Code sets out in some detail what criteria the EOUST will be looking for: the agency must demonstrate that it will provide “qualified counselors, maintain adequate provision for safekeeping and payment of client funds, provide adequate counseling with respect to client credit problems and deal responsibly and effectively with other matters relating to the quality, effectiveness and financial security of the services it provides”.

What is the impact that the new law has over creditors?
What are the changes with the new law that creditor will face concerning them?

Dennis LeVine:
From a secured creditor’s perspective, I anticipate the effect of the major changes from the Code to the Reform Act will be:

- a significant reduction in the effect of serial filings

- expedited confirmation hearings in Chapter 13

- a reduction in "cram downs" of personal property liens in Chapter 13

- codifying "retail value" for personal property valuations

- greater likelihood of adequate protection payments being made without

Court intervention

The changes in the Code are designed to make the bankruptcy process in Chapter 13 move along more quickly, so cases don’t languish for months prior to a confirmation hearing. The changes in the valuation standard in Section 506, which apply to valuations in Chapter 13 cases and redemption in Chapter 7 cases, clearly will benefit the recoveries of secured creditors since the Code now explicitly adopts retail value for most consumer personal property items.

From an unsecured creditor’s perspective, I anticipate the effect of the major changes from the Code to the Reform Act will be:

- an increase in filing motions to dismiss cases for "abuse"

- less distribution in Chapter 13, since most car lenders' claims can no longer be crammed down

The unknown and unintended consequences of the changes in the Code may undercut the "gains" which secured creditors anticipate. Perhaps debtors will simply surrender their older secured property (e.g. their used cars) and purchase a new one just before filing bankruptcy. What we can be sure of is that the debtor’s bar will fight back, and Bankruptcy Judges may be of the mind to interpret the new provisions so as to support the arguments made by debtors’ attorneys.

As it relates to Chapter 13 cases, do you see 507 requirement to pay Child Support and Alimony in full before everything including attorney\'s fees, or do you read 1322 (a) (2) such that it can be paid along with the other secured and administrative debts as long as it is paid in full during the life of the plan?

Tom Yerbich:
For amounts that accrue post-petition, the debtor must pay those as they come due. A failure to pay post-petition accruals may result in dismissal or conversion. For pre-petition arrearages, if any unsecured creditor or the trustee objects, cure will have to be spread out over the commitment period.

I am trying to better understand the Means Test as it relates to Ch 13, and specifically whether a debtor over the median income is limited to the lesser of actual expenses or the amounts provided in the IRS National and Local Standards. Sec. 1325(b)(3) provides that if the debtor's "current monthly income" is greater than the state median income, then "reasonably necessary" expenses "shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2) ...." 707(b)(2)(A)(ii) states that "the debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service....

This language seems to suggest that the debtor can deduct applicable expense amounts listed in the IRS National and Local Standards regardless of the debtor's actual expenses under such categories (e.g., the term "actual monthly expenses" is only used is reference to "Other Necessary Expenses"). For example, the IRS Local Standards for Housing and Utilities in Salt Lake County for a family of four is $1,617 per month. Does this mean if a debtor's actual monthly housing and utility expenses are only $1,000, the debtor can still deduct $1,617 in determining "reasonably necessary" expenses under § 1325(b)(3)?

What if the debtor is living with family and only pays a token $50 per month in rent? Can the debtor still deduct the full $1,617 as allowed by the IRS Standards?

Tom Yerbich:
The Financial Collection Standards for Transportation and Housing Utilities are "not to exceed" amounts. A debtor is allowed the lesser of the debtor's actual expenses or the maximum allowable amount given. In the examples given, the debtor would only be allowed the actual expenses, not the maximum permitted under the standards.

It seems that the means test only directs dismissal of a case for an individual with consumer debts if abuse is found. Is that correct and if so what will the definition of \"primarily consumer debt\" be?

Tom Yerbich:
Consumer debt is defined in 101(8) as one incurred "primarily for personal, family or household purpose." To determine whether debts are primarily consumer there are two approaches used: number of creditors or amount of debt. Most courts have used the amount of the debt but where the difference in amount is insignificant, the number of creditors falling within each category may tip the scales one way or the other.

Who are the \"approved credit counselors\"?  Can I be one?  Can my paralegal?

Sam Gerdano:
The list of approved providers will have to be public in all districts well in advance of the target October 17 effective date for filings under the new law.  A counseling agency not on the approved list at the outset, that is subsequently approved, will have a six month probationary period before a determination is made that they are eligible to be on the approved list for an additional year.  The list is up for renewed approval each year.  Agencies aggrieved by an adverse decision by the U.S. Trustee or BA can seek relief in federal court.  Courts can remove a provider from the approved list upon a finding that the agency does not meet the qualifications.

What is the status of plans to certify debt counselors?  What requirements will debt counselors need to meet?

Sam Gerdano:
To be approved by the U.S. Trustee or bankruptcy administrator, an agency must have an independent board of directors who does not benefit financially from the counseling services provided.  Any fees charged must be reasonable and provided “without regard for the ability to pay the fee”.  The statute provides for annual audits of the agency’s financials, bonding of employees, adequate financial resources to provide services and more.  Counselors providing the services must be trained and experienced, and cannot be compensated based on the outcome of the counseling services provided.  Again, all of these safeguards are in response to criticism of some who have taken advantage of consumers in the current environment.

Please explain the credit counseling requirement: who is eligible to provide it?

Sam Gerdano:
Under new section 109(h), individuals are ineligible to file for bankruptcy under any chapter unless, within 180 days of the filing, they’ve received “an individual or group briefing” from an approved nonprofit budget and credit counseling agency, such agency to be approved by the U.S. Trustee or bankruptcy administrator under extensive standards set out in new section 111 of the Code.  The list of such eligible agencies will be maintained by the clerk of each court.  The required briefing may occur by phone or over the Internet.  It must outline the opportunities for credit counseling and assist “in performing a related budget analysis”.  There are some exceptions to the requirement, where the US Trustee or bankruptcy administrator has determined that adequate services are not available in the district (a determination that must be reviewed at least annual).  There is also an exception for “exigent circumstances” requiring an immediate bankruptcy filing, where the debtor certifies that he or she tried to obtain it at least 5 days before the filing (in which case the debtor is required to complete the counseling within 30 days after filing).  And there are exceptions for debtors who are incapacitated, disabled or on active duty in a combat zone.  The debtor is required to file a certificate (with the bankruptcy filing papers) from the agency describing the services provided, and any debt repayment plan developed by the counseling agency.

Sam Gerdano:
The debtor’s current monthly income is clearly augmented by that of the debtor’s spouse, even in a non-joint case.  Since so much of the means test relies on “household” income, it’s reasonable that other working members’ income would be folded into that calculation.  Should the petition be filed under the “exigent circumstances” language so as to avoid the counseling pre-filing requirement, the excuse from counseling is just temporary: the debtor is required to complete the counseling within 30 days after the filing.  The means test still applies to a covered debtor even in these emergency situations; such debtor could still be shifted to a chapter 13 notwithstanding any need to file as an “emergency”.  As to the application of the stay, there are many new rules to watch for: if you are filing within 1 year of the dismissal of an earlier case, for example, the stay in the second case will usually dissolve 30 days after filing.  And if a second repeat filing takes place within the 1 year period, the stay doesn’t go into effect at all.  Rather the burden shifts to a party in interest can obtain the stay by showing that the third filing is in good faith with respect to the creditor sought to be stayed.

If the debt is above the 13 level, does the means test and the debt counseling still kick in for a chapter 11 liquidation plan or must there be some sort of a repayment/composition/reorganization plan?

Sam Gerdano :
Debt counseling applies to all debtors as an eligibility requirement, even those whose income puts them over the chapter 13 limit.  These cases will end up looking like individual chapter 11 cases, but with an important new twist: property of the estate for an individual chapter 11 includes property acquired by the debtor post-petition.  Funding for the individual debtor’s plan comes from future earnings for the 60 month period, assuming any unsecured creditor objects.  Chapter 11 debtors get a discharge only after completion of their 5 year payment plans.  This is a major change from current law for wealthy filers, consistent with Congress’intention that those who have the ability to repay must do so in bankruptcy.

Does anyone have a sense as to when a clean-up bill will be introduced and more importantly, what provisions/changes/amendments (other than how fees are divided) will be/may be/are contemplated to be included? Who is responsible for sheparding this clean-up bill through Congress and whom would one contact with suggested \"clean-ups\"?

Sam Gerdano :
Notwithstanding some testimony at a Senate hearing on this bill, the new law is not “perfect”.  Changes and technical fixes are clearly needed, as is the case with every new statute, let alone one largely sitting on a shelf for several years.  Hill staffers are collecting information now on such fixes.  As with the underlying bill, now law, the Republican majority is going to drive this train.  The appropriate subcommittee chair of the Judiciary Committee on each side of the Hill: Rep. Chabot (R-Oh) in the House and Sen. Sessions (R-Ala) in the Senate would be the place to go to raise issues for “fixes”.  Don’t bother asking them to repeal something they just passed into law!

Explain the issue/problem and suggest a practical solution, consistent with the clear intent of Congress demonstrated by this new law.

Sam Gerdano :
The education requirements generally apply across the board, to all chapters, as a condition for a discharge.  They are satisfied after filing; does not have to be completed before confirmation of the plan.  Again as with the pre-filing counseling, the clerk maintains the list of approved providers; again the course has to be available without regard to the debtor’s ability to pay any fee.  Telephone and internet based courses are OK “if effective”.  The overall intent here is to have the education (“financial management training”) help the debtor avoid a repeat of the decisions that might have led to the filing.  This seems to make less sense in the case of a chapter 13 where the debtor is “living” the education as a practical matter during the 60 months of the plan.  The other oddity is that the EOUST is required to develop and study a test curriculum model in 6 districts over an 18 month period, beginning no later than 270 days after April 20.  The Director of the EOUST is supposed to report back to Congress on the effectiveness and cost of the education pilot program.  So the test for “effectiveness” is going on while the unfunded program mandate is already in place.  Based on my 20+ years of hanging around Capitol Hill, I boldly predict that the ”study”  will show debtor education after filing, and as a condition for discharge, to be worth continuing!

Sam Gerdano :
Again, section 111 of the new Code sets out in some detail the criteria for debtor education, to address the concern about ineffectual programs.  Whether it works in reality, how much it costs and who pays is to be determined.  The statute says the US Trustee or BA can only approve a program providing, at a minimum, (a) trained personnel with adequate experience in such instruction, (b) learning materials and methods on personal financial management consistent with the objectives, (c  ) adequate facilities and convenient locations and (d) ways to evaluate the effectiveness of the instructional course.  Approved providers of these services will be reevaluated as with the pre-bankruptcy counseling services and can be removed from the approved list where appropriate.  Both the counseling and education requirements will receive a lot of attention in the coming months, and I think both the EOUST and the BA will be under some pressure to make sure these new provisions live up to something meaningful, rather than a sham or formality.  Where all the approved providers are going to come from to serve this huge new demand is to be determined.

Sam Gerdano :
There’s a fair amount of concern from pro bono providers about the potential new exposure, especially from smaller firms or sole practitioners who practice in areas other than bankruptcy, and take the occasional pro bono case.  Hallway chatter at our recent ABI Annual Spring Meeting confirmed some of this.  But large law firms with a major commitment to pro bono may not feel threatened by Rule 9011, or the need to spend more time to investigate the debtor’s schedules.  Those firms may be a little more cautious, but many feel so strongly about support for the poor in their communities, I don’t see them abandoning the area.  I also don’t see Congress exempting pro bono from the certification requirements contained in new section 707(b).  Again, Congress views lawyers as part of the problem for the rise in consumer filings – especially high volume filers who don’t thoroughly investigate their client’s finances before they “meet” at the 341 hearing.  Sorry but that’s the reality: Congress (to borrow from a current popular book title) is “just not that into you”.

Sam Gerdano :
As stated above, the requirement for debtor education starts BEFORE the pilot program is developed, launched, studied and reported upon.  As the Queen said to Alice: “Sentence first,verdict afterwards”.

Sam Gerdano :
I think the truly no asset debtors are going to be in the “no fee” category.  Beyond that, you might see developed a sliding scale based on ability to pay some fee – a kind of “needs based” system.  Since the bill otherwise expands IFP filings for the truly poor filers, the number of debtors paying no fee may be fairly large.  “For-profit” counseling is out, under this law.  So there’s no ability to shift “can-pay” debtors down the hall to a for-profit affiliate.  Again, the regulators coming up with the approved list of providers know Congress won’t tolerate either counseling or educational programs that take advantage of debtors.

What is this about giving the court a preferred address for
notice, and if the preferred address is not used a creditor is not
liable for stay violations?

Sam Gerdano :
Section 342 of the Code now provides that notice to a creditor will not be effective unless it is served at an address filed by the creditor with the court or at an address stated in two communications from the creditor to the debtor within 90 days of the filing. To be effective, the notice must also include the account number used by the creditor in the two relevant communications. An otherwise ineffective notice will only subject the creditor to liability if the notice was "brought to the attention of the creditor".

Given the changes in 707(b), it is highly likely that creditors will start filing Motions to Dismiss as a matter of course. What are the strategies for dealing with what may turn into an avalanche of Motions to Dismiss filed by creditors?

Judge Dow:
There are some limitations on the creditors’ ability of creditors to file such motions.  For example, a creditor lacks standing to file a motion to dismiss under the means test or the general grounds of abuse if the debtor’s income is at or below the applicable median.  § 707(b)(7)(A).  In addition, although it has not been highly publicized, while debtors’ counsel have exposure in the event a motion to dismiss is filed and is successful, under § 707(b)(5)(A), a court may on its own initiative or on the motion of a party in interest award a debtor costs and fees in contesting a motion if the court does not grant it and it finds that the position of the party filing the motion violated Rule 9011.

Are involuntary bankruptcy filings dead, since the new law requires a debtor to undergo credit counseling within 180 days of filing a bankruptcy petition in order to be an \"eligible debtor\"?

Judge Dow:
The literal language of § 109(h)(1) does suggest this result because it makes an individual ineligible to be a debtor if the credit counseling requirement is not met.  Certainly, an argument could be made that this provision was not intended to apply in such a case not consistent with congressional intent and perhaps that it would produce a result which was demonstrably inconsistent with the intent of congress as to the purpose of the credit counseling requirements.  A court might, however, be inclined to apply the test in a case in which it felt that the involuntary filing was collusive.

Judge Dow:
Debtor’s counsel face new duties and potential liabilities in a number of areas.  Section 707(b)(4)(A) allows the court, on its own motion or that of a party in interest, to award costs and fees to a trustee who successfully prosecutes a § 707(b) motion.  Subparagraph (4)(b) authorizes the court to award a civil penalty against debtor’s counsel if it finds a violation of Rule 9011.  In addition, subparagraphs (C) and (D) of that same paragraph provide that the signature of debtor’s counsel on a petition, pleading or motion constitutes a certification that the attorney has “performed a reasonable investigation” and determined that the document is well grounded in fact and law, that a Chapter 7 petition is not an abuse under § 707(b) and that the attorney has “no knowledge after an inquiry that the information in the schedules filed with [the] petition is incorrect.”  The Code does not define what constitutes a reasonable investigation or define the appropriate scope of inquiry.

Judge Dow:
It is likely that the most significant of the exceptions to the super discharge would be the extension of § 523(a)(2) to Chapter 13 and the possibility that holders of credit card debt may now litigate the dischargeability of those claims in Chapter 13.  Section 523(d) would remain applicable, which authorizes a court to award the debtor costs and attorneys’ fees if a creditor requests a determination of dischargeability of a consumer debt and the court finds the position of the creditor was not substantially justified.  In addition, a creditor filing an unsuccessful motion to dismiss under § 707(b) risks subjecting itself to an award of sanctions.  Specifically, under § 707(b)(5)(A), a court may on its own initiative or on the motion of a party in interest award a debtor costs and fees in contesting such a motion if the court does not grant it and finds that the position of the party filing the motion violated Rule 9011.

Judge Dow:
The means test established under revised § 707(b) still applies only to the case of an individual debtor whose debts are “primarily consumer debts.”  The definition of the phrase “consumer debt”, contained in § 101(a)(8) was not altered by the new legislation.  Accordingly, the same principles the courts have applied to determine whether filings could be challenged as a substantial abuse will apply in determining whether such cases are susceptible to being challenged under the means test.

Do you interpret Sec 342(c)(2) to require that debtor account numbers be provided to creditors electronically via the Bankruptcy Noticing Center?

Judge Dow:
Section 342(c)(2) appears to apply only to notices required to be sent to the creditor by the debtor.  Therefore, it would likely not apply to notices creditors receive from the Bankruptcy Noticing Center which sends notices on behalf of the court.  Since other provisions of § 342 provide creditors with the opportunity to specify addresses at which they might receive notices from the court and specify consequences of failure either by the creditor or the court to give notice in accordance with the section, this distinction is apparently intentional.

Judge Dow:
The language of § 522(q)(1)(B)(iv) includes intentional, wilful or reckless conduct if it caused serious physical injury or death to another individual.  The provision does not appear to encompass simple negligence.  The section you cite prevents the court from granting a discharge unless it has determined that there is no pending proceeding in which the debtor might be found guilty of the conduct described.  In another provision, the scope of Chapter 13 discharge has been restricted so that it does not discharge a debtor from damages awarded in a civil action resulting from wilful or malicious injury by the debtor that caused personal injury or death.  § 1322(a)(4).  Unfortunately, the language of the two provisions is not identical.

Do the notice provisions in Amended Section 342 apply to
adversary proceedings?  Or does that require a rules change?  Is there
likely to be such a change?

Judge Dow:
The section (at least (c)(1))applies by its terms to any notice required to be given by the debtor under this title or under the rules or under applicable law or court order. By its terms, therefore, it would appear to apply to adversaries. Other subsections appear to apply in more limited circumstances. Rule 7004 might need to be amended for consistency.

Can you please explain the new limitations on state law
homestead exemptions.  Second, if required by the means test to be in
chapter 13, will all such debtors be required to file a 5 year plan?

Judge Dow:
If the debtor has income that exceeds the applicable median income, the plan requires commitment of the debtor's disposable income for a 5 year period. See section 1322 (d)(1).

The tax return requirements look like the real monster in a very scary closet. Are they as bad as they look? Why wouldn\'t every creditor demand returns from debtors? (It looks like the best way to deal with them will be to file the required returns with the Court with the petition, but even then, debtor\'s counsel must send a separate copy to requesting creditor. Fees are bound to increase as a result of this and other onerous requirements upon debtor\'s counsel.)

Judge Waldron:
The provisions of 521(e)(2)(A) establish a multitude of new requirements with regard to filing tax returns and providing copies of tax returns and related tax return amendments to various parties. A particularly time sensitive section states that a debtor has an obligation to furnish a copy of the Federal income tax return, required under applicable law (or a transcript) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed, to the trustee and any creditor timely requesting such a copy, not later than 7 days before the date first set for the first meeting of creditors. The provisions of 521(e)(2)(B) provide that if the debtor fails to comply, the court shall dismiss the case, unless the debtor demonstrates the failure to comply is due to circumstances beyond the control of the debtor. Other provisions provide creditors with the opportunity to have the case dismissed or provide for automatic dismissal if the debtor fails to comply.

When might we expect the AO to promulgate interim rules? Here\'s one suggestion: any creditor may demand the debtor\'s last tax return. I think the rule should provide (1) that debtor may upload pages one and two of form 1040 with the bankruptcy schedules so the creditor may, at its expense, examine the return; (2) that if the creditor is entitled to the entire return, the rules should require the creditor to pay the cost of producing and transmitting it; i.e., no free lunch. I suspect that in almost every case, credit card companies will routinely demand tax returns. As a debtor\'s attorney, I need an efficient mechanism to deal with these requests.

Judge Waldron:
The process for amending or adopting new bankruptcy rules is time consuming (approximately 3 years); however, the Judicial Conference of the United States is developing a fast-track procedure for recommending the adoption by bankruptcy courts of Interim Local Rules. These proposed Interim Local Rules are in the process of being developed. A firm date has not been established for their release; however, it is hoped that they will be available by September, 2005.

Is there a retroactive effect of the Act time lines to the
Code filed cases? For instance 6 year bar on refilling chapter 7 has been changed to 8 year bar. If the case is filed now will the 6 year or the 8 year rule apply to cases that go to discharge if filed prior to October but the discharge order is entered after October 2005?

Judge Waldron:
This amended provision [727(a)(8) - 8 year limitation] appears applicable only to cases commenced on or after October 17, 2005. The previous case law should continue to apply to the amended 727(a)(8)- the date the case was commenced , not the date of a discharge,  is the controlling date for calculating the [ 6 or 8 year] time period.

If the stay in chapter 7 is not effective as to a certain
creditor, or in a specific case, how will the trustee protect the
estate\'s interest in any equity in a asset the creditor may attempt to
seize and sell?  -- Concerned Trustee

Judge Waldron:
The abandonment section [554] has not been amended and relief from the stay would not necessarily eliminate the trustee's opportunity to protect the estate's interest.  Additionally, Section 362(h)(2) specifically authorizes a trustee to attempt to prevent, under certain conditions, the expiration of the stay and the trustee could argue that the trustee is a party in interest with standing to have "the stay take effect" under 362(c)(4)(B).

Jeffrey W. Morris:
It appears that the means test would be applied whenever a case proceeds under chapter 7, even when it is a conversion from a failed chapter 13. Remember, the means test motion can only be brought when the debtor’s income is above the state median income for a comparably sized household. Second, an more important, the new § 707(b)(2) means test creates a presumption of abuse. The failure of the chapter 13 case would seem to be substantial evidence to overcome the finding of abuse, but the difference between a debtor’s actual income and expenses and the means test income and expense calculations could create some area of doubt as to the application of the test in cases converted from chapter 13 to chapter 7.

Jeffrey W. Morris:
The reform legislation does not change the concept of undue hardship for student loan dischargeability. Student loan nondischargeability is expanded to protect any lender who makes a qualified educational loan, even if the lender is a for profit institution.

Jeffrey W. Morris:
The first change is the residency requirement for exemptions. Under the revised § 522(b) (3), the state or local law where the debtor has resided for the past 730 days governs the debtor’s exemptions. If the debtor has not resided in the state for the past 730 days, then the law of the jurisdiction where the debtor resided for the greater part of the last 180 days before the 730 day period is the law governing the exemptions. If this new residency rule creates a situation in which the debtor is ineligible for any exemption, then that debtor may select the federal exemptions under § 522(d), even if that state has opted out of the federal exemption scheme.

Section 522(p)(1) of the Revised Code places a cap on homestead exemptions for property acquired during the 1215 days prior to the commencement of the case, unless the property was transferred from the debtor’s previous residence located in the same state.. Section 522(q) sets a cap on exemptions if the debtor has been convicted of a felony that makes the filing an abuse of the Bankruptcy Code or the debtor owes debts from a variety of other acts of wrongdoing during the prior 5 years. The § 522(q) cap does not apply, however, if the full homestead exemption is necessary for the support of the debtor or the debtor’s dependents.

Is there any way an individual district, such as California, Central, refuse to do reaffirmations now under the new law? Since retain and pay no longer exists, don\'t all judges have to comply in the same way?

Jeffrey W. Morris:
The retain and pay (otherwise known by some as “pass through”) was available in some circuits and not in others. Revised Code § 521(a)(6) no longer permits that treatment of personal property that is subject to a purchase money security interest. Instead, the debtor must reaffirm, redeem, or surrender the property. Reaffirmations continue to be governed by § 524, and there is a new subsection (k) that sets out a detailed reaffirmation form that must be signed by the debtor. New § 524(m) includes an additional procedure applicable when the debtor’s apparent disposable income is insufficient to pay the reaffirmed debt. In that instance, the debtor must demonstrate to the court that he or she will be able to fund the reaffirmation agreement.

Jeffrey W. Morris:
Section 1328 of the Code was amended so that the revised version limits the availability of a discharge in a chapter 13 case if the debtor has gotten a discharge in a prior chapter 7, 11, or 12 case commenced within 4 years of the chapter 13 case. There is also no discharge in a chapter 13 case if the debtor received a discharge in a chapter 13 case filed within 2 years of the commencement of the second chapter 13 case. This change will extend the time between those filings and largely curtail the practice.

expenses vary within a district, for instance Poughkeepsie and Manhattan are both in the Southern District of New York. Expenses are \"night and day\" between the two. How will the new law address the difference?

Jeffrey W. Morris:
The means test in revised § 707(b)(2)(A)(III) does allow for the deduction of the “actual administrative expenses of administering a chapter 13 plan for the district in which the debtor resides,”up to a maximum of 10%. I believe that this is a reference to the applicable division within a district. If your debtor would properly file in Poughkeepsie, then the expenses for the district are those that would apply in Poughkeepsie.

My practice deals most with distressed business. I usually only have to address individual insolvency issues when a principal of company has guaranty obligation to a lender. I understand, but want to confirm that when an individual\'s debts are primarily business related, he/she will still be able to file under Chapter 7. Could you please confirm.

Jeffrey W. Morris:
Dismissal or conversion of a case under § 707(b) continues to apply only to individual debtors whose debts are primarily consumer debts. Therefore, there should be no change in the law as regards whether a debtor’s obligations are “primarily consumer debts.”

Please explain each of the limitations now imposed upon homestead exemptions by the amendments to the Act, including any cap on the exemption amount that can be claimed.

Jeffrey W. Morris:
See the response to question 16. Additionally, new § 522(o) provides that homestead exemptions are reduced to the extent that the value of the homestead is attributable to property that the debtor disposed of in the 10 years prior to the filing of the petition if the disposition of the property was made with an actual intent to hinder, delay, or defraud a creditor. Interestingly, it does not appear from the statute that the creditor who was defrauded must still be a creditor at the time of the bankruptcy case.

Jeffrey W. Morris:
The requirement for receiving credit counseling is an eligibility requirement under §109(h)(1), so there is an argument that a debtor would not be eligible for relief absent going through the credit counseling briefing. Courts might also allow these involuntary petitions in the absence of credit counseling on the grounds that the debtor can receive the counseling postpetition under § 109(h)(3)(A) with the need for the filing of the involuntary petition constituting exigent circumstances. The reason courts may adopt this or some other reasoning is that it seems unlikely that Congress would have amended the Code to make individual debtors immune from involuntary petitions simply by refusing to undertake credit counseling.

What if any adjustments can and should the debtor and her attorney make to the means test for Student Loan payments?

Jeffrey W. Morris:
There is no deduction for student loan payments from the debtor’s current monthly income under the means test. If the debtor cannot pass the means test, she will have to go forward under chapter 13 or the case will be dismissed.

How is the 10 year reach back period that was effective immediately for fraudulent transfers affected by state laws with shorter times?

Jeffrey W. Morris:
The 10 year reach back period to challenge a homestead exemption is contained in section 522(o) of the Revised Code. This reach back period is applicable only in bankruptcy and only as regards a homestead exemption challenge. The supremacy clause of the Constitution authorizes this law to apply without regard to a shorter state limitations period. If a longer period applied under state law, a trustee may be able to use section 544 to take advantage of that provision.

Briefly describe how and when the \"means test\" is done. Who
applies the standard and resolves disputes about the specific details of
the standard to be applied in any specific case?

Jeffrey W. Morris:
There are several discussions of the means test on the ABI website that you might find helpful. From the home page, click on the link to "Full Coverage of Bankruptcy Reform. That will take you to a two column page, and on the left column, the third item is a paper prepared by Judge Wedoff. He has a discussion of the means test, as does Mr. Yerbich, whose paper is accessible on the right hand column, fourth item from the top. There is also a link immediately below the box with Mr. Yerbich's materials that is titled "Means Test Constants and Variables that links to some of the data necessary to apply the means test.

What will the requirement of credit counseling do to debtors\'counsel\'s practices? Do the changes require actual participation in a workout plan, or just attendance at counseling?

Jeffrey W. Morris:
Section 109(h)(1) of the Revised Code requires a debtor to receive a briefing on available credit counseling, and the counseling agency must have "assisted such individual in performing a related budget analysis." I assume that this means only that the budget have been prepared but not that the debtor have made any payments.

Do the mandatory credit counseling provisions present constitutional problems in that they require people to seek advice that relates to their legal rights from companies or individuals who not authorized to give legal advice?

Jeffrey W. Morris:
The Supreme Court has held that there is no constitutional right to bankruptcy relief in the context of a debtor who could not pay the filing fee. The same reply is likely as to the limit on access to relief in the absence of credit counseling. The remainder of the question seems to suggest some constitutional protection based on the attorney client privilege. I do not believe that there is any constitutional argument that would support such a challenge to the credit counseling requirement for eligibility for relief.

Dennis J. LeVine:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("New Law"), signed by the President on April 20, 2005, made a number of significant changes in the Bankruptcy Code. The statute specifically provides that most of the new provisions are effective for new cases filed on or after 180 days after the date of enactment – Monday, October 17, 2005. 

The revisions to Chapter 12 become effective on July 1, 2005.

Certain limitations on homestead exemptions, however, are effective NOW.  These changes became effective for cases filed on or after April 20, 2005.   These amendments, found in Section 522(o) and 522(p), limit the extent of the value of the homestead exemption to $125,000 where the debtor

    (a) obtained money and put the money into his residence within 10 years of filing where he obtained  the   money by fraudulently transferring property;

    (b)  the debtor did not live in the state where he is claiming the homestead exemption for the 1215 day period preceding the filing date.

There are certain limitations and exceptions to this new provision.

The only provision which appears to apply retroactively -- that is, applies to pending cases -- is an amendment to Section 547 which eliminates the Trustee's right to recover preferences made to a related entity by the Debtor between 90 days and one year before filing.

Dennis J. LeVine:

where do you go to find the median income for each state?

Dennis J. LeVine:
The definition is in 101 (29A).

• What types of things do you anticipate will or will notconstitute a "reasonable investigation\" under the new 9011 rules?
• What type of investigation of a debtor\'s assets will be sufficient by the debtor's attorney under the new law?

Dennis J. LeVine:
The first issue is whether the so-called "attorney liability" sections appl only to Chapter 7 cases.  Since Chapter 11 and Chapter 13 have their own sections on dismissal and conversion, a good argument can be made that the provisions of §707(b)(4) only apply in Chapter 7 cases.Under §707(b)(4)(C), (D) the Debtor's counsel now has several additional duties.  Rule 9011 is specifically incorporated; therefore, the case law which has developed under Rule 9011 should be helpful on this issue.Under  §707(b)(4)(C) the Attorney must perform a "reasonable investigation under the circumstances that gave rise to the petition, pleading or other motion".  The circumstances of most consumer cases generally relates to a job loss, health problem or divorce.  A reasonable investigation into the "circumstances" may well only require a review of the relevant documents, such as medical bills, divorce decree, or unemployment compensation checks.Under §707(b)(4)(D), the Attorney also must certify that "the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect".  First, the only requirement is for an inquiry, and not a reasonable inquiry.  Second, the attorney has to certify that he has no knowledge that the information in the schedules is incorrect.  This seems to be a lesser standard than most people have speculated.  The Attorney is not certifying that everything is correct; instead, he is certifying that he inquired (i.e. asked the debtor), and that after asking he has no reason to believe that the debtor is not telling the truth.Since debtor's counsel may not find sufficient solace in simply saying "Well, I asked the debtor if everything was correct and he said yes", here are some things the debtor's attorney may want to ask the debtor for:    - an affidavit from the debtor certifying the correctness of the information;    - a copy of the homeowners insurance policy to determine whether there are any riders insuring valuables;    - a photo of the house where the debtor lives;    - a copy of the debtor's last tax return;The debtor's attorney also can:     - check the public records for any deeds or pending lawsuits;    - check PACER for prior filings;    - engaging a company (you know they will spring up) to go look at the debtor's house and prepare a short report on the debtor's possessions;

Does the new law apply to cases filed before the effective date but CONVERTED from chapter 13 to chapter 7 after the effective date? 

Dennis J. LeVine:
Section 348 covers conversions, and specifically provides that a case converted from one Chapter to another DOES NOT effect a change in the date of the filing of the petition, commencement of the case, or the order for relief.   Therefore, the new law WOULD NOT apply to pending Chapter 13 cases which convert to Chapter 7 after October 17, 2005.  

Once a Chapter 13 plan is confirmed, and an unsecured creditor brings a fraud action under 11 USC 523 and is successful will the creditor be be paid outside of the plan, or will the plan be modified since disposable income will be effected.

Dennis J. LeVine:
A significant change in the new amendments is to codify the "fast confirmation" process in Chapter 13.   Another significant change is that many of the debts listed under Section 523(a) will no longer be dischargeable in Chapter 13 -- the "super discharge" in Chapter 13 appears to be history. 

Dennis J. LeVine:
The starting point is Section 1325(a)(5), which deals with the treatment of secured claims in Chapter 13 Plans.   The secured creditor (A) must accept the Plan (I suppose that means does not file an objection to confirmation), (B) the Plan must provide that the secured creditor retain its lien, or (C) the debtor must surrender the property to the secured creditor.

The amendment to Section 1325(a)(6) states that for car loans incurred within 910 days of the filing, Section 506 does not apply.   As for post-petition interest, the "Till" case is still good law and Section 1325(a)(5)(B)(ii) would require the payment of post-petition interest.   As to attorneys fees, the question raised is a good one, perhaps another "unintended consequence" of the amendments.   I would suggest they be put in the Proof of Claim and argue that the intention of Congress was not to deprive an over secured car lender (assuming there is such a thing) from being paid post-petition fees and costs.

Florida and 5 other states have an unlimited homestead exemption.  In Florida that exemption is embedded in the Florida Constitution.  Since 1978 we have relied on that State Constitution to protect our unlimited homesteads.  Where in the new code, if at all, is the authority to undermine Florida\'s Constitution?

Dennis J. LeVine:
Florida still has an unlimited homestead exemption for residents who are NOT in bankruptcy, so Florida residents who may be "caught" in the new homestead cap should simply not file bankruptcy for a while.

I think the simple answer may be that the supremacy clause of the U.S. Constitution controls.  To the extent the U.S. Constitution conflicts with the Florida Constitution, then the federal law should be supreme.  Under this theory, federal laws can limit rights under state law.  This may not sit well with many supporters of "states rights", but the recent decisions of the Supreme Court will probably uphold these provisions of the Code.  The debtor has voluntarily filed bankruptcy, so he gets the burdens and the benefits of the Bankruptcy Code.  The more difficult question on this issue may arise when an individual is put into bankruptcy involuntarily.

What is this about giving the court a preferred address for notice, and if the preferred address is not used a creditor is not liable for stay violations?

Dennis J. LeVine:
The problem is related to debtors providing notice to creditors at a payment address, or lock box, or a local bank branch. By the time the notice is received by a creditor's bankruptcy dept. time may have run out to respond to a motion, etc.

Section 342 has been amended to try and address this issue. Under Section 342(f), a creditor may file with the Court a notice of a specific address to be used by debtors in notifying them in Chapter 7 and Chapter 13 cases. Once this is done, notice to any other address would be ineffective until it actually reached the creditor.

Section 542(g) has been added, which provides that no MONETARY sanction can be imposed against a creditor for violating the stay where the conduct occurs before the creditor received notice as required under this section.

Does the new law specify a narrow checklist of things for which attorneys will be liable?

Dennis J. LeVine:
While there is no "checklist", Section 707(b)(4)(C) states that it applies to the petition, pleading or written motion. Section
707(b)(4)(D) states that the debtor's attorney has no knowledge -- after an "inquiry" -- that the information in the Schedules are incorrect.
These two provisions, taken together, appears to cover pretty much EVERYTHING an attorney signs which is filed with the Court. While this provision appears to be applicable only to Chapter 7 cases, the provisions related to "debt relief agencies" - that's you, Mr. Debtor Lawyer -- In Section 526, 527 and 528 may bring in some additional duties in Chapter 13 cases. Of course, Rule 9011 remains applicable in all bankruptcy cases!

§362(h): Termin of stay when debtor does not timely perform stated intentions concerning personal property loans. Does the failure of a debtor to list a secured debt for reaffirmation or redemption , within the specified 30-day period.allow for termination of the stay in that 30 day period? If the Debtor properly list his intentions, does the stay terminate automatically after 45 days from the date the initial 341 meeting is scheduled, or from the date that the meeting is actually held and concluded?

Dennis J. LeVine:
Under Section 362(h) the stay terminates whether or not the property is listed. This termination of the stay appears to be automatic. One exception is found in Section 362(h)(2), where the Trustee has the right to file a Motion to extend the time. This Motion must be filed BEFORE the 30 day time period runs. The Trustee must make certain showings on such a Motion. Of course, if the debtor never schedules the asset, and the Trustee never finds out about it before the 30 day time period runs, it appears the stay terminates as to the property. The Trustee only remedy at that point would be to move for injunctive relief.

Tom Yerbich:
Current monthly income is defined in 101(10A) as all income received in the six months preceding the filing date, Monthly net income although not defined in the Code is understood to be current monthly income less allowable expenses.

Tom Yerbich:
It should not be assumed that the trustee will be limited to verifying income and expenses for self-employed debtors from the Schedule C to a tax return. As with any financial records of a debtor, the trustee will have access to the business records of a self-employed debtor, just as the trustee has had under existing law.

Tom Yerbich:
So-called “Chapter 20’s” remain available through October 16, 2005. On or after October 17, ‘Chapter 20 is probably relegated to the historical scrap pile.

The IRS standards for housing and utilities currently lump all expenses, including the principal and interest mortgage payments, into a single lump-sum. At this point whether the IRS standards place an absolute cap on housing and utility expenses, including mortgage payments is the subject of differing views. As a matter of prudence, in the absence of controlling decision, one should assume that the maximum permitted under the IRS Local Standards for Housing and Utilities includes the mortgage payment. That is, the mortgage payment plus the other expenses (taxes, insurance, maintenance, utilities) may not exceed the maximum allowable,

Are attorneys going to have to change their business cards to state that they are a \"debt relief agency\" if they represent consumers with less than $150,000 in non-exempt assets?

Tom Yerbich:
Business cards are not generally or commonly considered to be advertising, The answer to your question then should be no.

Tom Yerbich:
Unless the debt determined to nondischargeable under 523 is entitled to priority, there should be no need to amend the plan. The fact a debt is nondischargeable is not, standing alone, sufficient to warrant preferential treatment under a plan or alter disposable income. The creditor would be entitled to receive the same payments under the plan as any other creditor in the same class. The creditor then must wait until the plan is completed to resume collection of the unpaid amount. In the case of a creditor whose income is less than the applicable median income, it may be appropriate to amend the plan to devote 100% of the disposable income to the nondischargeable debt.

Tom Yerbich:
For a debtor whose current monthly income exceeds the applicable median income, it appears that the base contribution to a chapter 13 plan is the monthly net income determined under the means test. Congressional intent appears to be clear that consumer debtors with above median incomes, must make substantial life-style adjustments to obtain bankruptcy relief. The open question is the extent to which bankruptcy courts retain discretion to “tailor”the adjustments to reality, i.e., how and how quickly must the debtor reduce expenses, e.g., reduce housing costs.

Tom Yerbich:
Disposable income only comes into play if an unsecured creditor objects. Some items are excluded from disposable income (these are delineated in the Synopsis of S. 256 on the ABI website) but disposable income only determines how quickly unsecured creditors are paid.

Tom Yerbich:
The means test provides the presumptive base amount to be contributed to a chapter 13 plan for those debtors whose current monthly income exceeds the applicable median family income.

Tom Yerbich:
In the example given, I suggest that the appropriate household size would be determined by whether the household member physically resided with the debtor the majority of the time. In the joint custody situation where the time was equally split or the debtor had the children less than half the time, it could probably be addressed under 707(b)(2)(B) as an adjustment due to extraordinary circumstances.

How is the 10 year reach back period that was effective immediately for fraudulent transfers affected by state laws with shorter times?

Tom Yerbich:
The shorter state law period gives way to the longer federal period in bankruptcy cases.

Under sec 362, second and third filings will generate a presumption of bad faith which must be rebutted by clear and convincing evidence. That presumption will arise according to new sec 362(i) in \"any subsequent case\" if a debtor\'s case is dismissed \"due to the creation of a debt repayment plan.\" What does that phrase mean and how will it apply? Does it refer to a credit counseling plan or a chapter 13 plan?

Tom Yerbich:
It would not apply to a chapter 13 plan, which would not result in a dismissal. Congress was addressing the situation in which the debtor during postpetition credit education was able to create a repayment plan through the credit counseling agency but then failed.
Avoids being punitive for a debto who tries to repay creditors.

How will payday loan lenders view a a present client declaring bankruptcy, especially if there are unpaid loans still in effect?

Tom Yerbich:
Not with a great deal of favorability I am sure.

How do you see the changes impacting the ability of debtor\'s attorneys collection of their fee?

Tom Yerbich:
It is called gettinbg it up front.

Would you clarify section 526(a)(4). regarding advising assisted persons \"to pay an attorney or petition preparer as part of preparing for\" Does this mean no one may charge consultation fees?

Tom Yerbich:
526(a)(4) in proper context is a prohibition on advising an assisted person to incur debt to file or pay an attorney. It does not preclude advising an assisted person to pay for services. In short, do not tell an assisted person to take out a cash advance on a crredit card