Fall 2006
Volume 3, Number 1
Table of Contents

Bankruptcy Reform At Year One

By Lloyd D. Cohen

With the first year anniversary of bankruptcy reform in sight, practitioners are beginning to peer through the twilight of statutory vagueness into the daylight of uncertain practice. An initial court decision construing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, “BAPCPA,” actually commented that, “BAPCPA is not a model of clarity.”  Another written decision asked, “Can any rational being make a cogent argument that this stuff makes any sense at all?”  Some practitioners sum-up their feelings by referring to BAPCPA by the alternate colloquial acronym ‘BARF,’ the Bankruptcy Act Reform Fiasco .  But regardless of ones personal feelings about bankruptcy reform, it is here to stay.

Bench and Bar have struggled toward a reasonable administration of this law.  Many districts have issued general orders clarifying some of the new BAPCPA requirements, including: How creditors should implement the clerk’s registration of preferred addresses; how debtors should transmit required pay and tax information; and in Chapter 13 cases, how the trustee should administer adequate protection payments.  These orders, together with updated local rules, and other helpful bits of information, often can be found on the court’s web site.  Also, Chapter 13 Trustees often have model Chapter 13 Plans available. Note however, that the U.S. Trustee has its own guidelines which are continue to be subject to change without notice.

All this still leaves trustees, creditors, debtors (and their attorneys) with the same question as that posed by Ronald Regan during his first successful campaign for the presidency. That is, “Are you better off today then you where four years ago?”  At the risk of speaking for everyone, I would guess that the resounding answer is “No.” At least, no one is happier, except for the select groups of creditors, supposedly blessed by BAPCPA, who are still waiting to see if they will ultimately be more profitable.  Everyone else is just trying to cope with change.

Creditors are pleased with the current down-turn in the number of bankruptcy filings. However, since other regulations have caused charge card minimum payments to double, and recent financial conditions have caused interest rates to rise, more experience is needed before the forecast of any new trend is possible.  Secured creditors and landlords are pleased with their improved rights, but again it is too early to measure its effect on defaults or collections.  Meanwhile, creditor attorneys keep busy making sure that their clients are afforded all of their new rights.   However, the vagueness of this law continues to cause its enforcement to be a challenge.

At the same time, trustees must now do more with less. They have more regulations, more required questions to ask, and more information to report. They must accomplish these tasks within shorter time periods but (so far) for the same compensation. Consequently, trustees may be tough on filers who have not completely and appropriately answered all of the required questions and who have not timely produced all of the required documents.

BACPA gives debtors have a mixed bag. On one hand, the era of cheap & easy bankruptcy may be over but, on the other hand, bankruptcy is alive and well. Standing alone, each of the new bankruptcy filing requirement may be trifling, but take as a whole, they can be daunting to the poor, the ignorant, or the emergency filer. Indeed, many potential filers are experiencing “sticker shock” not only as to the new total cost of relief but also as to the new duties that must be fulfilled to obtain relief.  My conclusion is that the current down-turn in bankruptcy filings is not the result of the new pre-bankruptcy credit counseling or other requirements, but instead is the result of this “sticker shock,” or change in expectations. I speculate that the long-term effects of this may be the opposite of what the supporters of BAPCPA intended. The abusive filer, who should be dissuaded from filing, and the upper-middle class filer who should be encouraged to enter into a payment plan, may instead just enter into more extensive pre-bankruptcy planning. While those who are most distressed and most deserving may be denied access. Only time will tell.

Meanwhile, debtor attorneys are busy implementing all of their new duties. First they became “Debt Relief Agencies.” This new title brought a new layer of specifically tailored restrictions and obligations. Second, they found that they now have to obtain more documents then they ever did before, and perform a “Means Test” to qualify each debtor. They must do this while exercising an increased level of “due diligence,” else risk possible exposure to personal liability. These burdens have driven some general practitioners from the field, but there are still plenty of debtor attorneys available.

So even though the rate bankruptcy filings are down, filing volume is again slowing growing. Chapter 13 now comprises a larger share of these filings then it did under the old law. However, we are still in the period of time when we are waiting for consumer expectations to adjust. We are still wondering if that adjustment will cause any long term change in debtor behavior. We are all still waiting to have more experience with this law so we can return to an era of certainty. Meanwhile, here is my quick list of simple answers to consumers’ Frequently Asked Questions(You may copy and use them, with the understanding that the answers are very simple and very general).

Q. Is it true that the new bankruptcy law might affect what type of bankruptcy I might choose to file? 

A. Yes.  Your ability to choose may be limited by a “means test” you must now complete to determine the type of bankruptcy for which you are eligible. The “means test” form is now part of the consumer’s bankruptcy case filing and it compares your last six months actual household income to the median household income level reported by families of the same size in your area.  If your household income is above the median, then your household expenses are examined as well.  If more than 50 percent of your debts are business-related debts, then you do not have to file a means test. 

Q. How might the means test affect my bankruptcy?

A. If your household income is below the median, you can file either a Chapter 7 “straight liquidation” bankruptcy or a three-to-five-year Chapter 13 repayment plan bankruptcy.  If, however, your income is above the median (assuming yours is a consumer debt bankruptcy), and your household expenses result in excess income for your household, then you will not have the option of filing a Chapter 7 bankruptcy.  Instead, you will be limited to filing either a Chapter 11 or Chapter 12 or Chapter 13 repayment plan. 

Q. What are the differences between the types of bankruptcy?

A. In a Chapter 7 bankruptcy, an examiner (the “trustee”) may sellassets with non-exemptequity (such as a valuable car with no loan against it, cash in the bank, or tax refunds) to pay off some of your debts.  The most of the remaining debts are discharged (legally forgiven), although some debts, such as student loans, child support and spousal support, cannot be discharged.

In a Chapter 13 bankruptcy, you keep your property while repaying a potion of your debts over time.  Your repayment amount is based on what the court finds to be reasonable.

A Chapter 11 bankruptcy is usually reserved for big businesses or very wealthy people.  Most consumers file under Chapter 7 or Chapter 13.  There is also a Chapter 12 bankruptcy that can be used by family farmers and fishermen. Bankruptcies filed under Chapter 11 or 12 do not require the means testing and counseling that is required for individuals filing Chapter 7 or 13.

Q. Must I now go through counseling if I intend to file for bankruptcy?

A. Yes!  You are now required to have two counseling sessions, one before filing and one afterward, but you can complete them in person, over the phone, or across the Internet. However, the sessions must be with a credit counselor that has been approved for bankruptcy counseling by the Executive Office of the United States Trustee.

Q. What happens during counseling?

A. Before filing for bankruptcy, you must review your bills and budget with a credit counselor who will discuss non-bankruptcy alternatives(This is called pre-bankruptcy counseling).  The second counseling session (called debtor education) must occur after you have filed your case, but before the 45th day following your first scheduled hearing with the bankruptcy trustee (called a “Section 341” meeting). Debtor education involves a financial management course.

Q. What types of documents will I need when I file bankruptcy?

A. In addition to your pre-bankruptcy counseling certificate, you will need a record of the last six months’ income used to calculate the “means test,” including actual pay stubs received in the last two months before filing, and your last two to four years’ tax returns. Additionally, you may be requested to produce the following documentation:

  • deeds, mortgages, motor vehicle and memorandum titles, as well as bank and investment accounts;
  • any divorce or child support records, and records of any lawsuits or  judgments; and
  • the last couple of months of bills and a credit report (to ensure that all debts have been listed).

Q. When should I consult an attorney about bankruptcy?

A: You should consult with an attorney experienced in bankruptcy issues when you believe you will not be able to continue to pay your bills on time, have been sued on your debts, or are uncertain as to your rights concerning the debts you owe.  Depending upon your particular situation, your attorney can help you decide if it would be to your advantage to file bankruptcy or to avoid bankruptcy.


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