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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
- Bankruptcy Chapter Eligibility for Consumers and Individuals
a. Chapters and Restrictions
b. Credit Counseling - Notices
- Exemptions
- Statement of Intent, Redemption, and Reaffirmation
- Discharge
- Needs-Based Bankruptcy, Presumption of Abuse, Means Test
- The Automatic Stay
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA” or the “Act”) on April 20, 2005. BAPCPA represents the most far reaching and substantial changes to the Bankruptcy Code since it was enacted in 1978. Debtors, debtors’ attorneys, trustees, the United States Trustee and the Courts have new duties. This writer foresees that in addition to increased filings for the period before the general effective date, the amendments will be a boon for providers of bankruptcy software, and that many attorneys will forego bankruptcy practice leading to a second coming of the bankruptcy boutique law firm.
This article will deal primarily with provisions affecting individual, mainly consumer, debtors.
The general effective date of the amendments is October 17, 2005, 180 days after enactment. Most of the amendments do not apply to cases filed before that date. This means that cases commenced prior to October 17, 2005, will be governed by pre-BAPCPA provisions. Some amendments were effective for cases filed on or after enactment on April 20, 2005, and a very few apply to cases pending on enactment. If the effective date is other than October 17th, it will be noted. Before going further, an overview of chapters available to individuals and eligibility requirements is provided.
1. Bankruptcy Chapter Eligibility for Consumers and Individuals
a. Chapters and Restrictions
Individuals with consumer debts may file for protection under various chapters of Title 11 of the United States Code (“Bankruptcy Code”). Chapter 7 is the liquidation chapter whereby non-exempt unencumbered assets are converted to cash for the benefit of the creditors and paid to the unsecured creditors pursuant to priorities set out in § 507 of the Bankruptcy Code. Most chapter 7 cases are determined by the trustee to be “no asset” cases with no distributions to creditors. BAPCPA amendments dealing with presumption of abuse based on median income/expense formula will be discussed below. Most of the “Needs-Based Bankruptcy” amendments become effective for cases filed on or after October 17, 2005.
Chapter 13 is Adjustment of Debts of an Individual with Regular Income more commonly known as the Wage Earner bankruptcy. There are certain dollar limitations on the amount of secured and unsecured debts that may prevent filing under this chapter or conversion from chapter 7. The BAPCPA amendments include, among other changes, a reduced form of “means testing” (discussed under the heading of Needs-Based Bankruptcy) to determine the number of months required for the plan. The plan term will be anywhere from 3 to 5 years.
Chapter 12 is Adjustment of Debts of a Family Farmer of Fisherman with Regular Annual Income. Inclusion of fisherman in chapter 12 is a BAPCPA amendment and became effective July 1, 2005. Additionally, enacted chapter 12 was permanently enacted on that date. In order for an individual, or an individual and spouse, to be eligible for Chapter 12 treatment as a family farmer, more than 50% of gross income must have been derived from farming during the preceding taxable year or during the 2nd and 3rd taxable years preceding the taxable year in which the bankruptcy is filed (the alternative 2 year test is a new and is not retroactive for cases pending on the effective date of July 1, 2005). There are aggregate debt limits with regard to debts. In addition to aggregate debt limits, not less than 50% (80% for cases filed before July 1, 2005) of this aggregate debt (not including the principal residence) has to result from farming operations. Please note there are different eligibility requirements for corporations and partnerships.
In order to be eligible to be a family fisherman under chapter 12, an individual, or individual and spouse, must have received more than 50% of gross income for the taxable year preceding filing of the bankruptcy from commercial fishing operations. In addition to aggregate debt limits, not less than 80% of this aggregate debt (not including the principal residence) has to result from commercial fishing operations. Again, it should be noted that there are different eligibility requirements for corporations and partnerships.
An individual, or individual and spouse, may file under chapter 11, the Reorganization chapter. For instance, a chapter 11 filing would be in order if the debts in exceed the chapter 13 limitations. If the debtor is eligible for small business case treatment, various chapter 11 requirements are less onerous. For example, there is the newly added § 308 containing reporting requirements for small business debtors. Reports for small business bankruptcies are only required on a periodic basis rather than monthly and require less information than monthly operating reports. This may permit the small business debtor to dispense with both the need and the expense of an accountant which is generally needed to prepare the monthly operating reports in chapter 11. Further, the new amendments regarding “prepackaged” bankruptcy plans would apply.
The definition of “small business case” under chapter 11 is amended by BAPCPA and defined by new § 101(51C) to be a case “in which the debtor is a small business debtor.” Yes, that is really what it says. New § 101(51D) defines who may be a small business debtor. There is a $2,000,000 aggregate non-contingent liquidated limit of secured and unsecured debts not owed to one or more affiliates or insiders. A person whose primary activity is the business of owning or operating real property or activities incidental thereto is excluded from being a small business debtor.
The time between discharges under chapter 7 or discharges under chapter 11 becomes 8 years rather than the current 6 years. Discharges under chapter 13 will not be granted if there was a prior discharge in a chapter 7, 11 or 12 case within the last four years preceding the filing of the chapter 13. Chapter 13 debtors will not receive a discharge if a there is a prior chapter 13 is discharge in a case filed within two years of the current case.
b. Credit Counseling
New § 109(h)(1) provides that “an individual may not be a debtor unless such individual has, during the 180 day period preceding the date of filing of the petition received from an approved nonprofit budget and credit counseling agency an individual or group briefing including one conducted by telephone or on the internet that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.” This requirement does not apply if the United States Trustee (the “UST”) (or the bankruptcy administrator) for that district determines that the approved nonprofit budget and credit counseling agencies are overextended to such a degree that they cannot provide adequate services to those seeking credit counseling for purposes other than bankruptcy. If this determination is made, there must be an annual review of such determination. A debtor may submit to the court a certification that describes exigent circumstances that merit a waiver; that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency but was unable to obtain the service during the 5-day period beginning on the date on which the debtor made the request; and which is satisfactory to the court. This exemption to the pre-bankruptcy filing credit counseling is only good for 30 days after filing of the petition but may be extended for cause an additional 15 days.
The credit counseling requirement will not apply to a debtor if, after notice and hearing, the court determines that the debtor is unable to complete those requirements because of incapacity, disability or active duty in a military zone. Incapacity is further defined as impairment by reason of mental illness or mental deficiency to the extent that the debtor is incapable of realizing and making rational decisions with respect to his financial responsibilities. This raises the nasty problem that of whether the debtor had the legal ability to incur some of the financial obligations in first place. Additionally, such a finding would point to the need to appoint a guardian for the debtor. “Disability” means the debtors is so physically impaired as to be unable, after reasonable efforts to participate in person, telephonic or internet briefing. It would seem that a debtor would have to be nearly on his death bed under this definition.
It should be noted that in the Draft of the Interim Bankruptcy Rules and Forms recently submitted to the Advisory Committee on Bankruptcy Rules that that credit counseling is not a requirement for commencing an involuntary case although there is no specific language to so indicate. On the other hand, commencement of an involuntary case by creditors is an exceedingly rare occurrence.
BAPCPA includes new § 521(b) which requires that the debtor who is an individual to file a certificate from the approved nonprofit budget and credit counseling agency that provide services to the debtor under § 109(h) describing those services plus a copy of the debt repayment plan if any was developed through the approved counseling agency. The debtor must also complete a personal financial management course per new § 111 covering the new nonprofit and credit counseling agencies and financial management instructional courses. This section is referenced in numerous new or amended sections of the Bankruptcy Code. Denial of discharge provision under § 727 appears to apply to all individual debtors but only this chapter and chapter 13 contain amendments to deny the discharge of the debtor in the event he fails to so file the certificate or complete the course.
2. Notices
There have been several amendments to §342 regarding notices. New subsection § 342(d) deals with notice to creditors where there is a presumption of abuse under § 707(b). The bankruptcy court clerk is required to notify creditors not later than 10 days after the filing of the petition that the presumption of abuse has arisen. This is interesting since the UST has until 10 days following the meeting of creditors to make that determination.
§ 342(c) deals with what the identification information that must be sent to the creditor in a notice sent by the debtor. § 342(c)(2) deals with where the debtor must send notices to creditors. § 342(e) provides the manner for the creditor to designate its address for notices directed to that creditor but only in chapter 7 and 13 cases. This new subsection also determines when said notices are effective. § 342(e) likewise is only applicable in chapter 7 and 13 cases and provides that an entity may file a notice of address to be used by either all or specific bankruptcy courts. All notices required to be sent later than 30 days after the filing of the address of record by the entity will be sent to such address unless, with respect to a particular case, a different address has been specified pursuant to § 342(e). The new § 342(g)(1) provides that if the debtor does not notice the creditor in accordance with the provisions of § 342, the notice is not effective until it is brought to the attention of the creditor (actual notice). If the creditor designates a person or an organizational subdivision as responsible for receiving such notices and establishes reasonable procedures so that such notices are to be delivered to such person or subdivision, then a notice is not considered to have been brought to the attention of that creditor until such notice is received by such person or such subdivision. This provision is going to be a major pitfall to pro se debtors as well as causing heartburn (and heartache) for debtors’ attorneys. Note that § 342(g)(2) provides that monetary penalties cannot be imposed on a creditor for violation of the automatic stay or failure to turn over property of the estate under §§ 542 and 543 unless such violation or failure occurs after such creditor receives notice pursuant to this section.
Suppose Anybank has several branches and has filed a notice in accordance with § 342(f): Anybank, Main Bank Attn: Call the Lawyer Dept., 123 Plaza, Anytown, OK, for all bankruptcy cases filed in which Anybank is designated as creditor. Deadbeat calls the loan officer at the branch where he obtained the loan and advises Ms. Friendly Lender of the bankruptcy filing. Shortly, thereafter Mr. Repoman informs Ms. Lender that he has successfully repossessed Deadbeat’s car. Will Anybank be liable for monetary damages for violating the automatic stay? Probably, unless Anybank has established reasonable procedures so that the notice is delivered to the appropriate person or department. If on the other hand, Ms. Lender then provides Deadbeat with the mailing and/or street address, telephone number, fax number or email for the Call the Lawyer Dept. or transfers the call, then the ball may have been lobbed back into Deadbeat’s court. The issue then becomes whether this is a reasonable procedure to give actual notice to the designated person or department. Arguably it is reasonable. Certainly a procedure where Anybank employees immediately upon receiving notice of bankruptcy either in person, by mail, telephone, fax, or email such notices are directed to forward this information to the attention of the appropriate person or department along with information of any pending actions by Anybank would be reasonable. On the other hand, this procedure puts a greater burden on Anybank.
3. Exemptions
Renumbered § 522(b)(3) is amended to prevent forum shopping to take advantage of the more lenient exempt property provisions of some states. It provides that exemption election will be governed by the State where debtor was domiciled for 730 days, or if the debtor has not been located in a State for such 730-day period, the State in which the debtor’s domicile was located for 180 days preceding the 730 day period or such longer portion of such 180-day period than any other State. § 522(b)(3) is subject to new §§ 522(o), 522(p) and 522(q), dealing with value of the homestead exemption all of which amendments became effective on April 20, 2005, for bankruptcies filed on or after that date.
§ 522(o) reduces the allowed exempt value of a debtor’s homestead for to the extent any addition to the value of the homestead was due to a disposition of nonexempt property made by the debtor with the intent to hinder, delay or defraud creditors during the 10 years prior to the bankruptcy filing.
§ 522(p) generally places a cap $125,000 on the homestead exemption without regard to debtor’s intent if added during the 1215-days (roughly 3 years, 4 months) preceding the bankruptcy filing may not be included in a state homestead exemption unless it was transferred from another homestead in the same state of the homestead or is the principal residence of a family farmer. This section appears to pre-empt Oklahoma’s unlimited value exemption for homestead for any bankruptcy filed during approximately the first 40 months after a homestead is established. However, if funds from the sale of a prior Oklahoma homestead are invested in the Oklahoma homestead, then the debtor will be able to tack the prior period to the new homestead period to avoid the dollar limitation.
This preemption of state homestead dollar amounts affects only thirteen other states besides Oklahoma: Arkansas, California, District of Columbia, Florida, Iowa, Kansas, Louisiana, Massachusetts, Minnesota, Nevada, Rhode Island, South Dakota, and Texas. The other states either only allow the exemptions contained in the Bankruptcy Code or have homestead exemption allowances of $125,000 or less.
This provision has caused a variety of responses from Oklahoma bankruptcy experts. Questions have been raised about the constitutionality of this new subsection. One member of the bankruptcy bar has opined that there maybe a loophole for Oklahoma debtors and those in some of the other states. The argument is that the $125,000 restriction “as a result of electing under subsection (b)(3)(A) to exempt property under state or local law.” Since Oklahoma only allows utilization of the state exemptions, debtors cannot actually “elect.” Certainly there will be challenges raised by debtors’ counsel, however, very few debtors have more than $125,000 in equity in their homes.
§ 522(q) provides an absolute $125,000 homestead cap if either (a) the debtor is convicted of certain felonies (including violations of federal securities laws) or (b) who commits criminal acts, intentional torts, or willful or reckless misconduct that caused serious physical injury or death within 5 years preceding the bankruptcy filing. Amendments to the discharge provisions under all chapters require the court to delay entry or the discharge until there is a determination that this section does not apply.
The dollar amounts for these sections are subject to adjustment.
4. Statement of Intent, Redemption, and Reaffirmation
§ 521(a)(2) requires that within 30 days of filing the petition under chapter 7 or on or before the meeting creditors whichever occurs first or within such additional time allowed by the court for cause, the debtor must file his statement of intent indicating whether such property is to be retained or surrendered, and if applicable specifying which property is exempt and whether such property will be redeemed or reaffirmed with respect to such property. Within 30 days after the first date set for meeting of creditors or within such additional time allowed by the court for cause, the debtor is required to perform according to his statement of intent. In a chapter 7 case, the debtor may not retain possession of personal property subject to a purchase money security interest unless not later than 45 days after the first meeting of creditors the debtor either enters into an agreement with the creditor to reaffirm the debt or else he redeems such property from the security interest. Note that lien stripping (lien attaches only to the value of the collateral which is less than the amount owed) with regard to automobiles is prohibited in the first two and half years of and prohibited for the first year with regard to other secured personal property.
If the debtor fails to perform under the statement of intent, the automatic stay is terminated with respect to personal property of the estate or property of the debtor, and such property is no longer property of the estate. The creditor can then pursue non-bankruptcy remedies unless prior to the expiration of the 45 days, the trustee files to have the court determine that the property is of consequential value or benefit to the estate. If after notice to the creditor and hearing, the court so finds, then orders for appropriate adequate protection of the creditor’s interest and orders for the debtor to turnover property in debtor’s possession to the trustee.
§ 348 deals with the effect of conversion and has been amended so that valuations of property and allowed secured claims in chapter 13 only apply if the case is converted to one under chapter 11 or chapter 12, with allowed secured claims in the chapter 11 or 12 being reduced to the extent that they have been paid in chapter 13. If the chapter 13 case is converted to a chapter 7, the secured claim will continue to be secured unless the amount of such claim as determined under applicable non-bankruptcy law has been paid in full even if there has been a valuation hearing or determination in the chapter 13 of the secured amount. This protects the secured creditor from having the debtor redeem the collateral at a reduced value. Further, if there has been a pr-bankruptcy default, that default will be given effect under applicable non-bankruptcy law unless the default had been fully cured at the time of conversion.
Reaffirmation agreements under § 524(c) between the holder of a dischargeable debt and the debtor must be entered into before granting of the discharge under chapters 7, 11, 12 or 13, and the debtor must receive the disclosures contained in § 524(k) at or before the time the debtor signs the agreement. The agreement must be filed with the court and accompanied by a declaration of the attorney, if applicable, that the agreement represents a fully informed and voluntary agreement, such agreement does not impose an undue hardship on the debtor or a dependent of the debtor, and that the attorney has fully advised the debtor of the legal effect of the agreement and the consequences of default. There must be a statement that debtor has not rescinded said agreement prior to discharge or within 60 days of filing whichever is later. When the debtor has not been represented by counsel, the court must hold a hearing at which the debtor is informed of that he is not required to enter into the reaffirmation agreement and the consequences of a reaffirmation agreement of so doing. The court has to determine that it does not impose an undue hardship and is in the debtor’s best interests.
There is a presumption of undue hardship if debtor’s monthly income less expenses does not provide sufficient funds to make the payments on the reaffirmed debt, and the agreement must be reviewed by the court. The presumption may be rebutted by a statement in writing by the debtor of additional sources of income that will be used to make payments. If the presumption is not rebutted in writing by the debtor to the court’s satisfaction, the court may disapprove the agreement, after a hearing in which both debtor and creditor participate. This presumption and hearing requirement do not apply to debts owed to credit unions.
Bankers will recognize most of the disclosures contained in § 524(k) as TILA. Note that Administrative Office of the Court is charged with developing an official form for reaffirmation agreements.
5. Discharge
Claims against the debtor will be barred by entry of the discharge unless it is a claim set out in § 523. Claims for money, property services or credit obtained by false pretenses or actual fraud other than a statement respecting the debtor’s or an insider’s financial condition, or the use of a materially false written financial statement of the debtor’s or insider’s financial condition that was made or published by the debtor with the intent to deceive and upon which the creditor reasonably relied are excepted from discharge. This will entail timely filing of an adversary proceeding. Claims for fraud or defalcation in a fiduciary capacity, embezzlement, larceny or willful and malicious injury to property will also survive discharge but also require an adversary proceeding. Claims that are not scheduled will only be discharged if there was an opportunity for the holder to file a proof of claim (chapter 7 asset case) unless the holder had notice or actual knowledge in time to file a proof of claim. If the claim is for one of the “bad acts” there is no requirement that the case be an asset case only that the holder has no notice or actual knowledge in time to file an adversary action to determine dischargeability.
Certain taxes assessable or due within specific time periods are not subject to discharge. Debts for death or personal injury due to intoxication from alcohol, drugs or other substance while operating a motor vehicle, vessel or aircraft are non-dischargeable. Various debts that were or could have been listed in a prior bankruptcy will not be discharged. Money owed to a financial institution as a result of fraud or defalcation while in a fiduciary relation that is final and unappealable, malicious or reckless failure to fulfill any commitment to maintain capital and any payment per an order of restitution under Title 18 are non-dischargeable. Debts attributable to domestic relations orders are non-dischargeable.
6. Needs-Based Bankruptcy, Presumption of Abuse, Means Test
A number of BAPCPA amendments are directed toward the reduction in the number of debtors for whom relief under chapter 7 is available with the result of “encouraging” repayment under chapter 11, 12 or 13 plans. Prior to the BAPCPA amendments, § 707(b) allowed, after notice and hearing, only the court or the United States Trustee (the “UST”) to move to dismiss a case under chapter 7 for “substantial abuse.” § 707(b) specifically prevented the panel trustee or creditors from filing said motions. Further, § 707(b) stated: “There shall be a presumption in favor of granting the relief requested by the debtor.” Typically, an unsecured or under-secured creditor outraged that a debtor with significant income but either few or no nonexempt, unencumbered assets could receive a discharge under chapter 7 would contact the panel trustee or the UST. Because only the UST (and the court) had standing to file a motion to dismiss under § 707(b), the UST was reluctant to file and did so only in the most egregious cases based on the vagueness of the term “substantial abuse” combined with the presumption in favor of the debtor. Additionally, at least one Oklahoma bankruptcy judge (who has since retired) stated at a bankruptcy seminar that, while such actions had been brought by the UST, he had yet to hear of a debtor whose conduct rose to the level of “substantial abuse.”
BAPCAP amended § 707(b) to give the panel trustee, (“trustee”), the bankruptcy administrator (not applicable in Oklahoma) and parties in interest (i.e., creditors) standing to bring a motion to dismiss for abuse under certain circumstances.
New § 101(39A) defines “median family income” to mean the median family income both calculated and reported by the Bureau of the Census in the then most recent year. If the median family income is not calculated and reported in the then current year, then the figure for the most recent year as adjusted to reflect the percentage change in the Consumer Price Index for All Urban Consumers during the years since the most recent calculation is used. Access the Median Family Income Tables at the Bureau of the Census at: http://www.census.gov/hhes/www/income/statemedfaminc.html.
Under BAPCPA § 707(b)(6), only the judge or the UST (or bankruptcy administrator, if any) may file a motion to dismiss for abuse if the current monthly income for the debtor, or in a joint case, the debtor and spouse, as of the date of the order for relief (filing of the petition in voluntary cases) when multiplied by 12, is equal to or less than the relevant median income for a debtor for a family of similar size. If the debtor’s is married and it is not a joint case, and the combined current monthly income when multiplied by 12 of the debtor and non-filing spouse is equal to or less than the relevant income for a family of similar size for the applicable State, then per new § 707(b)(7)(A) neither the court, UST, trustee (bankruptcy administrator if applicable) nor any party in interest may file a motion to dismiss for abuse. Note that per § 707(b)(7)(B), if the debtor and debtor’s spouse are either legally separated or living separate and apart other than to evade § 707(b)(7)(A), and provided the debtor files a statement under penalty of perjury so stating and discloses the aggregate of best estimate of the aggregate amount of any cash or money payments received from the non-filing spouse attributed to debtor’s income the income of the non-filing spouse is not used and 707(b)(7)(A) does not come into play. If the calculation of debtor’s (and non-filing spouse’s income) do not exceed the relevant median income the means test does not apply and presumption of abuse do not apply.
New §101 (10A) has been added and defines “current monthly income” to be the average monthly income received by debtor (or debtor and debtor’s spouse in a joint case) for the 6 month period prior to filing if the debtor files the schedule of current monthly income pursuant to § 521(a)(1)(B)(ii) or as determined by the court at a later date if the schedule is not filed. Monthly income includes that derived from all sources without regard to whether the income is taxable. An unanswered question, however, is whether the debtor is to use gross monthly income or net after taxes and social security. Also included in income is any amount paid by an entity other than the debtor (or debtor and debtor’s spouse in a joint case) on a regular basis for household expenses of the debtor or debtor’s dependents, but excludes Social Security payments, and payments to victims of terrorism. This means that if, for example, Grandma and Grandpa have been paying for the grandchildren’s school, piano lessons, clothing, or the like, that will be counted as income.
Monthly living expenses are the Internal Revenue Service’s (the “IRS”) amount under the National Standards and Local Standards plus the debtor’s actual expenses for the categories specified as Other Necessary Expenses for the area in which the debtor resides in effect on the date of the order for relief. Necessary Expenses include those expenses necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income. These necessary expenses must also be reasonable in amount. National Standards apply to food, housekeeping supplies, apparel and services, and personal care products and services. There is also a miscellaneous category for discretionary spending which is $100 for one person and $25 for each additional member in the taxpayer’s household. Local Standards apply to housing and transportation. Other Necessary Expenses include health and disability insurance as well as health savings accounts for the debtor and dependents. For more information on National Standards, Local Standards and Other Necessary Expenses (or if you happen to have insomnia) visit: www.irs.gov.
Monthly expenses do not include debt payments but do include expenses for protection from family violence to the extent reasonably necessary. If the latter expenses exist, the court is required to keep those expenses confidential. This will cause some problems if a determination of reasonableness is required.
The debtor may be allowed up to an additional 5% of the National Standards for food and clothing. If the increased amount is contested, the debtor would have the burden of showing that the increased amount is necessary and reasonable. The debtor is also allowed to deduct continuing actual expenses for the reasonable and necessary care and support of an elderly, chronically ill, or disabled household member or such member of the debtor’s immediate family who is unable to pay for such reasonable and necessary expenses (parents, grandparents, siblings, children and grandchildren of the debtor, debtor’s dependents, and the spouse of the debtor in a joint case who is not a dependent). Proof actual expenses and inability of the person to pay will raise issues regarding privacy of non-debtors.
The debtor, if eligible for chapter 13, may deduct the actual administrative expenses of a chapter 13 plan in the debtor’s judicial district up to a maximum of 10% of the projected chapter 13 plan payments.
The debtor may also deduct up to $1500 per child for public or private elementary and secondary expenses. The debtor is required to provide documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for under the National Standards, Local Standards or Other Necessary Expenses. Debtor may also include an allowance for housing and utilities in excess of that provided under Local Standards based on actual expenses for home energy costs if documentation of such expenses is provided and the same are demonstrated to be reasonable and necessary.
After deducting the foregoing standard and actual expenses, the debtor deducts an average monthly payment to service each secured debt. This amount is calculated by totaling all contractually due amounts for the 60 months post-filing plus any additional amounts required by a chapter 13 plan to cure arrearages to maintain the debtor’s primary residence, motor vehicle or other collateral necessary for the support of the debtor and dependents divided by 60. Issues exist when the payment term is less than 60 months for the collateral and whether to include escrows for insurance and taxes for mortgages.
Likewise, the debtor’s expenses for all priority claims (including priority child support and alimony) are calculated and divided by 60 and deducted.
The presumption of abuse arises when the debtor’s current monthly income less allowable expenses multiplied by 60 equals or exceeds the lesser of: 1) 25 percent of the debtor’s non-priority unsecured debt or $6000, whichever is greater, or 2) $10,000. In other words, if debtor’s monthly income minus allowed expenses is less than $10,000, one must calculate 25% of the non-priority unsecured debt and determine that amount and if it is less than $6000. If debtor’s monthly income minus allowed expenses multiplied by 60 is less than the greater of these two amounts, the presumption of abuse does not exist.
For example, Don Deadbeat’s monthly income less expenses is $200.00. He has $47,252.00 in non-priority unsecured debt. Two hundred times 60 gives him $12000 available to fund a plan. The presumption of abuse attaches. If on the other hand, his monthly income less expenses is $150.00, then there is only $9000 available. Twenty-five percent of the non-priority unsecured debt is $11,813.25. This is greater than $6000 so the higher figure is used. In this scenario, no presumption of abuse exists, and Don can blithely stay in chapter 7.
Assuming that presumption of abuse arises in a chapter 7, § 706 covers conversion. That section provides that, the debtor may seek and be allowed to convert from a chapter 7 to a case under 11, 12 or 13 if he has not previously converted to chapter 7 from the chapter to which he seeks to convert. § 706(b) allows any party in interest to request conversion from chapter 7 to one under chapter 11. Subsection (c) prohibits the court from converting the case to one under chapter 12 or chapter 13 unless the debtor requests or consents to conversion. Note that the case can only be converted to one under another chapter if the debtor is eligible to be a debtor under that chapter.
The abovementioned changes to §707(b) provide the impetus for the debtor to “consent” to conversion to a chapter 12 or 13 rather than have the case dismissed.
Even if the presumption of abuse under the means test is determined to be inapplicable (or is successfully rebutted by the debtor), § 707(b)(3) requires the court to consider whether the case was otherwise filed in bad faith or whether “the totality of the circumstances of the debtor’s financial situation (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtors financial situation demonstrates abuse.”
7. The Automatic Stay
In voluntary cases, an order for relief becomes effective upon filing of the petition thereby invoking the automatic stay provisions of § 362. The stay applies to the commencement or continuance of any action including the issuance or employment of process in a judicial, administrative or other action against the debtor that arose prior to the commencement of the bankruptcy; the enforcement of a pre-bankruptcy judgment against the debtor or property of the estate; any act to obtain possession of property of the estate or of property from the estate or exercise control over property of the estate; any act to create, perfect or enforce a lien against property of the estate to the extent that such lien secures a claim that arose pre-bankruptcy filing; any act to collect, access or recover against the debtor a claim that arose before the filing of the bankruptcy; setoff of any debt owing to the debtor that arose pre-bankruptcy; and the commencement or continuation of a proceeding before the United States Tax Court concerning liability for a taxable period of a corporate debtor that the bankruptcy court may determine or for a taxable period of an individual debtor that ended before the order for relief.
Certain actions are NOT stayed by the order for relief. Criminal proceedings against the debtor may be commenced or continued. A variety of domestic relation actions are not stayed and have been expanded under the BAPCPA amendments to include all of the following: paternity establishment, establishment of child support or alimony, custody and visitation, dissolution of marriage except insofar as the proceeding seeks to divide property that is property of the estate, and proceeding regarding domestic violence. Proceedings to collect child support or alimony from property that is not property of the estate is allowed as well as income assignment for child support or alimony. BAPCPA amended § 362 to allow most actions taken by the State Child Support Enforcement Division for collection of support including license revocation, tax refund intercepts, and reporting delinquent support to credit agencies.
Actions to perfect or maintain or continue the perfection of an interest in property to the extent that the trustee’s rights and powers are subject to perfection under the bankruptcy code or to the extent that such act is accomplished with the time frame permitted under the bankruptcy code are not subject to the stay. Actions by a lessor under a lease of nonresidential real property that terminated by expiration of the lease before the commencement or during the bankruptcy to obtain possession of such property are not stayed unless the debtor files a certification under penalty of perjury that circumstances exist under non-bankruptcy law allowing cure of the default and deposits with the clerk of the court sufficient money to pay the rent during the ensuing 30 days that the stay is in effect.
New § 362(b)(22) excludes form the stay eviction actions involving residential property where the lessor has obtained a pre-bankruptcy judgment for possession while new § 362(b)(23) allows the commencement of eviction proceedings from residential property if the property is endangered or illegal use of controlled substances on the property, but in this case the landlord must file a certification under penalty of perjury. BAPCPA amendments allow the withholding of income from debtor’s wages under an agreement for the benefit of a pension, profit sharing-plan, stock bonus or other plan establish under certain provisions of the Internal Revenue Code that is sponsored by the employer, affiliate, successor or predecessor the employer of the debtor the extent that the payments are solely related to a certain approved loans.
Another new exception to the automatic stay is for any act to enforce a lien against or security interest in real property where the court finds that the filing of the petition was part of a scheme to delay, hinder and defraud creditors involving either an attempt by the debtor to transfer all or part ownership or interest in such real property without consent of the secured party or court approval, or multiple bankruptcy filings involving the same property for a period of two years following the entry of said order provided that the debtor may move for relief on the bases of changed circumstances or other good cause. An amendment also provides that any act to enforce a lien against or security interest in real property where the debtor is ineligible to file because, in the preceding 180 days, the case was dismissed for willful failure to abide orders of the court or to appear before the court in proper prosecution of the case or the debtor requested and received a voluntary dismissal after a motion for relief from the stay had been filed. New provisions also address the issue of bad faith of repetitive filings whether filed or pending during the year preceding the current case if that prior case was dismissed. Presumptions of bad faith do not attach is the prior case was dismissed and the current case filed as a result of § 707(b), or if a prior chapter 7, 11, or 13 case was dismissed due to the debtor entering a repayment plan outside bankruptcy.
If the debtor filed two cases within the one year period following dismissal of a case within that time period, the automatic stay does not go into effect. There are provisions to allow the court to verify such on the request of a party in interest without hearing, but another party my move within 30 days of the filing to put the stay in place.