2005: a Consumer Bankruptcy Odyssey

• Publication year: 2022

39 Creighton L. Rev. 225. 2005: A CONSUMER BANKRUPTCY ODYSSEY

Creighton Law Review

Vol. 39

GARY NEUSTADTER(fn*)

INTRODUCTION

"I'm sorry, Dave, but . . . 'When the crew are dead or incapacitated, the onboard computer must assume control' . . . I must, therefore, override your authority now since you are not in any condition to exercise it intelligently." HAL(fn1)

Congress has concluded that the voyage of consumer bankruptcy in the United States is off course and that some of its crew - consumer bankruptcy attorneys and bankruptcy judges - no longer can be completely trusted at the helm. Following years of drama reminiscent of the 1914 silent film serial "Perils of Pauline," we now have a midcourse correction: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("the Act").(fn2) Save perhaps the 1938 introduc-tion of Chapter XIII, the correction presents the most far reaching changes in consumer bankruptcy law since the adoption of the Bankruptcy Act of 1898. These changes come little more than a decade after Congress established a National Bankruptcy Review Commission (the second such commission in twenty-five years) to review, improve, and update the Bankruptcy Code "in ways which do not disturb the fundamental tenets and balance of current law."(fn3) A House Report accompanying the legislation that established the second Commission pronounced Congress "generally satisfied with the basic framework established in the current Bankruptcy Code."(fn4)

The Act ignores most of the Commission's consumer bankruptcy recommendations.(fn5) Fueled by concern about dramatic increases in Chapter 7 filing rates,(fn6) the Act accepts instead the premise, advanced persistently and forcefully by and on behalf of extenders of consumer credit, that too many consumer debtors with the ability to repay meaningful amounts of non-priority unsecured debt have been seeking Chapter 7 relief.(fn7) Advocates of reform have attributed much of this alleged abuse to consumer bankruptcy law that they characterize as lenient, to an alleged decline in the moral shame and social stigma associated with bankruptcy, and to increased attorney advertising.(fn8) This claim of abuse, together with concomitant suggestions for restricted access to the Chapter 7 discharge, is a familiar refrain, having been advanced several times during the twentieth century, most notably in the 1930s, in the 1960s, and soon after the 1979 effective date of the Bankruptcy Code.(fn9) The claim also has deeper historical roots. As Professor Bruce Mann has argued, from at least the beginning of the eighteenth century "inability to pay was [perceived as] a moral failure, not a business risk."(fn10)

"Means testing" is a cornerstone of the perceived solution. Means testing, a formula applied to the imputed income, imputed expenses, and actual debt of some individuals who file, or might otherwise file, a Chapter 7 petition, can deny Chapter 7 relief to some consumer debtors presumed able to pay a defined portion of their non-priority unsecured debt over a five-year period.(fn11) Although means testing will affect only a small percentage of individual debtors contemplating Chapter 7, it has nonetheless commanded the lion's share of debate, overshadowing other significant components of the reform. I discuss several of these other components of consumer bankruptcy reform in this Article. Part I considers the purposes, contours, and possible benefits, costs, and consequences of two new conditions to Chapter 7 and Chapter 13 relief for individual debtors: receipt by the debtor of a briefing and related budget analysis by a nonprofit budget and credit counseling agency as a condition to the filing of a petition, and completion of an instructional course in personal financial management as a condition to discharge. Part II explains means testing and dismissal of consumer Chapter 7 cases for abuse, in part to suggest both the transitory and enduring flaws of means testing and in part to provide important context for the remaining portions of the Article. Part III considers provisions requiring that consumer Chapter 7 debtors furnish what may often be superfluous additional information and computations in support of a petition. Part IV considers extensive new rules governing the behavior of consumer bankruptcy attorneys. It includes discussion of rules restricting the kind of advice that an attorney may give to a client and mandating specific content in advertising, rules that raise significant First Amendment issues. It also includes discussion of rules imposing new due diligence obligations upon consumer bankruptcy attorneys and authorizing sanctions for violation of those obligations, rules that have raised significant concerns about the viability of consumer bankruptcy practice and access of debtors to legal representation.

Together with significant reform of Chapter 13, which I do not discuss, this package of reforms - - counseling, instruction, means testing, documentation, and attorney regulation - - constitutes the core of the Act's consumer bankruptcy design. Its architects have clearly intended through them to constrict the availability, feasibility, and de-sirability of Chapter 7 relief for individuals. The mid-course correction occurred on October 17, 2005.(fn12)

I. PRE-PETITION BRIEFING FROM A CREDIT COUNSELING AGENCY AND POST-PETITION INSTRUCTION IN PERSONAL FINANCIAL MANAGEMENT

The Act introduces two new conditions to bankruptcy relief for an individual debtor. First, an individual may not file a petition without the benefit of a "briefing" and related budget analysis from an approved nonprofit budget and credit counseling agency ("counseling agency" or "agency") during the 180-day period preceding the date of filing a petition.(fn13) To assure compliance, the Act requires the debtor to file both a certificate from an approved counseling agency stating that the debtor received the briefing and a copy of any debt repayment plan developed through the agency.(fn14) Second, the Act denies an individual debtor a Chapter 7 or Chapter 13 discharge absent post-petition completion of an approved instructional course in personal financial management.(fn15) The Act does not exempt sole proprietors (or other individuals whose debts are not primarily consumer debts) from either of the two new requirements even though experience in operating a business likely makes either credit counseling or instruction in personal financial management superfluous for many such debtors. Likewise, the Act does not exempt others whose education, training, or experience will make a briefing and budget analysis or instruction in financial management superfluous, but the bright line rule avoids both the burden of administering an exemption and its uneven application.

The Act charges the United States trustee(fn16) with the task of evaluating, approving, and annually re-evaluating counseling agencies and instructional courses, and requires that bankruptcy court clerks maintain a publicly available list of approved agencies and instruction providers.(fn17) The United States Trustee Program announced the beginning of the approval process and posted the application forms and related materials on June 30, 2005.(fn18) It began accepting applications on July 5, 2005.(fn19) The Act exempts from the briefing or education requirements those debtors filing in districts in which the United States trustee determines that the approved counseling agencies or instructional courses, as the case may be, cannot adequately serve all who would otherwise be required to obtain a briefing or financial management instruction.(fn20) The Act also exempts debtors from a pre-petition briefing and budget analysis upon submission to the court of a satisfactory certification of both exigent circumstances and inability to obtain the briefing and budget analysis within five days of requesting the counseling.(fn21)

The justifications for and implications of these two new conditions to bankruptcy relief warrant extended discussion.

A. PRE-PETITION BRIEFING AND BUDGET ANALYSIS

For individuals seeking bankruptcy relief, the Act requires an individual or group "briefing" with an approved counseling agency within the 180-day period preceding the date of the filing of the petition.(fn22) The briefing, which may be conducted in person, by telephone, or over the Internet, must outline opportunities for credit counseling and assist an individual in performing a related budget analysis.(fn23) In a complementary provision, the Act amplifies the written notice that the clerk of the bankruptcy court must provide to an individual whose debts are primarily consumer debts before that individual commences a case. The notice must briefly describe the types of services available from counseling agencies in addition to briefly describing Chapters 7, 11, 12, and 13 and the purposes, benefits, and costs of each.(fn24) The Act also requires that consumer bankruptcy attorneys and bankruptcy petition preparers furnish that notice to their clients.(fn25)

The pre-petition briefing and budget analysis requirement is one product of congressional concern about the increase in individual bankruptcy filings. Some may view the requirement as a wasteful detour deliberately designed to discourage bankruptcy even by those with no other realistic alternative. If not that, the requirement must reflect either...