Tcl - the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 - February 2006 - Business Law
| Jurisdiction | Colorado,United States |
| Citation | Vol. 35 No. 2 Pg. 15 |
| Pages | 15 |
| Publication year | 2006 |
2006, February, Pg. 15. TCL - The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 - February 2006 - Business Law
February 2006
Vol. 35, No. 2 [Page 15]
Business Law
This column is sponsored by the CBA Business Law Section to apprise members of current information concerning substantive law. It focuses on business law topics for the Colorado practitioner, including, but not limited to, issues surrounding antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities.
Column Editors:
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097, dpsteig@sparkswillson.com; Rob Fogler of Kamlet Shepherd & Reichert LLP, Denver - (303) 825-4200, rfogler@ksrlaw.com.
About The Author:
This month's article was written by David C. Hoskins, Englewood, an associate of George T. Carlson & Associates, a firm whose sole practice for more than thirty years has been devoted solely to representing debtors in bankruptcy - (303) 789-1313, dchoskins@cobk.com.
This article discusses provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that affect consumer bankruptcy cases. It describes the Act's new means test, new requirements for debtors and counsel, and other measures intended to prevent the abuse of bankruptcy.
On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("2005 Act").(fn1) The 2005 Act modifies and adds to the Bankruptcy Reform Act of 1978 ("1978 Code") and, with some exceptions,(fn2) became effective October 17, 2005.(fn3) The purpose of the 2005 Act is "to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors."(fn4)
To accomplish its stated purpose, the 2005 Act makes dramatic changes to bankruptcy law. Practitioners representing debtors now must ensure the accuracy of financial information provided by debtors.(fn5) Debtors must obtain credit counseling before filing a petition and fulfill certain educational requirements prior to obtaining a discharge.(fn6) Debtors must wait longer before becoming eligible to obtain a subsequent discharge, whether in Chapter 7 or 13. The 2005 Act imposes new restrictions on the applicability of the automatic stay, targeting repeat filers and certain residential evictions. The 2005 Act dramatically reduces the types of debts that are dischargeable in a Chapter 13 case and virtually eliminates the "cram down" of automobile payments in Chapter 13 cases. The Act contains provisions that attempt to strengthen the requirements for reaffirmation of debts and redemption of collateral. The definition of "student loans" that may not be discharged in bankruptcy has been expanded. Finally, the 2005 Act includes a new "means test" that will be used to determine whether a petition filed under Chapter 7 will be considered presumptively abusive, compelling the debtor to file under Chapter 13.(fn7)
This article provides an overview of the 2005 Act. It focuses on areas of particular concern to debtors and practitioners representing debtors, including the new "means test" and prerequisites to discharge.
Pre-Bankruptcy Planning
Pre-bankruptcy planning and asset management, by which debtors seek to take advantage of exemptions from execution to protect assets before filing a bankruptcy case, was an acceptable practice under the 1978 Code.(fn8) Such planning generally was permitted, as long as any transfers were not fraudulent(fn9) and did not warrant a denial of discharge based on the debtor's intent to hinder, delay, or defraud creditors.(fn10)
Asset Conversion
Pre-bankruptcy asset conversion was permitted unless the conversion resulted in a fraudulent transfer.(fn11) A fraudulent transfer is a transfer made in an effort to "hinder, delay or defraud creditors."(fn12) A trustee may avoid fraudulent transfers to bring the transferred asset back into the bankruptcy estate for the benefit of creditors.(fn13) A transfer could be avoided if: (1) the debtor makes a transfer within one year before the date of filing the bankruptcy petition for inadequate consideration;(fn14) and (2) at a time that the debtor was insolvent, engaged in a business or transaction for which remaining assets were inadequate, or was made with intent to incur debts beyond an ability to repay.(fn15) The trustee may "look back" a longer period of time under the applicable state law to avoid a fraudulent transfer.(fn16)
Under the 1978 Code, absent extrinsic evidence of fraud, conversion of non-exempt assets to exempt assets before filing a bankruptcy case was not considered a per se fraudulent transfer.(fn17) Courts determined such matters on a case-by-case basis, and although the distinction between acceptable and unacceptable pre-bankruptcy transfers was not clear, certain types of conversion generally were allowed. Proceeds from the sale of non-exempt property could be used, for example, to pre-pay mortgage installments or pay down the mortgage principal on a home,(fn18) thus putting non-exempt assets to a use beneficial to the debtor's immediate and reasonable needs.
The 2005 Act introduced two new provisions intended to reduce the debtor's opportunity to engage in pre-bankruptcy planning and asset management by lengthening the time frame within which improper pre-bankruptcy asset conversions and other potential fraud may be challenged. The first provision requires scrutiny of any conversion of non-exempt property that adds to the value of the debtor's homestead(fn19) or burial plot(fn20) exemptions, within ten years of filing. To the extent such conversions are found to hinder, delay, or defraud creditors, the value of the allowable homestead or burial plot exemption will be reduced by an amount equal to the amount fraudulently converted.(fn21) The second provision subjects transfers into self-settled trusts to scrutiny for up to ten years; if made with intent to hinder, delay or defraud creditors, such transfers may be avoided by the trustee.(fn22)
Changing Domiciles
The Act contains a provision that limits pre-bankruptcy planning that is akin to "forum shopping." Because most exemptions vary according to state law, a debtor was free, under the 1978 Code, to move to a jurisdiction where available exemptions protected more assets than the debtor's home state. For example, Colorado provides a $45,000 homestead exemption,(fn23) and states retaining the federal exemption scheme limit a homestead exemption to $18,450.(fn24) A non-Colorado debtor with $40,000 equity in a home could move to Colorado, purchase a home with that $40,000, and claim the homestead exemption. On the filing of a bankruptcy petition in Colorado, the debtor would have $40,000 equity in a home protected by the homestead exemption. The 1978 Code did not specifically address such tactics; as long as the debtor resided in the state for 180 days before filing, the exemption would not have been objectionable under the 1978 Code.(fn25)
However, under the 2005 Act, such a move would prohibit the debtor from claiming exemptions under the law of the new domicile state. New provisions bar the debtor from using the new state's exemptions for 730 days (two years).(fn26) Thus, in Colorado, for example, where the legislature has opted to apply its own statutory exemptions to bankruptcies filed in this state,(fn27) a debtor who filed a bankruptcy petition after being domiciled in Colorado for 730 days or more(fn28) may claim an exemption for, among other things, a homestead of $45,000.(fn29)
Means Test
Monthly Surplus
Presumption of Abuse
Less than $100
No
$100-$149
Presumption, unless debt exceeds $24,000
$150-$166.66
Presumption, unless debt exceeds $34,000
More than $166.66
Presumption
However, if the debtor's domicile was not in Colorado for the previous two years, the applicable exemptions will be either those of the state of the debtor's prior domicile or the exemptions provided by the Act.(fn30) The exemptions of the state of previous domicile could be used if the debtor's domicile was located in that state for at least 180 days prior to the 730-day period immediately before filing. This is the case even when a debtor spent more time, recently, in the new state.(fn31) The 2005 Act does not indicate whether the prior state's exemptions may be used if, by their own terms, they are not available a non-resident.
Credit Counseling and Financial Management
The 2005 Act establishes credit counseling as a prerequisite to filing a bankruptcy petition and the completion of a financial management class as a prerequisite to obtaining a discharge. An individual debtor must receive an individual or group briefing from an approved, nonprofit budget and credit counseling agency within 180 days before filing for relief.(fn32) The briefing must explain available credit counseling programs and assist the debtor in performing a budget analysis.(fn33) In the event of an emergency filing and the unavailability of the prescribed credit counseling services, the 2005 Act allows an individual to certify that services were requested and denied, and then to receive such services within thirty days after filing.(fn34) The 2005 Act excuses debtors who are located in areas where the U.S. Trustee has determined that such services are not available from obtaining credit counseling.(fn35)
Prior to the entry of a discharge order,(fn36) the debtor must complete an approved instructional course designed to assist debtors in...
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