A Hitchhiker's Guide to Consumer Bankruptcy Reform
| Jurisdiction | United States,Federal |
| Citation | Vol. 75 No. 10 Pg. 20-28 |
| Pages | 20-28 |
| Publication year | 2006 |
75 J. Kan. Bar Assn. 10, 20-28 (2006). A Hitchhiker's Guide to Consumer Bankruptcy Reform
75 J. Kan. Bar Assn. 10, 20-28 (2006)
I. Introduction
Have you ever given legal advice to an individual about the effect of an ex-spouse's bankruptcy? Have you ever given advice to an individual named as a defendant to a preference action commenced by a bankruptcy trustee? Have you ever explained the effect of the automatic stay to individuals who just received notice that a bankruptcy petition has been filed by someone who owes them money? If you answered "yes" to any of these questions, you may be a "Debt Relief Agency." This is because the phrase "Debt Relief Agency," like many other bankruptcy terms and provisions found in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), is a misnomer and ready trap set to spring on those unfamiliar with bankruptcy reform.(fn1) Reader be warned - ignore BAPCPA and expose yourself to professional liability.
Because no writer could reasonably hope to cover every aspect and interpretation of consumer bankruptcy practice after BAPCPA without composing a treatise, this article is geared toward the occasional bankruptcy practitioner and aims to debunk prevalent myths about bankruptcy reform while providing the reader with a basic understanding of changes in consumer bankruptcy practice after the implementation of BAPCPA. This article is not intended as a comprehensive review and should not be used as a substitute for reading and understanding the amended provisions of the Bankruptcy Code. Section II of this article reviews issues attorneys should consider before filing a bankruptcy petition. Section III addresses changes in case administration and discharge. Section IV addresses changes governing the treatment of Domestic Support Obligations. Finally, Section V addresses the new provisions governing lawyer liability.
It may be beneficial to begin with a very general review of the organizational structure of the Bankruptcy Code, which is found in Title 11 of the U.S. Code, as it applies to the individual consumer. Individual consumer debtors most often file cases under Chapters 7 or 13, but may also file under Chapter 11 and, under certain circumstances, Chapter 12. This article will focus primarily on the changes in consumer practice under Chapters 7 and 13. Under Chapter 7, most debts are discharged after a debtor's nonexempt assets are liquidated and the resulting proceeds are distributed by the trustee according to the priority scheme in the Bankruptcy Code. Chapter 13 allows individuals with regular income who fall within certain debt limits to keep property, which would otherwise be liquidated while making monthly payments toward their debts over a three-to-five-year period. Upon completing their Chapter 13 payments, most individuals qualify to receive a discharge of that portion of their prepetition unsecured debts, with certain exceptions, which was not repaid during the three-to-five-year period. Individuals sometimes opt to file under Chapter 11, traditionally a vehicle for business reorganization, when they have considerable income or assets or they otherwise have too much debt to qualify for Chapter 13. Finally, individual farmers may qualify to proceed under Chapter 12, which allows the individual to reorganize debts while continuing to operate the farming business.
II. Prepetition Considerations
While bankruptcy can be a useful tool for individuals coping with financial distress, it does not solve all problems. Therefore, before filing a case for your client, it is of paramount importance to understand what obligations your client will be left with once the case is completed. When contemplating filing a bankruptcy for a client, attorneys should consider the following issues.
A. Eligibility
An individual's eligibility for discharge is the first important change brought by BAPCPA. Under Chapter 7, individuals generally are entitled to discharge their debts unless they previously received discharge under Chapters 7 or 11 in a case commenced within the eight years preceding the date of the current petition.(fn2) Prior to BAPCPA, the time period was six years. However, individuals who previously received a discharge under Chapters 12 or 13 must still wait, with certain exceptions, six years after receiving the discharge before becoming eligible to receive discharge under Chapter 7.(fn3) Under Chapter 13, prior to BAPCPA, debtors were entitled to proceed to discharge regardless of whether they had received discharge in a previous case. Under BAPCPA, however, individuals generally are entitled to discharge their debts only if they did not receive a discharge:(fn4)
(1) In a case filed under Chapter 7, 11, or 12 . . . during the four-year period preceding the date of the order for relief under this chapter, or
(2) In a case filed under Chapter 13 . . . during the two-year period preceding the date of such order.(fn5)
1. Prefiling credit counseling requirement
Attorneys who take on new debtor clients should immediately familiarize themselves with the prepetition credit counseling requirements imposed under BAPCPA. Under § 109(h)(1) and § 521(b)(1), a debtor must participate in a prepetition credit counseling session from an approved credit counseling agency and file a certificate of completion with the court at the time of the bankruptcy filing.
If a debtor cannot obtain credit counseling before filing, the debtor must meet the requirements contained in § 109(h)(3)(A). Under that section, a debtor must file a certificate that:
(1) describes exigent circumstances that merit a waiver of the counseling requirement;
(2) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the five-day period beginning on the date on which the debtor made that request; and
(3) is satisfactory to the court.
Without the certificate of credit counseling or a showing of exigent circumstances under § 109(h)(3)(A) sufficient to excuse compliance with § 109(h)(1), an individual may not be a debtor under an chapter.
B. Dischargeability
The dischargeability of certain debts may weigh heavily in favor of, or against, seeking relief under Chapters 7 or 13.
1. Generally
Consumer debts aggregating more than $500 owed to a single creditor for luxury goods purchased on or within 90 days before the order for relief is filed are now presumed to be nondischargeable.(fn6) Similarly, cash advances that are extensions of consumer credit under an open-end credit plan aggregating more that $750 incurred on or within 70 days prior to the order for relief are now presumed to be nondischargeable.(fn7) While debts incurred to pay nondischargeable taxes owed to the United States were previously nondischargeable, debts incurred to pay nondischargeable taxes owed to a governmental unit other than the United States have been added to the list of nondischargeable debts.(fn8)
2. Chapter 7
The substance of discharge under Chapter 7 has changed very little. One of the most notable changes relates to property settlement obligations, which are discussed more fully in Section IV. For now, it is important to note that the "ability to pay test" was removed from § 523(a)(15). Because the court will no longer balance the relative abilities of ex-spouses to pay those obligations, property settlement obligations are no longer dischargeable in Chapter 7 under any circumstances.
3. Chapter 13
Significant change to the substance of discharge under Chapter 13 has occurred. Prior to BAPCPA, discharge under Chapter 13 was often identified as the "super-discharge" because of its broad scope. The "super-discharge" has found its Kryptonite in BAPCPA. While some priority taxes are still technically dischargeable through the consummation of a Chapter 13 plan, tax obligations "required to be collected or withheld and for which the debtor was liable in whatever capacity" are no longer dischargeable.(fn9) In addition, whereas an individual could previously discharge nonpriority taxes under Chapter 13, if an individual fails to file a return, files a return within two years of filing bankruptcy, files a false return, or willfully evades payment of taxes, the resulting tax obligations are no longer dischargeable regardless of their priority status.(fn10)
Under the "super-discharge," debtors were entitled to discharge certain debts related to frauds they committed. Chapter 13 is no longer a means for discharging debts related to fraud. Whether a debtor's acts of fraud related to actions in a fiduciary capacity, embezzlement, larceny, or whether they were related to obtaining credit under false pretenses, such debts are not dischargeable in Chapter 13.(fn11) Debtors can also no longer discharge an obligation in Chapter 13 if they fail to notify creditors of the filing of the bankruptcy in time to allow that creditor to assert a claim.(fn12) Finally, an individual can no longer discharge under Chapter 13 debts resulting from "willful or malicious" injury by the debtor that causes...
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