SC Lawyer, July 2005, #1. You say you want a revolution: the Bankruptcy Reform Act and its effect on consumer debtors in South Carolina.

• Author: By Helen Elizabeth Burris, Jody Bedenbaugh and George B. Cauthen

South Carolina Lawyer

2005.

SC Lawyer, July 2005, #1.

You say you want a revolution: the Bankruptcy Reform Act and its effect on consumer debtors in South Carolina

South Carolina LawyerJuly 2005You say you want a revolution: the Bankruptcy Reform Act and its effect on consumer debtors in South CarolinaBy Helen Elizabeth Burris, Jody Bedenbaugh and George B. CauthenOn April 20, 2005, President Bush signed into law the bankruptcy reform bill, officially titled the "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" (hereinafter "the Reform Act" or "the Act"), S. 256, 109th Cong. (2005), thereby enacting sweeping changes to the bankruptcy code, 11 U.S.C. § 101 et seq. The Act provides that the amendments are effective 180 days after enactment, except as otherwise specifically provided in the Act. This article discusses the impact of the Act on consumer debtors in South Carolina by surveying the current status of consumer bankruptcy in our state and discussing particular aspects of the Reform Act aimed at preventing abuse and increasing accountability among consumer debtors and their attorneys.

1. Can't buy me love: the state of consumer bankruptcies in South Carolina

   When South Carolinians think of bankruptcy these days, they likely think of the well-publicized Carolina Investors or Homegold cases and the unfortunate investors in those businesses. Those cases, however, are a very small part of the bankruptcy court system and practice in our state, and those business cases certainly are not a fair representation of what the bankruptcy court in South Carolina is all about. In fact, Chapter 11 business reorganization cases comprised less than one percent of the bankruptcy cases filed in South Carolina in 2004, according to clerk of court's office. Simply put, bankruptcy in South Carolina is largely "about" financially over-extended consumers.

   Consumer debtors seek bankruptcy protection under either Chapter 7 or Chapter 13 of the bankruptcy code. Nationally, most choose Chapter 7 - sometimes referred to as "straight liquidation" - in which unsecured creditors rarely receive any money, and a debtor is usually discharged from those debts without repayment. South Carolina does not follow this national trend. As discussed in more detail below, in our state, a majority of consumer cases are filed under Chapter 13 repayment plans. Chapter 13 allows individuals to reorganize their debts and selectively retain essential property while repaying creditors over time. Often Chapter 13 is necessary for individuals who have lost a job or experienced a costly family illness and can afford the basics such as a house and transportation, but can no longer service the debt load incurred prior to the setback. Experience tells us that most Chapter 13 debtors file bankruptcy to save a house from imminent foreclosure, and they purport to repay the amounts of the mortgage delinquency through the Chapter 13 plan while paying a compromised amount to unsecured creditors (anywhere from one percent to 100 percent of the debt owed, depending on equity in property and income level).

   The remaining chapters of the bankruptcy code, namely Chapters 9 (applicable to certain governmental units), 11 (reorganization) and 12 (family farmers), are either not applicable to or are infrequently utilized by consumers and thus are beyond the scope of this article, though these chapter do not remain unscathed by the Reform Act. In addition, the Reform Act adds a new chapter, Chapter 15, which applies to certain cross-border and ancillary cases. See S. 256 § 801.

   For a number of years, the U.S. Congress has considered various bankruptcy reform initiatives to revolutionize the bankruptcy system nationwide and to encourage consumer debtors to seek repayment of debt through Chapter 13 rather than avoiding debts through abuse of Chapter 7 and the bankruptcy system in general. Whether the reported abuse exists on a large scale in South Carolina is questionable. In 2004 there were approximately 15,400 bankruptcy cases filed in South Carolina - or 9.8 bankruptcy cases filed per 1000 households in the state. See Calendar Year 2004 New Case Filings by District and County, available at www.scb.uscourts.gov/courtInfo/reports.htm. Here, 57 percent of households that filed for bankruptcy protection in 2004 chose a Chapter 13 repayment plan compared to a national average of only 28 percent. While many of these Chapter 13 repayment plans are never completed, these figures do seem to indicate that South Carolina was on the right track before the Act. Regardless, the Act is here and will undoubtedly revolutionize consumer bankruptcies in South Carolina.

2. You really got a hold on me: Reform Act tightens the screws on consumer debtors and their lawyers

   The sweeping changes of the Act are too numerous to mention in a short article, but highlights regarding its effects on consumer cases are included below. Note that this article is not exhaustive - there are additional changes to consumer bankruptcy law, and some non-bankruptcy law, in the Act.

   1. Audits of bankruptcy schedules and statements

      A debtor's schedules and statement of financial affairs are official forms that a debtor must complete showing his assets, liabilities, sources of income, transfers of property, lawsuits and other financial information. While a debtor's schedules and statements have always been signed by the debtor under penalty of perjury, the Reform Act requires the U.S. Trustee's office to audit at least one of every 250 cases for accuracy and to audit the schedules and statements that vary from statistical norms to further raise accountability. S. 256 § 603.

   2. Attorneys may be held responsible for errors and omissions

      The Act represents a significant shift in responsibility for ensuring the accuracy of the schedules and statements in Chapter 7 cases, providing that debtor's counsel may be liable for certain mistakes in the schedules. S. 256 § 102(a).

   3. Pre-filing credit counseling

      The Reform Act aims to better educate consumers seeking bankruptcy protection and requires them to consider non-bankruptcy options first. Specifically, the Act provides that no consumer debtor may file under any chapter of the bankruptcy code unless, within 180 days prior to filing the bankruptcy petition, the debtor has received an individual or group briefing outlining credit counseling opportunities and aimed toward assisting a debtor in performing a personal budget analysis. S. 256 § 106(a) (revising 11 U.S.C. § 109). While on the surface this seems like a wonderful idea, implementation and regulation may prove far more troublesome due to time constraints and costs. The Act provides exigent circumstances or the unavailability of such services merit a waiver of the credit counseling requirement until after filing, but what will constitute "exigent circumstances" and render services "unavailable" remains to be determined in future litigation. Id.

      Further, the Reform Act requires credit counselors to be registered with and regulated by the U.S. Trustee's Office and provides guidelines and penalties for non-compliance. S. 256 § 322. In South Carolina, we will have to somehow ensure that unscrupulous entrepreneurs are not allowed to prey on helpless individuals during this process, depriving them of precious time, money and proper advice. With today's technology it is likely that credit counseling may be offered via the internet and over the telephone, and the possibilities for abuse from a business with no employees or office in South Carolina appear to be endless.

   4. Limits on debtors' ability to take advantage of exemption planning

      The Reform Act has provisions aimed at leveling the bankruptcy playing field between states by limiting the amount a debtor can claim as an exemption in a residence to protect that property from creditors. Currently, some states have outrageously high exemption amounts, while the amounts in other states may be relatively small. The bankruptcy code has always allowed each state to decide whether it will take standard federal exemptions or those found in the state laws, and South Carolina, in 1981, has chosen the latter. The Reform Act will limit homestead exemptions nationwide to a maximum of $125,000, effective immediately upon passage. S. 256 § 307 (revising 11 U.S.C. § 522). This generous limit will not affect long-time South Carolina debtors - as South Carolina's homestead exemption of $5000 established by the General Assembly does not even approach this amount. The Act provides not only a monetary limit on the homestead exemption but also provides that the appropriate exemption is governed by where the debtor has been domiciled for the 730 days prior to filing the petition. Before the Act, the bankruptcy code only looked back 180 days before the filing and therefore allowed debtors more options in moving to a state with more generous exemptions to shield money from creditors in bankruptcy. S. 256 § 307 (amending 11 U.S.C. § 522). This provision will also require bankruptcy attorneys to routinely research and recommend the application of exemptions from other states to cases they file in South Carolina for clients who have recently moved to the state.

   5. The means test to prove eligibility for Chapter 7 relief and the presumption of abuse

      The Act makes it more difficult for a consumer debtor to discharge unsecured debts without some repayment. The new "means test" of the Act represents a significant hurdle to eligibility for Chapter 7 relief. The means test requires a showing by the debtor of eligibility for filing Chapter 7 in which the debtor's income and reasonable expenses are compared to certain median income standards and budget guidelines. S. 256 § 102(a) (amending 11 U.S.C. § 707). A similar analysis is already performed by trustees in South Carolina, and the diligence of those trustees under the guidance of the U.S. Trustee's Office has resulted in a rate of Chapter 13 filings in South Carolina that almost doubles the national average. In other words, in South Carolina it is already relatively difficult to get a Chapter 7 discharge if the debtor has a substantial ability to pay creditors.

      To that same end, the new Act presumes abuse by debtors filing a Chapter 7 case under certain circumstances. S. 256 § 102. The presumption is governed by a formula and applies to Chapter 7 debtors with income levels (net certain expenses and payments) exceeding a specified dollar amount or percentage of non-priority unsecured claims. Id. The presumption can be rebutted if the debtor makes a showing of "special circumstances," such as a serious medical condition, and qualifies under the formula, as re-applied considering the special circumstances. Id. If the presumption is not rebutted, the court may dismiss the case or, with the debtor's consent, convert it to a case under Chapter 11 or 13.

   6. Changes to Chapter 13 repayment plans and the application of the means test to Chapter 13

      Many analysts believe that the Reform Act will increase Chapter 13 filings and reduce Chapter 7s. As most debtors in South Carolina already choose Chapter 13, it remains to be seen if that will be true in our state. The Act includes provisions that make it more difficult for Chapter 13 debtors as well. It requires the application of means testing and, if a debtor's income is higher than the median income for the state, the debtor's plan may have to run for five years to maximize repayment to creditors. S. 256 § 318. Currently, bankruptcy law only requires a three-year repayment plan that can be extended to five years "for cause."

      Also, the Act will no longer allow "cram down" on vehicles in Chapter 13 cases if the vehicles were obtained within 910 days of filing. S. 256 § 306 (amending 11 U.S.C. 1325). This means that repayment of the debt secured by a purchase money security interest in a vehicle cannot be limited to the market value of the car, as is currently the law and practice. This fact may discourage many debtors from filing Chapter 13 bankruptcy cases and will probably result in the repossession of more vehicles that debtors cannot afford absent this option. Alternatively, this change may have the effect of Chapter 7 debtors obtaining an expensive car prior to filing.

   7. Additional notable consumer bankruptcy changes Changes to bankruptcy law to protect creditors with claims arising from child support or alimony: The Act places domestic support obligations - alimony and child support - as a first priority for payment in Chapter 7, 11 and 13. S. 256 § 212 (amending 11 U.S.C. § 507(a)). In a Chapter 13 proceeding, a debtor may not receive a discharge unless the debtor certified that all amounts due for alimony and support have been fully paid. S. 256 § 213 (amending various sections of Title 11). Further, the changes to the law exempt from automatic stay certain child support and alimony collection actions. S. 256 § 214 (amending 11 U.S.C. § 362). Similar provisions are already in place in South Carolina. Changes in pre-filing notice: The Act changes the pre-filing notice mailed out to debtors by the clerk of court to include statements on credit counseling and warnings about fraud. S. 256 § 104 (amending 11 U.S.C. § 342(b)). Extends time between discharges: Expands the time that must pass between chapter 7 discharges from six to eight years. S. 256 § 312 (amending 11 U.S.C. § 727). Pro se cases: Adds additional restrictions for non-lawyer bankruptcy petition preparers. S. 256 § 221 (amending 11 U.S.C. § 110). Repeat filers: Adds a presumption that a bankruptcy filing is not filed in good faith (which may prohibit discharge) if another case was filed within one year prior and limits the application of the automatic stay of collection actions with respect to repeat filers. S. 256 § 302 (amending 11 U.S.C. § 362). Account numbers: Requires that if the debtor received two creditor communications within 90 days prior to filing that contained the account number for a debt, then that account number must appear on the debtor's schedules and matrix. S. 256 § 315 (amending 11 U.S.C. § 342). Creditor notice: A creditor may designate a central address for bankruptcy notice. If the debtor/court fails to comply with the creditor's instructions as to address and notice, then creditor is considered to be without notice of the bankruptcy. S. 256 § 315(a) (amending 11 U.S.C. § 342). Further, no monetary penalty for a violation of the stay may be found against the creditor due to lack of using the proper address for notice. Id. Representation at 341 meeting of creditors: An agent of a creditor may represent that party at first meetings of creditors, and that agent may even represent multiple creditors at section 341 meetings in bankruptcy court even if that agent is not an attorney. S. 256 § 413 (amending 11 U.S.C. § 341). Stay lifted with prejudice as to real property: If the stay is lifted as to real property, it is with prejudice for two years even if the debtor refiles, with some leeway to the court to reinstate upon change of circumstances. S. 256 § 303 (amending 11 U.S.C. § 362).

3. Conclusion: we can work it out

   The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 revolutionizes the bankruptcy practice in our state and will touch the lives of every consumer debtor here as it is interpreted and applied in the months and years to come. The bankruptcy courts and bankruptcy bar in South Carolina will be required to pull together too as we work to learn, interpret and implement this nationwide reform as efficiently and effectively as possible for the good of consumer debtors and their creditors in our state.

   Ms. Burris is a Standing Chapter 13 Trustee located in Greenville. Mr. Cauthen is a partner in the Columbia office of Nelson, Mullins, Riley & Scarborough, LLP, where he chairs the firm's Bankruptcy Practice Group and practices in the area of bankruptcy law. Mr. Bedenbaugh is an associate in the Columbia office of Nelson Mullins Riley & Scarborough, LLP, where he practices in the areas of banking, finance and bankruptcy law. The comments of the authors do not reflect any position of the U.S. Trustee, Nelson Mullins Riley & Scarborough, LLP or any of its clients.

   Copyright (c) 2005 by the South Carolina Bar. All rights reserved. No part of this publication may be reproduced without written permission.