Vermont Bar Journal
Spring 2007 - #8.
Bankruptcy Reform, Part II: Chicken Little Still Looking Skyward
THE VERMONT BAR JOURNAL SPRING 2007
Bankruptcy Reform, Part II: Chicken Little Still Looking Skyward .by Jennifer Emens-Butler, Esq.
Following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), I wrote an article entitled "Bankruptcy Reform--Gather `Round Children - Yes, the Sky is Falling" for the spring 2005 issue of the Journal. The article focused on the hidden and not so hidden pitfalls attorneys and their clients would face in dealing with BAPCPA and its aftermath. As with all writings at the time, scholarly as they may have been, the best adjective that could be used to describe mine, as any other, would be "whiney." Judicial decisions after the effective date could also be similarly described. With over a year after the effective date under our belts, most courts and scholars have made the transition from "whine" to "deal." The attorney liability dangers are still very real and the cautions set forth in my prior article still apply. I will explore the interpretive decisions regarding the attorney liability provisions further in this article. But the rumors of the death of bankruptcy and the bankruptcy attorney may have been exaggerated--may have been. As bankruptcy attorneys ponder their potential upcoming demise, we continue to apply the very real changes to the law that BAPCPA brought about and speculate about the future in our newly found spare time.
Debt Relief Agencies
Clearly the most frightening aspect of BAPCPA to bankruptcy attorneys is their new found vocation as "Debt Relief Agencies" who provide advice to "assisted persons."(fn1) Under BAPCPA, Debt Relief Agencies are required to give scripted legal advice and time sensitive disclosures to each assisted person seeking any advice as to bankruptcy matters. The directives and disclosures take up several sections of the new code and many pages.(fn2) The scripted legal advice includes giving the assisted person the directive not to incur any more debt or pay anyone, including bankruptcy attorneys. This prohibition may indeed be prohibitive to some, such as the case where obtaining a car loan prior to a Chapter 13 filing in order to obtain a reliable vehicle for the work commute may indeed be the best advice for the client.
Just after BAPCPA became effective (within hours), the Bankruptcy Court for the Middle District of Georgia took it upon itself to declare unilaterally that bankruptcy attorneys are not Debt Relief Agencies as defined by BAPCPA. In the decision, entitled In Re Attorneys at Law and Debt Relief Agencies, Judge Davis determined that attorneys did not specifically fit within the definition of Debt Relief Agencies as they were not listed therein and defined.(fn3) The court reasoned that the blanket prohibitions, disclosures and scripts could not possibly apply to highly skilled legal professionals. On appeal the District Court agreed with the United States Trustee that there was no case or controversy before the court and reversed for lack of standing.(fn4)
In July of 2006, a Texas attorney, Susan Hersh, filed an action in District Court seeking a declaratory judgment that BAPCPA does not apply to attorneys and that its provisions are unconstitutional. The court found that the attorney had standing because the arguable suppression of speech going forward conferred standing upon her.(fn5) The Texas court did not buy the Georgia rationalization that attorneys are not Debt Relief Agencies because (a) BAPCPA did not specifically exclude attorneys, (b) the section references legal advice, and (c) the House Report mentioned "attorney" 164 times. More importantly, however, the Texas court did address the issue of constitutionality.
The Texas court found the scripted legal advice for Debt Relief Agencies to be overbroad and therefore unconstitutional. The section requiring Debt Relief Agencies to advise assisted persons not to take on additional debt was found to prevent lawyers from giving good counsel and to prevent clients from taking lawful actions. The court found that the requirements also go beyond the stated purpose of BAPCPA to remedy abuse of the system. A near mirror decision, Olsen v. Gonzales, similarly held on all counts and further found that, despite the foregoing, the required advertising disclosures are constitutional since attorneys are permitted to provide "substantially similar" statements.(fn6)
In light of the Georgia, Hersh, and Olsen decisions, as well as a few other decisions,(fn7) bankruptcy attorneys are facing the reality that they are indeed Debt Relief Agencies(fn8) and that the glimmer of hope streaming from Georgia has faded into nothingness. Fortunately, the most grossly offensive Debt Relief Agency provision--that prohibiting the advice to incur additional debt--has been subject to very real scrutiny. Although decisions are few, they are consistently finding that at least that portion of the statute may be unconstitutional.
While the post-BAPCPA era is a far cry from "business as usual," in terms of exposure for bankruptcy attorneys, the real, rather than theoretical, effect of the "Debt Relief Agency" provisions has so far been non-existent.(fn9) Even though attorneys are understandably cautious and generally compliant with the Debt Relief Agency provisions, the question remains as to the enforceability of the sections. The party with express standing under those provisions is the debtor, with enforcement powers conferred upon the state and federal courts to enjoin or sanction.(fn10) The specific remedy in the Bankruptcy Code is to void the contract, with the presumed return of fees, and for fees or other damages. If a violation were to occur, especially concerning the requirement to advise against incurring more debt, it is difficult to conceive of a scenario where a debtor would sue, and if so, what the damages could possibly be. Despite the lack of case law and the questionable damage calculations, attorneys prefer compliance over unknown alternatives.
The means test has been simply stated in the media as generally prohibiting or at least discouraging those debtors who earn more than the state median income from filing a Chapter 7 bankruptcy case. In doing so, BAPCPA was heralded as a way to prevent abuse by forcing those with higher incomes to choose a Chapter 13 repayment plan over no filing at all. While the concept is indeed simple, as my last article demonstrated, the application under the specifics of the law is next to impossible. The section excerpted from the BAPCPA means test in the last article was only a small segment of the labyrinth to be solved in applying the means test. Practically, even with the software programs available to bankruptcy attorneys, wading through the test, especially for those who earn more than the median, is rarely worth the effort.(fn11) More problematic are the inconsistencies in the case law interpreting the various requirements under the means test.
As predicted, one aspect of the means test currently receiving significant judicial attention stems from BAPCPA's definition of "current monthly income" and the lack of a definition for "projected disposable income." "Current monthly income" is defined by BAPCPA as the average monies received or earned over the six months prior to the bankruptcy filing.(fn12) This current monthly income figure is used to determine the eligibility for a Chapter 7 case, and potentially to determine the payments required under a Chapter 13 plan. Clearly there is a disconnect in BAPCPA where a person now earning $100,000 annually but who had been unemployed for five out of the past six months is eligible for a chapter 7 case, because she earns less than the state median according to her "current monthly income."
In a Chapter 13 case, a debtor is required to pay his or her "projected disposable income" into the plan, although this term is not defined under the Bankruptcy Code.(fn13) Leaving aside the issue as to whether the person in the above example would be eligible for a Chapter 7 case, if she were to file for Chapter 13 reorganization, would she use her "current monthly income" to minimally fund a plan, or would she, instead, be required to use her upto-the-minute budget to project the future? The existing case law on this issue is best...