The Bankruptcy Abuse and Prevention Act of 2005

By Christopher K. Werner, Esq.
Monday, November 14, 2005
Monroe County Bar Association Views

“Congress shall have Power To establish uniform Laws
on the subject of Bankruptcies”

So they did…

Promoted on inflated fables of widespread abuse by big income debtors, Congress enacted The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” aka “BARF”). In turn, the unwarranted belief that Bankruptcy would no longer be available to the common debtor produced a flood of personal bankruptcy filings in the prelude to its October 17, 2005 advent – encouraged by bankruptcy practitioners wary of change.

What many see as “mean spirited” legislation, bought-and-paid-for by the rapacious Credit Card lobby with 8 years of campaign contributions, is seen by the average non-debtor in the street, as a worthy effort to stem the rising tide of personal financial irresponsibility in an era of promiscuous credit card consumption.

Despite 2,289 filings between 10/1 and 10/17, the Rochester Bankruptcy Court staff and ECF Systems held and we are only left with the clean-up – multiple November Trustee calendars of simultaneous §341 Meetings conducted at double-time (16 – 20 cases/hour) starting at 8 a.m.- including 51 to be heard the Friday after Thanksgiving.

October 17 – November 10 saw only 22 cases filed: 5 Ch 7’s and 17 Ch 13’s – the majority pro se. In December, Hearing Room 6080 will look like Sunday at the Hickey-Freeman sale – except for adjourned cases from the November “pre-sale” melee.

What was all the fuss? How significant are the new “reforms”? For the general bar, let me attempt to simplify some of the highlights.

Means Testing. The most significant changes seek to push the “high income” consumer debtor out of Chapter 7 and into Chapter 13 to pay something to creditors. Abuse is still ferreted out by general inquiry but is “red-flagged” (literally) by the new tool of “Means Testing”. Fail the Means Test and abuse is presumed – resulting in dismissal unless you are willing to convert to Chapter 13.

My first foray was painless – since I started with a VLSP client. I input my client’s monthly income into the new software and was rewarded with a smile. (BestCase© has maintained a sense of humor.) My client was not presumed to be an abuser and I need not test his “means” further. Who’s afraid of BAPCPA?!

High income is determined by Census Bureau statistics for each state – where we get the benefit of a low cost of living in a high income state – Example: NY Family of 4 $67,564/year // $48,492 for a couple. Contributions to the household by non-debtor residents are included but Social Security is excluded.

For those above these limits, Means Testing is more burdensome – with IRS standards brought into play to limit deductions in various expense categories: housing, transportation, food, clothing etc. against gross income – all with an eye for finding the surplus available for creditors. The lobbyists for secured lenders delivered full deductions for mortgage payments, auto payments and the like (though the latter are averaged over 5 years in the analysis).

Overall, think of “Means Testing” as mandatory sentencing guidelines for consumer debtors – no more soft judges (or Trustees)! – perhaps with the hope that Congress will not be forced to reinstitute Debtors’ Prison.

Business debtors. To avoid discouraging business venture and risk, high income business debtors are exempt from Means Testing – they weren’t the abusers who caused this credit card mess!

Abuse. The threshold tolerance for general “abuse” has now been lowered. (A Means Test is not a free pass.) “Substantial” was deleted and now any degree of consumer abuse can result in dismissal. Business debtors are waived thru – abuse inapplicable. If you resist a Motion to Dismiss – and lose – you (read lawyer) pay the fee.

Consumer Protection (the CP of BAPCPA). Lawyers are now “Debt Relief Agencies” (except in the Southern District of Georgia per Chief Bankruptcy Judge Lamar W. Davis) and the unsuspecting “Consumer” is “Protected” from their abuses by mandatory written warnings like, “I help people file bankruptcy” and by mandatory written explanations of bankruptcy and how many cases are “routine” and that you don’t really need a lawyer. (I’m not making this up!) Retainer agreements, always a good practice, are now mandatory.

Further, the integrity of the bankruptcy system is protected by a heightened obligation of investigation and certification by attorneys of the truth and completeness of the Debtor’s disclosures in his Bankruptcy Schedules – with sanctions for failure.

Though the ability to deduct secured debt (like auto loans) might benefit the Means Test result, we Debt Relief Agencies are also prohibited from counseling a debtor to incur more debt in anticipation of a bankruptcy filing (like, to replace a dying auto) or to pay fees. Equal protection, notwithstanding, this restriction only applies when advising consumer debtors with less than $150,000 in non-exempt property. Shrugging of shoulders and rolling of eyes remains unrestricted for all.

Credit Counseling and Documentation. Knowing that the lack of proper counseling about the alternatives to bankruptcy is a root cause of the dramatic rise in consumer filings, a debtor must complete Credit Counseling and submit their Certificate with their bankruptcy petition. – or suffer dismissal. Pre-bankruptcy credit counseling will surely be as effective as mandatory pre-Divorce counseling was in the 70’s. The last 60 days of pay stubs and tax returns are also required. Completion of Personal Financial Management instruction is now a condition of discharge.

Marital Aspects. The biggest gains were made by children and spouses in enforcement of their “Domestic Support Obligations”. Arrears are now first in line – 1st priority – for payment from any assets collected in the estate. FILE A CLAIM!

More importantly, though support remains non-dischargeable, the “(a)(15)” balancing analysis and the need to file an Adversary Proceeding to test the dischargeability of distributive awards and other non-support obligations, has been eliminated. All marital obligations now survive a Chapter 7 bankruptcy. The Bankruptcy Code no longer provides this second bite at the marital apple. Chapter 13, however, continues to provide a discharge of non-support obligations.

Chapter13 discharge is also dependent upon debtor’s payment of all required child support during the pending case.

Discharge. The amendments make some subtle but significant changes to the dischargeability rules.

Non-dischargeable educational loans are more broadly defined and include debts incurred in re-financing these loans. No more “end runs” around your school loans with credit card advances. Non-dischargeable “D”WI obligations now include aircraft and vessels. The obligation to pay post-petition Condominium fees survives even if the debtor is not in residence, as previously required.

Audits will be conducted in one out of every 250 cases and your discharge will be revoked if you fail. Frequent filers must wait 8 years between Ch 7’s (previously 6) and 6 years for a Ch 7 discharge after a Ch 13.

The Chapter 13 “Super-Discharge” has been eliminated. Creditor Objections to Discharge (claims of fraud, misappropriation etc) are now available in both Chapter 7 and 13. While promoting the use of Chapter 13, Congress has eliminated this important incentive. More debts will now survive even a Ch 13.

Chapter 13 Cramdowns/lien stripping. No longer can a Chapter 13 debtor pay only the value of his auto to satisfy his purchase money auto loan obtained within 910 days (2 1/2 yrs) of the bankruptcy filing. Similarly, other debt secured in consumer collateral within one year is free from “cramdown”.

Exemption Shopping. Use of more generous state property exemptions (like NY’s secret new $50,000 Homestead Exemption – quietly signed 8/30/05) is denied to new residents arriving within 2 years of their bankruptcy filing. (No more fleeing to 100% Homestead states for bankruptcy. Florida and Texas will have to rely on jobs, tourism and no wage garnishees again.) And debtors intentionally (etc) causing death or serious injury to another, or who have committed Securities Law violations, within five years, can’t exempt more than $125,000 in any property. (OJ and the Enron’s ruined it for everyone!).

In similar vein, new homeowners are limited to an exemption of $125,000 in homes purchased within 1215 days of Bankruptcy (you do the math). Purchase of a new home from proceeds of a prior home within the same state is ok, however.

Preferences. Business creditors also made good headway against Trustees’ actions to recover preferential payments – those hard fought payments squeezed out of a debtor in the last 90 days before the bankruptcy filing. The Trustee can’t pursue less than $5,000 and he’s lost home court advantage in cases less than $10,000 – which must now be heard in the business creditor’s venue – a further disincentive to pursuit. The ordinary course of business defense now requires only satisfying 2 out of 3 – debtor/creditor/industry standards (previously 3 out of 3) – all too complex for simple summary here. Consumer preferences remain unchanged.

For most debtors, these changes will have little impact – Oh!- the Chapter 7 filing fee went up $65 and 13’s went down $5. Otherwise, most consumer debtors, of ordinary means, will emerge from bankruptcy better “credit counseled” “financial managers”, oblivious of “reform”. Many, if not most, high income debtors – with commensurately high mortgages and auto payments – will similarly pass thru Means Testing unscathed.

This expectation is particularly so here in the Rochester Court, where high judicial demands for quality legal work and conservative scrutiny of debtor income and thresholds for “substantial abuse” – pegged even lower than the new “abuse” standards – have culled the proper 13’s from the 7’s and the professional practitioners from the incompetents.

In my view, what these “reforms” may have changed is the perception, and worse – the reality – of how our political system sets about effecting a cure for “abuse” – addressing only the addict and those that might help with the cure – with a blind eye for the pusher of consumer debt.

I am always struck by the fact that Bankruptcy was put in the First Article of the Constitution. Perhaps because creditor abuses – and debtors’ prison – were not a distant memory for our Founding Fathers. The next “reform” will surely address this side of the equation.

See you in court.