Final Notice
Bankruptcy under the
new law.
By Tim
Wilkerson
January/February 2007 Issue
On Oct. 17, 2005,
the most sweeping bankruptcy reforms in decades took effect — the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Unsecured creditors such as credit card companies perceived that
individuals and married couples were cheating them by filing Chapter 7
liquidation cases when they had the income to pay some portion of their
unsecured debts. The creditors lobbied Congress for several years,
resulting in BAPCPA, which includes a number of hurdles intended to
discourage debtors with primarily consumer debts from seeking a Chapter
7 discharge. The new requirements make the role of paralegals in debtor
practices more important than ever before.
A New Burden for
Attorneys
BAPCPA adds a number
of disclosures that attorneys must give to potential clients. It also
specifically requires attorneys who represent consumer debtors in
Chapter 7 cases to certify that they have performed a reasonable
investigation into the debtor’s circumstances and determined that the
filing is well grounded in fact and warranted by existing law or a good
faith argument for extension, modification or reversal of existing law.
The attorney must certify that the filing doesn’t constitute an “abuse”
as defined by the statute. By signing the debtor’s bankruptcy petition,
the attorney certifies that, after an inquiry, the attorney has no
knowledge that the information in the debtor’s schedules is incorrect.
According to 11 U.S.C.A. § 707(b)(4)(C) and (D), if the court finds
abuse and the attorney violated rule 9011 of the Federal Rules of
Bankruptcy Procedure, it can order the attorney to reimburse the trustee
who brought the motion to dismiss for reasonable costs for the motion,
including attorneys’ fees. The court also can assess a civil penalty
against the debtor’s attorney, payable to the trustee.
The old law
contained a presumption in favor of granting relief to the debtor,
permitted only the court or the U.S. Trustee to bring the motion to
dismiss and required a showing of “substantial abuse” to overcome the
presumption. In contrast, BAPCPA has a “presumption of abuse” against
the consumer debtor if the debtor doesn’t meet certain income and
expense standards, allows any party in interest (including unsecured
creditors) to move for dismissal of the debtor’s case and has dropped
the term “substantial abuse” to just “abuse.”
These changes and
others have made debtors’ attorneys re-evaluate their practices. Many
have given up on bankruptcy rather than expose themselves to the greater
risk of liability. Others have changed the way they practice and have
doubled their fees to account for the increased risks, time, paperwork
and investigation the new law requires.
Many firms that used
to give free initial consultations now only take the debtor’s name and
address over the phone. Then, the paralegal typically sends out the
debtor’s questionnaire, a consultation agreement and statements
(disclosures) required by BAPCPA with a cover letter explaining that
everything should be filled out before the potential client comes in for
the initial paid consultation. The paralegal briefly reviews the papers
when the potential client arrives, and then the attorney goes over the
documents with the potential client.
For an individual
who is going broke, finding the money to hire a lawyer is a problem. The
increased costs of providing competent representation are making it even
more difficult for consumer debtors to get the advice they need and the
fresh start they seek.
On the other end of
the representation spectrum, BAPCPA increased the disclosures by (and
the penalties against) bankruptcy petition preparers — nonattorneys that
help debtors fill out the required forms (sometimes known as typing
services). BPPs must give clients a disclosure form explaining that they
can’t give legal advice or represent the clients in court. BPPs that
follow the rules can do nothing more than type the information they
receive from the clients onto the official forms. Even giving the
clients a questionnaire explaining the information needed for the
bankruptcy schedules and putting the information into a software program
that places it appropriately into the forms can constitute the
unauthorized practice of law. BPPs can’t provide any guidance to debtors
regarding their rights under the law, so their comparatively small fees
actually are no bargain at all.
Credit Counseling and
Debtor Education
Another new
requirement that affects a debtor is the need to seek credit counseling.
The credit counseling provisions call for the debtor to go to a
nonprofit credit counseling organization approved by the U.S. Trustee’s
office. The approved organizations are different in each federal
district and are listed on the U.S. Trustee’s Web site (www.usdoj.gov/ust).
The debtor can go through credit counseling in person, by telephone or
by Internet. Credit counseling generally costs about $50. A debtor must
present a certificate that proves the counseling took place as part of
the initial filing with the Bankruptcy Court.
Some law firms that
represent consumer debtors help their clients with the counseling by
establishing accounts with counseling organizations, registering the
clients, reviewing the clients’ budget worksheets with them before the
counseling session and providing an office telephone or computer for the
session itself.
Consumer debtors
must also file a certificate proving participation in a personal
financial management instructional course (debtor education) to receive
a discharge in Chapter 7 or Chapter 13. The course should provide
information on creating a budget, managing money wisely and using credit
safely. The U.S. Trustee’s office also approves nonprofit debtor
education providers and has a list for each district. Many providers are
on both lists, but in some districts, there are two or three times more
debtor education providers than credit counseling providers.
Law firms handle the
debtor education requirement in much the same way they deal with the
credit counseling certification. Paralegals often provide clients with
contact information and give debtors a deadline for finishing the course
and providing the certificate. Paralegals make sure the certificate and
all other documents are filed with the court.
Chapter 7 and Chapter
13
Probably the biggest
change for individual debtors is the unprecedented requirement of means
testing. The idea is to determine whether the debtor has the means to
pay unsecured creditors a certain amount or percentage per month for the
next five years. If the answer is yes, filing a Chapter 7 petition
raises the presumption that the debtor is abusing the system and should
be filing a Chapter 13 petition instead.
Being able to file a
Chapter 7 petition rather than a Chapter 13 in many ways is an advantage
to a consumer debtor. The goal of most debtors is to get a fresh start
as quickly as possible by discharging their current debts. A discharge
releases the debtor from liability for certain debts and prevents
creditors from taking any action against the debtor to collect the
debts. Chapter 7, with its no monthly payments and its typical four
months to discharge, always has been preferred by those with no assets.
Normally, the debtor would only voluntarily choose Chapter 13 when
monthly payments would help to cure a default on a mortgage or car loan,
or pay other nondischargeable debts, or when nonexempt assets would be
taken in Chapter 7 and could be saved by paying creditors through a
Chapter 13.
In a Chapter 7 case,
the debtor uses state or federal exemptions to protect and keep certain
property while a trustee sells the debtor’s nonexempt property, if any,
and distributes the proceeds to creditors. The case only is open a few
months, and at the end the debtor receives a discharge.
In a Chapter 13
case, however, the debtor pays all disposable income to a trustee,
usually for a planned period of three to five years. The trustee
distributes the funds to the debtor’s creditors based on the type and
relative amount of the creditors’ claims. At the end of the plan, the
debtor receives a discharge. Chapter 13 requires the debtor to wait much
longer to achieve a fresh start.
Means Test
Calculations
The law spawned a
new six-page form for Chapter 7 filers called the Statement of Current
Monthly Income and Means Test Calculation (Form B22A). On Form B22A,
debtors first list their average monthly income for the six calendar
months before the month in which they file. Married debtors who are not
filing jointly must include their spouse’s income unless they can
declare under penalty of perjury that “[m]y spouse and I are legally
separated under applicable non-bankruptcy law or my spouse and I are
living apart other than for the purpose of evading the requirements of §
707(b)(2)(A) of the Bankruptcy Code.”
The income sources
are:
-
gross wages,
salary, tips, bonuses, overtime and commissions;
-
income from a
business, profession or farm (gross receipts less ordinary and
necessary expenses);
-
rent and other
real property income (gross receipts less ordinary and necessary
expenses;
-
interest,
dividends and royalties;
-
pension and
retirement income;
-
child or spousal
support and other regular contributions to the debtor or the
debtor’s dependents’ household expenses;
-
unemployment
compensation (unless claimed to be a benefit under the Social
Security Act); and
-
income from all
other sources (again excluding Social Security Act benefits as well
as payments to victims of war crimes, crimes against humanity and
terrorism).
Debtors must list
the monthly average in each category for the previous six months. For
example, a debtor who was earning $5,000 per month but lost his/ or her
job two months before filing would have four months of $5,000 and two
months of no wages. The $20,000 total would be divided by six to give an
average monthly income of $3,333.33. After this calculation is completed
for all income categories, the debtor computes the total Current Monthly
Income.
Next, the debtor
multiplies the CMI by 12 to get an annual income. That number ($3,333.33
x 12 = $40,000 in the example) then is compared to the median family
income for the debtor’s state and household size according to U.S.
Census Bureau figures available from the U.S. Trustee’s Web site. If the
number is less than or equal to the median family income, there is no
presumption of abuse. The debtor is finished with Form B22A. For an
individual debtor with no dependents, $40,000 would be below the median
in New Hampshire, Maryland, Alaska and 17 other states.
If the debtor’s
annual income is greater than the median family income, the debtor must
go on to calculate deductions using Internal Revenue Service standards
and some actual living expenses. Idaho, Texas and Alabama, for example,
all have median family incomes (for an individual with no dependents)
below $40,000. Median family income figures are adjusted periodically to
reflect Census Bureau updates. The most recent adjustments became
effective Oct. 1, 2006.
Deductions
Debtors above their
state’s median family income must plug in allowable expenses as
deductions against their income to see if their disposable income is
enough to trigger the presumption of abuse. Several standard expenses
that the IRS uses in collection cases to determine how much delinquent
taxpayers can afford to pay are also used in BAPCPA. The IRS has
national standards for food, clothing, household supplies, personal care
and miscellaneous. One person with a gross monthly income of $3,333 can
claim to spend $556 on those items. BAPCPA lets debtors claim an
additional five percent expense for food and clothing if they can
provide documentation showing that the additional amount is reasonable
and necessary (in the example, an extra $19).
The IRS has local
standards by county for housing and utilities. Location truly matters.
In California, a single debtor with no dependents could deduct $622 for
utilities, repairs and maintenance (nonmortgage expenses) in Marin
County, but only $311 in Kern County. The mortgage/ rent expense allowed
in Marin County is $1,808 as compared to just $430 in Modoc County.
Debtors can try to show that their home energy costs are higher than the
IRS figures. Also, actual mortgage debt in excess of the IRS numbers is
allowed. Renters with higher rent expenses have to argue for the
additional amount on the form.
Local standards for
transportation costs are broken into census regions. In the Northeast
region, for example, Boston, New York, Philadelphia and Pittsburgh
(along with certain named surrounding counties) each make up their own
Metropolitan Statistical Area. Each MSA has its own allowances; anyone
outside an MSA uses a regional figure. An individual with one car in
Boston would deduct $300 for operating expenses, in New York $402 and in
the Northeast region outside an MSA $311. The second component of
transportation costs is ownership or lease costs. Monthly ownership or
lease costs are national: $471 for the debtor’s first vehicle and $332
for the second. Like a home mortgage, the debtor’s actual secured
vehicle debt and other ownership expenses can offset and even exceed the
IRS figures.
After the IRS
standard allowances, BAPCPA lets debtors deduct their actual expenses in
several specific categories under what the IRS calls “Other Necessary
Expenses.” These include:
-
taxes other than
real estate and sales taxes;
-
mandatory
payroll deductions;
-
term life
insurance;
-
court-ordered
payments such as spousal or child support;
-
education for
employment or for a physically or mentally challenged child;
-
childcare;
-
unreimbursed
health care
-
expenses; and
-
telecommunication services
-
beyond basic
home phone service if necessary for the debtor’s
-
health and
welfare or that of the debtor’s dependents.
-
Finally, BAPCPA
includes a few additional expense deductions, such as:
-
health
insurance, disability insurance and health savings account expenses;
-
care and support
of an elderly, chronically ill or disabled member of the
debtor’s household or immediate family;
-
expenses to
maintain family safety under the Family Violence Prevention and
Services Act (the court must keep the nature of these expenses
confidential);
-
education
expenses for dependent children under 18; and
-
continued
contributions to tax-exempt charities (up to 15 percent of the
debtor’s gross income).
Next, the debtor
lists future payments on secured claims. Since the goal of the
calculations is to find out how much the debtor could pay to unsecured
creditors over five years by filing a hypothetical Chapter 13 case, the
debtor has to calculate the Average Monthly Payment on secured debts for
the next 60 months. Mortgage debts include taxes and insurance required
by the mortgage.
A debtor with one
more year to pay off a $400-per-month car loan would still owe a total
of $4,800. That amount would be divided by 60 to reach the Average
Monthly Payment of $80. The $80 gets deducted from the CMI in the
calculation rather than the debtor’s current actual $400 monthly
payment.
Another deduction
accounts for an expense the debtor might have in a Chapter 13 plan. When
a Chapter 13 debtor is behind in payments on a secured debt such as a
home mortgage or a car loan at the time of filing, the debtor generally
can “cure” the default and keep the house by making current loan
payments and paying back the missed payments and other costs through the
trustee-supervised plan. A Chapter 7 debtor can include one-sixtieth of
that “cure amount” as a monthly deduction on Form B22A.
Congress has
determined that certain unsecured claims have priority over general
unsecured claims; they will be paid in full before general unsecured
claims get a penny. The debtor can deduct one-sixtieth of all priority
claims, which include:
-
domestic support
obligations owed at the time of filing;
-
the bankruptcy
trustee’s expenses to administer the estate (not known when
completing Form B22A);
-
claims for death
or personal injury resulting from the debtor’s unlawful operation of
a motor vehicle or vessel while intoxicated; and
-
miscellaneous
other claims usually irrelevant to individual debtors.
The last deduction
the debtor can claim is the projected average monthly Chapter 13
administrative expense. Debtors who are eligible to file a case under
Chapter 13 (individuals and couples with regular income who owe less
than $307,675 in unsecured debts and less than $922,975 in secured debt)
must calculate what their monthly Chapter 13 plan payments would be.
This calculation involves actual post-filing income and expenses that
might vary greatly from the CMI and standard expenses used in Form B22A.
The administrative expense is a predetermined percentage of the debtor’s
monthly plan payment that will cover the Chapter 13 trustee’s expenses
in accepting the payment and distributing funds to the debtor’s
creditors.
Once again, location
matters. The trustee’s administrative expenses are as high as 10 percent
of the debtor’s plan payments in several districts, including the
Central District of California, the Eastern District of New York and the
Western District of Texas. In contrast, the Western District of
Pennsylvania has actual administrative expenses of only 2.8 percent of
the debtors’ plan payments. For Form B22A, debtors can deduct the
portion of their hypothetical Chapter 13 plan payments that their
hypothetical Chapter 13 trustee would be keeping.
Determination of the
Presumption
The debtor now adds
up all allowed monthly deductions and subtracts the total from the CMI
to get monthly disposable income. The second level of presumption
determination begins. The debtor multiplies disposable income by 60 (for
the 60 months in a five-year plan). If the total is less than $6,000
(less than $100 per month), the presumption of abuse doesn’t arise. The
debtor is finished and deemed worthy (or worthless) enough to file a
Chapter 7. If the total is more than $10,000 (a little more than $166
per month), the presumption of abuse arises. Again, the debtor is done,
but this time is presumed to be cheating creditors by filing a Chapter 7
instead of a Chapter 13.
If the 60-month
disposable income total falls between $6,000 and $10,000, the debtor
moves to the third and final level of presumption determination. The
total is compared to 25 percent of the debtor’s total nonpriority
unsecured debt. If the total is less than the 25 percent, the
presumption doesn’t arise. If the total is more than the 25 percent, the
presumption arises. In other words, if the unsecured creditors with
nonpriority claims would get at least 25 cents on the dollar in the
debtor’s fictional Chapter 13 case with fictional monthly income and
fictional expenses, the debtor should not be filing a Chapter 7.
More Work for
Paralegals
Bankruptcy was a
practice area full of paperwork long before BAPCPA. Besides the
petition, debtors had to file 10 schedules listing all their real and
personal property; the exemptions they were claiming; their secured and
unsecured priority and unsecured nonpriority debts; executory contracts
and unexpired leases; co-debtors; and current income and expenditures.
There also was a statement of financial affairs, a statement of
intention (what the debtor planned to do with property that secured a
debt), a matrix of all creditor addresses, and several other notices,
disclosures and declarations.
In addition to Form
B22A, BAPCPA has added a certification of employment income (with two
months of pay stubs attached), the certifications of pre-bankruptcy debt
counseling and post-filing debtor education, as well as other new
notices, disclosures and declarations.
Bankruptcy
paralegals generally have to keep track of all the paperwork, deadlines,
appointments and rules. In most firms, paralegals prepare the petition,
schedules, means test and other documents for review by their
supervising attorney. Using petition filing software, they translate the
information on the questionnaires — along with the debtor’s pay stubs,
tax returns, bills, loan documents, eviction papers, etc. — into the
format of the official bankruptcy court forms. Paralegals track down any
missing information from the debtor, the creditors or the court to
complete the forms. Also, as previously mentioned, many firms make sure
a paralegal is close by to assist the client, if necessary, with the
credit counseling and debtor education requirements.
The bottom line is
bankruptcy paralegals make sure everything is done, everything is filed
and everything happens when or before it should. Therefore, bankruptcy
paralegals need to know the new requirements and timelines as well as
the attorney.
Fortunately for
paralegals in consumer bankruptcy practices, the burden placed on
debtors by the new law means that leveraged practices need efficient
legal assistants to handle much of the increased workload. Paralegals
are having a greater impact than ever on the successful management of
debtors’ cases.
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