Michigan Bankruptcy Laws

Detroit Chapter 7 Bankruptcy Lawyer

“Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”

109th Congress—First Session BAPCPA

Major Consumer Bankruptcy Effects of the 2005 Reform Legislation

 

Prepared by Eugene R. Wedoff

United States Bankruptcy Court

Northern District of Illinois

July Il, 2005

 

On April 20, 2005, president Bush signed into law S. 256. Titled the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” this is most substantial revision of bankruptcy law since the 1978 Bankruptcy Code. The new law will be gener­ally effective as to cases filed on or after October 17, 2005. The following summary discusses changes in consumer bankruptcy law affected by the law. This summary addresses the areas of major impact; it is not a complete list of the bill’s consumer provisions.

 

Changes affecting consumer cases under multiple chapters of the Code

 

1. Extended time between discharges

 

S. 256 § 312

 

Section 727(a) (8) is amended to subject a Chapter 7 debtor to denial of discharge if the debtor received a Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case. Section 1328 is amended to include a new subsec­tion (f) providing that a Chapter 13 debtor will be denied dis­charge if the debtor received a discharge (1) “in a case filed under Chapter 7, 11, or 12 . . . during the 4—year period pre­ceding the date of the order for relief” in the pending case, or

(2)  “in a case filed under Chapter 13 . . . during the 2—year period preceding the date of such order.”¹ The resulting dis­charge system can be displayed in a table:

 

 

The quoted language is ambiguous. It denies discharge in a Chapter 13 case if some triggering event occurred during the two— or four—year period before the case was filed, but it does not clearly identify that event. The triggering event could be either the filing of a prior bankruptcy case that resulted in a discharge or the receipt of a discharge in the prior case. Since the first verb before the phrase “during the . period” is “filed,” the grammatically correct interpretation is that dis­charge is denied if the prior case was “filed [under the rele­vant chapter] during the [2— or 4—year] period preceding the

Discharge waiting pe— nod	Current case:      Chapter 7  Chapter    Chapter 13        11
Prior case:	8 years from	None	4 years from prior
Chapter 7       Chapter 11       Chapter 13	prior case filing     8 years from prior case filing     Current law (6 years from prior case filing; none with defined pay— out)	None       None	case filing (or prior case dis­charge) 4 years from prior case filing (or prior case dis­charge) 2 years from prior case filing (or prior case dis— charge)

   2.     Production of tax returns and other documents; dismissal on nonproduction

 

S. 256 § 315(b)

 

Section 521 has been amended to impose a number of new pro­duction requirements on debtors. First, a new subparagraph (a) (1) (B) provides that unless the court orders otherwise indi­vidual debtors must file, together with their schedules:

 

•  a certificate of an attorney or petition preparer indi­cating that the debtor was given an informational notice required by amended § 342(b) , or, in the case of a pro se debtor, a certificate of the debtor that the debtor has re­ceived and read the notice;

 

•  “copies of all payment advices or other evidence of pay­ment received within 60 days before the filing of the peti­tion, by the debtor from any employer of the debtor”;

 

•  “a statement of the amount of monthly net income, item­ized to show how the amount is calculated”; and

   

 

date of the order for relief.” However, it is possible to read the provision as applying “if the debtor received a discharge [in a case filed under the relevant chapter] during the . pe­riod.” Policy arguments and legislative history might be ad­vanced in support of the latter interpretation.

 

•  “a statement disclosing any reasonably anticipated in­crease in income or expenditures over the 12—month period following the date of the filing of the petition.”

 

“Monthly net income” is not a term defined in the Code as amended by 5. 256. The use of this term in § 521(a) (1) (B) could have at least three different meanings: (1) it could mean simply the debtor’s take home pay (that is, gross income less payroll deductions); (2) it could mean the amount remaining after al­lowed deductions under the means test (discussed below in con­nection with changes to Chapter 7); or (3) it could mean the difference between the debtor’s income reported on Schedule I and the expenses reported on Schedule 3. Since this last “monthly net income” would be relevant to the feasibility of a Chapter 11 or Chapter 13 plan, as well as to the ability of the debtor to perform under a reaffirmation agreement, this may be the most reasonable interpretation.

 Second, new subparagraph (e) (2) (A) requires that each debtor, at least seven days prior to the 341 meeting, provide both to the trustee and to any creditor making a timely request a copy of the federal income tax return or transcript of the re­turn (at the debtor’s option) for the period for which the re­turn was most recently due and for which the debtor filed a re­turn. This requirement may apply only to individual debtors in Chapter 7 and 13 cases, since § 521(e) (1) (requiring the court to give copies of certain filings to creditors) is limited in this way. A failure by the debtor to produce the return or tran­script requires dismissal of the case (presumably on motion of the trustee or requesting creditor) unless the debtor demon­strates that the failure to produce the return or transcript was beyond the debtor’s control.

 

Third, new paragraphs (f) (1)—(3) provide that each individ­ual debtor in a case under Chapter 7, 11, or 13, must also, on request of a party in interest or the court, file with the court, at the same time filed with the IRS, copies of any fed­eral income tax return (or at the debtor’s option, a transcript of the return) for a tax year ending while the case is pending and for a tax year that ended during the three years before the case was filed, as well as copies (or transcripts) of any amend­ments filed to these returns. New paragraph (g) (2) provides that the filed returns or transcripts are to be available to any party in interest, with the debtor’s privacy protected by regu­lations to be adopted by the Director of the Administrative of­fice.

 

• S. 256 § 316

 

A new § 521(i) provides that if an individual debtor in a voluntary Chapter 7 or a Chapter 13 case fails to file all of the information required under § 521 (a) (1) (including the new § 521(a) (1) (B) discussed above) within 45 days after filing the petition, the case must be dismissed on the 46th day, and that any party in interest may request a court order to that effect, which must be entered within five days of the request. The automatic dismissal may be delayed for up to 45 additional days on motion of the debtor made within the original 45—day period, and on motion of the trustee, filed prior to automatic dis­missal, showing that the debtor attempted in good faith to file the debtor’s payment advices and that the best interests of creditors would be served by administering the case. (It is un­clear whether this exception would apply only when the debtor has satisfied the other filing requirements of § 521 (a) (1)

 

 Audits

 

• 5. 256 § 603

 

Section 603 of 5. 256 sets out an uncodified duty, imposed on the Attorney General (in districts served by United States trustees) and on the Judicial Conference of the United States (in districts served by bankruptcy administrators) to conduct audits (1) of all information provided by the debtors in at least 0.4% of individual Chapter 7 and 13 cases, randomly se­lected, and (2) of any schedules of income and expenses “which reflect greater than average variances from the statistical norm of the district in which the schedules were filed if those vari­ances occur by reason of higher income or higher expenses than the statistical norm of the district in which the schedules were filed.” The audits are to “determine the accuracy, veracity, and completeness of petitions, schedules, and other information” that the debtor is required to provide under §S 521 and 1322 of the Code. The audits are to be conducted by certified or li­censed public accountants in accordance with generally accepted auditing standards, or under regulations adopted by the Attorney General (and the Judicial Conference in areas served by bank­ruptcy administrators) . Provision is made for aggregate reports of the results of the audit and for criminal referrals in the event of material misstatements. A new §727(d) (4) creates as a ground for revocation of discharge the failure by the debtor to cooperate with the auditor or to “explain satisfactorily a mate­rial misstatement in an audit.” The latter phrase presumably refers to misstatements in filings of a debtor reflected in the

 

 

audit, rather than misstatements in the audit itself; however, it is not clear what would constitute a “satisfactory” explana­tion of such a misstatement. There is no deadline for motions to revoke discharge based on § 727(d) (4)

 

The Attorney General and the Judicial Conference are given two years from enactment of S. 256 to develop bankruptcy audit­ing standards. However, the auditing provisions themselves be­come effective 18 months after enactment, thus requiring earlier development of bankruptcy auditing standards to avoid the need to conduct the required audits under generally accepted auditing standards.

  

4.        Credit counseling and debtor education

 

•     5. 256 §106 (a)

 

Under new § 109(h), individuals are ineligible for relief under any chapter of the Code unless, within 180 days of their bankruptcy filing, they received “an individual or group brief­ing” from a nonprofit budget and credit counseling agency ap­proved by the United States trustee or bankruptcy administrator under standards set forth in a new §111 and published by the clerk of court. Among these standards is a requirement that the agency provide its services without regard to the debtor’s abil­ity to pay any fee. The required briefing, which may take place by telephone or on the Internet, must “outline” the opportuni­ties for credit counseling and “assist . . . in performing a re­lated budget analysis.” Exceptions are made (1) for districts in which adequate counseling services are determined by the U.S. trustee or bankruptcy administrator not to be available (a de­termination that must be reviewed annually); (2) for debtors who submit to the court a certification describing exigent circum­stances requiring immediate bankruptcy filing and stating that the debtor had sought the required briefing at least five days prior to the bankruptcy filing without being able to obtain it (in which case the debtor is required to complete the counseling within 30 days after the bankruptcy filing); and (3) for debtors who are incapacitated, disabled, or on active military duty in a combat zone (with limiting definitions for incapacity and dis­ability) . The debtor is required to file a certificate from the credit counseling agency describing the services provided, and file any debt repayment plan developed with the agency. By mak­ing individuals who have not received the defined briefing in­eligible to be debtors, this change may have the effect of immu­nizing most individuals from involuntary bankruptcy cases. However, because the required briefing is to be received prior to the “filing of the petition by [the] individual [debtor],” it may be argued that the eligibility requirement applies only in voluntarily filed cases.

 

•     5. 256 § 105

 

The Executive Director of the Office for United States Trustees is required to develop a financial management training curriculum and materials to educate individual debtors “on how to better manage their finances.” The curriculum is to be tested in six judicial districts over an 18—month period, begin­ning no later than 270 days after enactment of S. 256. The Di­rector is required to evaluate the effectiveness of the curricu— 6

lum and materials, as well as other consumer education programs, and report to Congress no later than three months after the end of the test period as to the effectiveness and cost of the pro­grams.

 

• S. 256 § 106(b) and (c)

 

Even while the U.S. Trustees’ test program is being evalu­ated, debtors in both Chapter 7 and 13 will be required to com­plete “an instructional course concerning personal financial management” in order to assure their discharge, as long as the United States trustee or bankruptcy administrator determines that there are adequate approved educational programs available and the debtor is not disabled or incapacitated (as defined in § 109(h)), or on active military duty in a combat zone. Unless one of these exceptions of the requirement applied, failure to compete the instructional course would be a ground for denial of the Chapter 7 discharge under a new § 727(a) (11), and of the Chapter 13 d discharge under new §l³²⁸(g). Telephone and Inter­net courses would be permissible “if effective.” As with credit counseling agencies, (1) the clerk of court must maintain a list of educational courses approved for each district by its United States trustee or bankruptcy administrator, under standards set out in new § 111, and (2) among the standards for approval is a requirement that the course be provided without regard to the debtor’s ability to pay any fee charged for the course.

 

5. Automatic stay

 

• S. 256 § 302; serial filings

 

A new § 362(c) (3) provides that if a Chapter 7, 11, or 13 case is filed within one year of the dismissal of an earlier case (other than a Chapter 11 or 13 case filed after a §707(b) dismissal) , the automatic stay in the second case terminates 30 days after the filing, unless a party in interest demonstrates that the second case was filed in good faith with respect to the creditor sought to be stayed. And if a second repeat filing takes place within the one—year period, the automatic stay will not go into effect (and the court is required promptly to enter an order confirming the inapplicability of the stay on request of a party in interest) . However, a party in interest may ob­tain imposition of the stay by demonstrating that the third fil­ing is in good faith with respect to the creditor sought to be stayed. For both second and third filings within one year, cir­cumstances are described which generate a presumption that the new filing was not made in good faith, and such a presumption

 

 

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would be required to be rebutted by clear and convincing evi­dence. Under a new §362(i), this presumption would not arise in “any subsequent case” if a debtor’s case is dismissed “due to the creation of a debt repayment plan.”

 

• 5. 256 § 303; in rein relief; ineligible debtors

 

“In rem” relief from the automatic stay is authorized by a new § 362(d) (4) . In cases involving either (A) transfers of real property collateral without the consent of the secured creditor or court approval or (B) multiple bankruptcy filings involving the same real property, the court may issue an order of relief from the automatic stay, which order, properly recorded, is binding on all owners of the property for two years from the date of entry. A party in interest may file a request for impo­sition of the stay within 30 days of a subsequent case filing, and the court may impose the stay only if the party demonstrates that the case was filed in good faith as to the creditors sought to be stayed. Where in rem relief is effective, new § 362(b) (20) creates an exception to the automatic stay for lien enforcement activity in later cases.

 

A new § 362(b) (21) excepts from the stay any act to enforce a lien or security interest in real property if the debtor was ineligible under § 109(g) or filed the case in violation of an or­der “prohibiting the debtor from being a debtor” in another case under Title 11.

 

• S. 256 § 311; exception for leased residential real estate

 

Two new exceptions from the automatic stay are established for landlords seeking to evict tenants. The first, § 362(b) (22), allows the continuance of any eviction proceeding in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition. The second, § 362(b) (23) , deals with evictions based on “endangerment” of the rented property or “illegal use of controlled substances” on the property. Paragraph (b) (23) excepts the eviction proceeding from the stay if (a) it was commenced before the filing of the bankruptcy case, or (b) if the endangerment or illegal use oc­curred within the 30 days before the bankruptcy filing. In ei­ther situation, the landlord would be required to file with the court and serve on the debtor a certificate setting out the facts giving rise to the exception.

 

 

 

 

 

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New provisions in §362(l)—(m) allow a debtor to contest the applicability of both of these new exceptions by filing timely certifications under penalty of perjury. As to the (b) (22)

lease exception, the debtor would be able under §362(1) both to

keep the stay in effect for an initial 30 days after the bank­ruptcy filing—by certifying that applicable nonbankruptcy law allowed the lease to remain in effect upon the debtor’s cure of the default that was the basis of the eviction order—and to keep the stay in effect after 30 days by filing a further certifica­tion that the cure amount had been paid within the initial 30 days. As to (b) (23), a new §362(m) provides that if the debtor files a certificate denying the assertions in the landlord’s certificate, the court is required to conduct a hearing within 10 days “to determine if the situation giving rise to the les­sor’s certification . . . existed or has been remedied.”

 

• 5. 256 § 315(a); notice to creditors

 

Section 342(c) is amended to remove the provision that a failure by the debtor to supply notice to creditors in the pre­scribed form does not invalidate the notice. Instead, a new § 342(g) provides that no monetary penalty may be imposed on a creditor for violating the automatic stay or for failing to turn over property, unless notice is given in a form effective under amended § 342. As amended by new provisions in (c) (2), (e) , and (f), §342 now provides that notice to a creditor will not be ef­fective unless it is served at an address filed by the creditor with the court or at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case (or between 90 and 180 days if the creditor was prohibited from communicating with the debtor during the more recent 90—day period) . To be effective, the notice must also include the account number used by the creditor in the two relevant communications. An otherwise ineffective notice will only subject the creditor to liability if the notice was “brought to the attention of the creditor,” which is defined as receipt by a person designated by the creditor to receive bank­ruptcy notices.

 

6. Limiting definition of household goods for purposes of lien avoidance

 

• 5. 256 § 313

 

A new § 522(f) (4) limits the “household goods,” as to which a nonpossessory, nonpurchase—money security interest can be

 

 

 

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avoided under § 521(f) (1) (B). The new definition limits elec­tronic equipment to one radio, one television, one VCR, and one personal computer with related equipment; it excludes (among other things) works of art not created by the debtor (or a rela­tive) , jewelry worth more than $500 (except wedding rings) , and motor vehicles.

 

7. Disehargeability

 

S. 256 § 310; credit card debts

 

The presumption of nondischargeability for fraud in the use of a credit card, set out in §523 (a) (2) (C), is expanded. The amount that the debtor must charge for “luxury goods” to invoke the presumption is reduced from $1225 to $500; the amount that the debtor must withdraw in cash advances in order to invoke the presumption is reduced from $1225 to $750. The period of time prior to the bankruptcy filing in which these charges must be made in order for the presumption to apply is increased from 60 to 90 days for luxury goods, and from 60 to 70 days fcr cash ad­vances.

 

• S. 256 § 220; student loans

 

Section 523(a) (8) is amended to make student loans nondis— chargeable, in the absence of undue hardship, regardless of the nature of the lender, thus covering loans from non—gcvernmental and profit—making organizations.

 

8.     Two—year residency requirement for state or local exemp­tion law

 

•   5. 256 § 307

 

A new § 522(b) (3) specifies the state or local law governing the debtors’ exemption as the law of the place where the debtor’s domicile was located for 730 days before filing, and if the debtor did not maintain a domicile in a single state for that period, the governing exemption law is that of the place of the debtor’s domicile for the majority of the 180—day period preceding the 730 days before filing (that is, between 2 and 2— ~/2 years before the filing) . If this new residency requirement would somehow render the debtor ineligible for any exemption, then the debtor is allowed to choose the federal exemptions.

 

9. Limits on homestead exemptions

 

 

 

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Contrary to the general effective date of S. 256, each of the following amendments, limiting the right to claim large homestead exemptions, applies in all cases filed on or after the enactment of S. 256.

 

S. 256 § 308; reduction of homestead value for fraudulent additions

 

A new § 522(o) reduces the value of a debtor’s homestead, for purposes of a state homestead exemption, to the extent of any addition to the value of the homestead on account of a dis­position of nonexempt property made by the debtor—made with in­tent to hinder, delay, or defraud creditors—during the 10 years prior to the bankruptcy filing.

 

S. 256 § 322; limitation on new homestead addi­tions; homestead cap

 

Under a new §⁵²²(p), any value in excess of $125,000— without regard to the debtor’s intent—that is added to a home­stead during the 1215—days (about 3 years, 4 mcnths) preceding the bankruptcy filing may not be included in a state homestead exemption unless it was transferred from another homestead in the same state or the homestead is the principal residence of a family farmer.

 

Under a new §⁵²²(q), an absolute $125,000 homestead cap ap­plies if either (a) the court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was an abuse of the provision of the Bankruptcy Code, or (b) the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death “in the preceding 5 years.” However, this limitation is inapplicable if the homestead property is “reasonably necessary for the support of the debtor and any dependent of the debtor.”

 

 

 

 

 

 

 

 

 

 

 

 

 

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S. 256 § 330; delay of discharge to determine home­stead limits

 

The discharge provisions of Chapters 7, 11, and 13 are all

amended to delay the grant of a discharge for a debtor who is subject to a proceeding that might give rise to a limitation of the homestead exemption under new § ⁵²²(q) (1) , discussed above. In Chapter 7, a new ground for not granting discharge is set out in § 727(a) (12), based on a finding by the court that such a § 522(q) proceeding is pending. In Chapter 11, a new §1141~d) (5) (C) appears to require, as a condition for discharge, that the ccurt find no reason to believe that such a proceeding is pending (the provision is ambiguous because it is a long sen­tence fragment) . In Chapter 13, new § 1L328(h) clearly provides that the court may not grant a discharge unless the court finds “no reasonable cause to believe” that there is pending a pro­ceeding of the kind that would result in the limitation of an exemption under § 522(q) . All of these new provisions specify that the hearing they allow or require is to be conducted “not more than 10 days before the date of the entry of the order granting discharge.” The intent of these provisions apparently is to allow a discharge order to be entered only if the court is able to find that no § ⁵²²(q) proceeding is pending, with the Ira— pact of delaying discharge until the conclusion of any such pro­ceeding. The heading of §330 of S. 256—”Delay of Discharge dur­ing Pendency of Certain Proceedings”— confirms this understanding.

 

10. Avoidance of transfers to asset protection trusts

 

S. 256 § 1402

 

A new § 348 (e) allows a trustee to avoid any transfer by the debtor to a self—settled trust or similar device made within 10 years of filing the petition, with “actual intent to hinder, de­lay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.” This provision would allow recovery of funds transferred by the debtor to an asset protection trust, but apparently only if the trustee could establish that the transfer was made in connection with avoiding a particular claim, rather than simply as a gen­eral asset protection device.

 

11. Exclusions from estate property

 

 

 

 

 

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S.    256 § 225; educational retirement accounts; state tuition programs

 

A new paragraph (b) (5) is added to § 541, providing that funds placed in an educational retirement aeccunt at least 365 days prior to a bankruptcy filing, within the limits established by the Internal Revenue Code, and for the benefit of a child or grandchild of the debtor, are excluded from the debtor’s estate, with a $5000 limit on funds contributed between one and two years before the filing. A new paragraph (b) (6) similarly ex­cludes similar contributions to qualified State tuition pro­grams, as defined in the Internal Revenue Ccde,

 

S. 256 § 323; contributions to employee plans

 

Another new exclusion from estate property, § 541(b) (7), ap­plies to employee contributions to ERISA—qualified retirement plans, deferred compensation plans, tax—deferred annuities, and health insurance plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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12. Bankruptcy appeals

 

5. 256 § 1233

 

Section 158 of the Judiciary Ccde (Title 28, U.S.C.) is amended to provide the circuit courts of appeal with discretion to accept bankruptcy appeals without an intermediate appellate decision. The circuit court may accept a direct appeal if the bankruptcy court, the district court, the Bankruptcy Appellate Panel, or the parties to the appeal acting jointly certify that direct appeal is necessary to resolve a matter of first impres­sion, conflicting decisions, or public importance, or a matter that would materially advance the progress of the case.

 

13. Effective date

 

S. 256 § 1501

 

The changes made by S. 256 are generally effective only with respect to cases filed after its effective date, October 17, 2005 (180 days after the date of enactment, April 20) . How­ever, as noted above, the limitations on homestead exemptions set out in §~ 308 322, and 330 are effective upon enactment, while the auditing requirements of § 603 are not effective until 18 months after enactment.

 

 

Changes affecting consumer cases under Chapter 7

 

1.  New § 707(b)—means testing; 5. 256 § 102(a)-(d)

 

Secticn 707 (b) of the Bankruptcy Code is amended to provide for dismissal of Chapter 7 cases or (with the debtor’s consent)

conversion to Chapter 13, upon a finding of abuse by an individ­ual debtor with primarily consumer debts. Abuse can be found in one of two ways: first, through an unrebutted presumption of abuse, arising under a new means test (~7O7(b) (2)); and second, on general grounds, including bad faith, determined under the totality of the circumstances (~ 707(b) (3)

 

Standing. New §707(b) (1) generally allows any party in in­terest, as well as the court on its own initiative, to bring a motion seeking dismissal of a Chapter 7 for abuse, but

§ 707(b) (6) provides that only the judge, U.S. trustee or bank­ruptcy administrator may bring the motion if the debtor’s income does not exceed a defined state median. Moreover, under

§ 707(b) (7) the means—test presumption is completely inapplicable

 

 

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to debtors whose inccme is below that median. (In addition, § 707(b) (2) (D) makes the means test inapplicable to certain dis­abled veterans.) The standing limitations can be summarized in a table:

	Debtor’s income at or below the applicable median	Debtor’s income above the applicable median
The means-test pre— sumption	No one has standing.	All parties in inter— est have standing.
General grounds of abuse	Only judges, U.S. trus-tees, and bankruptcy administrators have standing.

To apply the standing limitations, it is necessary to determine both “debtor’s income” and the applicable state median.

 

(a) Debtor’s income. Generally, the debtor’s income, for purposes of standing to bring an abuse mction, is de­fined as the debtor’s “current monthly income” multiplied by 12. As discussed below, “current monthly income” is the debtor’s average monthly income over a six—month period. However, for purposes of limiting the standing of judges, U.S. trustees and bankruptcy administrators under

§ 707(b) (2) (B) (7), the debtor’s current monthly income is augmented by that of the debtor’s spouse, even in a non— joint case, unless the debtor submits a sworn statement re­flecting that the spouses are separated.

 

(b) Applicable median income. The median income ap­plicable for determining standing to bring a motion under § 707(b) is as fcllows: (a) for a debtor in a hcusehcld of 1 person, the median family income of the applicable state for 1 earner; (b) for a debtor in a household of two, three, or four individuals, the highest median family in­come of the applicable state for a family of the same or fewer persons; and (c) for a debtor in a household of more than four individuals, the highest median family income of the applicable state for a family of four or fewer indi­viduals, plus $525 per mcnth for each individual in excess of four. According to a new definiticn of “median family income” added to the Code as § 1O1~39A), these figures would be as “both calculated and reported by the Bureau of the Census in the then most recent year,” and if this cal­culation and reporting is not in the current year, then ad— 15

justed to “reflect the percentage change in the Consumer Price Index . . . during the period of years occurring af­ter such most recent year and before such current year.” The $525 adjustment for larger families—with the other pro­visions of amended § 707(b) —is made subject to § 104 of the Code, and so would be increased (or decreased) in accor­dance with the cost of living on a triennial basis. With the current $525 monthly adjustment, the annual median in­come figure would be increased by $6300 for each family member above four.

 

The Bureau has recently released income data reflecting the median family income figures required for purposes of

§ 707(b) (6)—(7) . One report, “Income—Median Family Income by Family Size,” provides the data relevant for households of two or more individuals;² another, “Income—Median Family Income by Number of Earners in Family,” provides the data for households of one person.³ These reports use 2003 data, which the Bureau has apparently adjusted for inflation through 2005. As an exam­ple of the range of applicable medians, the following is the relevant information from the repcrts for the state of Illinois:

         1—person household                  $39,407

         2—person families                   49,855

         3—person families                      57, 987

         4—person families                   69,141

 

Because the income figures reflected in the recent reports were “both calculated and reported” in 2005 and because §1O1(39A) only directs inflation adjustment “annually” for the period after the year of the most recent Bureau report and be­fore the year of the bankruptcy filing, the figures could be used without any inflation adjustment in bankruptcy cases filed in 2005 and 2006, However, if the Bureau issued no new report from 2005 to 2007, cases filed in 2007 would use the 2005 fig— 2 This report is available at

 

<http: //www.census.gov/hhes/www/income/medincsizeandstate.html> (last visited June 4, 2005) . It can be anticipated that this data will also be available on the website of the United States Trustee Program.

 

This report is available at <http: //www. census.gov/hhes/www/income/medincearnersandstate.htm

1> (last visited June 4, 2005) . It can be anticipated that this data will also be available on the website of the United States Trustee Program.

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ures adjusted by the percentage change in the Consumer Price In­dex for 2006 (a year after the current report but before the 2007 filing) .~

 

Presumption of abuse under the means test. The presumption of abuse, set out in a new § 707(b) (2), is governed by a means test, designed to determine the extent of a debtor’s ability to repay general unsecured claims. The means test has three ele­ments: (a) a definition of “current monthly income,” measuring the total income a debtor is presumed to have available; (b) a list of allowed deductions from current monthly income, for pur­poses of support and repayment of higher priority debt; and (c) defined “trigger points,” at which the income remaining after the allowed deductions would result in the presumption of abuse.

 

(a) Presumed income. “Current monthly income” is defined in a new § 1O1(1OA) as a monthly average of all the income re­ceived by the debtor (and the debtor’s spouse in a joint case)—including regular contributions to household expenses made by other persons, but excluding Social Security bene­fits and certain victim payments—during a defined six—month period. Earlier versions of the reform legislation pro­vided that this period would be the six-month period ending with the last day of the calendar month preceding the fil­ing, but only if the debtor filed a statement of current monthly income at the time of the filing. However, S. 256 uses this six—month period in any case where the debtor files the statement of current income, without regard to when the filing is made. .Thus, for example, if a bank­ruptcy case were filed in March, as long as the debtor filed a statement of income, current monthly income would be the average monthly income received by the debtor during the preceding September through February. However, if the

 

The Consumer Price Index for All Urban Consumers is maintained by the U.S. thpartinent of Labor, Bureau of Labor Statistics, and is reported on the Bureau’s website, currently available at <http://www.bls.govlcpi/home.htin>(last visited June 4, 2005). It can be anticipated the United States Trustee Program will compute and report any necessaiy inflation adjustments to census data.

 

⁶Fed. FL Bankr. P. 4008 does provide that a motion by the debtor for approval of a reaffirmation agreement must be filed before or at the time of a hearing under § 524(d), but approval of reaf­firmation agreements is not required for represented debtors and § 524(d) hearings are optional with the court. Section 524(c) (1) requires only the agreement be “made before the granting of the discharge.”

 

 

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debtor failed to file the required income statement, then the six—month period ends on the date that the court deter­mines “current monthly income.”

 

(b) Presumed deductions. The deductions from current monthly income allowed under the means test are set out in new § 707(b) (2) (A) (ii)—(iv) and can be categorized as fol­lows:

 

(1) Living expenses specified under standards of the Internal Revenue Service. The IRS has developed living ex­pense standards to provide guidance for its agents in nego­tiating consensual payment of overdue taxes. The IRS’s website, <http://www.irs.gov/individuals/article/O, ,id=96543,00.html

>, explains the standards and links to tables of allowed expenses.

 

The specified expense allowances are of two types. First, “National Standards” establish allowances for food, clothing, personal care, and entertainment, depending on the taxpayer’s family size, on a national basis (except for Alaska and Hawaii, which have higher allowances) . Under the means test, debtors can deduct the National Standards amounts with an increase of up to 5% of the food and cloth­ing allowance, if demonstrated to be reasonable and neces­sary.

 

Second, the IRS’s “Local Standards” establish allow­ances for transportation (on a regional basis) and housing (on a ccunty by county basis) . It can be expected that the Executive Office for United States Trustees will issue ta­bles of the IRS standards applicable in each relevant geo­graphical area. However, it is unclear whether for pur­poses of the means test a debtor may claim the full amount specified in the Local Standards or only the amount actu­ally expended by the debtor up to those amounts.

 

In any event, the means test requires that the amounts deducted by the debtor under the National and Local stan­dards be reduced by whatever portion of the allcwance re­flects repayment of debt. Thus, repayment of a car loan would be deducted from the IRS Local Standard allowance for acquiring transportation. The legislation does not explain how mortgage payments are to be deducted from the IRS Local Standard for housing, which does not distinguish mainte­nance from acquisition costs.

 

 

 

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(2)    The actual expenses of the debtor in categories recognized by the IRS but as to which no specific allowance has been specified. The IRS recognizes a third category of expenses (“Other Necessary Expenses”) , for which it does not specify an allowance. The means test provides that “reasonably necessary health insurance, disability insur­ance, and health savings account expenses” may be deducted by the debtor. The latter provision could result in actual expenses of the debtor for insurance not being deducted from current monthly income if the insurance is found not to be reasonably necessary.

 

(3)    Expenses for protection from family violence.

 

(4) continued contributions to care of nondependent family members. The family members to whom these contribu­tions may be made include children, grandchildren, step­children, and step—grandchildren.

 

(5)    Actual expenses of administering a Chapter 13 plan. These expenses are to be determined by the Executive Office for United States Trustees and applied to “projected plan payments.”

 

(6) Expenses for grade and high school (up to $1500 annually, per minor child). To claim this allowance the debtor is required both to document the reasonableness and necessity for the expenses and to show that the expenses are not covered by the applicable IRS standards.

 

(7) Additional home energy costs. Again, the debtor would have to document the expenses as reasonable and nec­essary and not covered by the IRS Local Standards.

 

(8)    1/60th of all secured debt that will become due in the five years after filing. Past due debt may only be in­cluded in this amount if it is secured by property neces­sary for support of the debtor and the debtor’s dependents.

 

(9) 1/60th of all priority debt.

 

(10) Continued contributions to tax—exempt charities. This deduction is provided for under current § 707(b) , and is newly codified as § 707(b) (1). No limit is placed on the amount of the contributions.

 

 

 

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(c) Trigger points. Two distinct trigger points for the presumption of abuse are set cut in § 707(b) (2(A) (1) : (1) if the debtor has at least $166.67 in current monthly income available after the allowed deductions ($10,000 for five years) , abuse is presumed regardless of the amount of the debtor’s general unsecured debt, and (2) if the debtor has at least $100 of such income ($6000 for five years) , abuse is presumed if the income is sufficient to pay at least 25% of the debtor’s general unsecured debt over five years. The impact of these trigger points can again be shown in a table

“Current monthly in- come” after defined deduc­ Li on 5	Presumption of abuse
Less than $100	Does not arise
$100	Arises unless debt exceeds $24,000
$150	Arises unless debt exceeds $36,000
$166.66	Arises unless debt exceeds $39,998.40
More than $166.66	Always arises

   (d)           Rebuttal. To rebut the presumption, §707(b) (2) (B) re­quires that a debtor swear to and document “special circum­stances” that would decrease income or increase expenses so as to bring the debtor’s income after expenses below the trigger points.

 

General grounds for abuse. The other basis for a finding of abuse, applicable under § 707(b) (3) where the presumption does not apply or has been rebutted, is that the debtor filed the pe­tition in bad faith or that the totality of the debtor’s finan­cial circumstances indicates abuse. As noted above, the U.S. trustee, bankruptcy administrator or judge can assert this basis for finding abuse in any case; creditors and case trustees are limited to asserting it in cases where the debtor’s income is above the defined state median.

 

Procedure. Section 707(b) (2) (C) requires debtors to file a statement of their calculations under the means test as part of the schedule of current income and expenditures under § 521. If the presumption arises, then, under § 342(d), the court is re­quired to notify creditors within 10 days of the filing of the

 

 

 

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petition. In addition, under § 704(b), (1) the U.S. trustee or bankruptcy administrator is required to review the debtor’s ma­terials and file with the court, within “10 days after the first meeting of creditors,” a statement as to whether the presumption of abuse arises, a copy of which the court must “provide to all creditors,” and (2) if the presumption arises, the U.S. trustee or bankruptcy administrator must file either a motion under § 707 (b) or a statement explaining why the motion is not being filed.

 

2.  Sanctions imposed on debtor’s counsel

 

• S. 256 § 102(a) (2)

 

Section 707(b) is amended to add several new duties and li­abilities of debtcrs’ counsel:

 

• Subparagraph (4) (A) allows the court to award costs and fees to a trustee who successfully pursues a § 707(b) mo­tion, payable by debtor’s ocunsel, if it finds that the Chapter 7 filing violated Fed. R. Bankr. p. 9011.

 

• Subparagraph (4) (B) specifies that if the court

finds any violation of Rule 9011 by the debtor’s attorney, it

may award a civil penalty against the attorney, payable to the

trustee, U.S. trustee, or bankruptcy administrator. Pursuant to

§ 103(b) of the Code, this provision would apply only in Chapter

7 cases.

 

• Subparagraphs (4) (C) and (D) set out a statutory parallel to Fed. R. Civ. P. 11, providing that the signature of a debtor’s attorney constitutes a certification that the attor­ney has “performed a reasonable investigation” and determined that the signed documents is well grounded in fact, that any Chapter 7 petition is not an abuse under § 707 (b) , and that “the attorney has no knowledge after an inquiry that the information in the schedules filed with [the] petition is incorrect.” This statutory restatement of Rule 11 includes no provision for sanctions in the event that its signature certification is in­correct.

 

• S. 256 §~ 227—29

 

Under new § 526, debtors’ counsel are subject to loss of fees, damages, injunctive remedies, and imposition of costs for any failure to meet new disclosure and record—keeping require­ments imposed on “debt relief agencies” in new §~ 527 and 528.

 

 

 

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“Debt relief agency” is defined in new § 101 (12A) as “any person whc provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable considera­tion.” “Assisted person” is defined in new § 101(3) as “any per­son whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150,000.” Ac­cordingly, bankruptcy lawyers who represent only nonpaying debt­ors or owners of businesses and other relatively wealthy indi­viduals would not be covered. Amcng the new provisions are an obligation to include specified statements in advertisements (~ 528) and an obligation to retain for two years a copy of each of several notices required to be given to any “assisted person”

(~ 527)

 

S. 256 § 319

 

A sense of Congress is set out, stating that Fed. R. Bankr. P. 9011 should be amended to include a requirement that all documents submitted by a debtor either to the court or a trus­tee, specifically including schedules, be subject to a reason­able inquiry by the debtor or the debtor’ s ocunsel to verify that the docu