BAPCPA Analysis of Consumer Provisions - Michael Barnett, PA

¶1.1 Counsel is now permitted to sharing compensation with a public service attorney referral program operating in compliance with state and local laws regarding referral services and with all bar or other professional conduct rules regarding attorney acceptance of referrals.

§504(c) This section [limiting sharing of compensation] shall not apply with respect to sharing, or agreeing to share, compensation with a bona fide public service attorney referral program that operates in accordance with non-Federal law regulating attorney referral services and with rules of professional responsibility applicable to attorney acceptance of referrals.

¶1.2 Debt Relief Agency

¶1.21 Debtor’s counsel is a generally a debt relief agency, with the possible exception of pro-bono cases. §526 sets out the requirements all debt relief agencies (including debtor’s counsel) must follow.

Cases:

Georgia:

In re Attorneys at Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005). Judge Lamar W. Davis, Jr., Chief Judge of the Southern District of Georgia, has ruled that these provisions generally will not cover attorney admitted before his court. The Office of the US Trustee has appealed this order.

In the Middle District, Judge Hershner ruled that he did not have jurisdiction to determine whether debtor’s attorney qualified as Debt Relief Agency under BAPCPA in absence of some party threatening to enforce the DRA provisions against counsel. In re McCartney, 336 BR 588 (Bankr. M.D. Ga. 2006). Debtor’s attorney filed a request to determine counsel’s status, alleging that the DRA provisions of BAPCPA are unconstitutional as applied to attorneys practicing in the court, that the statutory structure indicated that attorneys were not DRA’s, and that legislative history indicated that the provisions were not intended to apply to attorneys. The US Trustee filed a response.

The Court initially determined whether Debtor’s counsel had met the burden of proof of showing that the motion involved a ‘case or controversy’ citing Wolff v. Cash 4 Titles, 351 F.3d 1348, 1353 (11^th Cir. 2003). In order to meet this requirement, the litigant must show ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent.’ The litigant must have suffered some threatened or actual injury that is subject to redress by a favorable ruling. The injury or threat of injury must be both real and immediate, not conjectural or hypothetical. Three elements are required to meet the case or controversy requirement: 1) the plaintiff must demonstrate ‘actual injury’; 2) the plaintiff must demonstrate a causal link between the challenged conduct and the injury; 3) it must be likely rather than speculative that the injury will be redressed by a favorable ruling.

Since no one has threatened to enforce the Debt Relief Agencies provisions against the counsel, counsel has not suffered any harm or injury and has not shown that he is at risk of suffering harm or injury. Thus the Court determined it lacked jurisdiction to determine whether the DRA provisions applied to counsel.

§101(12A)The term ‘debt relief agency’ means any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110, but does not include –

(A) any person who is an officer, director, employee, or agent of a person who provides such assistance or of the bankruptcy petition preparer;

(B) a nonprofit organization that is exempt from taxation under section 501(c)(3) of the Internal Revenue Code of 1986;

(C) a creditor of such assisted person, to the extent that the creditor is assisting such assisted person to restructure any debt owed by such person to the creditor;

(D) a depository institution (as defined in section 3 of the Federal Deposit Insurance Act) or any Federal credit union or State credit union (as those terms are defined in section 101 of the Federal Credit Union Act), or any affiliate of subsidiary of such depository institution or credit union; or

(E) an author, publisher, distributor, or seller of works subject to copyright protection under title 17, when acting in such capacity.

¶1.22 DRA’s must show in all advertisements for bankruptcy assistance or the benefits from bankruptcy directed to the general public (including direct mail, websites, and answering machines) that the services are with respect to bankruptcy relief under Title 11. Thus, advertisements simply stating that federal law may permit reduction of debt or stop foreclosures or the like must disclose that the referenced law is the bankruptcy code. The telephone answering machine message may need to be modified to disclose that the firm is involved in assisting individuals in bankruptcy; while at the same time making clear that the firm is not then offering to assist the caller in any matter. For a definition of bankruptcy assistance, see §101(4A) and related discussion. For further statutory expansion of advertisements subject to these sections, see §528(b).

§528(a) A debt relief agency shall-

(3) clearly and conspicuously disclose in any advertisements of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public (whether in general media, seminars or specific mailings, telephonic messages, or otherwise) that the services or benefits are with respect to bankruptcy relief under this title; and

¶1.23 All advertisements subject to §528(a)(3) also must make the a statement substantially similar to the following in such advertisement. “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”

Cases:

Requirement is not unconstitutional under 5^th Amendment. Milavetz Gallop & Milavetz, PA v United States, __ U.S. ___, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010).

9^th Cir.

Requirement not unconstitutional under 1^st Amendment as false speech. Olsen v Holder, 402 F.Appx 311 (9^th Cir. 2010). §528 permits debt relief agencies to customize the required disclosure statement so long as it is ‘substantially similar’ to the statement in the statute, therefore appellee is not compelled to engage in false speech.

§528(a) A debt relief agency shall-

(4) clearly and conspicuously use the following statement in such advertisement: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” or a substantially similar statement.

§528(b)(1) An advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public includes –

(A) descriptions of bankruptcy assistance in connection with a chapter 13 plan whether or not chapter 13 is specifically mentioned in such advertisement; and

(B) statements such as “federally supervised repayment plan” or “Federal debt restructuring help” or other similar statements that could lead a reasonable consumer to believe that debt counseling was being offered when in fact the services were directed to providing bankruptcy assistance with a chapter 13 plan or other form of bankruptcy relief under this title.

(2) An advertisement, directed to the general public, indicating that the debt relief agency provides assistance with respect to credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressure, or inability to pay any consumer debt shall-

(A) disclose clearly and conspicuously in such advertisement that the assistance may involve bankruptcy relief under this title; and

(B) include the following statement: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” or a substantially similar statement.

¶1.24 DRA’s must perform any service that it informed an assisted person it would perform in connection with a case under this title. §526(a)(1). Thus, if a law firm’s advertisement states same day filing, and it cannot do this for a client that comes in at 5:00pm appointment with none of the required information, that may be a violation of this section. If the ad promises restoration of credit after the bankruptcy, or promises to wipe out debts, or stop foreclosures, or anything related to bankruptcy: and due to the circumstances of the individual case it doesn’t happen: counsel may have violated this section. Therefore it is critical to review any advertising to insure that nothing is promised that cannot be delivered in every case.

§526(a) A debt relief agency shall not-

(1) fail to perform any service that such agency informed an assisted person or prospective assisted person it would provide in connection with a case or proceeding under this title;

¶1.25 It is very important that neither the advertising from counsel nor the initial contact by the staff when the client calls to set an appointment constitutes an offer to provide bankruptcy assistance, since this triggers the additional requirement for the written disclosure of §527(a)(2). Thus, when the law firm gets the call from that client that keeps wanting assurance that counsel can help them before they come in for an appointment, the staff must be firm that the attorney will discuss whether the attorney can help at the appointment, and not before.

¶1.26 DRA’s cannot misrepresent, either directly or by material omission, what services will be provided by the firm and the benefits and risks from filing a bankruptcy. §526(a)(3). ‘Puffing’ or overly optimistic descriptions of what bankruptcy can accomplish, either in advertisements or in oral or written communications with ‘assisted persons’ could violate this section. Be sure you know what your staff is telling potential clients to get them in the door.

§526(a) A debt relief agency shall not-

(3) misrepresent to any assisted person or prospective assisted person, directly or indirectly, affirmatively or by material omission, with respect to –

(A) the services that such agency will provide to such person; or

(B) the benefits and risks that may result if such person becomes a debtor in a case under this title; or

¶ 2 Appointment with Attorney

¶2.1 Limitations on communications:

A DRA is not permitted to recommend that the client/potential client incur additional debt or recommend that such person pay an attorney or bankruptcy petition preparer for services in preparing the petition or representing them in a bankruptcy. Thus, while counsel may recommend that they file bankruptcy, counsel cannot recommend that they pay for it. Counsel may, of course, decline to file the case without payment, can describe the payment that counsel would require to file, but cannot specifically recommend paying such fee. Also, it would appear to be a violation to, for instance, recommend that the client trade in their car for a new car prior to filing. It would even seem to be a violation to recommend that they get insurance on the vehicle or house if any of the insurance is financed. There may be constitutional problems with this section. This section would also seem to prohibit putting a portion of the chapter 13 fee in the plan. Some courts have instituted a procedure determining in the confirmation order that payment of fees in the plan is not a violation of this section. This would then become res judicata preventing future problems in that case on the issue. More courts should be encouraged to emulate such procedure.

Limitation against advice to incur debt is applies only wihen the impetus of the advice to incur more debt is the expectation of the filing for bankruptcy and obtaining the attendant relief. Milavetz, Gallop & Milavetz, PA v. US, 170 L.Ed.2d 79, 130 S.Ct. 1324 (2010). The Bankrutpcy Code authorizes the court to decline to discharge fraudulent debts, §523(c)(2), or to dismiss or convert a case if it finds that granting relief would constitute abuse, §707(b)(1). Attorneys and professionals who give debtors bankruptcy advice must know of these provisions and their consequences for a debtor who in bad faith incurs additional debt prior to filing relief. §707(b)(4)(C) states that an attorney’s signature on bankruptcy filings shall constitute a certification that the attorney has determined that the filing does not constitue an abuse under §707(b)(1). A lawyer shall not counsel a client to engage, or assist a client, in conduct the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may assist the client to make a good faith effort to determine the validity, scope, meaning or application of the law.

§526(a) A debt relief agency shall not-

(4) advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.

¶2.2 Written DRA disclosure regarding accuracy of information: within three days of the first date on which counsel offers to provide bankruptcy assistance the firm must provide the written disclosure required by §527(a)(2). This includes a statement that all information on the petition and later disclosures must be true, accurate, and complete; that all assets and liabilities must be disclosed with replacement value of such assets; income and expenses must be disclosed as required, and all information may be audited, and failure to accurately and completely disclose may result not only in dismissal but criminal sanctions. As to replacement value, the point has been raised that the ‘documents filed to commence the case’ is the voluntary petition, which does not show any values. Even a broader interpretation, to include schedules, §527(a)(2)(B) refers to replacement value ‘in those documents where requested’ but since the schedules do not request replacement value, this may be inapplicable.¹

§527(a)(2) to the extent not covered by the written notice described in paragraph (1), and not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person, a clear an conspicuous written notice advising assisted persons that –

(A) all information that the assisted person is required to provide with a petition and thereafter during a case under this title is required to be complete, accurate, and truthful;

(B) all assets and all liabilities are required to be completely and accurately disclosed in the documents filed to commence the case, and the replacement value of each asset as defined in section 506 must be stated in those documents where requested after reasonable inquiry to establish such value;

(C) current monthly income, the amounts specified in section 707(b)(2), and, in a case under chapter 13 of this title, disposable income (determined in accordance with section 707(b)(2)), are required to be stated after reasonable inquiry; and

(D) information that an assisted person provides during their case may be audited pursuant to this title, and that failure to provide such information may result in dismissal of the case under this title or other sanction, including criminal sanction.

¶2.3 DRA disclosure re General Bankruptcy Information: at the same time as a DRA provides the §527(a)(1)/342(b)(1) disclosure, a DRA must provide the §527(b) disclosure. In practical terms, all of these should be provided initially to the potential client at the initial appointment with counsel. The section 527(b) disclosure notes that the client can file pro-se, can file with an attorney, or may be able to file with a petition preparer. Attorneys and petition preparers are required to provide a contract with the client showing what they will do and what it will cost. It notes that either the client or the attorney (but not the petition preparer apparently) should analyze the different cases and the clients eligibility for each, mentions some of the filing documents, reaffirmations, chapter 7 and 13 cases, and notes that petition preparers are not permitted to provide legal advice.

§527(b) A debt relief agency providing bankruptcy assistance to an assisted person shall provide each assisted person at the same time as the notices required under subsection (a)(1) the following statement, to the extent applicable, or one substantially similar. The statement shall be clear and conspicuous and shall be in a single document separate from other documents or notices provided to the assisted person:

IMPORTANT INFORMATION ABOUT BANKRUPTCY ASSISTANCE SERVICES FROM AN ATTORNEY OR BANKRUPTCY PETITION PREPARER.

If you decide to seek bankruptcy relief, you can represent yourself, you can hire an attorney to represent you, or you can get help in some localities from a bankruptcy petition preparer who is not an attorney. THE LAW REQUIRES AN ATTORNEY OR BANKRUPTCY PETITION PREPARER TO GIVE YOU A WRITTEN CONTRACT SPCIFYING WHAT THE ATTORNEY OR BANKRUPTCY PETITION PREPARER WILL DO FOR YOU AND HOW MUCH IT WILL COST. Ask to see the contract before you hire anyone.

The following information helps you understand what must be done in a routine bankruptcy case to help you evaluate how much service you need. Although bankruptcy can be complex, many cases are routine.

Before filing a bankruptcy case, either you or your attorney should analyze your eligibility for different forms of debt relief available under the Bankruptcy Code and which form of relief is most likely to be beneficial for you. Be sure you understand the relief you can obtain and its limitations. To file a bankruptcy case, documents called a Petition, Schedules and Statement of Financial Affairs, as well as in some cases a Statement of Intention need to be prepared correctly and filed with the bankruptcy court. You will have to pay a filing fee to the bankruptcy court. Once your case starts, you will have to attend the required first meeting of creditors where you may be questioned by a court official called a ‘trustee’ and by creditors.

If you choose to file a chapter 7 case, you may be asked by a creditor to reaffirm a debt. You may want help deciding whether to do so. A creditor is not permitted to coerce you into reaffirming your debts.

If you choose to file a chapter 13 case in which you repay your creditors what you can afford over 3 to 5 years, you may also want help with preparing your chapter 13 plan and with the confirmation hearing on your plan which will be before a bankruptcy judge.

If you select another type of relief under the Bankruptcy Code other than chapter 7 or Chapter 13, you will want to find out what should be done from someone familiar with that type of relief.

Your bankruptcy case may also involve litigation. You are generally permitted to represent yourself in litigation in bankruptcy court, but only attorneys, not bankruptcy petition preparers, can give you legal advice.

¶2.4 DRA disclosure as to how to fill out information: Unless counsel provides the required information for the petition and schedules itself after a reasonably diligent inquiry, counsel must provide another disclosure to the client describing how the client should value assets at replacement value, determine income and expenses in accordance with §707(b)(2) and related calculations, how to complete the list of creditors including amount owed and how to determine the correct address to use; and how to determine exemptions.

An argument has been raised that while §527(c)(1) requires advice to the ‘assisted person’ of how to value assets at replacement value, that is irrelevant for filling out the schedules in the case. See ¶ 2.2 above.

A number of bankruptcy filing programs have an option to order credit reports and asset reports. This will probably be used more after BAPCPA. However, counsel will still need 6 months of statements from creditors (if possible) to determine the correct address for creditors, and should review payroll records to confirm the income and expenses.

§527(c) Except to the extent the debt relief agency provides the required information itself after reasonably diligent inquiry of the assisted person or others so as to obtain such information reasonably accurately for inclusion on the petition, schedules or statement of financial affairs, a debt relief agency providing bankruptcy assistance to an assisted person, to the extent permitted by nonbankruptcy law, shall provide each assisted person at the time required for the notice required under subsection (a)(1) reasonably sufficient information (which shall be provided in a clear and conspicuous writing) to the assisted person on how to provide all the information the assisted person is required to provide under this title pursuant to section 521, including-

(1) how to value assets at replacement value, determine current monthly income, the amounts specified in section 707(b)(2) and, in a chapter 13 case, how to determine disposable income in accordance with section 707(b)(2) and related calculations;

(2) how to complete the list of creditors, including how to determine what amount is owed and what address for the creditor should be shown; and

(3) how to determine what property is exempt and how to value exempt property at replacement value as defined in section 506.

¶2.5 Retention of DRA disclosures: A DRA is required to retain a copy of all the §527 disclosures for 2 years after the date on which the notice is given. It would seem advisable to have the potential client sign and date each notice, acknowledging receipt of a copy of each. Note that copies of all these forms must be retained whether or not the potential client ever retains the firm. The statute does not require that the original be retained, but rather just a copy, so presumably an electronic copy should suffice.

§527(d) A debt relief agency shall maintain a copy of the notices required under subsection (a) of this section for 2 years after the date on which the notice is given the assisted person.

¶3 Contract:

¶3.1 Within 5 days of the first date on which a DRA provides any bankruptcy assistance services (ie any advice regarding bankruptcy) and prior to filing any case, the DRA must execute a written contract with the person explaining the services the agent will provide and the fee or charges for such services as well as the payment terms. It is critical to note this contract must be provided within 5 days of first making any recommendation to the potential client whether or not counsel is employed within the five days. Thus, best practice would seem to be to provide a separate DRA contract at the initial appointment. If counsel advertises free initial consultation the DRA contract may show no fee for initial DRA advice and also set out the fees and costs for representation in the bankruptcy itself, including contingent fees such as for adversary proceedings.

A copy of this contract must be provided to the petition client.

A strict reading of §101(4A) might require that if an attorney ‘covers’ a 341 or other hearing, that attorney must make a separate DRA contract with the client, and have the client sign it, except that such contract must be executed prior to the bankruptcy petition being filed. Presumably, this might apply if a law firm always has another attorney cover their 341s, but hopefully would not apply where counsel only rarely has other counsel cover a hearing due to illness or a scheduling conflict.

§528(a) A debt relief agency shall-

(1) not later than 5 business days after the first date on which such agency provides any bankruptcy assistance services to an assisted person, but prior to such assisted person’s petition under this title being filed, execute a written contract with such assisted person that explains clearly and conspicuously-

(A) the services such agency will provide to such assisted person; and

(B) the fees or charges for such services, and the terms of payment;

(2) provide the assisted person with a copy of the fully executed and completed contract;

§101(4A) The term “bankruptcy assistance” means any goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors’ meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title.

¶3.2 In determining the fee to be charged the debtor, the court is now required to consider whether the professional is board certified or has otherwise demonstrated ‘skill and experience’ in the field. Thus, board certified or counsel with demonstrated skill and experience may reasonably charge higher rates in their contract for services.

§330(a)(3) In determining the amount of reasonable compensation to be awarded to an examiner, trustee under chapter 11, or professional person, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including –

(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and expertise in the bankruptcy field;….

¶3.3 The contract with the client cannot waive any of the client’s right under §526 related to obligations of Debt Relief Agencies.

§526(b) Any waiver by any assisted person of any protection or right provided under this section shall not be enforceable against the debtor by any Federal or State court or any other person, but may be enforced against a debt relief agency.

¶3.4 Any contract between a DRA and client (including between bankruptcy counsel and client) that does not comply with the requirements of §§526, 527, and 528 is void and unenforceable except as by the client against the firm.

Case Law:

Michigan:

The provision of §526(c)(1) making a contract unenforceable against a debtor for noncompliance with §§526-528 only applies to requirements in those sections dealing with the terms of such contract, not with the timing of the execution of such contract. In re Humphries, 452 B.R. 261 (E.D. Mich. 2011). Debtor first met the law firm and attorney on November 17, 2009 where the options for bankruptcy were discussed. The first fee agreement was signed on 15 December 2009. A chapter 13 bankrutpcy was filed on 18 January 2010. The law firm filed a fee application in the chapter 13 on July 28, 2010 requesting fees and costs of $7,349.67 less a $1,000 retainer; which application included $520 in fees incurred prior to the initial contract. The trustee objected 1) to allowance of any fees prior to the signed contract, 2) to fees for review of the unsecured claims, 3) fees in the adversary proceeding caused by errors by the law firm, and 4) fees for review a transfer of a claim. The Bankruptcy Court raised the compliance with §526 sua sponte, found that §528(a) required a contract within five days of the intial advice, that such provision was a material requirement of the contract, and based on such failure the contract was unfenforceable under §526(c)(1). The firm filed a timely appeal of the decision.

The appellate court ruled that the bankruptcy judge could raise the §526(a)(1) issue sua sponte, under its authority to take any action or make any determination necessary to or appropriate to enforce or implement court orders or rules. The law firm argued that the initial meeting consisted solely of an explanation of the bankruptcy process, fees and costs, and did not constitute providing legal services. The appellate court did conclude that not all contacts with a law firm constituted the provision of legal services, however the Court found that the time entry in the fee application indicating initial preparation of the bankruptcy schedules contradicted such allegation.

The last argument by the firm was that the five day requirement was not a material requirement of the contract, citing In re Kinsman, No. 10-57364 (Bankr. E.D. Mich. Dec. 14, 2010). The Kinsman Court determined that if all the requirements in sections 526, 527, and 528 are material, then there is no purpose in the word ‘material’ in §526(c)(1). The appellate court ruled that the focus on materiality was in error.

The District Court ruled that §§526-528 were aimed at curbing ‘abusive practices undertaken by attorneys as well as debt relief agencies.’ Milavetz, 130 S.Ct. at 1332, n. 3. §526(c) prescribes the sanctions and remedies to be imposed if a debt relief agency runs afoul of these requirements. §526(c)(1) deals with contracts for bankruptcy assistance, which may not be enforced against a debtor if not in compliance. §526(c)(2) deals with the conduct of debt relief agencies (including law firms) themselves, and consequences if they fail to comply with the requirements. These sections are separate and distinct, but the bankruptcy court’s treatment of the five day provision in §526(c)(1) conflates the two provisions.

The five business day requirement of §528(a)(1) is directed at the conduct of a debt relief agency, not the contents of the agreement for services. The terms of the agreement are governed by the requirements of §§526-528 that prescribe the mandatory and prohibited terms of the agreement for services. The five business day requirement is not a requirement regarding the terms of the contract, and noncompliance is governed by §526(c)(2) rather than §526(c)(1). The authority to avoid contracts for services is triggered only when the contract does not comply with the material requirements of the statute. The bankruptcy court’s determination that the contract was unenforceable under §526(c)(1) was reversed. The District Court concluded that disallowance of the fees was too harsh a remedy for a technical violation of §528 and remanded the case for determination of the proper fee.

§526(c)(1) Any contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with the material requirements of this section, section 527, or section 528 shall be void and may not be enforced by any Federal or State court or by any other person, other than such assisted person.

¶3.5 The notice given to debtors before filing describing the different chapters has changed to include notice regarding the types of services available from credit counseling agencies and warnings regarding the accuracy of the schedules. Since this includes credit counseling disclosures, and is required by the DRA (Debt Relief Agency) disclosure statute, counsel probably should provide this to potential clients prior to or at the time of the initial conference.

§327(a) A debt relief agency providing bankruptcy assistance to an assisted person shall provide –

(1) the written notice required by §342(b)(1),

§342(b) before the commencement of a case under this title by an individual whose debts are primarily consumer debts the clerk shall give to such individual written notice containing –

(1) a brief description of –

(A) chapter 7, 11, 12, and 13 and the general purpose, benefits, and costs of proceeding under each of those chapters; and

(B) the types of services available from credit counseling agencies; and

(2) statements specifying that –

(A) a person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury in connection with a case under this title shall be subject to fine, imprisonment, or both; and

(B) all information supplied by a debtor in connection with a case under this title is subject to examination by the Attorney General.

¶4 Sanctions for violation of DRA requirements

¶4.1 If counsel intentionally or negligently fails to comply with the DRA requirements, fails to file any required document resulting in dismissal or conversion of a case, or disregards the material requirements of the Federal Rules of Bankruptcy Procedure applicable to such DRA, then such counsel or firm would be liable to the client for all fees charged, actual damages, and fees and costs. A notice and hearing is required prior to the finding of such liability. Also, the chief law enforcement officer of the state may bring an action to enjoin any violations of §526 (and maybe §527 and 528 through §526(c)(1)) and to seek damages for such violation including fees and costs of such action. State and federal district courts shall have concurrent jurisdiction of such actions. Finally, the Debtor, US trustee, or the court on its own motion may seek an injunction and civil penalty if the court finds that a DRA intentionally violated this section, or engaged in a clear and consistent (though presumably unintentional) pattern or practice of violating this section. Thus, if counsel’s practices are not in conformity with sections 526-528, then they may lose all fees in multiple cases, and face litigation from everyone from their own client, the courts they practice before, and the state attorney general, even if such violation is unintentional.

§526(c)(2) Any debt relief agency shall be liable to an assisted person in the amount of any fees or charges in connection with providing bankruptcy assistance to such person that such debt relief agency has received, for actual damages, and for reasonable attorney’s fees and costs if such agency is found, after notice and a hearing, to have –

(A) intentionally or negligently failed to comply with any provision of this section, section 527, or section 528 with respect to a case or proceeding under this title for such assisted person;

(B) provided bankruptcy assistance to an assisted person in a case or proceeding under this title that is dismissed or converted to a case under another chapter of this title because of such agency’s intentional or negligent failure to file any required document including those specified in section 521; or

(C) intentionally or negligently disregarded the material requirements of this title or the Federal Rules of Bankruptcy Procedure applicable to such agency,

(3) In addition to such other remedies as are provided under State law, whenever the chief law enforcement officer of a State, or an official or agency designated by a State, has reason to believe that any person has violated or is violating this section, the State-

(A) may bring an action to enjoin such violation;

(B) may bring an action on behalf of its residents to recover the actual damages of assisted persons arising from such violation, including any liability under paragraph (2); and

(C) in the case of any successful action under subparagraph (A) or (B), shall be awarded the costs of the action and reasonable attorneys’ fees as determined by the court.

(4) The district courts of the United States for districts located in the State shall have concurrent jurisdiction of any action under subparagraph (A) or (B) of paragraph (3).

(5) Notwithstanding any other provision of Federal law and in addition to any other remedy provided under Federal or State aw, if the court, on its own motion or on the motion of the United States trustee or the debtor, finds that a person intentionally violated this section, or engaged in a clear and consistent pattern or practice of violating this section, the court may-

(A) enjoin the violation of such section; or

(B) impose an appropriate civil penalty against such person,

(d) No provision of this section, section 527, or section 528 shall –

(1) annul, alter, affect, or exempt any person subject to such sections from complying with any law of any State except to the extent that such law is inconsistent with those sections, and tehn only to the extent of the inconsistency; or

(2) be deemed to limit or curtail the authority or ability-

(A) of a State or subdivision or instrumentality thereof, to determine and enforce qualifications for the practice of law under the laws of that State; or

(B) of a Federal court to determine and enforce the qualifications for the practice of law before that court.

¶5 Initial checks

¶5.1 Check whether the debtor has ever filed before. For a national pacer search see https://pacer.login.uscourts.gov/cgi-bin/login.pl?court_id=00idx.

¶5.2 The time between the filing of a prior chapter 7 (or chapter 11) which resulted in discharge and a new chapter 7 has been expanded from 6 to 8 years. (No changes were made to §727(a)(9), thus the time between a prior chapter 12 or 13 and a new chapter 7 remains the same at 6 years or less, if 100% of unsecured were paid or it was the debtors best efforts and 70% of unsecured were paid). [Note, the 2005 Thompson-West Norton quick reference Code and Rules erroneously does not show this change]. Note the changes to the automatic stay as to any prior filings: §§362(c)(3); 362(c)(4).

§727(a) The court shall grant the debtor a discharge unless –

(8) the debtor has been granted a discharge under this section, under section 1141 or this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

¶5.3 The time between a the filing of a prior 7, 11, or 12 which resulted in discharge and a new chapter 13 has been set to 4 years. The time between a prior 13 and a new 13 has been set for 2 years. This section would not apply if the prior case were dismissed prior to discharge. However, note the changes to the automatic stay as to any prior filings: §§362(c)(3); 362(c)(4).

Case Law:

Arkansas:

Section regarding chapter 13 refilings following prior chapter 13 discharge must be read literally, to prohibit discharge only if new case is filed within 2 years of prior order for relief which ultimately resulted in discharge, not 2 years from prior discharge, In re West, 352 B.R. 482 (Bankr. E.D.Ark. 2006). Prior chapter 13 was filed on 11/29/01, resulting in discharge on 3/22/05; current case was filed on 4/5/06. While recoginizing that it would be rare for a debtor to obtain a discharge in a prior chapter 13 filed less than 2 years before the subsequent case, the plain language of the statute sets this requirement.

Georgia:

The first case under this section found that it is not an eligibility requirement for filing a chapter 13. In re Lewis, 339 B.R. 814 (Bankr. S.D. Ga. 2006). J. Dalis. While §1328(f) prevents issuance of a discharge upon completion of the chapter 13 plan, it is not an eligibility provision. §109(e) establishes the debtor’s eligibility to be a debtor under chapter 13. The trustee also argued that since no discharge can be entered, the case must be considered to be filed in bad faith. However, BAPCPA did not change the good faith factors found in Kitchens v. Georgia Railroad Bank & Trust Company ( In re Kitchens), 702 F.2d 885 (11th Cir.1983). The availability of a discharge is only one factor in determining good faith. Finally, the trustee argued that dismissal is proper under §1307(c)(1), that the case constitutes an unreasonable delay prejudicial to creditors. However, requiring a creditor to wait in pursuing its claim against a debtor until conclusion of the case is not per se unreasonable in and of itself. While this is particularly true of 100% plans, the plan need not pay creditors in full if they are otherwise confirmable. As to secured creditors an orderly distribution of debtor's post-petition income to pay down pre-petition creditor obligations provides for adequate protection of creditor's pre-petition collateral interest and is far superior to a first come first paid race to the courthouse contemplated under non-bankruptcy law. Unsecured creditors have a better chance and more cost-efficient opportunity to be paid in a chapter 13 plan under court supervision than contemplated under available state debt-collection law. Merely because the chapter 13 debtor will not receive a discharge under an otherwise confirmable plan does not establish unreasonable delay that is prejudicial to creditors.

South Carolina:

The four year time period requirement between a prior chapter 7, 11, or 12 discharge and a new chapter 13 discharge is computed backwards from the filing of the later chapter 13 case. In re Ratzlaff, 349 B.R. 443 (Bankr. D.S.C. 2006). The Court rejected Debtor’s argument that the time was computed from the prior discharge to the chapter 13 discharge.

Virginia:

The fact that the prior case was initially filed under chapter 7, and subsequently converted to chapter 13 does not change the analysis: if a subsequent chapter 13 case is filed within 4 years of the date the chapter 7 was filed, it is not eligible for a discharge. In re Sours, 350 B.R. 261 (Bankr. E.D.Va. 2006).

§1328(f) Notwithstanding subsections (a) and (b), the court shall not grant a discharge of all debts provided for in the plan or disallowed under section 502, if the debtor has received a discharge –

(1) in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief under this chapter; or

(2) in a case filed under chapter 13 of this title during the 2 year period preceding the date of such order.

¶6 Means Test

¶6.1 The means test does not apply, and the case may not be converted under §707(b)(2) if the debtor is a disabled veteran and the debts occurred primarily when the debtor was either on active duty or performing homeland defense activity.

§707(b)(2)(D) Subparagraphs (A) through (C) shall not apply, and the court may not dismiss or convert a case based on any form of means testing, if the debtor is a disabled veteran (as defined in section 3741(1) of title 38), and the indebtedness occurred primarily during a period during which he or she was –

(i) on active duty (as defined in section 101(d)(1) of title 10); or

(ii) performing a homeland defense activity (as defined in section 901(1) of title 32),

¶6.15 The means test does not apply if the debts are not primarily consumer debts.

Ohio:

In computing whether debts are business or consumer for application of §707(b) liability for leases should not be capped pursuant to §502(b). In re Mohr, 425 B.R. 457 (Bankr. S.D.Ohio 2010) (J. Walter). Debtor was liable on a long term lease for his business, which if counted in full, would make over 50% of his debts non-consumer. Court determined that it should use the initial threshold computations in the schedules in determining eligibility and applicability of the means test was appropriate rather than more extensive computations as required to ultimately determine amount of allowed claims. Upon filing the case the Debtor is obligated to accurately schedule debts as they exist upon filing, thus it is cannot be bad faith to schedule the total amount of liability on that date. Further, the statutory limit is only triggered by a postpetition event, ie an objection to the claim.

¶6.2 Next, determine the amount of monthly income, taking the average of the last 6 months ending on the last day of the month prior to filing, excluding social security (and certain rare war crime/terrorism benefits) income. The first issue is what constitutes ‘income’. While the bankruptcy code does not define this term, §101(10A)(A) distinguishes between ‘income from all sources’ and taxable income; this appears to reflect the Internal Revenue Code distinction between ‘gross income’ (26 USC §61(a)) and ‘taxable income’ (26 USC §63(a)). The Internal Revenue Code then sets out what is included in gross income, including gains on dealings with property, interest, rents, royalties, dividends, alimony and maintenance, pensions (26 USC §61(a)(1)-(11)), prizes and awards (26 USC §74), and unemployment compensation (26 USC §85); as well as what is excluded including gifts (26 USC §101), inheritances (26 USC §102), child support payments (26 USC §74(c)), and qualified foster care payments (26 USC §131)². On the other hand, §101(10A)(B) appears to include child support and foster care payments as income, which is specifically backed out of the income computations in §1325(b)(2). Thus courts will be left to decide how much if any of the Internal Revenue Code standards will apply.

Social security income which is not listed includes ssi payments to both adults and children, unemployment benefits may or may not be included if funded through social services block grants to states under title XX.¹ It also includes programs to provide supplemental income to World War II veterans, blind or disabled individuals age 65 or older.² But, at least one court has ruled that it does not include Railroad Retirement Act benefits, due to the antialienation language in the Railroad Retirement Act statute, and due to the railroad retirement act’s history and similarity with the social security act (see Scholtz), though the 9^th Cir BAP reversed the exclusion from CMI, but upheld the exclusion from computation of disposable income (presumably as a special circumstance deduction). However query whether the same analysis may apply to other antialienation statutes like that for VA benefits, 38 USC §5301.

It is also not entirely clear whether the non-spouse’s income is included in an individual case. Despite Reeves, cited below, the means test as now written includes the non-filing spouse’s income initially, then has a entry to remove so much of the income as is not contributed to household expenses (ie the non-filing spouse’s separate credit cards). Presumably, too high a deduction here would be subject to challenge. Income is defined as including only income received on a regular basis for household expenses. Thus, if a household member other than the joint filing spouse helps toward expenses, it is arguably only those funds paid toward household expenses and only if paid on a regular basis that this should be included.

Cases:

8^th Cir.: The antialienation language of 42 U.S.C. §407(a) prohibits the forced inclusion of past or future social security proceeds in the bankruptcy estate. In re Carpenter, 614 F.3d 930 (8^th Cir. 2010).

9^th Cir: (CA): Private disability insurance is included in CMI. Blausey v US Trustee, 552 F.3d 1124 (9^th Cir., 2009).

Reversing In re Scholz, 9^th Cir. BAP found that Railroad Retirement benefits are included in CMI, but excluded from calculations for disposable income. In re Scholz, 447 B.R. 887 (9^th Cir. BAP, 2011). §101(10A)(B) specifically enumerates types of income to be excluded from the means test, and railroad retirement income is not one of the sources of income excluded therein. While the Social Security Act (SSA) and the Railroad Retirement Act (RRA) share many similarities, there are substantial differences between them. Unlike the SSA, some benefits under the RRA function like a private pension plan. However, the Court agreed with the Bankruptcy Court that §231m of the RRA that prohibits anticipation of the RRA benefits prevents inclusion of the benefits in computing disposable income. The Court also noted it appeared likely that the omission of RRA benefits from the statutory exclusion from CMI could have been mere oversight by Congress, but noted it was not their job to correct Congressional error.

10^th Cir:

Court adopts ‘forward looking approach’ which modifies projected means test income over length of plan subject to debtor’s actual circumstances at the time of confirmation to determine applicable median income; but limits an adjustment to require a substantial change of circumstances. In re Lanning, 545 F.3d 1269 (10^th Cir. 2008).

California:

Railroad Retirement Act benefits are in lieu of social security income, drafting and purpose very similar to social security act, and includes antialienation language which has the effect of excluding such income from the means test. In re Scholz, 427 B.R. 864 (Bankr. C.D.Cal 2010). Debtor alleged that Railroad Retirement Act income from debtor was excluded from B22C as received under the social security act. The Court rejected this argument, but accepted the alternative argument. The court traced the history of the Railroad Retirement Act and the Social Security Act, which was very similar. The court also noted that 42 USC §407 providing bar against use of any legal process to reach social security benefits has been used by courts for some time to make them free from the reach of bankruptcy law; and therefore BAPCPA only clarified and confirmed existing law excluding such benefits rather than creating new laws. Since the Railroad Retierment Act has similar anti-alienation language, the same policy should apply to these benefits. Reversed In re Scholz, 447 B.R. 887 (9^th Cir. BAP, 2011).

CMI includes all income received during the 6 months prior to filing, even if earned before such time. In re Katz, 451 B.R. 512 (Bankr. C.D. Cal. 2011). Debtor was physician receiving a salary of approximately $27,638/month as well as quarterly bonuses, which are reasonably regular. The Debtor is separated from his spouse and has limited custody of his three children. He pays substantial child support and alimony. Debtor’s apartment exceeds the allowance under the IRS Standards for a family of four. Debtor claimed two vehicle expense allowances asserting that he leases a SUV for use with the children which allows limited mileage on the lease, and a Jetta for commuting to work. US Trustee filed motion to dismiss under §707(b).

The Debtor argued he should be entitled to omit the bonus payments received during the 6 months prior to filing in that they were based on work performed before the commencement of the six month period, since the language of the statute refers to funds received and derived during such period. The Court rejected this interpretation, finding that the test is money received during the six months, and derived simply refers to the period in which such calculation is made, not when such money was earned. The Court also ruled that the Debtor could not include in the CMI computations payments toward child support arrearages on the line for domestic support obligations, as §707(b)(2)(A)(ii) specifically excludes payments for debts, though such amount is allowed separately as a payment on a priority debt. Debtor did not provide adequate documentation of his other additional expenses, and the request to dismiss was granted.

Idaho:

Debtor’s post-confirmation social security disability income award is a basis for modification of plan by trustee notwithstanding exempt status of award and law excluding such income from reach of creditors. In re Hall, 442 B.R. 754 (Bankr. D.Idaho 2010). Debtor received $44,377.50 lump sum award, and $1,133/month award of social security disability after confirmation of the plan, of which all but $15,000 was spent prior to the hearing on the trustee’s motion to amend. The Debtors amended the budget to show increase in expenses accounting for virtually all of the $1,133/month. The court ruled that the increased social security disability income could be used for debtor’s basic needs, offsetting non-social security income thereby avoiding violation of the antialienation clause of 42 U.S.C 407; but since the expenses increased proportionately no increase in the monthly plan payment was required. However, the court did require payment of the balance of the lump sum award toward the plan.

Illinois:

Bankruptcy Court found that monthly loan forgiveness to employee, who as part of the initial employment contract obtained a loan a portion of which was forgiven each month he continued employment, did not constitute income during the six months prior to filing. In re Killian 422 B.R. 903 (Bankr. N.D.Ill. 2009). Court stated it was not bound by tax code’s definition of gross income, but can look to definitions in the tax code to clarify udefined terms in the Bankruptcy Code. Id. at 908. In determing whether an advance is a loan or an advance is whether at the time the advance was made the parties actually intended repayment. Id. at 910. The obligation must be uncontingent and not conditioned on a future event. Thus, under these facts the advance would have counted as income when initially made and does not constitute ongoing income during the employment contract.

Earned income tax credit is counted toward income both in CMI and on I & J, though may be exempt under Illinois law as public assistance benefit. In re Royal, 397 B.R. 88 (Bankr. N.D.Ill 2008). Below median income debtor listed in plan that they would turn over all tax refunds to trustee excluding earned income credits. Trustee objected both on good faith and disposable income grounds, and as to exemptions. Though below median income, debtor computed plan payments based in part on means test figures. The Court ruled that CMI under §101(10A) is sufficiently broad to include earned income credits, even though exluded from the IRS’s definition of income for tax purposes. The Court also noted that some of debtor’s expenses were unrealistically low, leading to a likelihood that the debtor was deferring expenses to pay with the earned income credit, and suggested amending the plan to reduce the monthly payment with an increase upon receipt of the tax credit.

Missouri:

In dicta in a pre-BAPCPA case, Judge Dow in Missouri indicated that the code seems to indicate that the spouse’s income should only be considered in a joint case. In re Reeves, 327 B.R. 436 (Bankr. W.D. Mo. 2005) (FN 7).

Montana:

Social security benefits excluded from §1325(b)(1)(B) disposable income test pursuant to pre-BAPCPA antialienation statute in the social security law: 42 USC §407, BAPCPA did not modify this exclusion. In re Welsh, 440 B.R. 836 (Bankr. D.Mont. 2010).

New York:

Court found that non-recurring income received within the 6 months prior to filing was included in disposable income computations, and could not be backed out as special circumstances. In re Cotto, 425 B.R. 72 (Bankr. E.D.N.Y. 2010). §101(10A) does not distinguish between income that is non-recurring and income that will be received on an on-going basis. A request to eliminate such income as a special circumstance flies in the face of Congresses clear intent to include income from all sources in CMI. Note that the timing of the filing of the case could have avoided this issue, and also chapter 13’s greater emphasis on on-going income also could result in lower payment in converted case.

Ohio:

CMI includes exemption pension income. In re Briggs, 440 B.R. 490 (Bankr. S.D.Ohio 2010). In filling out the means test, the Debtor excluded his Ohio state pension of $32,686/year. Debtor argues that being exempt, the income was not available for payment to his creditors and must be excluded from the means test. The Court rejected this argument, finding no reference to §522 in §707(b). Further, §101(10A)(B) specifically enumerates the income excluded from the means test, and omits any exclusion of exempt income.

Pennsylvania:

Trustee had burden of proof to show that domestic partner’s income should be considered in income computation of debtor when there is no legal obligation for combining assets or liabilities. In re Holmes, 496 B.R. 765 (Bankr. M.D. Pa. 2013).

South Carolina:

Debtors not required to devote social security income to plan repayment in order to confirm plan. In re Miller, 445 B.R. 504 (Bankr. D.S.C. 2011). Debtor received $588/month in social security benefits, and her spouse received $1,545/mo in social security benefits as well as $2,823/mo in VA disability benefits. The spouse resides in a nursing home for which the household bears no cost. Schedules I&J show excess income over expenses of $2,388/month. The plan proposes payment of $255/mo for 36 months for a 6% dividend to the $87,000 in credit card debt.

The trustee initially argued that the husband’s social security benefit was not ‘received by the debtor’ as required under 11 U.S.C. 522(d)(10)(A) and therefore must be included in CMI. The Court agreed with the Debtor that §101(10A)(A) & (B) excludes benefits received under the social security act; finding that §101(10A) was the more appropriate section to define CMI, and found that it was Congress’ intent to exclud all such benefits from the computation of CMI regardless of whether such benefits are personal to the debtor. Since such benefits are excluded from CMI they must necessarily be excluded from computation of the debtor’s disposable income under under §1325(b)(2).

The Court also cited the antialienation language of 42 U.S.C. §407(a) as a complete bar to forced inclusion of past or future social security proceeds in the bankruptcy estate, citing Carpenter. This limitation applies to any such income, not just that received by the Debtor.

The Court also questioned the wisdom of requiring a non-debtor spouse to contribute social security funds intended for the support and maintenance of such spouse toward a repayment plan to creditors.

The trustee also argued that the plan is not proposed in good faith. The Court found that the debtor was honest in disclosing her financial situation, and that the husband’s ill-health could result in a significant loss of income during the life of the plan. The Debtor is not attempting to retain luxury items, while paying a minimum dividend to unsecured creditors.

Washington:

To be included in CMI income must both be derived from and received during the applicable six month period prior to filing. In re Arnoux, 442 B.R. 769 (Bankr. E.D. Wash 2010). US Trustee filed motion to dismiss alleging that the debtor should have included money earned during the six month period that was received after the six month period. Debtor was paid every two weeks, and received 22 weeks of pay during the six month period. The US Trustee argued that the limiting phrase ‘during the six month period’ relates only to ‘derived’, and not to the word ‘received’, thus resulting in inclusion of all income earned within the six month period regardless of when it was received. The Court rejected this argument. First, the court found that the language of the statute is ambiguous (as shown by contradictory arguments by the US Trustee in prior cases). The Court found that the legislative history refers only to when the income was received, and not to when it was earned. Based on this history the Court concluded that the ‘during the six month period’ limitation applies to both receives and derived, and that only income both received and earned during the period is included in CMI.

§101(10A)(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on –

(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or

(ii) (ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii) and

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of war crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of terrorism.

¶6.23 Nonfiling Spouse Income expenses

Texas: When nonfiling spouse owned vehicles in his name, debtor could not use ownership deduction for vehicles in means test, but rather should house marital adjustment for spouse’s income. In re: Peggy A. Hall Debtor(s), No. 16-20057, 2016 WL 5794728 (Bankr. S.D. Tex. Oct. 4, 2016). Debtor does not discriminate by providing that non-debtor spouse pays debts in his name in full separately, even though plan does not provide for payment of her debts in full, and even though debts were incurred for household expenses. § 707(b)(2)(A)(ii) is unequivocal that “monthly expenses of the debtor shall not include any payments for debts.” 11 U.S.C. § 707(b)(2)(A)(ii).

Virginia: Mortgage payments by non-filing spouse properly included as marital adjustment where debtor and child live with non-filing spouse. In re Marian Leah Baker, No 17-32061-KLP; 2017 WL 5197120 (Bankr. E.D. Va. Nov 8, 2017). House was purchased prior to marriage, and both mortgages obtained prior to marriage. The plain language of §101(10A)(B) provides that Current Monthly Income (CMI) includes amounts paid by any other entity on a regular basis toward debtor’s or debtor’s dependent’s household expenses. Cases that disallow payments on debts from the marital adjustment do so to avoid double dipping on deductions. Since here debtor is not claiming both marital adjustment and secured debt payment, she is not double dipping. Also, since house was purchased prior to marriage and he alone is liable on mortgage, such expenses are not expenses of the debtor or her dependents. The trustee’s solution of including the income but also allowing a mortgage expense on form 122C-2 requires manipulating such form in a manner not envisioned by the rules committee that drafted the form. Line 33 of the ofrm only applies to debts secured by an interest in property that you own.

¶6.3 Compare debtors income to median family income reported by the census bureau for the ‘then most current year’ or, if not so reported, the last reported year as adjusted for the change in the consumer price index. For the census report see census. If the median income is less than the state average for the size of the household, then the court may not dismiss. See also requirements of §707(b)(6), which also must be met for any party other than the US Trustee to file a motion to dismiss. Subsection (B) states that the spouse’s income shall not be included if the case is not filed jointly, and if the debtors are 1) separated or 2) are living separate and apart other than to evade this section. Query whether there is a difference in the 2 standards, other than that if separated the motive does not matter. In determining household size, an issue may arise as to inclusion of college students who lives away from home most of the year. Arguably, if the permanent address of the student is still at home, and lives at home when not in school, and is at least partially supported when at college such student should be included.¹

North Carolina:

Court determined that household size is based on the economic unit of the family, ie individuals whose income and expenses are intermingled with that of the debtor. In re Morrison, 443 B.R. 378 (Bankr. M.D.N.C., 2011). Court included debtor’s boyfriend in household size since he had been paying the mortgage payment, even though they did not share a bank account or have any joint debts.

Debtor allowed household size of 11 where debtor had been supporting his girlfriend, their daughter, and the girlfriend’s eight other children for many years. In re Herbert, 405 B.R. 165 (Bankr. W.D.N.C. 2008). The Court distinguished this situation from where a debtor contrived or concocted a familial situation for purposes of the means test.

Ohio:

Debtors living with 2 dependent and 2 adult children, and 3 grandchildren allowed to claim family of eight where they supported all but one of the adult children; adult child who did not contribute toward household and did not receive assistance from Debtors excluded from household. In re Jewell, 365 B.R. 796 (Bankr. S.D.Ohio, 2007).

Viriginia:

In case involving family size for determination of applicable standards to waive filing fee in chapter 7, court examined US Trustee Programs published position that family size is debtor, spouse, and any dependants that debtor could claim under IRS dependency tests. In re Frye, 440 B.R. 685 (Bankr. W.D.Va. 2010). This position would require examination of the IRS dependency test found at IRS Publication 501. Publication 501 provides a six part test: 1) a relationship test; 2) an age test; 3) a residency test; 4) a financial support test; 5) a joint return test; and 5) a special test for a dependent child of more than one person. Each test must be met for a child to qualify as a dependent. The relationship test requires that h echild must be the son, daughter, stepchild, foster child, or descendant of any of them…of the filng taxpayer (but also may claim as qualifying relative-which does not require any relationship if child lived with taxpayer as a member of the household for the entire year and the relationship did not violate local law). The age test requires that the child be either a) under the age of 19 at the end of the year, or b) under the age of 24 at the end of the year and a full time student, or c) any age if permanently and totally disabled. To meet the residency test, the child must have lived with the parent for over half of the year. To meet the support test the child must not have provided more than half of his or her own support for the year. To meet the joint return test the child must show that it is not filing a joint return for the year. Finding these requirements met the court allowed her 19 year old daughters as dependants and members of her family.

Unmarried father of four children, which on average live four days per week time with the Debtor and the remainder with their mothers, allowed to claim household size of three for purposes of the means test. In re Robinson, 449 B.R. 473 (Bankr. E.D. Va. 2011). Debtor requires a three bedroom apartment in order to accommodate the children (all under age 15), one for him, one for the 2 sons, and one for the 2 daughters. The Debtor has never claimed any of the children as dependents on his tax returns, but hopes to claim two this year. The youngest son has medical problems requiring bi-weekly doctor visits, the Debtor being responsible for such costs. The Debtor initially claimed a household of one, but claimed some expenses from the IRS allowances for a household of five.

Courts have adopted three alternative tests to determine household size for purposes of the means test. The Heads-on-beds or Census Burea approach sets a household size as all the people who occupy a housing unit. The Internal Revenue Service approach uses approach under §707(b)(2)(A)(ii) restricting the household to the debtor, the dependants of the debtor, and the spouse of the debtor in a joint case in which the spouse is not otherwise a dependent. To determine whether a child qualifies as a dependent in this test the Court should examine IRS Publication 501. The Court declined these test, opting instead for the Economic Unit test, which it determined fell between the other two tests.

The Economic Unit test measures the number of individuals in a home that act as a single economic unit, regardless of familial relationship, citing Herbert and Jewell. In interpreting undefined statutory terms the court should use the definition which bests serves the goals of the statute in which the terms are found. The definition of household must be that which leads to the most accurate and realistic calculation of the debtor’s projected disposable income given the economic realities of the debtor’s family circumstances.

The Heads-on-beds approach overstimates the family size by including individuals who are not economically dependent on the debtor. The IRS dependent approach unnecessarily subordinates the Bankruptcy Code to the Internal Revenue Code, undercounting legitimate deductions due to a debtor that financially provides for individuals he does not claim as dependents.

The problems of the approaches are shown in the case at bar. Under the heads on beds approach, given that the children live only part time with the debtor, the test would be inconclusive. The dependency approach would subject the distribution to unsecured creditors to decisions made with the childrens’ mothers as to tax dependency.

Given the part time basis of the debtor’s support of the children, the Court found that each child can best be described as a fractional member of the household. As the four children spend four-sevenths of the week with the Debtor, they approximate two full time members in the aggregate. The Court also noted that while the family size of three may be appropriate for food expenses in the budget, given the necessity of the Debtor maintaining living space for five, the housing expense may well be based on a family of five.

§101(39A) The term ‘median family income’ means for any year –

(A) the median family income both calculated and reported by the Bureau of the Census in the then most recent year; and

(B) if not so calculated and reported in the then current year, adjusted annually after such most recent year until the next year in which median family income is both calculated and reported by the Bureau of the Census, to reflect the percentage change in the Consumer Price Index for All Urban Consumers during the period of years occurring after such most recent year and before such current year.

§707(b)(7)(A) No judge, United States trustee (or bankruptcy administrator, if any), trustee, or other party in interest may file a motion under paragraph (2) if the current monthly income of the debtor, including a veteran (as that term is defined in section 101 of title 38), and the debtor’s spouse combined, as of the date of the order for relief when multiplied by 12, is equal to or less than –

(i) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;

(ii) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or

(iii) in the case of a debtor in a household exceeding 4 individuals, the highest median income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4.

(B) In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for purposes of subparagraph (A) if –

(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or

(II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and

(ii) the debtor files a statement under penalty of perjury –

(I) specifying that the debtor meets the requirements of subclause (I) or (II) of clause (i); and

(II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s current monthly income.

¶6.4 In determining whether an abuse exists under §707(b)(1), the court will examine the ‘means test.’ Counsel must run the means test prior to filing the case, and include a copy of the means test with the petition filing (see §707(b)(2)(C)). The test requires the computation of debtors monthly income as determined under §101(39A) above less allowed expenses in the four categories below, to come up with a monthly net available for creditors. If this figure is less than $100, no abuse is presumed. If the figure is greater than $166.67, then abuse is presumed. If between $100 and $166.67, then the debtors unsecured nonpriority claims are totaled and divided by 4. If the monthly available income x 60 is less than ¼ of the unsecured claims, no abuse is presumed. If the monthly available income x 60 is greater than ¼ of the unsecured claims, abuse is presumed.

The categories of allowed expenses are:

1) The applicable National and Local Standards issues by the IRS in effect on the date of the order for relief for the debtor, dependants, and spouse of the debtor. These standards are divided into Food/clothing, housing, and transportation. These are based on the monthly income of the debtor and the number of family members. To this total the debtor can add expenses (arguably only reasonable expenses) allowed as per the IRS Financial Analysis Handbook for health insurance, disability insurance, term life insurance (but not whole life), health savings accounts (for the debtor or any dependant), reasonably necessary expenses to protect the family from family violence, child care, court–ordered payments (including restitution as well as alimony and child support), medical expenses, dental expenses, taxes, other involuntary deductions from the paycheck, telephone and internet service¹ as well as accounting and legal fees, cell phones, student loans, repayment of loans made for payment of federal taxes, educational expenses, and professional association dues.² The food and clothing expense may be increased by 5% if the debtor demonstrates such increase is reasonable and necessary. There is a theory that the court cannot disallow these expenses since the statutory language allows ‘actual monthly expenses for the categories specified.’

The treatment of leased vehicles raises more issues. While the Internal Revenue Manual states as to the transportation allowance provided by the IRS states that if the taxpayer does not own a car, the standard public transportation amount is allowed, the manual also allows an ownership expense for leased vehicles.²

A more complicated situation arises if the debtor uses someone else’s car, a common situation for debtors. It would seem that Current Monthly Income would need to include car payments and contributions toward car expenses by a 3^rd party that the debtor uses; and consequently the debtor should be allowed an automobile allowance for the car expenses if the income is increased based on such contributions.²

Also allowed are any actual and necessary expenses for the care and support of elderly, chronically ill, or disabled household member (apparently whether or not related) or member of the debtor’s immediate family (apparently whether or not incapacitated, and including grandparents, grandchildren, and siblings) who is unable to pay for such reasonable and necessary expenses. Thus, it would seem if the debtor is assisting in supporting a grandparent, even if the grandparent is not living with the debtor, such expense may be allowed if the grandparent is needs such support. Query, if a family member is unemployed but cannot be proven to be unemployable, is that person unable to pay for such expenses?

This section allows a presumed expense of up to 10% of the projected plan payments for chapter 13 trustee administrative expenses. In actual practice this figure will almost always be negligible in the means test computation.

Private school expenses are allowed for each dependent child less than 18 years up to $1500/year if the debtor produces proof of such expense and a detailed explanation of why such expenses are reasonable and necessary, and why the expenses are not already accounted for in the standards allowed in the first paragraph. It is unclear how the debtor would prove whether or not the IRS standards include such expenses.

Additional housing and utilities expenses may be allowed if the debtor produces proof of their actual expenses and demonstrates that such expenses are reasonable and necessary.

Charitable contributions should still be deductible under §707(b)(1) though there should be evidence that such contributions did not commence with the preparation of the budget.

2) Payments due per contract on secured debts over the next 60 months, plus any other payments necessary in a chapter 13 to maintain possession of the debtor’s home, car, or other property necessary for the support of debtor and debtor’s dependants that is collateral for a debt (ie payments toward home arrearage, homeowners fees, insurance/taxes etc) over the next 60 months, all divided by 60. This would have to include payment toward any arrearage paid in the plan. Arguably this would also include any interest that accrued over the life of the plan, ie, on secured tax claims where there is no amortized payment due prepetition.¹

3) Payments to priority claims as of filing, divided by 60. DSO’s are priority, property settlements are not. This may provide an incentive to argue that a given obligation is a DSO so as to reduce net income under the means test. Attorneys fees to be paid in the plan would constitute a priority administrative expense, and so an argument could be made to include these, though since the means test specifically allows the chapter 13 trustee’s fees and does not mention attorneys fees paid through the plan, this argument may well fail.²

Note that the means test only applies to cases filed under chapter 7, not to cases converted from chapter 13 to chapter 7, even if the chapter 13 is filed after the effective date of BAPCPA. Of course, the case could still be subject to dismissal for §707(b)(1) bad faith.

Case Law

See ¶23.31

¶6.405 Housing Expense

4^th Circuit

Debtor allowed full allowance under national and local standards even if actual expense on house/car is less. Lynch v. Lackson, No 16-1358, 2017 WL 59011 (4^th Cir., Jan 4, 2017). Plain language of statute, as well as policy not to punish frugal debtors mandate result.

Florida

Debtor limited to local standard for rental expense despite higher actual expense. In re Prestwood, 451 B.R. 180 (Bankr. N.D. Fla. 2011) (J. Killian). In Ransom v. FIA Card Services, ___ U.S. ___, 131 S.Ct. 716, 727, 179 L.Ed.2d 603 (2011) the Supreme Court noted that if a debtor’s expenses exceeded the applicable allowance, the debtor could claim only the amount allowed under the Applicable National and Local Standards. The debtors claimed a rent expense of $1,750 when the IRS allowance for a family of 2 in this locality is only $943. While Debtors could argue under Hamilton v. Lanning, __ U.S. __, 130 S.Ct. 2464, 2478, 177 L.Ed.2d 23 (2010) that the Court should consider the additional rent expense incurred during the life of the plan, the Court believes this refers to expenses not contained in the local IRS Standards. The Court does not have discretion to account for changes in the debtor’s expenses when those expenses are of the type found in subpart B of the B-22C form.

Illinois

Debtor allowed full housing expense deduction on means test even though has no mortgage payment. In re Curry, 537 B.R. 884 (Bankr. C.D. Ill, 2015). Internal revenue manual has only one standard for housing and utilities, not broken down as on the means test into mortgage and non-mortgage deductions, thus contradicting trustee’s argument that utilites are included in the non-mortgage expense category. Since debtor actually incurs expenses for property taxes and homeowners insurance, this is all that §707(b)(2)(A)(ii)(I) requires for allowance of the full housing deduction.

North Carolina

Debtor allowed full housing and car expenses deduction on means test even though the actual expenses were less. In re Jackson, 537 B.R. 238 (Bankr. E.D. N.C., 2015). Trustee argues that official form is incorrectly designed, but Court treats the form as an advisory opinion of how §707(b)(2)(A)(iii) should be interpreted. Judicial conference creating form B22C was authorized by 11 U.S.C. 331 and pursuant to Rule 9009 of the FRBankrProc such forms shall be observed and used with alterations as may be appropriate.

¶6.41 Vehicle Operating Allowance

Florida:

Can claim operating expense for 3^rd car used by debtor’s daughter where necessary to provide for family’s welfare or production of income. In re Johnson, 454 B.R. 882 (Bankr. M.D. Fla. 2011) (J. Williamson). Ch 7 case, also notes allowance of $200 old car deduction without objection by US Trustee. Daughter enrolled in dual high school/college program requiring travel between two schools, and to provide daily transportation to younger sisters to medical appointments, school, and other activities.

Illinois:

Above median income Debtor with older high mileage vehicle not entitled to additional $200 operating expense as allowed in Internal Revenue Manual, and not allowed deduction for 2^nd vehicle that barely runs and has negligible value. In re Vandyke, 340 B.R. 836 (Bankr. C.D. Ill. 2011). The Debtor who is married but filed individually, owns both a 2008 Pontiac G6 subject to a lien, and a 1994 Chevy Beretta with 145,000 miles which does not run. On an amended form B22C debtor claimed an ownership expense for the Pontiac and an increased operating expense on the Beretta of $200. The Trustee objected to the increased operating expense on the Beretta.

The Court looked to the Ransom decision, particularly the advise that while the Code does not incorporate the IRS guidelines, courts may consult this material in interpreting the National and Local Standards. Ransom v. FIA Card Services, ___ U.S. ___, 131 S.Ct. 716, 726, 179 L.Ed.2d 603 (2011). The Internal RevenueManual allows an additional monthly operating expense of $200 for vehicles over six years old or which have over 75,000 miles, IRM §5.8.5.20.3(3) and (5). The Debtor cited the Statement of the US Trustee Program Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test and to the advisory committee notes on the means test forms. The Court indicated that the US Trustee’s position would be given no weight in the case at bar. The allowable expenses are those set forth in the National and Local Standards. Ransom precludes resort to the guidelines because the additional operating expense dirctl contradicts the language of the Bankruptcy Code.

The practicalities of allowing additional expense differ in the IRS negotiations with a delinquent debtor and a debtor in bankruptcy. If the IRS agent allows an additional deduction, it simply takes longer for the taxpayer to pay the delinquent taxes, while a bankruptcy deduction is the one and only opportunity for most creditors to recover their claims. The appropriate method for accounting for unanticipated car repairs or the need to replace a vehicle is not to increase the monthly expense in the means test but to permit modification of the plan. Likewise the expense cannot be allowed in the ‘special circumstances’ category as debtor is unable to itemize each additional expense, which must be actual and not speculative.

The debtor’s non-filing spouse makes payments on another truck and motorcycle. These expenses are deducted from the income computed to be paid to creditors, and no deduction is permitted on B22C for the vehicles as the Debtor has no ownership interest in them. As married couples are only allowd deductions for two vehicles, the deduction for the Beretta is improper.

Texas:

In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) operating expense for 2 cars for joint debtor was $425 rather than doubling the single allowance of $332.

In re Lara, 347 B.R. 198 (Bankr. S.D. Tex. 2006). In determining debtors were limited to $425 operating allowance, the court cited the National and Local Standards from the IRS manual as made applicable by §707(b)(2)(A)(ii)(I).

¶6.42 Charitable Contributions

New York:

Court disallowed deduction for charitable contributions in chapter 13 means test. In re Diagostino, 347 B.R. 116 (Bankr. N.D.N.Y. 2006). (May be reversed legislatively). Debtors scheduled $100/month for charitable contributions. §1325(b)(2) requires use of §707(b)(2)(A) and (B) to determine debtor’s reasonable expenses if the debtors are above median income. Since charitable contributions are not in the IRS standards, nor in one of the specific allowable subsections in the statute, they could only be allowwed under ‘other expenses.’ To be allowed here, the must provide for the health and welfare of the taxpayer andor his or her family or must be for the production of income. Charitable contributions are necessary if it is a condition of employment or meets the necessary expense test. Citing Internal Revenue Manual §5.15.1.10. Since these conditions are not met, the expense cannot be allowed.

¶6.43 Allowance of secured payments not to be continued

9^th Cir. BAP

Chapter 13 above-median income debtor not entitled to deduct 2^nd mortgage payments on mortgage to be stripped in chapter 13 plan, since virtually certain as of confirmation that payments would not be continuing on mortgage. In re Kramer, 2014 WL 818942 (9^th Cir. BAP, 2014). The debtors cited Morse v. Rudler (In re Rudler ), 576 F.3d 37 (1st Cir.2009), in which the First Circuit held that a chapter 7 debtor is permitted to deduct mortgage payments under § 707(b)(2)(A)(iii)(I) when calculating disposable income on Form B22C for purposes of means testing, despite the fact that the debtor intended to surrender his home to the mortgagee and would not be making these payments. Appellate panel disagreed based on forward looking approach to means test required by Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), and Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011). While §707(b) may permit the deduction, §1325(b)(1) and Lanning require exclusion of the deduction for the chapter 13 means test. post-Lanning, the starting point for determining projected disposable income for above-median debtors is not the “net monthly income” calculated on Schedule J, but the “disposable income” calculated on Form B22C under the statutory formula.

Alabama:

The court rejected allowance of secured payments on a means test when such payments would avoided by surrender of the collateral in the chapter 13 plan. In re Love, 350 B.R. 611 (Bankr. M.D.Ala. 2006). §1325(b)(1)(B) requires debtor to pay all of their projected disposable income. One would not project future secured payments on surrendered collateral. Recognizing that this approach results in a logical inconsistencey of matching historyical income with future expenses; the court determined this was a more accurate reding of the Code.

California:

In chapter 13, deduction not permitted for payments on liens where there is no equity remaining after more senior liens. In re Reyes, 2009 WL 567185 (Bankr. C.D.Cal 2009). Debtors listed 2^nd mortgage payment of $813/month on B22C but not on schedule J. Chapter 13 trustee objected under best interests test of §1325(b)(1)(B).

In chapter 13 case, deduction on means test for mortgage to be stripped is not permitted. In re Grant, 423 B.R. 420 (Bankr. S.D. Cal 2010). Means test included deduction for 2^nd mortgage when plan provided for stripping this mortgage. Court rejected debtor’s argument to use a ‘snapshot in time’ in computing the means test. Court also found that debtor argued mortgage was wholly unsecured (as required to strip it) and therefore it was not a secured claim for purposes of deduction of on-going payments contractually due during the 60 months under §707.

Florida:

In Chapter 7 Debtors may include means test expense for .mortgage payment on house to be surrendered. In re Ralston, 400 BR 854 (Bankr. MD Fla. 2009) (J. Williamson). Court indicated this was emerging majority position. Situation in chapter 13 may be distinguished due to different policy concerns in chapter 13. The language of the statute, payments that are scheduled as contractually due, is not ambiguous. To assign a special meaning in bankruptcy is inconsistent with the fact that no reference is made in the statute to the schedules, nor is there any schedule to require the listing of payments contractually due. Payments remain contractually due on the petition date despite the debtor’s intent to surrender the property. In chapter 7, the means test is a snapshot of the debtor’s situation at the time of filing, and is in the nature of a mechanical formula that often relates very little to the actual financial circumstances of the debtor. The bulk of the alloweable deductions are fixed amounts based on the IRS national and local standards rather than actual expenses. As a mechanical formula, it is appropriate that deductions should be a bright line measurement rather than requiring courts to examine the facts and circumstances of ech case. Court also determined that debtors are allowed car allowance despite not owing money on vehicle.

Chapter 13 Debtor not entitled to include on means test payments to secured creditors on property being surrendered. White v. Waage, 440 B.R. 563 (M.D. Fla. 2010) (J. Kovachevich). The Debtors argued 1) that §1325(b) requires that the court rely exclusively on the means test when computing the minimum chapter 13 payment for above-median income debtors, and 2) that the court does not have discretion to thwart the means test computations by use of a good faith justification to require higher payments. The Debtor included in the means test payments for furniture which they did not intend to retain. The Bankrupcy Judge found the means test to be a forward looking concept, showing payments the Debtors will be required to pay over the life of the chapter 13 plan. Hence, the filing of a plan based on a means test which included expenses which were not to be continued shows violation of the requirement of §1325(a)(3) that a plan be proposed in good faith. When the Debtors failed to file an amended plan conforming with the Bankruptcy Judge’s ruling the case was dismissed and the Debtor’s appealed to the District Court.

Judge Kovachevich examined the Kitchens [In re Kitchens, 702 F.2d 885, 888 (11^th Cir. 1983)] factors in determining good faith, stressing that the reasoning which focused only ont eh simple arithmetic of 11 U.S.C. 1325(a)(4) neglected the importance of the general good faith requirement of 11U.S.C. 1325(a)(3). 702 F.2d at 888. While BAPCPA added a required that the petition be filed in good faith, it did not change the requirement that the chapter 13 plan be filed in good faith. The purpose of chapter 13 is to repay the debtor’s creditors to the fullest extent possible. In re Waldron, 785 F.2d 936 (11^th Cir. 1986). If the court discovers unmistakable manifestations of bad faith the case should be dismissed. Such manifestations need not be based on actual fraud o, scienter, or an intent to defraud, bur rather simply require the court to condone the abuse of the bankruptcy process.

While good faith has no role in assessing whether the income paid into the plan is sufficient, it and the Kitchen factors remain relevant to the confirmability of the plan. Inclusion of an amount for surrendered collaterail in debtor’s calculations of amounts reasonably necessary to be expended without the present intent to pay such expenses amounted to fraud, and dismissal was warranted.

Missouri:

Debtors had ceased payments on the vehicle prior to filing, and stated an intent to surrender the vehicle on the statement of intentions. Debtor’s cited In re Walker, 2006 WL 1314125 (Bankr. N.D. Ga., 2006) for the proposition that §707(b)(2)(A)(ii)(I) allows expenses in effect on the date of the order of relief regardless of the debtor’s intent to surrender. The Court cited the Internal Revenue Manual’s requirement that an ownership expense is only allowed for the purchase and/or lease of a vehicle. The Court also cited the IRS Collection Financial Standards for the proposition that the ownership costs provide the maximum allowance for the lease or purchase of up to two automatobiles if allowed as a necessary expense.

West Virginia

When a secured claim is being bifurcated and paid through the plan, the allowable deduction on the means test in not the contractual due payments, but the payments to be actually paid on such secured claim in the plan. In re McPherson, 350 B.R. 38 (Bankr. W.D.Va. 2006). The over-median income Debtor scheduled the $67.60/month contract payments to Best Buy in the means test, and the trustee objected arguing that the expense attributable to the secured claim under the plan would be $1.82/mo. Projected disposable income means the projected current monthly income less rojected amounts reasonably necessary to be expended for support, with the latter determined under §707(b)(2)(A) & (B). The term ‘contractually due’ does not carry the same meaning in a chapter 13 case as in a chapter 7. The chapter 13 plan constitutes a new agreement between the debtor and each secured creditor. The obligation under the plan is substituted for the original contract with the creditor. Based on the plan, there are no amounts contractually due on Best Buy after bifurcation, therefore only the amount allocated under the plan payment should be used in the means test. Disagreeing with In re Walker, 2006 WL 1314125 (Bankr. N.D.Ga. 2006) and In re Barr, 341 B.R. 181 (Bankr. M.D. N.C. 2006).

Wisconsin

Chapter 13 Debtors entitled to deduction ongoing payments on vehicle to be surrendered. In re Dionne, 2009 WL 1024094 (Bankr. WD Wis, 2009). The fact that debtors intended to surrender the vehicle did not change the fact ath payments were ‘amounts scheduled as contractually due’ on the petition date. This date is the critical date to determine both whether the case is presumptively abusive and whether the proposed plan satisfies the projected disposable income requirements.

¶6.44 Vehicle Ownership Allowance

US Supreme Court

On 11 January the Supreme Court held that individuals in chapter 13 could not claim the car ownership allowance in the means test unless they had loan or lease payments on the vehicle. Ransom v. F.I.A. Card Servs. N.A., 131 S.Ct. 716 (US, Jan 11, 2011). With only Judge Scalia dissenting, the court determined that applicable standards referred to the Collection Financial Standards, which, while not incorporated into the statute, should be referenced in interpreting the statute. The court also noted the possibility of a debtor financing a junk car just prior to filing in order to take advantage of the ownership allowance, though indicated that the remedy for such an event would be for a creditor could seek modification of the plan once such vehicle was paid off.
      This leaves a few possible solutions for debtor's counsel in preparing cases. If the debtor is unable to afford the fees to file bankruptcy, it might be possible for the debtor to borrow such fees, either in the open market or even through relatives, and give a lien on the vehicle as security for such debt. Advice would have to be included as to the possibility of the trustee challenging this approach on a good faith basis, and BAPCPA's prohibition against advising debtor's to incur debt must be kept in mind, but in certain circumstances Courts may find this approach necessary. Also, if the debtor has an older vehicle that is paid off, that is likely to require substantial repairs during the case, they may in good faith determine that they could not afford both the higher repair bills associated with the older vehicle and the high court payment required under the means test, and determine that the best way to make a chapter 13 plan feasible is to trade it in on another financed vehicle with as low a payment as possible. Under either approach counsel must be mindful of §526(a)(4)'s prohibition against advising debtors to incur debt.
      The other approach, which would also be applicable to cases filed prior to the decision, is to file repeated modifications of the plan for unanticipated car repairs, seeking to reduce the payment to the trustee; or alternatively to seek to modify the plan if repairs are unaffordable to allow financing of a vehicle with lower repair costs, and consequent reduction of the required payment to the trustee with a new B22C.
      The decision is likely to lead to more litigation over the means test and post-petition modifications of the test, and likely to result in an overall lower success rate of chapter 13 bankruptcies.

7^th Cir.

Debtors may take vehicle ownership expense deduction in means test despite not owing any money on vehicle. In re Ross-Tousey, 549 F.3d 1148 (7^th Cir. 2008). US Trustee filed motion to dismiss under §707(b)(2) for the means test and §707(b)(3)(B) ‘totality of the circumstances.’ The district court reversed the bankruptcy court’s ruling in favor of the Debtors, the district court basing its decision solely n §707(b)(2). The 7^th Circuit reversed, and remanded for further proceedings under §707(b)(3)(B). Debtors acknowleged no special circumstances. Court adopts plain language line of cases that ‘applicable’ in applicable montly expense amount refers the the debtor’s geographic region and number of cars, regardless of the actuality of such expense. In order to give plain meaning to all the words of the statute, the term ‘applicable monthly expense amont’ cannot mean the same thing as ‘actual monthly expenses.’ Under the statute, the actual expenses are only relevant with respect to the IRS ‘other necessary expenses.’ This approach also makes sence given §707(b)(2)(A)(ii)(I)’s section prohibiting inclusion of any payments for debts in the monthly expenses. The statute makes reference only to the ‘amounts specified’ in the local standards rather than incorporation of the Internal Revenue Manual or the Fianciail Analysis Handbook. This approach was included in a prior version of the bill and was subsequently removed from the final version. Further, it would be impracticable to consider the broad discretion given to revenue agents by the IRM in applying the bright line test that was intended to eliminate judicial discretion. Policy consideration further support this determination, as ownership expense include insurance, depreciation, licensing fees and taxes. Limiting the allowance to debtors who have a car payment, however small, would be arbitrary and capricious.

9^th Cir.

Debtor allowed vehicle ownership expense despite vehicle not titled in her name where she had use of the vehicle and actually made the payments to the secured creditor on car titled in sister’s name. In re Drury, No. 2:15-BK-17125, 2016 WL 4437555 (B.A.P. 9th Cir. Aug. 23, 2016). BAP reversed bankruptcy court’s disallowance of expense and determination that filing was abusive under §707(b)(2). Nothing in the Bankruptcy Code or in the IRS Collection Financial Standards suggests that debtors only may claim as local transportation expenses car loan or lease payments they make for which they are personally liable. In fact, the language of the statute points in the opposite direction: “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.” Id. at *6. Nor does Drury's lack of title to the automobile persuade us otherwise. We do not read the Local Standards' reference to car “ownership” expenses as making ownership of the automobile essential to claiming this transportation expense. In order to claim this transportation expense, the key determinant is whether the debtor makes a car lease payment or a car loan payment. Ownership of the car is no more essential to the necessity of this expense than a legally enforceable debt. Id.

Delaware:

Debtor may deduct standard vehicle ownership expenses even though nothing is owed on vehicle. In re Fowler, 349 B.R. 414 (Bankr. D.Del. 2006). US Trustee moved to dismiss case on basis that debtor failed means test due to their allegation that ownership allowance was only available if money was owed on vehicle. The Court cited the National and Local Standards refered to by §707(b)(2)(A)(ii)(I); and the Financial Analysis Handbook containing instructions for analyzing th taxpayer’s financial condition to help IRS field agents determine appropriate case resolution. Under this handbook, the taxpayer is allowed the full amount of the National Standards deductions, regardless of their actual expenses. 5.15.1.8 ¶2. For the Local Standards however, the taxpayer is allowed the local standard or the amount actually paid, whichever is less.

The Court begins with the language of the statute. The plain language of §707(b)(2)(A)(ii)(I) provies that “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amount specified under the … Local Standards.” There is no reference in that language to the use of the Local Standards as a cap. The fact that Congress did not use the limiting language as provided in the Internal Revenue Manuel evidences that it did not intend the Local Standards to apply as a cap. This is further supported by the fact that the same sentence in §707(b)(2)(A)(ii)(I) Congress expressly provides that a debtor would be entitled to ‘catual monthly expenses’ for Other Necessary Expenses. The use of ‘actual’ with respect to Other Necessary Expenses and ‘applicable’ with respect to the National and Local Standards must mean that Congress intended two different applications.

Further, the legislative history supports the debtor’s interpretation. A prior version of BAPCPA which was not passed defined projected monthly net income to require a calculation of expenses to be determined under the Internal Revenue Service financial analysis. H.R. 3150, 105^th Congress (1998). The fact that this was changed from using the IRS financial analysis to the amount allowed under the National and Local Standards evidences Congress’ intent that the cCourts not be bound by the financial analysis contained in the Internal Revenue Manual.

Florida

Ownership expense allowed despite no debt owed. In re Ralston, 400 BR 854 (Bankr. MD Fla. 2009). The statute uses the term applicable rather than actual. The limits in the Internal Revenue Manual are not in the statute, and are used inconsistently with the rest of the means test. A prior version of the statute specifically referred to the Internal Revenue Manual, but such reference was removed in the statute as passed. Denying the expense to debtors that owned their vehicles outright would lead to arbitrary and unfair results.

Applicable in ownership deduction statute refers to factors listed in the IRS local standards rather than the actual expense of the debtor, therefore allowance applies when no debt is owed on vehicle. In re Bentley, 400 BR 848 (Bankr. MD Fla. 2008) (J Funk). The ownership cost table in the local standards is based on the number of vehicles owned, not whether any debt is owed on the vehicle. Since §707(b)(2)(A)(iii) was enacted to give a separate deduction for the actual car payments, the allowance deduction must be read as meaning something other than the actual payment in order not to read the two provisions as redundant. Use if the Internal Revenue Manual would be inconsistent with the wide discretion used by revenue agents in determining a taxpayer’s ability to pay. This is in accord with policy considerations allowing debtors a deduction for ownership expenses such as depreciation, licensing, insurance and taxes. All evehicles incur ownership expenses regardless of whether paid off, financed, or leased.

Indiana

Asserting that it is following the majority position, Indiana bankruptcy court found that car ownership allowance is permitted only if money is owed on vehicle. In re Hunt, 400 BR 662 (Bankr. S.D. Ind, 2008). Court indicated that result was consistent with both the Code and BAPCPA’s purpose in requiring above-median income debtors to pay more to unsecured creditors.

New York

Single above median income debtor with two vehicles on which she makes two car payments is entitled to vehicle ownership expense for both vehicles. In re Joest, 450 B.R. 381 (Bankr. N.D.N.Y. 2011). The trustee objected alleging that it was not necessary for the single debtor with no dependants to keep and pay for two vehicles. Pursuant to Hamilton v. Lanning, __ U.S. __, 130 S.Ct. 2464, 2478, 177 L.Ed.2d 23 (2010) the Court is required to take post-petition changes to a debtor’s income into account to the extent such changes are known or virtually certain as of the time of confirmation. However, the decision is limited to those sections of the Bankruptcy Code that Congress did not explicitly modify. Lanning acknowledged that the term ‘amounts reasonably necessary to be expended’ is newly defined, and only certain specified expenses are included. Id. a 2471. The expenses for car ownership is a ‘newly defined’ expense as mended in §§707(b)(2) and 1325(b)(3). The amendment signals Congress’ intent to modify court’s ability to independently access the reasonableness of this defined expense. Moreover, §1325(b)(3) requires the Court to determine reasonable necessary expenses in accordance with §707(b)(2) by using the IRS standard amounts that are ‘applicable’ to her.

This leaves the issue of whether the Court has discretion to deny confirmation where the debtor is directed under §1325(b)(3) to claim expenses in accordance with §707(b)(2). In Ransom v. FIA Card Servc. N.A., ___ U.S. ___. 131 S.Ct. 716, 724, 178 L.Ed.2d 603 (2011) the Supreme Court determined that the ‘applicable’ expense is appropriate only if the debtor has costs corresponding to the category covered by the table, ie onl if the debto would incur that kind of expense during the life of the plan. Based on Ransom, whether an above median income debtor is permitted to claim the vehicle ownership cost deduction depends on whether the debtor is actually incurring costs associated with the aquisition of the vehicle. Since the Debtor sub judice is making payhments on two vehicles, under Ransom the ownershiop cost expense is applicable to her and she may claim the deduction for both vehicles.

The IRS guidelines for vehicle ownership expenses are not based o household size, but rather permits a maximum allowance fo rhte lease or purchase for a vehicle for up to two vehicles. Likewise §707(b)(2)(A)(ii)(I) does not account for household size. However the Internal Revenue Manual states that an individual taxpayer is normally only allowed a deduction for one vehicle. Since the guidelines are at odds with the plain language of §707(b)(2)(A)(ii)(I) as incorporated into §1325(b)(3) and as instructed by the Court in Ransom, the IRS guidelines do not control.

Rhode Island

Applicable is not same as actual in determining car ownership allowance, therefore debtor is entitled to deduction regarless of existence of an debt on vehicle. In re Burbank, 401 BR 67 (Bankr. D.R.I. 2009). Ownership expenses include licensing, taxes, insurance, and depreciation as well as actual car payments.

Texas

In In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006). The court then examined the IRS standard expense allowances to determine that the debtor could only take the higher of the actual car and mortgage payment, or the allowed IRS deductions for housing or vehicles. Here the court examined the provision in §707(b)(2)(A)(ii)(I) providing ‘nothwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debt.’ The court noted that Congress’s intent in enacting BAPCPA was to “ensure that those who can afford to repay some portion of their unsecured debts [be] required to do so.”151 CONG. REC. S2470 (March 10, 2005). The Debtor argued that the language means that in interpreting the local standards for expenses, the court should disregard any payments for debts regardless of anything contrary in the applicable local standards. The Court rejected this interpretation, finding that it would render the ‘notwithstanding’ language superfluous. The local standards are based not on actual expenses but on reasonable necessary amounts regardless of actual expenses. Rather, the Court concluded that the ‘notwithstanding’ provision requires deduction from the local standards for actual expenses for the house and car. However, if the actual secured debt payment is higher than the allowed standard then the Debtor may claim the higher of the two.

The court noted an advantage of this interpretation is to allow a higher dividend to unsecured creditors.

The court also ruled that the debtor is not allowed to claim an allowance for a vehicle on which no debt is owed, based on the IRS Financial Collection Standards. Court determined that car ownership allowance was only available to debtors who owed money on the vehicles.

Subsequent to his decision in Hardacre, Judge Nelms sustained the trustee’s motion to dismiss for bad faith a debtor working 80 hours a week at 2 jobs disallowing proposed deductions in the means test for ownership expenses on a vehicle that was not financed or leased (being owned outright) and repayment on a 401k loan. In re Barazza, 345 B.R. 724 (Bankr. N.D.Tex. 2006). The debtor owns and drives a 1988 pickup that is not liened. The court noted that he lives modestly on a tight budget. The court again referred to the IRS local standards which do not permit an ownership deduction for vehicles that are not financed or leased.

In re Lara, 347 B.R. 198 (Bankr. S.D. Tex. 2006). Court cited Hardacre as authority for disallowing the car ownership allowance if no debt is owed on the car.

¶6.441 Non-Purchase Money Debt

Georgia

Debtor allowed ownership expense even when debt is not purchase-money obligation. In re Feagan, No. 15-40823-PWB, 2016 WL 1456166 (Bankr. N.D. Ga. Apr. 11, 2016). Ransom establishes that a debtor must have an expense within the Ownership Costs category in order for the category to be “applicable” under the statutory language of § 707(a)(2)(B)(ii)(I). And this Court must answer the same question that the Ransom Court asked: “What expenses does the vehicle-ownership category cover?”

The Ransom Court's answer is that the Ownership Costs category “encompasses the costs of a car loan or lease and nothing more.” Ransom, 562 U.S. at 71, 131 S.Ct. at 726. hroughout the opinion, repeatedly and consistently, the Supreme Court referred to “loan or lease” payments, “costs of a car loan or lease,” or “loan or lease costs;” nowhere did the Court state that, to qualify for the deduction, payments had to be a purchase-money debt. In re Feagan, No. 15-40823-PWB, 2016 WL 1456166, at *4 (Bankr. N.D. Ga. Apr. 11, 2016)

¶6.45 Other Expenses

Texas

In re Barazza, 345 B.R. 724 (Bankr. N.D.Tex. 2006). Court cited Financial Analysis Handbook and Hardacre analysis to deny ownership allowance to debtor with 1999 pickup with 125,000 miles, and who indicated a need to replace the vehicle within the next several months. Court also required strict independent proof any any special circumstances to deviate from the means test. In re Oliver, 350 B.R. 294 (Bankr. W.D.Tex. 2006). Debtor also filed a declaration of special circumstances showing he was unsuccessful in making debt payments under a prior debt consolidation program; and that the cost of replacing the vehicle would almost equal the monlthly amount available for chapter 13 according to schedules I and J. Debtor testified that he drives approsiately 3,000 miles per month, which at 15 miles per gallon costs about $600/mo in gas alone. No evidence was produced as to other vehicle expense. Debtor testified as to diagnosis of depression, anxiety and bipolar disorder and the medications prescribed therefore, but did not produce evidence from any physician about the conditions or medications.

In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) Court also discussed allowance of other phone, internet, and additional transportation expenses.

In re Lara, 347 B.R. 198 (Bankr. S.D. Tex. 2006). Court allowed $183/mo expense for cell phones which debtors say are required by their job, absent the trustee showing that comparable services could be obtained for less money. Court disallowed $27 for dial up internet in that debtors did not prove this was necessary for health and welfare of debtors or for production of income. Court also disallowed basic phone service determining this is included in the local housing and utility standard. Court disallowed claim for additional transportation expense on the basis that §707(b)(2)(A)(ii)(I) only permits actual expenses for the categories specified as other necessary expenses issued by the IRS, and that there is no category for transportation expenses in other necessary expenses.

Debtors permitted to deduct payment toward support of elderly parents. In re Clingman, 400 BR 555 (Bankr. SDTex 2009). Debtors were making mortgage payments on home elderly parents live in. Home was in parents name but had been transferred to debtors prior to filing as security for a home equity loan used to make necessary improvements on the property. Court determined that 1)monthly expenses subsidized the care and support of the elderly parents; 2) without the subsidy the parents would be unable to provide for their own lodging; and 3) the subsidy was not commenced in contemplation of the bankruptcy case. Whether an expense is allowed is a separate and independent determination from the effect on the debtor or any particular creditor. Thus the fact that the payments result in an appreciation of the value of the home is irrelevant to the allowance of the expense.

Virginia

Expense for taking care of 40 year old non-disabled daughter not allowed in means test. In re Williams, 424 B.R. 207 (Bankr. W.D.Va. 2010). Court disallowed $200/month deduction on means test for taking care of 40 year old daughter of debtors in absence of showing of physical or mental impairment. Court ruled that to be allowed, expenses must 1) be a continuation of actual expenses paid by the debtor, and 2) be reasonable and necessary for the care of an elderly, chronically ill, or disabled (a) household member who is unable to pay for such expenses; or (b) member of debtor’s immediate family who is unable to pay for such expenses. Court granted trustee’s motion to dismiss with leave to convert to chapter 13.

Wisconsin

Property tax and insurance expenses required to be paid by mortgage are allowable deductions for means test. In re Bermann, 399 B.R. 213 (Bankr. E.D. Wis., 2009). Trustee objected to confirmation of amended plan based on debtor having taken deduction on line 47 of means test for projected property tax and property insurance payments since such payments are not contractually due to mortgage holder. The court overruled the objection, finding that if the payment is not made, the mortgage allows the lender to make the payment to protect its security and add it to the debt; thus it is owed to the lender. The court also notes that the Internal Revenue Manual allows such a deduction. The existence of an escrow is immaterial since such payments are only funneled through the account, and are not owed to the creditor until they ultimately reach the insurance provider or taxing authority.

¶6.46 Mandatory Deductions

In re Barazza, 345 B.R. 724 (Bankr. N.D.Tex. 2006). The debtor claimed the 401k loan deductions as mandatory payroll deductions, noting the exeption from the automatic stay of §362(b)(19) and that §1322(f) expressly provides that such repayments do not constitute disposable income for purposes of chapter 13. The Court determined it was error to focus on the language of the form in lieu of the statutory language. Despite evidence from the debtor that both plans require repayment through payroll deduction, the Court determined that the expenses were not mandatory in the same vein as uniforms or shoes, and hypothecating that the debtor probably would not be fired for ceasing such distributions, but rather would simply be subject to a tax liability, disallowed the deduction. The court examined the Internal Revenue Manual (apparently giving it more statutory deference than the official bankruptcy forms) but found no appropriate section allowing these deductions.

§707(b)(2)(A)(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of -

(I) 25 percent of the debtor’s nonpriority unsecured claims in the case, or $6,000, whichever is greater; or

(II) $10,000.

(ii)(I) The debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent. Such expenses shall include reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse for the debtor, or the dependents of the debtor. Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts. In addition, the debtor’s monthly expenses shall include the debtor’s reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence as identified under section 309 of the Family Violence Prevention and Services Act, or other applicable Federal law. The expenses included in the debtor’s monthly expenses may also include an additional allowance for food and clothing of up to 5 percent of the food and clothing categories as specified by the National Standards issued by the Internal Revenue service.

(II) In addition, the debtor’s monthly expenses may include, if applicable, the continuation of actual expenses paid by the debtor that are reasonable and necessary for care and support of an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case who is not a dependent) and who is unable to pay for such reasonable and necessary expenses.

(III) In addition, for a debtor eligible for chapter 13, the debtor’s monthly expenses may include the actual administrative expenses of administering a chapter 13 plan for the district in which the debtor resides, up to an amount of 10 percent of the projected plan payments, as determined under schedules issued by the Executive Office for the United States Trustees.

(IV) In addition, the debtor’s monthly expenses may include the actual administrative expenses of administering a chapter 13 plan for the district in which the debtor resides, up to an amount of 10 percent of the projected plan payments, as determined under schedules issued by the Executive Office for United States Trustees.

(V) In addition, the debtor’s monthly expenses may include an allowance for housing and utilities, in excess of the allowance specified by the Local Standards for housing and utilities issued by the Internal Revenue Service, based on the actual expenses for home energy costs if the debtor provides documentation of such actual expenses and demonstrates that such actual expenses are reasonable and necessary.

(iii) The debtor’s average monthly payments on account of secured debts shall be calculated as the sum of –

(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and

(II) an additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor’s primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor’s dependents, that serves as collateral for secured debts;

divided by 60.

(iv) The debtor’s expenses for payment of all priority claims (including priority child support and alimony claims) shall be calculated as the total amount of debts entitled to priority, divided by 60.

¶6.5 Rebuttal of means test presumption of abuse: Special circumstances.

In order to rebut the presumption of abuse under §707(b)(1)(A), the debtor must show special circumstances that justify additional expenses or adjustments of current monthly income. Such circumstances must be itemized, documented, and explained as to why such adjustment is both necessary and reasonable. This information shall be attested to by the debtor under oath. Further, the adjustment provided by the special circumstance must result in the means test computation showing a lack of abuse, thus the computations must be run a second time with the adjusted figures included.

Case Law:

¶6.51 Business mileage

North Carolina:

Business mileage expenses as shown on the tax returns properly reflects special circumstance deduction from means test. In re Babson, 2011 WL 5902664 (Bankr. E.D.N.C. 2011). Debtor works full time in position requiring frequent travel, and receives salary, bonus, and commission. The 2010 tax return showed $23,372 business expenses for the 2010 year, averaging $1,947.67/month. The debtor initially scheduled these expenses on the means test at $1,546.83, but indicated he did not realize the full amount of the expenses until he completed review of the receipts and milage for his tax return. The Bankruptcy Administrator argued that the means test deduction should be based on the six month figures prior to filing, which per the debtor’s bank statements they argued was substantially less than the $1,546.83/month claimed initially on the means test.

The Internal Revenue Code permits deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying out any trade or business, 26 U.S.C. §162(a). However, any amount claimed as a business expense must be substantiated, and taxpayers are required to maintain records sufficient therefor. The Tax Code permits either deduction of the business standard milage rate times the number of business miles traveled or the actual costs the taxpayer pays or incurs that are allocable to traveling those business miles, but not both. Internal Revenue Bulletin: 2009-51, Rev. Proc.2009-54 § 5.02 (Dec 21, 2009).

The Court agreed with the Debtor that the tax return takes into account all expenses related to the debtor’s business vehicle and is thus more indicative of the debtor’s unreimbursed employee excpenses than his bank statements. The court distinguished the Hickman case in that here the debtor credibly substantiatged his tax return by testifying.

Washington:

Debtor failed to document alleged business expenses in the six months prior to filing, therefore the court did not allow a special circumstances deduction on the means test. In re Hickman, 2008 WL 2595182 (Bankr. W.D. Wash. 2008). Debtor was a partner in, and then sole proprietor of a business doing sales, repairs, and installation of audio-video equipment until about 2 months prior to filing chapter 7 bankruptcy. The debtor showed gross receipts from the business of $9,085 during the six months prior to filing. However, the debtor failed to produce documentary evidence at the evidentiary hearing of the business expenses of the businss during the six months prior to filing, rather relying on the federal tax returns for 2005 and 2006 to show the average percentage of costs of goods sold.

However, the US Trustee argued this does not establish the expenses during the six months prior to filing. The Court rejected the Debtor’s non-filing spouse’s testimony of possible business expenses as the underlying records had not been produced to the US Trustee or introduced into evidence, and the fact that she had no independent basis for characterizing the items as business expenses other than the Debtor’s notes in the check register. The US Trustee initially calculated the business expenses based on the check registers, then computed it based on the gross contributions from the business to the personal expenses, thereby computing the maximum possible business expenses during the period. The Court used the US Trustee’s figures for expenses, and determined they did not rebut the presumption of abuse under §707(b)(2)(A)(i).

¶6.52 Commuting mileage

Iowa:

Unusually high vehicle operating costs can constitute special circumstances rebutting the presumption of abuse under the means test. In re Batzkiel, 349 B.R. 581 (Bankr. N.D.Iowa 2006). Debtors live in rural Iowa and each drives a significant distance to their place of employment. The husband drives through ares heavily populated by deer, and leaves home at 4:30 a.m., which has resulted in numerous collisions with deer, causing the insurance company to threated cancellation if any further claims are filed related to such collisions. Therefore the debtor has been doing his own repair work on the vehicle. The fact that one vehicle may be inoperable due to deer collisions also warrants consideration for expenses for two vehicles for the debtor husband. Further, the IRS standards for transportation are too low for the debtors since fuel costs have continued to rise after announcement of the standards, and the fact that debtor’s vehicles get low mileage. Debtors documented these increased expenses.

In considering special circumstances to rebut a presumption of abuse under the means test, any legitimate expense that is out of the ordinary for an average family, or that may have increased since the IRS guidelines were calculated, could be considered. In order to claim such expenses, the debtor must justify the actual expenses in the amount claimed, drawn from the type of expenses defrined in the Internal Revenue Manual, and must itemize such expenses, provide documentation, and explain the special circumstances that demonstrate that the expenses are reasonable and necessary. The court finds that the debtors have met their burden of establishing the special circumstances and therefore have rebutted the presumption of abuse.

Debtor who drives 80 miles round trip per day for employment, and who testified as to actual expenses incurred for transportation for the period about 2 months to 3 months after filing was permitted to use higher expenses than provided under the means test in computing disposable income in chapter 13. In re Pederson, 2006 WL 3000104 (Bankr. N.D. Iowa, 2006). The Debtors filed chapter 13 on 30 June 2006. They testified as to their actual expenses for gasoline as $268.21 for August 29 through September 19 2006, a period of 22 days. The court extrapolated that to $372/month. The husband also testified as to mechanical problems on the vehicles, and maintenance expenses over the four months from May 16, 2006 through July 14, 2006 of $373.56. The court found these expenses to be reasonable quarterly figures.

Debtors with 30 mile round trip commute failed to produce evidence that car repair bills were in excess of the standards permitted by the means test. In re Tedford, 2014 WL 3851129 (S.D. Iowa, 2014).

North Carolina:

A sixty mile daily commute to work did not qualify as a special circumstance when the debtor had been employed at same job for ten years, and purchased truck with low miles per gallon five years ago. In re Mansfield, 2012 WL 627786 (Bankr. E.D. N.C. 2012). Debtor worked as prison guard at prison 30 miles from house. He computed $859.14/month transportation expense based on the IRS reimbursement rate of 55.5 cents/mile. The Court found that special circumstances to rebut the presumption of abuse are not limited to those stated in §707(b)(2)(B)(i), however the circumstances must justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. The debtor bears the procedural and substantive burdent to show the special circumstances rebutting the presumption. The debtor testified as to the miles to his job as prison guard and for a part time job at a golf course. He also testified that his 2007 Chevy Truck gets approximately 22 mpg on the highway and 18 mpg in the city. Since his livelihood requires him to travel to and from work, he argues this commute is a special circumstance justifying the additional expense.

The court rejected the argument since the Debtor purchased the truck when he knew the commute distance. He testified he did not consider purchasing a more economical vehicle, and stated the truck was necessary for the maintenance of his home and yeard. However, the testimony did not show the need for a truck in connection with the purported special circumstance, ie the commute to work. The Court found there are more reasonable altgernatives to the use of the truck that would reduce his expenses. Further, the debtor did not include an itemized account for each additional expense to prove the special circumstances. The Court further questioned whether commuting expenses could ever constitute a special circumstance.

Texas:

Debtors with combined commute distance of 184 miles failed to produce adequate evidence of their additional transportation expenses to rebut presumption of abuse. In re Sadler, 378 B.R. 780 (Bankr. E.D. Tex. 2007). Husband had 124 mile round trip thrice weekly for employment, and wife had 60 mile daily round trip commute. Debtors claimed $880/month transportation expense on means test, consisting of $120/mo for automobile insurance, $373 for fuel and maintenance on the husband’s vehicle, $372/mo for fuel and maintenance ofn the wife’s vehicle. The husband testified that there were no reasonable alternative employment opportunities closer to their home, and that the commutes are reasonable and necessary for them to continue to earn a living. However, the debtors provided documentary evidence of vehicle-related expenses over a 34 day period totaling only $469.02. The court also noted the purchase of a new 2006 Titan within 30 days of the filing of the case (purported to be necessary by excessive repair bills on the prior vehicle, which also were not documented).

The Court concluded that the debtors failed to demonstrate the existence of special circumstances warranting the additional expense. Even if the debtor’s monthly gasoline consumption had been verified, which it was not, they failed to provide documentary evidence of their actual cost of insurance, licensing fees, repairs, and maintenance.

¶6.53 Student loans

Delaware:

Debtor’s obligation as co-signer on son’s student loan may constitute special circumstances rebutting the presumption of abuse. In re Haman, 366 B.R. 307 (Bankr. D.Del. 2007). Debtor was making payments on a $22,250 student loan for her son from three years prior to the filing of the bankruptcy, on which she co-signed. While initially mischaracterizing the debt as priority, debtor then alleged that since such debt was non-dischargeable, it constituted a special circumstance for which there was no reasonable alternative. The US Trustee argued that the student loan obligation could never qualify as a special circumstance because it did not fall within the ambit of the examples of special circumstances provided in §707(b)(2)(B), and because debtor could convert to chapter 13, and modify the rights of the student loan creditor under §1322(b) and make pro-rata distribution to the bank for the life of the chapter 13 plan.

To successfully demonstrate a special circumstance, the debtor must fulfill both the procedural and substantive requirements of §707(b)(2)(B). The procedural component requires the debtor to itemize each additional expense or adjustment of income and provide (I) documentation of such expense or adjustment to income, and (II) make a detailed explanation of the special circumstances that much such expense or adjustment to income necessary and reasonable. 11 U.S.C. §707(b)(2)(B)(ii). Debtor must also attest under aoth to the accuracy of any information provided. 11 U.S.C. §707(b)(2)(B)(iii). Debtor met these requirements by submitting her Declaration of Support of Rebutting the Presumption of Abuse, in which she attested under aoth and described in detail the circumstances necessitating an additional expense and to which she attached the promissory note on the student loan.

To meet the substantive requirement the debtor must demonstrate special circumstances that justify additional expenses or adjustment of the debtor’s current income for which there is no reasonable alternative. 11 U.S.C. 707(b)(2)(B)(i). The Debtor argues that there is no reasonable alternative than to pay her son’s student loan obligation because 1) she is the co-signer on the loan; 2) her son is unable to make the required payments due to the several psychological disorders from which he suffers; and 3) the debto cannot be discharged because it does not impose an udue hardship for her or her dependents as required under 11 U.S.C. 523(a)(8).

The first issue is whether the voluntary nature of the loan excludes it from special circumstances, as argued by the US Trustee. The examples provided in the statute: serious medical condition or a call to active duty in the armed forces, are both involuntary in nature. The Court rejected this argument, finding that the plain language of §707(b)(2)(B) is clear, with no indication that the special circumstance must be outside the control of the debtor. Second, the legislative history of the statue indicates that the examples of special circumstances set forth in subsection (i) were meant to be expansive, not limiting.

However the debtor still must show that the debtor must show that there is no reasonable alternative to the expense alleged to be a special circumstance. The record demonstrates that the only way the debtor can stop making the student loan payments is to pay the obligation in full, which the record indicates is impossible for this debtor, or for the son to resume the payments, which the record shows would be unreasonable to expect at this time due to his medical condition. The suggestion of the US Trustee to analyse how the debt would be treated in a chapter 13 is improper as violating the Congressional intent behind the means test; rather such analysis would more appropriate under §707(b)(3)’s totality of the circumstances test.

The Court determined that the debtor rebutted the presumption of abuse under §707(b)(2), and set a continued hearing if the US Trustee wish to pursue dismissal under the totality of the circumstances test of §707(b)(3).

Pennsylvania

Need to examine circumstance to determine whether a student loan is a special circumstance basis to rebut presumption of abuse in means test. In re Harmon, 446 B.R. 721 (Bankr. E.D.Pa 2011). Debtor filed chapter 7 listing $565.64 as an expense in the means test. The US Trustee objected, and the court found that it was not a proper expense item nor could be allowed as a special circumstance to rebut the presumption. The debtor bears the burden of proof under §727(b)(2)(B) of showing that special circumstances justify the expense claimed. Procedurally this requires debtor to 1) itemize each expense or income adjustment; 2) provide documentation of the expense; 3) provide a detailed explanation of the special circumstances that make the additional expense or income adjustment necessary and reasonable; and 4) attest under oath to the accuracy of such information. Substantively §707(b)(2)(B) requires that the special circumstance be sufficient to justify additional expense or income adjustments for which there is no reasonable alternative.

The court noted two lines of cases, one requiring uncommon, unusual, exceptional, distinct, peculiar, particular, additional or extra factors such that prevent most debtors from meeting its high standards. The second line of cases does not require that the circumstances be extraordinary, out of the control of the debtor, or even unanticipated. The court also noted a line of cases finding student loan repayment to constitute special circumstances rebutting the means test, but found contrary precedent to be more persuasive.

Some courts focus on the nondischargeable aspect of the student loans, and whether the debtor’s ongoing postpetition liability is a special circumstance due to the debtor’s inability to repay the debt. Others examine the reason why the debtor incurred the student loan debt, such as pursuit of education or training necessitated by permanent injury, disability, or an employer closing as distinguished from loans to incur a more advantageous income or to enter a different vocation. The third line of cases looks at the impact of the postpetition debt on the debtor, and whether amount is such that the increase in the debt during a pendency of the chapter 13, and would result in minimal payment to other unsecured debts during a chapter 13 repayment.

The court determined that the first line of cases was overbroad, as congress choose to allow deductions for priority debts in the means test but not for all nondischargeable debts. The court then determined that the Debtor failed to meet her burden under the tests in either other line of cases. There was no evidence presented that the reason for incurring the student loan was necessitated by injury, disability or job loss. The court also noted a chapter 13 plan could be proposed to repay a portion of the unsecured creditors in the approximate amount of her student loan payment; which would allow a dividend of approximately 35% to the student loan, increasing the repayment term of the student from approximately 8 years to 11 years.

Debtor failed to adequately show grave consequences of failing to pay student loan warranting special circumstance rebuttal of presumption of abuse. In re Womer, 427 B.R. 334 (Bankr. M.D. Pa., 2010). Debtors scheduled a $42,000 student loan on form B22A. The court noted that a student loan expense is included as a category in the charge accompanying the explanation of expenses that meet the necessary expense test issued by the Internal Revenue Service, see Internal Revenue Manual 5.15.1.10. However, §707(b)(2)(B)(i) specifically exludes th4e use of any payments for debtrs in the calculation of monthly expenses for this purpose. Debtors therefore claimed the expense as a special circumstance instead. The Court cited a number of cases allowing and disallowing student loan expense as special circumstances. The cases allowing focus on the exceptional burdens placed on the debtor by reason of the student loan obligation surviving the bankruptcy. However no such showing specific to the student loan debt was presented at the hearing in this case. The Court noted if a loan were an undue hardship, it could be discharged, but the third circuit requires a prior good faith effort to repay the debt. The debtor must show there is no ‘reasonable alternative’ in addressing it.

Wisconsin:

While facts did not allow for including student loan debt as special circumstance expense in means test, plan may separately classify long term student loan debt. In re Johnson, 446 B.R. 921 (Bankr. E.D. Wis 2011). Debtor obtained a student loan to go to law school to shift professions from a registered nurse to an attorney. The reasons for the shift were that debtor believed she had reached her maximum earning potential in nursing, and that debtor believed her problems with weight control would eventually prevent her from continuing her career as a nurse.

Debtor owed $98,660.72 in student loan debt out of total unsecured debt of $149,093. Debtor’s plan proposed continued payments of $641/month on the student loan, while paying $8700 to other unsecured creditors over the five year plan. The chapter 13 trustee objected, requesting equal distribution to all unsecured creditors, paying a dividend of approximately 22% to all creditors. If the debtor ceased payment on the student loan and paid them equally in the plan, the total obligation on the student loan would increase during the life of the plan.

The court noted three lines of reasoning in cases on the issue. One line states that student loan debt is so common that it cannot qualify as special circumstances. The other extreme is that since student loan debt is nondischargeable, it automatically qualifies. The court found the third lien more persuasive, wherein the court looks to the motivation of the debtor in pursing the education which created the student loan, finding that pursuing education solely for career advancement could never constitute special circumstances.

The court noted that the debtor in this case was arguing for a health basis for the student loan, but presented no evidence that her weight issues would prevent her from carrying on the duties of a nurse. Since the incurring of the debt was not related to health issues, it cannot qualify as special circumstances to rebut the means test.

However, the court did allow the debtor to separately classify the student loan debt since the repayment term extended beyond the five year repayment term. The debtor would be allowed to continue contractual payments on the loan post-petition. This does not violation the anti-discrimination provision of §1322(b)(1), since the long term debt provision of §1322(b)(5) supersedes the requirement for equal treatment of all creditors under §1322(b)(1).

¶6.54 Housing expense

Colorado,

Debtors showed special circumstance warranting increased housing expense based on mental and emotional difficulties of son. In re Scarafiotti, 375 B.R. 618 (Bankr. D. Colo. 2007). The standard housing allowance for a family of 3 where the debtors resided was $1,084. The debtors paid $1,050 rent and $331/month for utilities, thereby exceeding the allowance by $297. Subtracting the utility figure would leave only $753/month for rent. Debtor’s testified that they searched for rental units in this range, but that all such units were located in potentially unsafe neighborhoods. The debtor’s son is seeing a child psychologies monthly for mental and emotional difficulties related to bullying at his previous elementary school. There problems were lessened upon moving him to a new school. The debtor testified that their psychologist strongly recommended that they live in a neighborhood where he could interact with other children from his new school. The trustee suggested they move closer to their work, where cheaper housing is available; but the debtor’s indicated that despite the 100 miles per day commute, they needed the after school child care assistance of their family, which is only available where they live now.

¶6.55 Age of Debtor

New York

Fact that debtor is 67 years old and wishes to retire in near future insufficient to rebut means test. In re Anderson, 444 B.R. 505 (Bankr. W.D.N.Y. 2011). Debtor earned $7,219/month gross, and did not disclose girlfriend’s income of approximately $100,000/year. Unsecured debt totaled aroximately $212,000 primarily consisting of advances on credit cards. Debtor showed B22A showed presumption of abuse, but alleged special circumstance that he was 67 and planned to retire within the next 60 months. Debtor also proposed to pay his entire net disposable income into a pension account, resulting in no funds available to unsecured creditors.

Court noted special circumstances are not age specific, and that Debtor was gainfully employed and in good health. If age were to cause a serious medical condition, such condition could be a basis for a special circumstance to rebut the presumption of abuse, but age along cannot constitute such a basis. §707(b)(2)(B)(i) requires additional expenses or adjustments of current income for which there is no reasonable alternative. The Debtor in this case has the reasonable alternative to continue employment and defer additional pension contributions until after completion of a chapter 13 plan. Debtor shold not be allowed to augment his pension at the expense of creditors.

Debtor also argued that the language of §707(b)(1) that the court “may dismiss a case” in which the granting of bankruptcy relief wold constitute an abuse gives the court discretion to decline to dismiss the case. The Court rejected this, finding that the permissive language in the statute simply allows a choice between dismissal or, with the debtor’s consent, conversion to chapter 11 or 13.

The court also noted that the girlfriend’s contributions to the household expenses would have to be disclosed on a B22C form. While not specifically ruling, it appears the court considered the girlfriend to be included in debtor’s household for purposes of the means test.

¶6.56 Old car deduction

Nevada

That, however, is not the end of the matter. As discussed in other cases, the debtor is allowed an additional operating expense deduction of $200 for older cars. See In re McGuire, 342 B.R. 608, 613 (Bankr.W.D.Mo.2006) (“[C]onsistent with IRS Local Standards, [the debtors] are entitled to claim on Form B22C an additional operating expense of $200, which expense is allowed for debtors with cars more than six years old, or having more than 75,000 miles”); accord In re Oliver, 350 B.R. 294, 297 (Bankr.W.D.Tex.2006); In re Carlin, 348 B.R. 795, 798 (Bankr.D.Or.2006); In re Barraza, 346 B.R. 724, 729 (Bankr.N.D.Tex.2006). The IRM does not allow a deduction in addition to the ownership or operating expense, but rather allows “an additional operating expense.” IRM § 5.8.5.5.2 (2005), https:// www.irs.gov/irm/part5/ch08s05.html. Because the IRM construes the extra deduction as part of the operating expense, this court views it as part of the definition of that expense and would allow it.

In re Slusher, 359 B.R. 290, 310 (Bankr. D. Nev. 2007)

§707(b)(2)(B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

(ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide –

(I) documentation for such expense or adjustment to income; and

(II) a detailed explanation of the special circumstances that make such expenses or adjustments to income necessary and reasonable.

(iii) the debtor shall attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments too income are required.

(iv) The presumption of abuse may only be rebutted if the additional expenses or adjustments to income referred to in clause (i) cause the product of the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60 to be less than the lesser of –

(I) 25 percent of the debtor’s nonpriority unsecured claims, or $6,000, whichever is greater; or

(II) $10,000.

¶6.57 Retirement deductions

Louisiana:

3% voluntary deduction for 401k contribution for above-median income debtor is reasonable, but 6% was not. In re Donald E.. Miner Sandra R. Miner Debtors, No. 16-10441, 2017 WL 1011419 (Bankr. W.D. La. Mar. 14, 2017). On hearing to amend chapter 13 plan court found that the Debtor had been contributing $700.82/month toward his 401k plan, in addition to a 401k loan repayment of $356.18/month. The employer also had a 3% matching contribution. §541(b)(7) provides that property of the estate does not include any amount withheld by azn employer for contributions to an ERISA plan (as well as certain other qualified plans). While some courts hold that this allows any contribution up to the maximum amount allowed under non-bankruptcy law, the 4^th and 5^th Circuit have adopted the holding that debtors may simply continue the voluntary contributions in existence at the time the petition is filed. Maharaj v. Stubbs & Perdue, P.A. (In re Maharaj), 681 F.3d 558 (4th Cir. 2012): In re Lively, 717 F.3d 406 (5th Cir. 2013). Under Hamilton v. Lanning, 560 U.S. 505 (2010) courts must adopt the forward-looking approach to determine projected disposable income. As it would be impossibly for anyone to disagree that volunatary savings for retirement is a prudent financial decision, a reasonable contribution should be allowed even if such expense deviates from the national or local standards. Such contributions are limited by good faith. Given this the court presumes a 3% contribution would be reasonable in any case in this district, with a higher contribution possible in specific circumstances.

¶7 Requirements for Debtor prior to filing:

¶7.1 The debtor generally must have received a briefing (telephonic or in person) from an approved credit counseling agency within 180 days before the case is filed, unless the trustee determines there are insufficient credit counseling resources in the district, or the debtor is unable to get counseling due to incapacity, disability, or active military duty in a combat zone. The debtor may file first and obtain counseling within 30 days if the debtor sought counseling but was unable to obtain it within five days, and circumstances require filing before such counseling can be obtained. Query, if debtor first sees counsel the day before the foreclosure sale, is he barred from filing due to not being able to wait the five days after seeking counseling? If the counselor indicates they could give counseling in 4 days? Or only in 6 days? Does the debtor need to certify simply that they sought counseling from one agency and were unable to get it within five days, or must they certify that they tried all the approved counseling agencies, and none could provide counseling within five days? Does failure of an individual to voluntarily get credit counseling prevent an involuntary case from being filed against them?

While some cases have struck the petitions, thereby eliminating the ‘first strike’ prejudice of having a refiling rather than an original case, it has been argued that §109 is not a jurisdictional bar to filing, but rather a filing defect that is cured upon confirmation of a chapter 13 plan or discharge. Since it is not jurisdictional, it would therefore be improper to strike the petition. However, courts may determine not to dismiss cases absent an objection or motion by a party in interest; and courts may set a low bar for showing good faith on refiling after a §109(h) dismissal.

Cases:

8^th Cir. BAP:

In what appears to be the first appellate decision on BAPCPA, the court sustained a dismissal for failure to obtain prepetition credit counseling. In re Hedquist, 342 B.R. 295 (8^th Cir. BAP (Minn), 2006). The debtors had been attempting to work out a settlement with the mortgage company, and waited until the day prior to the foreclosure sale to file bankruptcy. There was no evidence that the debtors sought credit counseling. The BAP found that the bankruptcy court did not abuse it’s discretion in finding that waiting until the day prior to the foreclosure sale to seek bankruptcy protection when they had adequate notice of the foreclosure did not meet the requirements for exigent circumstances. The BAP also rejected the debtor’s argument that the dismissal must be done by the district rather than the bankruptcy court. Dismissal for failure to comply with the requirements for filing is a core matter subject to determination by the bankruptcy court. Debtor next argued that requiring individual debtors but not corporations to obtain credit counseling violated the equal protection clause. The BAP determined that individuals and corporations were not similarly situated as required for equal protection violations; and that intent of the statute to force them to obtain education and counseling regarding both the consequences of filing for bankruptcy and the non-bankruptcy alternatives available to the debtor to rebuild his or her financial health did not evidence an unlawful attempt to discriminate against individuals. The BAP also found no due process violation in that individual debtors as opposed to corporate debtors are not a suspect class; and that there is no constitutional right to obtain a discharge of ones debt in bankruptcy. Finally the debtor argued that the courts should grant pro-se litigants leniency with regard to their pleadings. The BAP rejected this argument in that the requirements of §109(h) are clear and mandatory, and the debtor clearly failed to meet the requirements.

Arkansas

The court denied a request for extension of time to obtain credit counseling and dismissed the case when the Debtor acknowledged that she had not sought counseling prior to the filing of the case in In re Wallace, 338 B.R. 399 (Bankr. E.D. Ark. 2006). The debtor’s argument that the clerk had not timely posted a list of approved credit counselors did not avail her. The statute clearly requires that the debtor seek counseling prior to the case. Further, upon inquiry of the clerk’s office, she had been provided such a list. Having failed to meet the strictures of the statute, the case had to be dismissed.

In a rare debtor victory under the credit counseling litigation, Judge Mixon ruled that credit counseling obtained the same day of, but prior to, the bankruptcy filing complied with the statutory requirement. In re Warren, 339 B.R. 475 (Bankr. E.D. Ark. 2006). Three problems were raised by the trustee. First, the language of the statute refers to obtaining counseling within the 180 days prior to filing, thus, according to the trustee, implying that counseling must be obtained the day prior to filing. Second, the certificate was dated well after the filing. Third, the certificate was issued after the case was filed. Debtor testified that they completed counseling prior to filing, but had difficulty getting the agency to accept payment, attempting first a prepaid mastercard which was not successful; then sending a money order which was not credited until after the case was filed. The debtor had sought and obtained an extension of time to file the certificate of counseling.

Since the code does not provide for automatic dismissal upon failure to file the credit counseling certificate. §707(a). Further, the absence of a credit counseling certificate, like that of the debtor’s signature on a pleading, is a matter of form, not substance.

The trustee’s argument as to needing to complete counseling the day prior to filing is based on their interpretation of the word ‘date’ as a calendar day. However, the law and dictionaries also recognize reference to date to mean a particular time on the day. The court interprets date under §109(h) as meaning the time and day of filing. This is in accord with bankruptcy practice as setting the time of filing as setting the rights of the parties. No waiting period after counseling is mentioned in the legislative history.

California:

Another dismissal of a pro-se bankruptcy for failure to obtain the credit counseling requirement, and failure to comply with the requirements for an extension was announced in In re Mingueta, 338 B.R. 833 (Bankr. C.D. Cal. 2006). The debtor had checked the box on the petition requesting an extension to obtain credit counseling, but did not attach any certification or other document was attached explaining the exigent circumstances. The court scheduled an order to show cause why the case should not be dismissed, but the debtor did not appear at the hearing.

A rare grant of a temporary waiver of the credit counseling requirement was entered in In re Romero, 349 B.R. 616 (Bankr. N.D.Cal. 2006). Concurrently with the filing of the petition, debtor filed a request for temporary waiver of the counseling requirement with a certification that the debtor was the sole wage earner for the family, and that he faced imminent garnishment of his wages. The certification further alleged that they had attempted to obtain credit counseling before filing but were unable to do so. The debtors completed credit counseling seven days after filing. In a supplemental sworn declaration, debtors alleged they had contacted an approved counselor 3 days prior to filing, but were told they were unable to obtain the counseling until seven days after their request. The court found that the threat of serious creditor action before the credit counseling can be obtained generally is sufficient to establish exigent circumstances. Advance knowledge of the threatened creditor action should not preclude a finding of exigent circumstances.

Colorado:

If a debtor is ineligible under §109(h) then the §362 stay does not come into effect. In re Anderson, 341 B.R. 365 (Bankr. Colo. 2006). The debtor was ineligible to be a debtor under chapter 13 due to her failure to obtain the requisite credit counseling briefing. The debtor filed a false affidavit that such counseling had been obtained. The foreclosure sale on debtor’s homestead occurred prior to the bankruptcy, but the writ of eviction was issued after the filing. No notice was given to foreclosure counsel of the filing. Courts have the power to annul the automatic stay retroactively for cause in order to rehabilitate stay violations.

District of Columbia:

Credit counseling must be obtained at least one calendar day prior to filing petition. In re Mills, 341 B.R. 106 (Bankr. Dist.Col. 2006). §109(h) does not simply require the debtor to obtain credit counseling prior to filing the bankruptcy petition, it requires the debtor to obtain such counseling prior to ‘the date of the filing of the petition’. When a statute requires a specific act to be done within a specified number of days prior to a fixed date, the last day (ie the fixed date) is excluded in making the calculation. The legislation's credit counseling provisions are intended to give consumers in financial distress an opportunity to learn about the consequences of bankruptcy-such as the potentially devastating effect it can have on their credit rating-before they decide to file for bankruptcy relief. The court also rejected the debtor’s request to strike the petition rather than dismiss the case. The court denied this, finding that the filing of a petition by an ineligible debtor created a case for the limited purpose of the court determining whether it had subject matter jurisdiction over the case. During that determination the stay would remain in effect unless the §362(b)(21)(A) exception applied. If the court were to strike the petition ab-initio, it would make the §362(b)(21)(A) exception unnecessary.

The credit counseling requirement may be met by obtaining a credit counseling course from an approved agency that met the general requirements of the code even though it was not the specific course set up by the agency for pre-bankruptcy counseling under §109(h). In re Hawkins, 340 B.R. 642 (Bankr. D.Dist.Col. 2006). The debtor obtained credit counseling through an approved agency (CCCS) prior to filing the bankruptcy, however, the course was not the pre-bankruptcy course provided by such agency. The court had issued its own order to show cause why the case should not be dismissed based on the debtor’s failure to file a credit counseling certificate. The debtor submitted a letter from the counselor showing the services provided included a personal financial summary reviewing debtor’s income and expenses, a net worth analysis, a debt summary, a debt analysis (showing the benefits of repaying the debt through CCCS’s program), and an action plan setting forth recommendations for the debtor. The court found that these could be viewed as satisfying the analysis required by the statute. A separate evidentiary hearing would be set if a party files a motion to dismiss the case, as to whether the counseling actually met the requirements of the statute. The court determined it did have jurisdiction to take the case based on debtor’s allegations as to the content of the counseling received.

The court also determined that §362(b)(21) must be read that the automatic stay is in effect while the court determines the threshold issue of jurisdiction. Thus pre-petition credit counseling is a pre-requisite the granting the court subject matter jurisdiction.

Counseling must be obtained at least the day prior to the filing of the bankruptcy, however, since counsel inadvertently filed another document labeled as the petition, the case was not commenced until the day after the initial documents were filed. In re Murphy 342 B.R. 671 (Bankr. D.Dist.Col. 2006). Court would allow mislabeled ‘amended’ petition to correct erroneous initial filing so as to allow filing fee to apply to instant case. Court also lifted stay as to mortgage since petition was ultimately filed after foreclosure sale even though initial documents including document labeled as petition was filed prior to sale.

Florida:

Yet another debtor’s attempt to seek waiver or delay of the credit counseling requirement without first seeking such counseling failed in In re Davenport, 335 BR 218 (Bankr. M.D. Fla. 2005) (J. May). In this case the Debtor established exigent circumstances from the fact that a creditor was actively seeking to repossess the family vehicle. Further, the debtor in fact obtained counseling two days after the bankruptcy was filed. However, since the debtor had not sought counseling prior to filing, as is required by §109(h)(3)(A)(ii) the court was required to deny the motion and dismiss the case.

A very similar situation arose in In re Randolph, 2005 WL 3408043 (Bankr. M.D. Fla. 2005) (J. Proctor). While the motion asserted that the debtor was unable to contact the credit counseling agency in a timely manner, it failed to make the required assertion that counseling was unavailable within five days of the initial request. The Court noted that there were 11 approved counseling agencies for the district, and expressed skepticism as to the extent of Debtor’s efforts to obtain such counseling. Therefore the Court denied the motion and dismissed the case.

In what is apparently the first reported decision ruling that the dismissal for failure to obtain credit counseling would not prejudice the debtor’s right to the automatic stay under §362(c)(3) in a subsequent case, Judge Cristol dismissed a pro-se chapter 13 in In re Valdez, 335 BR 801 (Bankr. S.D. Fla. 2005). As usual in these cases, the Debtor failed to allege that she was unable to obtain credit counseling within five days prior to filing, instead alleging that as a pro-se debtor she was unaware of the requirement. While ruling that ignorance of the law is no excuse, the Judge did note some skepticism of Congress’ intent in the statute. “The Court wonders what exactly was intended by Congress in regard to this Code section. Is it the intent of Congress that poor, ignorant persons who do not know the law and cannot afford to obtain the advice of counsel are to be denied protection and assistance of the Bankruptcy Code which is available to more affluent and better educated persons? Or, is it the intent of Congress that decent, honest, hardworking persons, who have suffered financial misfortune or tragedy, be educated by budget and credit counseling services to help them determine if there is a more appropriate way to deal with their financial problems? Sadly, the language in the Code does not clearly reveal Congress' intent; either the Code language was inartfully drafted or the congressional intent was indeed the former less compassionate, harsher result, rather than the latter.”

Rather than the usual dismissal, causing the automatic stay to disappear after 30 days in the new case pursuant to §362(c)(3), Judge Cristol ruled that the credit counseling requirement of §109(h) was jurisdictional, therefore the first case was not an effective filing, such that the refiled case could still be considered a first case for purposes of §362(c)(3) or (c)(4).

A rare case where the Debtor convinced the court that counseling was not available was when the debtor just spoke Creole in In re Petit-Louis, 338 BR 132 (Bankr. S.D. Fla. 2006) (J. Cristol). The debtor was fluent in Creole, and spoke very limited English. The Debtor had sent a letter to the trustee which the court treated as a motion to waive the credit counseling requirement. Finding that none of the credit counseling agencies in the area spoke Creole, the Court waived the counseling requirement. The US Trustee indicated that since the individual was not yet a debtor at the time of the counseling requirement, they were unable to provide translators. The debtor’s counsel provided a translator for conversations with the attorney but indicated that they should not have to provide translators for access to the court system.

Georgia:

Judge Bonapfel in Georgia agreed with what appears to be the majority of decisions that the filing of a bankruptcy without first obtaining credit counsel does commence a case, and that the remedy is to dismiss rather than declare the case void ab-initio. In re Ross, 338 B.R. 134 (Bankr. N.D. Ga. 2006). The court concluded that §109 in general, and §109(h) in particular is not jurisdictional, and therefore does not preclude the filing of a petition proper. There is no indication in the statute that the remedy for violation of §109(h) is different from the remedies determined for violation of the other sections of §109. While there is a dispute as to whether §109(g) is jurisdictional, BAPCPA treats this subsection as not being a jurisdictional bar to filing. This is reflected in §362(b)(21)(A)’s exception to the automatic stay as to foreclosure sales when the debtor is ineligible under §109(g). Congress specifically dealt with the effect of serial filings in §§362(c)(3) and (c)(4). A problem with ruling that §109(h) prevents the filing of a proper petition is the uncertainty it would create in creditors or others determining whether a valid case exists. By determining that a case is validly filed even without the credit counseling required by §109(h), this uncertainty is eliminated and the case will proceed until dismissed by definite order of the court.

Idaho:

Last minute unsuccessful attempts to obtain credit counseling were determined not to warrant a waiver of the credit counseling requirement in In re Rodriguez, 336 B.R. 462 (Bankr. D.Idaho, 2005). Facing an imminent wage garnishment, debtors attempted to contact two different counseling agencies. The first agency, which was accessed over the internet, required a phone call to obtain a username and password. Upon attempting to call the agency the phone was not answered. The second agency, again contacted over the internet, required entry to a ‘chat room’ for assistance, but no one was there. Debtor then contacted the agency by telephone and was advised that information would be retrieved in an hour and that the agency would call back the debtor then. The motion to waive was not signed by the debtor and no affidavit or similar submission supporting the request was filed. Subsequent to the hearing on the motion, Debtors filed a certificate in support of the motion, stating in part ‘I was unable to obtain services for an individual or group briefing outlining the opportunities for available credit counseling and assisting me in performing a related budget analysis during the 5-day period beginning on November 2, 2005.’ The debtors then submitted a second certification detailing the attempts to obtain counseling the day of the filing, ending with a note that they did not have the $100 fee charged by the counseling agency for such counseling (though noting that counsel could have paid it with the firm’s debit card.’

The court initially determined that the request for waiver of credit counseling must include a certification in compliance with 28 USC

§1746, which reads in part:

Whenever, under any law of the United States ... any matter is required or permitted to be supported, evidenced, established or proved by the sworn declaration, verification, certificate, ... [the following form may be used]:
...
(2) If executed within the United States, its territories, possessions or commonwealths: "I declare (or certify, verify or state) under penalty of perjury that the foregoing is true and correct. Executed on (date)."

Such certification must establish 1) exigent circumstances that merit the exception; 2) that the Debtor requested counseling from an approved agency but was unable to obtain it within five days; 3) and that the certification be satisfactory to the Court.

The court concluded that the initial motion was defective in containing no certification by the debtor. The first certification was inadequate for not providing any detail of the pertinent facts. The second certification was inadequate for not showing that counseling would be unavailable for five days. The court also noted that debtors were aware of the lawsuit well prior to November 2 and did not seek counseling earlier.

Kentucky:

A generous reading of the requirement to have sought counseling but have been unable to obtain it within five days was set forth in In re Graham, 336 BR 292 (Bankr. W.D. Ky. 2005). First analyzing the requirements for the certification seeking an extension, the court found that this was met simply by having the debtor sign the request for extension. Seeming to reject the Talib decision requiring an explanation why counseling was not sought earlier, the Court indicated that it would be inclined to be reasonably lenient in finding exigent circumstances for meeting §109(h) if there is impending creditor action that will affect the debtor or debtor’s dependents. This court went further than prior published decisions in defining what is required to meet the 2^nd prong of §109, certifying that the debtor sought credit counseling but was unable to obtain it within five days. Judge Fulton ruled that this analysis must take into account the particular situation of the debtor and nature of the pending exigent circumstances.

“In this regard, the Court finds no express requirement in § 109(h) that a debtor exhaust all credit counseling options or that a debtor absolutely accept any offer of counseling, no matter how inconvenient or onerous. Rather, the Court believes that whether credit counseling can be “obtained” by a debtor within the requisite time period should be judged by what a debtor can reasonably accomplish in light or his or her particular, and likely exigent, circumstances. Conversely, whether credit counseling can be “obtained” should not be determined simply by looking at what a credit counseling agency offers a debtor.”

Fact that debtor was over the road trucker, and that he obtained credit counseling four days after filing did not excuse non-compliance with §109(h). In re Logdon, 2012 WL 376513 (Bankr. W.D. Ky 2012). The exigent circumstances waiever requires the debtor to have actually attemped to obain credit counseling. No exigent circumstances were described other than the debtor’s work schedule. Absent compliance with the statute the Court has no discretion to waive or extend the counseling requirement.

Maryland:

The Maryland bankruptcy judges issued a joint decision in five pending cases requesting an extension for credit counseling. The decision, setting forth the requirements for extensions under §109(h) in Maryland, determined that such requests do not need to be under oath, must contain a brief explanation of the exigent circumstances requiring the immediate filing, must state that the debtor sought credit counseling within 180 days of filing, and that debtor was unable to obtain such counseling within five days of such request. The court found that the requirements to find exigent circumstances were minimal: requiring only the existence of some looming event that renders prepetition credit counseling to be infeasible. The requirement to allege seeking credit counseling and being unable to obtain it is more of a problem. Only one of the debtors in these cases alleged that he was unable to obtain credit counseling within five days of the request. Even in this case the exact reason for such inability was not explained, only that he was advised to seek counseling on October 20, which he did (the court appears to conclude that this meant he sought counseling on the 20^th, though this is not entirely clear either), and that he was unable to obtain an appointment for credit counseling until November 26 (no allegation was made as to the options of seeking telephonic or on-line counseling). The court concluded that this last affirmation was sufficient to qualify for an extension of time to obtain credit counseling, and dismissed all the other cases. In re Childs, 335 B.R. 623 (Bankr. D. Md. 2005).

Credit counseling need not be obtained the day prior to the day the bankruptcy is filed. In re Hudson, 352 B.R. 391 (Bankr. D.Md. 2006). The debtor filed ch 13 the same day as he obtained credit counseling. The court distinguished the term ‘date’ used in the statute form the alternative ‘day’, and found that in common usage, ‘date’ may encompass the concept of a moment in time. Upon examining the use of the work elsewhere in the code, the Court noted in §348(f)(1)(A) property of the estate in a converted case shall consist of property of the estate ‘as of the date of filing of the petition’ referring to the moment of conversion. This is contrasted with the use of the terms ‘days’ in §547(b)(4)(A) authorizing the trustee to recover transfers of property made ‘on or within 90 days’ of the filing of the petition. Under this section, the time period includes the full day of the 90^th day. Further, it would be inconsistent to penalize a debtor who went through the effort to obtain counseling vis a vis a debtor who sought an extension of time to obtain counseling.

Michigan:

A certification by the debtor that she had sought to obtain credit counseling but was unable to obtain the same prior to filing was found insufficient without the additional assertion that such counseling was unavailable within five days after such request. In re Burrell, 339 B.R. 664 (Bankr. W.D.Mich. 2006). The credit counseling requirement is an eligibility requirement under BAPCPA. While the code allows an extension, such extension also has strict requirements, including a certification showing exigent circumstances, that the debtor sought counseling and was unable to obtain it within five days, and that the certification is satisfactory to the court. While the impending foreclosure sale described by the debtor met the exigent circumstance requirement, there was no showing that counseling could not have been obtained within five days of the initial request. The court specifically noted that waiting until the last minute to seek bankruptcy was a common reality and should be the type of exigent circumstance anticipated by the statue, appearing to disagree with the DiPinto line of cases. By failing to meet the specific requirement of the statute, the certification also must fail the third test of being satisfactory to the court. A further problem was that the extension was requested more than 30 days after the case was filed, thus even if a certification complying with §109(h)(3)(A) had been filed, the extension would have to be denied under §109(h)(3)(B) since the counseling must be obtained within 30 days after filing in the absence of a further request for extension within such 30 days.

Minnesota:

A Minnesota bankruptcy court dismissed a pro-se case where the debtor filed a statement explaining that it was too far for her to travel to take a credit counseling course, but that she was willing to take a free one over the internet. The court ruled that this was not the certification required by §109(h)(3) that she had requested services required to grant an extension of time to obtain credit counseling, and that the statute was clear that this was an eligibility requirement to be in bankruptcy. In re LaPorta, 332 BR 879 (Bankr. D. Minn. 2005).

The fact that the debtor’s house was about to be sold at foreclosure was found to satisfy the exigent test of §109(h)(3), but the statement that debtor had attempted to contact credit counseling agencies but had been informed that she could not obtain counseling services on such short notice failed to satisfy the second requirement to waive the prepetition counseling requirement in In re Wallert, 332 BR 884 (Bankr. D. Minn., 2005). The debtor’s allegations were made in a separate ‘Certificate Requesting Exemption from Credit Counseling Briefing.’ In this document, which was subscribed under oath, debtor alleged that a foreclosure on her home was scheduled for Nov 2 at 10:00 a.m. (though this is inconsistent with later allegations and may be in error), that she was first advised to seek bankruptcy relief from a legal aid society on Nov. 2 at 2:00 pm. She first spoke with counsel that filed the case on Nov. 2 at 3:00pm, and was advised to seek credit counseling. At that point she sought counseling from Lutheran Social Services and was advised that she could not obtain immediate counseling and was advised to set an appointment for counseling at a later date. She then contacted Springboard Non-profit Consumer Credit Management, Inc. and was advised that there was a $50 fee for counseling. Determining that she was unable to obtain immediately counseling debtor and counsel proceeded with filing the chapter 13 case. Finally she certified that she had no prior knowledge of the need to obtain credit counseling, that she believed she could obtain it within 30 days, and that she believes cause exists not to dismiss the case.

Judge Kishel set the requirements of the §109(h)(3) certificate as 1) describing the exigent circumstances meriting waiver of the prepetition counseling requirement; 2) state that debtor attempted to obtain counseling from an agency but was unable to obtain counseling within 5 days of the initial request; 3) that the certification be satisfactory to the court. While the sale described met the exigent requirement, and inference can be made that she sought counseling from the certification debtor filed, she failed to show or allege that she was unable to obtain counseling within 5 days of the request. Finding such defect incurable, the court dismissed the case. The court went on to note that if the debtor first sought counseling 3 days prior to filing, but was told counseling would not be available until 6 days after the request, such a certification would satisfy §109(h)(3)(A). The court engaged in an extensive analysis of the possible congressional policies and consequences of the 5 day requirement.

Missouri:

Another court ruled similarly that the motion for extension must show that the debtor actually sought credit counseling within the 5 days prior to filing but was unable to obtain it. In re Gee, 332 BR 602 (Bankr. W.D. Mo. 2005). (J. Dow). This involved an emergency filing prior to a foreclosure sale. On reconsideration of the courts initial unpublished ruling the counsel both described the financial hardship, the problems the debtor had in traveling to counsel’s office, and communications problems. Further, the motion discussed how one of the credit counseling agencies was unable to provide a certificate the same day as it was initially contacted. This court seems to be strictly interpreting the requirement that the debtor prove that they would be unable to get a counseling within five days of the initial request in order to qualify for the extension.

The McGee case raises an interesting question. If the problem is solely of getting a certificate, and if the counseling itself could be done prepetition it appears this would satisfy §109(h), even if the certificate is sent post-petition.

The first case setting forth a requirement that the debtor show why counseling was sought at the last minute is In re Talib, 335 BR 417 (Bankr. W.D. Mo. 2005) (J. Dow). The court first examined the requirements for a certification under §109(h)(3). Examining the dictionary definition of certification: a written statement that the signer affirms or attests to be true, the court found that a simple statement signed by the debtor and counsel would suffice, despite not being under penalty of perjury. The certification must set forth the facts underlying the alleged exigent circumstances, the date credit counseling was requested, which agencies were contacted, why debtor believes such services could not be obtained prior to filing, and when the services are reasonably likely to be obtained.

In the case at issue, the debtor gave no explanation of why she did not seek credit counseling until 24 hours prior to the sale; at which time she was advised it would require two days to obtain such counseling. Based on this alone, the court indicated that such certification may be inadequate even to show exigent circumstances, in that the exigent circumstances were caused by the debtor’s own procrastination. The court stressed that any certification reflecting a last minute attempt to obtain counseling must show the reason why counseling was not sought earlier. Since this was the first announcement of this requirement for certification, the court accepted the exigent circumstance certification in this case but indicated it would not do so in future cases without such further explanation described above.

The court then examined the issue of when a certification shows counseling was sought and could be obtained within five days but not prior to the deadline to file, if such certification satisfied §109(h)(3). The court noted it must follow the literal language of the statute unless such application would produce an absurd result or one demonstrably at odds with the intent of the drafters (citing United States v. Ron Pair Enterprises, Inc., 489 US 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). Since Congress may have imposed this requirement to discourage hastily filed bankruptcy petitions the court is obligated to follow the literal language. Therefore the court was required to dismiss the case. In a footnote the court also noted that if the debtor had contacted a different credit counseling agency, which had indicated that counseling would not be available for seven days, certification of such facts would satisfy §109(h)(3).

The first appellate decision on the issue found that the bankruptcy court was justified in refusing to find exigent circumstances when a foreclosure sale was scheduled the following day. In In re Dixon, 338 B.R. 383 (8^th Cir. BAP, 2006) the court found that the prior notices given to the debtor regarding foreclosure gave adequate warning of the sale. The court noted that Virtually, all of the cases in which the exigent circumstances certificate is filed will, in fact, involve exigent circumstances. After all, the reason that such debtors are filing bankruptcy quickly and before they receive the briefing is because they feel that they are unable to wait. The real question for the court in such certifications will usually be whether or not those exigent circumstances merit the statutory waiver. Missouri law requires a minimum 20 day notice prior to any foreclosure sale. There was adequate basis for the bankruptcy court’s finding under the abuse of discretion standard, so the appellate court could not reverse the finding.

New York:

Also electing to strike the petition rather than dismiss it, Judge Morris found §109(h) to be an eligibility requirement in In re Rios, 336 BR 177 (Bankr. S.D. N.Y. 2005). Debtor did not seek prepetition counseling, and in opposition to a motion to dismiss plead ignorance of the requirement. Though counseling was obtained postpetition, this did not meet the requirements of §109(h). The Court cited §301 stating that a voluntary case is commenced by filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter. Since §109(h) provides that an individual may not be a debtor absent compliance with such section, no cases were effectively commenced when §109(h) was not complied with. Citing H.R. Rep. 109-31(I) at 89 ‘(“[BAPCPA] requires debtors to receive credit counseling before they can be eligible for bankruptcy relief so that they will make an informed choice about bankruptcy, its alternatives, and consequences.”) and at 104 (2005) (“[t]he legislation's credit counseling provisions are intended to give consumers in financial distress an opportunity to learn about the consequences of bankruptcy-such as the potentially devastating effect it can have on their credit rating-before they decide to file for bankruptcy relief.”) (emphasis supplied).’ Because dismissal would have the effect of prejudicing debtors under §362(c)(3) and (c)(4); and since failure to comply with §109(h) is not a basis for dismissal under §707, Judge Morris concluded that dismissal was contrary to Congressional intent regarding this section. “Congress sought to enlarge debtors' options in the face of financial difficulty, not limit them. Congress intended that debtors would inform themselves of their options prior to bankruptcy filing by participating in credit counseling, and if bankruptcy continued to be the best option, debtors could avail themselves of that alternative. It is therefore apparent that Congress did not intend the credit-counseling requirement to limit the availability or extent of bankruptcy relief for debtors, which dismissal would accomplish, and thus, dismissal is inappropriate. The Court instead finds that because the Debtor was ineligible for bankruptcy relief; the bankruptcy case was never properly commenced and is therefore stricken.”

A Pro-se chapter 13 debtor requested a post-petition extension of time to comply with the credit counseling requirement on the basis that she needed counsel to advise her of her rights. In re Henderson, 339 B.R. 34 (Bankr. E.D. N.Y. 2006). The court noted that the request for an extension, while not signed under penalty of perjury may not be presented for an improper purpose and must have evidentiary support. The form of the request in the court’s district requires the debtor to explain the exigent circumstances and requires the debtor to state that they sought counseling from an approved agency but were unable to obtain it within five days. While noting that the standard for exigent circumstances is not overwhelmingly high, especially for a pro-se debtor; at a minimum it should show circumstances particular to the debtor that that show the debtor was confronted with an urgent situation rendering them unable to comply with the counseling requirement prior to filing. The only exigent circumstance alleged by the debtor was the need to obtain counsel. The Court found this was not an urgent situation requiring a prompt filing to avoid some calamity in the debtor’s life. Further, the need for legal assistance does not distinguish this case from the thousands of others who are compelled to seek bankruptcy relief without the assistance of counsel. Based on these conclusions the court denied the extension of time to obtain counseling, but allowed additional time for counsel to obtain counsel and refile a request for extension in compliance with §109(h).

Where debtor failed both to file payment advices or to file certificate of credit counseling, debtor was ineligible to be a chapter 7 debtor, and case should be dismissed rather than stricken. In re Seaman, 340 B.R. 698 (Bankr. E.D.N.Y. 2006). US Trustee sought dismissal for failure to comply with payment advice and credit counseling requirements, and debtor did not appear at hearing. §109(h) does not specify what happens to the bankruptcy case of a debtor that fails to comply with its requirements. The issue is whether the case should be declared void ab initio or dismissed. If dismissed, then the stay limitations of §362(c)(3) or (c)(4) are triggered. On the other hand, if the case is stricken, then the issue arises whether the stay came into existence between the filing date and the date the court struck the petition. If it did come into effect, this would enable an ineligible debtor to trigger a series of bankruptcies improperly availing himself of the automatic stay. While §109(e) requires a chapter 13 debtor to have regular income, virtually all courts recognize that the filing of a chapter 13 petition by a debtor without regular income still commences a case that invokes the jurisdiction of the bankruptcy court. The court also cited the argument that to void a case ab initio would create uncertainty to secured creditors as to the existence of the stay. Further, other sections of the code dealing with failure to file documents, such as §707(a)(3), §1307(c)(9), and §1112(e) set a penalty of dismissal rather than stricking the petition. Under the BAPCPA, Congressional intent is clear that credit counseling is required prior to filing, as a prerequisite for bankruptcy relief, to provide putative debtors with the opportunity to make informed choices as to financial alternatives available, including the possibility of seeking bankruptcy protection. If a case is dismissed rather than stricken, then the debtor may not be able to take advantage of the full panoply of protections afforded under §362 if they refile after obtaining credit counseling. If a case were void ab-initio there would be no purpose for §362(b)(21)(A).

Filing bankruptcy without first complying with credit counseling requirement 1) does nto trigger automatic stay; 2) court may decide on case by case basis whether to strike petition for such failure; 3) court determined to strike both chapter 7 and chapter 13 cases. Court certified question to Court of Appeals. Extensive discussion of case law on issues. In re Elmendorf, 345 B.R. 466 (Bankr. S.D.N.Y. 2006).

Ohio:

The requirement for certification of a request for waiver were examined, and a less strict standard propounded in In re Cleaver, 333 BR 430 (Bankr., S.D. Ohio 2005) (J. Walter). While the motion was ultimately denied for not stating that prepetition counseling was ever sought, the court determined that a motion without separate affidavit or other certification qualified for the form of the request under §109(h)(3)(A). The motion, filed on the same day as the chapter 13 filing (November 3, 2005), stated that a sheriff’s sale of debtor’s property was scheduled the next day, and that there was insufficient time to obtain the counseling. Debtor subsequently filed a certificate that he obtained the counseling briefing on 11 November. The court examined the ‘certification’ requirement of §109(h)(3)(A), and based on Black’s Law Dictionary and Webster’s Third New International Dictionary determined to minimally require a written statement that the signer affirms or attests to be true. Under this definition, no affidavit or oath is required in the motion, nor any separate certification from the motion itself. Judge Walter found the requirements for the §109(h)(3)(A) certification to be 1) a description of the exigent circumstances that merit waiver of the prepetition briefing requirement; 2) That the debtor requested credit counseling services from an approved provided but was unable to obtain it within five days, 3) that the certification is accepted by the Court. Since the debtor did not allege that he sought counseling prior to the filing, the motion was denied and case dismissed.

Pennsylvania:

An issue regarding what constitutes the ‘certification’ of the credit counseling briefing arose in In re Miller, 336 B.R. 232 (Bankr. W.D. Pa. 2006). In this case, the debtor filed a certificate of exigent circumstances explaining why she could not obtain counseling prior to the filing (relating to a sheriff’s sale of the property). There was no discussion in the decision of the efforts, if any, the debtor made to obtain prepetition counseling. After obtaining a post-petition extension to obtain counseling, the debtor filed a ‘certification’ on the letterhead of an approved counseling agency with a hand written statement that she had obtained such counseling, but that the agency would not issue the certificate until its $50 fee was paid. Upon examining dictionary definitions of ‘certification’, Judge Deller ruled that a certification must at a minimum be written instrument which, in an official manner, assures to the reader that 1) that the statements in the certificate are truthful; 2) that the acts or requirements that are the subject of the certification have (or have not) been done. Since the certification filed by the debtor in this case is not shown to have been signed by an authorized officer of the counseling agency, and there is no affirmation that the statements therein are true and correct, and since the document appears not to have been intended by the creator to be presented to the court, it does not qualify as a certification. The court allowed additional time for the debtor to obtain proper certification.

An amplification of the requirement that the exigent circumstances are such as to merit a waiver of the credit counseling requirement was enunciated in In re DiPinto, 336 B.R. 693 (Bankr. E.D. Pa. 2006). The certification in support of the request for credit counseling recited that debtor approached counsel at 7:30 pm the day prior to a sheriff’s sale of the homestead, that the debtor attempted to obtain counseling but was advised that the earliest available date was over 20 days later; and that counsel advised the debtor to attempt to obtain counseling earlier. Judge Raslavich first determined that the purported certification did not comply with 28 U.S.C. §1746, and therefore failed to meet the certify requirement in the statute since the counsel rather than the debtor signed the certification. However, Judge Raslavich went further to determine whether the request would have met the exigent circumstances requirement even if the certification had been proper. Acknowledging that an impending foreclosure sale had been found by courts to constitute exigent circumstances, the court examined a second requirement, that the exigent circumstances merit a waiver of the prepetition counseling requirement.

The ‘merit a waiver’ requirement suggests that the court should consider all the facts and circumstances relating to the debtor's alleged inability to obtain credit counseling prior to filing a petition for relief. In other words, the focus should be not so much on the imminence of the event that threatens the debtor with loss of property and requires filing of the petition for relief in order to invoke the automatic stay, but on the reasons why the debtor was unable to obtain the required credit counseling prior to having to file for relief. Debtor’s statement that he had found a last minute buyer for the property failed to meet this requirement. Debtor had sufficient advance notice of the creditor action, waiting until the last minute to address the prerequisites to bankruptcy filing makes the injury self-inflicting and therefore not meriting a waiver of the prepetition credit counseling requirement.

The court also questioned the debtors efforts to obtain counseling, noting that they sought counseling from only 1 of 14 approved agencies, and did not allege attempting to obtain counseling by telephone or internet.

A request for extension for credit counseling was again denied for failure of the debtor to even seek such counseling prior to filing in In re Tomco, 339 B.R. 145 (Bankr. W.D. Pa. 2006). Judge Deller further found that he was required to dismiss the case rather than strike it. The debtor filed just prior to a foreclosure sale on the homestead. The court noted the practical problems of requiring unsophisticated debtors to obtain counseling prior to the filing, but found that there was a rational basis for the legislation such that it could not be ignored. The court defined the inquiry under the extension section to be whether the debtor was actually precluded by his or her circumstances from obtaining the credit counseling briefing. This is a fact-specific inquiry into the good faith of the debtor, in which knowledge of the law may be a factor. However, this analysis does not change the requirement that the debtor seek counseling prior to filing and be unable to obtain it within five days.

The court rejected the debtor’s argument to strike the petition as done by the court in Rios rather than dismiss the case. The court found that the plain language of §362(c)(3) set forth the only limitations on its applicability, and Congress could have but did not include dismissals due to credit counseling as a basis for waiving waiving the limitations on the stay. §109(h) does not affect the Court’s jurisdiction over a case. The court was granted jurisdiction over the case upon filing by title 28 USC. Further, practicality argues for the initial validity of a case filed in violation of §109(h), as otherwise there would be no automatic stay ab-initio. If a case proceeds when §109(h) was not complied with, its orders remain valid despite such noncompliance.

South Carolina:

Request for credit counseling must be made at least five days prior to filing of the petition in order for court to grant waiver. In re Dansby, 340 B.R. 565 (Bankr. S.C. 2006). While debtor filed a certification with the petition that he could not obtain credit counseling within five days of his request, in fact debtor had an appointment with an approved counselor on the 5^th day after filing. The fact that there was a foreclosure sale prior to the 5^th day did not change the legal requirement. While noting that the certification should be in the form of an oath, the court did not deny the motion on that ground. Citing Cleaver for the proposition that §109(h)(3)(A)(ii) appears to require a five day waiting period prior to filing the petition. Congress intended to provide debtors with an alternative to filing bankruptcy, and to discourage hasty filings. This goal is not met if the debtor waits until just prior to filing to seek credit counseling. The court noted that debtors are not required to ‘scour’ the list of approved counselors prior to seeking an extension, they would be well advised to check with other counselors to avoid dismissal.

Tennessee:

An exception to the usual rule that petitions are deemed filed when received by the bankruptcy clerk’s office was enunciated in In re Looper, 334 BR 596 (Bankr. E.D. Tenn. 2005). The Debtor here was a prisoner. Citing Houston v. Lack, 487 U.S. 266, 108 S.Ct. 2379, 2382, 101 L.Ed.2d 245 (1988), the court ruled that under the “prisoner mailroom or mailbox filing rule,” a document to be filed by a pro se prisoner is deemed “filed” with a court on the date the prisoner delivers the document to prison officials for forwarding to the court. Since the bankruptcy petition was delivered to the prison officials prior to the effective date of BAPCPA, the debtor was not required to comply with the credit counseling requirements of §109(h).

Examining whether there was any basis to determine if there was a basis to correct or reinterpret the statute requiring prepetition credit counseling, and determining that legal precedent required strict compliance, Judge Stair found himself required to dismiss a number of cases for failing to obtain prepetition counseling in In re Fields, 337 B.R. 173 (Bankr. E.D. Tenn. 2005). The US Trustee has sought dismissal of a number of pro-se cases, many of whom used paralegal services, but none of whom had obtained the prepetition counseling. Finding that the language of the statute was plain and unambiguous. The only grounds to waive the requirement are set forth in the section itself.

Texas:

A Texas court has published 3 decisions on this issue in the same case. In In re Hubbard, 332 B.R. 285 (Bankr. S.D. Tex. 2005) it ruled similarly to the other reported decisions in rejecting an extension where the motion failed to file a certification (a motion was insufficient) that explained the exigent circumstances, the date the counseling was sought, which agencies were contacted, why debtor believes that the services could not be obtained prior to filing, and when the services are reasonably likely to be obtained. The court stressed that in the absence of a certification that debtor actually sought counseling services, any such motion must fail. Upon reconsideration, the court sua sponte examined the possibility for relief under §109(h)(2), finding that the motions in a few cases before raised the issue as to whether credit counseling was available in the Southern District of Texas. The court found that if credit counseling is, in fact, not available in the that district, the U.S. Trustee is required to make such certification under §109(h)(2). The Court therefore issued an order for the U.S. Trustee to appear before him and describe the procedures undertaken regarding its certification obligations on the statute. In re Hubbard, 333 BR 373 (Bankr. S.D. Tex. 2005). J. Isgur. At this hearing the Court ruled that credit counseling was available. This final ruling determined that credit counseling was available, and debtors failed to meet the statutory requirements for extension. However, Judge Isgur also determined that since §109(h) specifically specifies that ‘an individual may not be a debtor under this chapter’ unless he meets the credit counseling requirements; and since §301 provides that a voluntary case is ‘commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter’, the commencement of a case without compliance with §109(h) does not successfully commence a voluntary case. Since no case was commenced in the Hubbard and related cases, there is no case to dismiss. Therefore, the Court stuck the petitions rather than dismissing them. This, of course, would also have the effect of not triggering the stay provisions of §362(c)(3) or (c)(4). The court determined that fee charged by the Debtor’s counsel exceeded the reasonable value of counsel’s services in the Hubbard and related cases and entered an order to show cause why such fees and expenses should not be returned to the debtors. In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 2005).

Another court very critical of BAPCPA in general and the credit counseling requirement in particular discussed the criticisms in In re Sosa, 336 BR 113 (Bankr. W.D. Tex. 2005). J. Monroe. “Those responsible for the passing of the Act did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act. This is because the parties pushing the passage of the Act had their own agenda. It was apparently an agenda to make more money off the backs of the consumers in this country. It is not surprising, therefore, that the Act has been highly criticized across the country. In this writer's opinion, to call the Act a “consumer protection” Act is the grossest of misnomers.”

And subsequently in the decision: “[o]ne Debtor has now substantially complied with the intent of the Act by undergoing the required credit counseling. One has not but still could within the time limit if a waiver could be granted. However, because the Debtors did not request such counseling before they filed their case, Congress says they are ineligible for relief under the Act. Can any rational human being make a cogent argument that this makes any sense at all?
But let's not stop there. If the Debtors' case is dismissed and they re-file a new case within the next year, it may be that some creditor will take the position that the new case should be presumed to be filed not in good faith. See 11 U.S.C. § 362(c)(3)(C). Section 362 further states that if subsection (c)(3)(C) applies, then the stay in that second case will only be good for thirty days unless the debtor (i) files a motion, (ii) obtains a hearing and ruling by the Court within such thirty-day period and (iii) proves by clear and convincing evidence that the second case was filed in good faith. It should be obvious to the reader at this point how truly concerned Congress is for the individual consumers of this country. Apparently, it is not the individual consumers of this country that make the donations to the members of Congress that allow them to be elected and re-elected and re-elected and re-elected.”

The facts of the case are similar to most reported decisions. The debtors filed at the last minute to avoid a foreclosure sale; putting of the filing in this case due to negotiations with the mortgage company regarding a cure and a last minute rejection by the mortgage company of a cure offer. The debtors admitted not seeking credit counseling prior to filing the bankruptcy case. Finding his hands tied by the act, the court found itself required to dismiss the case. The court appears to have specifically declined to rule on whether a new filing would trigger the stay limitations of §362(c)(3) or (c)(4).

Disagreeing with In re Ross and In re Tomco Judge Isgur determined that a bankruptcy filing by debtors that did not meet the pre-bankruptcy credit counseling requirements of §109(h) does not trigger the automatic stay, and therefore a post-petition foreclosure sale was neither void nor voidable. In re Salazar, 339 B.R. 622 (Bankr. S.D. Tex. 2006). The court determined that it was implausible to believe that Congress specifically identified people to exclude from the bankruptcy process under §109(h) for failure to obtain credit counseling, yet permitted those same people to benefit from bankruptcy’s most powerful protection: the automatic stay. §362(a) provides that the automatic stay takes effect when a petition is filed under §§301, 302, or 303 of the code. §302 (the relevant section for the bankruptcy at issue) provides that a case is commenced with the filing of a petition by an individual that may be a debtor under such chapter. §109(h) provides that an individual may not be a debtor under this title unless the met the credit counseling requirement. Thus, as read together, unless an individual met the credit counseling requirement, they are ineligible to file a proper petition for bankruptcy or to be eligible for the automatic stay. The statute gives no room for an equitable exception to the rule. The court noted that this could create uncertainty in some circumstances, but noted the code provides mechanisms both to punish creditors that act in violation of the stay and to punish debtors that attempt to avail themselves of bankruptcy proection when they are ineligible. The court noted that the Fifth Circuit’s position that stay violations are voidable rather than void also reflects a code interpretion allowing a certain degree of uncertainty until a final decision is reached. Other instances where the applicablility of the stay is subject to court review were note by the court. Congressional intent must also support the conclusion. Congress intended that individuals learn about the consequences of bankruptcy before they file. Not including the credit counseling certificate in the list of deficiencies that result in automatic dismissal under §521(i) also could reflect Congressional intent that there is no case to be dismissed in the absence of compliance with the credit counseling requirements. The debtors argued that §362(b)(21) would be surplusage if the automatic stay never arose upon failure to comply with §109(h). The court rejected this argument, finding that §362(b)(21) was adopted by Congress to overrule those decisions finding that ineligible debtors could still file a petition triggering the automatic stay. Lastly, the court distinguished between dismissing a case and dismissing (or striking) the bankruptcy petition. §941(c) and (d) provide for dismissal of petitions. Dismissal of a petition pursuant to §109 results in dismissal prior to commencement of a case, and therefore would not trigger the stay limitation of §362(c)(3) or §362(c)(4) in a subsequent case. The court certified the decision for direct appeal to the Fifth Circuit Court of Appeals.

Utah:

In In re Sukmungsa, 333 B.R, 875 (Bankr. D. Utah 2005) the court rejected an attempt to use Rule 60(b) to extend the time to seek credit counseling. Debtor’s counsel asserted that the Debtors told him they had completed credit counseling prior to filing. The original filing included a certification by the debtors that they had completed credit counseling, three days prior to filing, but no certificate from any approved credit counseling agency. An actual credit counseling certificate was later filed seven days after the bankruptcy, showing counseling received that same day. A corrected certificate of credit counseling was filed after the hearing on the motion to extend showing that counseling was had with an approved provider six days prepetition. The Court looked to Pioneer Investment Services Company v. Brunswick Associates Limited Partnership et al., 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) for the standards to show excusable neglect. The court found that counsel had a duty under Rule 9011 to make a reasonably inquiry that the factual contentions in the petition have evidentiary support. The court found that the Debtors never explained the discrepancies in the dates of credit counseling. The court ruled that the excusable neglect standard was not met in that debtors never adequately explained why the Debtors failed to timely certify the completion of the credit counseling. Further, counsel should have taken reasonable steps to verify the debtors assertions of completion of the counseling.

Virginia:

In In re Watson, 332 B.R. 740 (Bankr. E.D. Va. 2005) Judge St. John ruled the debtor must show both exigent circumstances and that he requested credit counseling from an approved agency; and that such showing is satisfactory to the court. Thus, even if the court finds that circumstances were sufficiently exigent to warrant not seeking credit counseling, the motion still must be denied and the case dismissed unless the debtor actually sought credit counseling from an approved agency within 5 days of filing. In this decision the court also rejected an equal protection argument made by the individual chapter 13 debtor that if he had chosen a corporate structure rather than a sole proprietorship, the corporation would not have to meet the credit counseling requirement. The court determined that the disadvantaged class – sole proprietorships – were not a suspect class for discrimination purposes. Further, that there was a rational basis for congress distinguishing individuals from corporations in making the credit counseling requirement.

Wisconsin:

One of the rare cases when a motion for extension was granted is the unpublished decision in In re Reed, 05-45739-pp (Bankr. E.D. Wis.. 14 November, 2005) (J. Pepper). In this case the Debtor filed a motion alleging that they sought credit counseling five days prior to filing, but were told that the first available appointment would not be for substantially more than five days. While they did not assert exigent circumstances, the court granted the motion and allowed 30 days after the filing of the case for the debtors to obtain such counseling.

A factual situation nearly identical to Looper was announced in In re Luedtke, 337 B.R. 918 (Bankr. E.D. Wis. 2006). Again, a petition was mailed by a prisoner prior to October 17, but received by the bankruptcy clerk after October 17. This court also cited the prisoner mailbox rule to determine that the petition was deemed filed when delivered to the prison mailbox, rather than when received by the bankruptcy clerk.

§109(h)(1) Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.

(2)(A) Paragraph (1) shall not apply with respect to a debtor who resides in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services to the additional individuals who would otherwise seek credit counseling from such agencies by reason of the requirements of paragraph (1).

(B) The united states trustee (or the bankruptcy administrator, if any) who makes a determination described in subparagraph (A) shall review such determination not later than 1 year after the date of such determination, and not less frequently than annually thereafter. Notwithstanding the preceding sentence, a nonprofit budget and credit counseling agency may be disapproved by the United States trustee (or the bankruptcy administrator, if any) at any time.

(3)(A) Subject to subparagraph (B), the requirements of paragraph (1) shall not apply with respect to a debtor who submits to the court a certification that –

(i) described exigent circumstances that merit a waiver of the requirements of paragraph (1);

(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and

(iii) is satisfactory to the court.

(B) With respect to a debtor, an exemption under subparagraph (A) shall cease to apply to that debtor on the date on which the debtor meets the requirements of paragraph (1), but in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition except that the court, for cause, may order an additional 15 days.

(4) The requirements of paragraph (1) shall not apply with respect to a debtor whom the court determines, after notice and hearing, is unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone. For the purposes of this paragraph, incapacity means that the debtor is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities; and ‘disability’ means that the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing required under paragraph (1).

¶8 Appointment to Sign Schedules

¶8.1 It is a violation of §526(a)(2) for a DRA to make a statement or advise a client (or potential client) to make any statement that is untrue and misleading, or that counsel should have known was untrue and misleading. This puts some burden on counsel to exercise reasonable care to insure that no statements by counsel or by the client are inaccurate and misleading. Note, the statements must be both untrue and misleading, hence while no one would recommend putting untrue statements on the schedules, the fact that a statement, while true, might be misleading, could not be the basis for sanctions under this section. There remains a question whether any affirmative investigation is required or whether counsel simply must not know that any statements are misleading. Since the section does not state ‘upon reasonable investigation’ as it does in §xxx, then presumably no investigation is required. This also only applies to written documents filed in a bankruptcy.

§526(a) A debt relief agency shall not –

(2) make any statement, or counsel or advise any assisted person or prospective assisted person to make any statement in a document filed in a case or proceeding under this title, that is untrue and misleading, or that upon the exercise of reasonable care, should have been known by such agency to be untrue or misleading;

¶8.2 Schedules and documents filed with petition: in addition to the schedules and statement of financial affairs, the code now requires a statement by the debtor’s attorney that counsel has delivered the §342(b) [notice of available chapters and statements regarding the accuracy of the forms] to the debtor. (This only requires delivery of the notice, not that the notice was read, contrast to §521(a)(1)(B)(iii)(II) where pro-se debtors are actually required to read the notice). Also the initial filing must include copies of pay stubs from the debtors from the last 60 days prior to filing, and a statement of any reasonably anticipated increase in income or expenditures (though not of any decrease in income or expenditures?) in the 12 months following the filing of the case.

If these documents are not filed within 45 days after the case is filed, the case is automatically dismissed on the 46^th day according to §521(i)(1); yet according to §521(i)(2) it shall be dismissed within 5 days after a request by a party in interest. Subsection (1) defers to subsection 2, thereby implying a defacto dismissal formalized by the procedures described in subsection (2). The debtor may request an extension of time of up to another 45 days but the request must be filed within the initial 45 day period. Also, the trustee (but not the debtor or any other party in interest) may request that the case not be dismissed if such request is made prior to the expiration of the time period and if the court finds that the debtor attempted in good faith to file all the information required and that the best interests of the creditors would be served by administration of the case.

Query wouldn’t this allow the debtor who decided after the filing of the case that it wanted out of bankruptcy to simply refuse to file such documents, thereby requiring dismissal of the case under this subsection regardless of the best interests of creditors?

Cases:

Colorado:

Excusable neglect is not a basis to waive the filing deadlines of §521(i)(1). In re Ott, 2006 wl 1152339 (Bankr. D.Colo. 2006). Debtor’s counsel did not advise debtor of the deadline to file the payment advices, and the advices were not filed within the deadline set by BAPCPA. The bankruptcy itself was filed just 2 days after BAPCPA took effect. Debtor sought to vacate the order dismissing on the basis that the delay in filing was caused by counsel’s mistake or omission, and the confusion of the new bankruptcy law. The court noted that the legislative history seemed to reflect that Congress viewed bankruptcy as morally similar to shoplifting, and set a number of self–executing, unforgiving, and inflexible provisions in the new law. The case is automatically dimissed on the 46^th day if the documents are not filed. Once that occurs, no other excuses or exceptions can apply to reinstate the case. The court did note that it may be possible to extend the time prior to the termination of the 45^th day, including by the court’s own initiative. The court also noted that if circumstances made it impossible to comply with the 45 day deadline, a different result might apply.

Florida:

A pro – se debtor sought reconsideration of dismissal of his case for failure to file the §521(a)(1) documents within 45 days. Judge McEwen ruled that the court had no discretion to grant an extension of time to file those documents, and that dismissal was required. The case is automatically dismissed under §521(a)(7)(i)(1) on the 46^th day after filing. The extension permitted under §521(i)(3) requires that such extension request be filed prior to the expiration of the 45 days. Once that time period expires, any discretion left to the court terminates. In re Williams, 339 B.R. 794 (Bankr. M.D. Fla. 2006) (J. McEwen).

Texas:

Judge Jones determined that where the debts are primarily business, the schedules I and J adequate disclose the debtors income and expenses and the statement of monthly income contained in §521(a)(1)(B)(v) is not required. In re Moates, 338 B.R. 716 (Bankr. N.D. Tex. 2006). This statement is required to help apply the means test of §707(b) The US Trustee took the position, accepted by the court, that the statement of monthly income is only required for debtors holding primarily consumer debts since the §707(b) means test does not apply to such debtors.

Utah:

The first published decision interpreting this section appears to be In re Fawson, 338 B.R. 505 (Bankr. D.Utah 2006). The court ruled that where the required documents were not filed until after the 45 days, and no request was made for extension within such 45 days, the court had no discretion but to dismiss the cases. The debtors failed to file the required payment advices or a statement that no such advices were required. In one of the cases the Debtor’s counsel explained that computer problems had prevented the filing of the advices with the Court. In another, the advices were delivered to the US Trustee and the Chapter 7 trustee, but not filed with the Court. As to one debtor, the debtor had not received any income within the 60 days prior to filing. The debtors requested extensions after expiration of the 45 days. The court concluded that the debtor who was not employed in the prior 60 days did comply with §521(i)(1), despite not filing a document showing no income for the period. Debtor argued that §521(i)(2) requiring the court to dismiss a case not later than 5 days after request of a party in interest showed that the court had discretion as to such dismissals. The court rejected this argument, finding that (i)(2) did not change the legal effect of (i)(1). Once §521(i)(1) is satisfied, the case is dismissed whether or not an order is entered. Rule 5005(c) does not avail the debtors because for a document to be deemed filed with the court when delivered to the trustee, the party must have intended to file it with the court. Neither does Rule 9006(b) help due to the automatic dismissal, the 9006(b) request coming after dismissal of the case cannot be effective since the court lost jurisdiction upon dismissal. Further, Rule 9006 only permits extension for deadlines set by the bankruptcy rules or by court order, and does not permit extension of deadlines set in the Bankruptcy Code itself.

§521(a) The debtor shall –

(1) file –

(A) a list of creditors; and

(B) unless the court orders otherwise –

(i) a schedule of assets and liabilities;

(ii) a schedule of current income and current expenditures;

(iii) a statement of the debtor’s financial affairs and, if section 342(b) applies, a certificate –

(I) of an attorney whose name is indicated on the petition as the attorney for the debtor, or a bankruptcy petition preparer signing the petition under section 110(b)(1), indicating that such attorney or the bankruptcy petition preparer delivered to the debtor the notice required by section 342(b); or

(II) if no attorney is so indicated, and no bankruptcy petition preparer signed the petition, of the debtor that such notice was received and read by the debtor;

(iv) copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition by the debtor from any employer of the debtor;

(v) a statement of the amount of monthly net income, itemized to show how the amount is calculated; and

(vi) 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;

§521(i)(1) Subject to paragraphs (2) and (4) and notwithstanding section 707(a), if an individual debtor in a voluntary case under chapter 7 or 13 fails to file all of the information required under subsection (a)(1) within 45 days after the date of the filing of the petition, the case shall be automatically dismissed effective on the 46^th day after the date of the filing of the petition.

(2) subject to paragraph (4) and with respect to a case described in paragraph (1), any party in interest may request the court to enter an order dismissing the case. If requested, the court shall enter an order of dismissal not later than 5 days after such request.

(3) Subject to paragraph (4) and upon request of the debtor made within 45 days after the date of the filing of the petition described in paragraph (1), the court may allow the debtor an additional period of not to exceed 45 days to file the information required under subsection (a)(1) if the court finds justification for extending the period for filing.

(4) Notwithstanding an other provision of this subsection, on the motion of the trustee filed before the expiration of the applicable period of time specified in paragraph (1), (2), or (3), and after notice and a hearing, the court may decline to dismiss the case if the court finds that the debtor attempted in good faith to file all the information required by subsection (a)(1)(B)(iv) and that the best interests of creditors would be served by administration of the case.

¶8.3 Accuracy of Schedules

In re McKain, 325 B.R. 842, 851 (Bankr. Neb. 2005) in dicta, Judge Mahoney states that BAPCPA attorney’s signature on petition constitutes certification that attorney has no knowledge, after inquiry, that information on schedules is incorrect, implying that a reasonable inquiry is required into schedules as well as petition.

Counsel held liable for not confirming that mother’s alleged security interest in debtor’s motor home was perfeced despite advising debtors to obtain counsel to assure perfection, and being advised by debtors that they had done so. In re Dean, 2008 WL 5683493 (Bankr. D. Idaho).

¶8.4 Installment payment or waiver of filing fee. Rule 1006(b)(1) has eliminated the requirement that no fees have been paid to counsel in order to seek payment of filing fee by installments. However, such filing fee must be paid by the chapter 13 trustee prior to any fees being paid by the trustee to the attorney. Rule 1006(c) now permits waiver of the filing fee in chapter 7 upon filing the appropriate form. The standards for such waiver are not shown.

Cases:

Missouri:

The first published case interpreting this section of BAPCPA is In re Nuttall. 334 BR 921 (Bankr. W.D. Mo. 2005). Judge Federman granted a motion to waive the filing fee, finding that the debtor had income less than 150 percent of the income official poverty line (as defined by the Office of Management and Budget, and revised annually in accordance with section 673(2) of the Omnibus Budget Reconciliation Act of 1981) applicable to a family of the size involved and is unable to pay that fee in installments. See 28 USC §1930(f)(1). In determining this, the court first determines the relevant income figure. This would be the amount shown on line 16 of schedule I, but must include any income of a spouse (unless the parties are separated and filing is not joint), and income of dependent debtor; but does not include non–cash governmental assistance such as food stamps and housing subsidies. If this is less than 150% of the DHHS poverty guidelines, the court determines whether the debtor is able to pay the filing fee in installments, considering the totality of the circumstances. While payment or a promise to pay an attorney, bankruptcy petition preparer, or debt relief agency does not preclude the court from finding such inability, it may be a factor in such consideration. The burden to show such necessity is on the debtor.

Tennessee:

Where a debtor’s schedules I and J (as corrected) show a net income of over $200/month, the application for waiver of the filing fee should be denied despite showing no net income on the means test and having expenses less than that allowed under the means test. In re Bradshaw, 349 B.R. 511 (Bankr. E.D.Tenn. 2006). In order to waive the filing fee, the debtor must show that they have income less than 150% of the poverty guidelines, and inability to pay the fee based on the totality of the circumstances. It is the debtor’s burden to prove these factors.

Rule 1006. Filing fee.

(a) GENERAL REQUIREMENT. Every petition shall be accompanied by the filing fee except as provided in subsections (b) and (c) of this rule. For the purpose of this rule, “filing fee” means the filing fee prescribed by 28 U.S.C. 1930(a)(1) – (a)(5) and any other fee prescribed by the Judicial Conference of the United States under 28 U.S.S. §1930(b) that is payable to the clerk upon the commencement of a case under the Code.

(b) PAYMENT OF FILING FEE IN INSTALLMENTS.

(1) Application to Pay Filing Fee in Installments. A voluntary petition by an individual shall be accepted for filing if accompanied by the debtor’s signed application, prepared as prescribed by the Official Form, stating that the debtor is unable to pay the filing fee except in installments.

…

(3) Postponement of Attorney’s Fees. All installments of the filing fee must be paid in full before the debtor or chapter 13 trustee may make further payments to an attorney or other person who renders services to the debtor in connection with the case.

(c) WAIVER OF FILING FEE. A voluntary chapter 7 petition filed by an individual shall be accepted for filing if accompanied by the debtor’s application requesting a waiver under 28 U.S.C. §1930(f), prepared as prescribed by the appropriate Official Form.

¶8.5 Check for preferences or fraudulent transfers

The definition of a transfer has been changed in an apparent attempt to broaden it.

§101(54) The term ‘transfer’ means –

(A) the creation of a lien;

(B) the retention of title as a security interest;

(C) the foreclosure of a debtor’s equity of redemption; or

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with –

(i) property; or

(ii) an interest in property.

¶8.6 Minor children’s names shall not be disclosed on the petition.

§112. The debtor may be required to provide information regarding a minor child involved in matters under this title but may not be required to disclose in the public records in the case the name of such minor child. The debtor may be required to disclose the name of such minor child in a nonpublic record that is maintained by the court and made available by the court for examination by the United States trustee, the trustee, and the auditor (if any) serving under section 586(f) of title 28, in the case. The court, the United States trustee, the trustee, and such auditor shall not disclose the name of such minor child maintained in such nonpublic record.

¶8.7 Creditor Addresses

¶8.71 Check the last 3 months of bills or statements from creditors to determine the proper address for service to creditors and the proper account number. If 2 statements or bills show an address at which the creditor wishes to receive correspondence and shows the account number, then notice must be sent to that address with the account number. Query, what if the debtor had moved and did not send forwarding notice to the creditors? The statute refers to notices sent to the debtor, not to notices received by the debtor. Does this mean the notices to creditors may be improper if the debtor did not receive creditor bills/statements for the last 90 days? Subsection B refers to situations where the creditor was prohibited from communicating with the debtor for such 90 day period (or a portion thereof?), in which case it appears the statute looks back to the indefinite past for whenever the last 2 communications were sent by the creditor. If state law or debt collection law prohibits contact with represented debtors, then counsel should attempt to insure that correspondence is retained that was received within 90 days prior to retention of the counsel. Note that the Fair Debt Practices Collection Act generally prohibits contact with debtors that are represented by counsel. 15 U.S.C. §1692c(a)(2).

One other interpretation notes that section 2(A) refers to notice required under title 11 to be sent by debtor. The only notices there noted that debtor is required to send is regarding rejection of reaffirmation agreements and regarding executory contracts; and would not apply to the address used on the schedules.¹If this interpretation holds, this section would have minimal effect.

Query whether this notice provision supersedes the notices required by Rule 7004/9014 such as to insured depository institutions or government agencies?

§342(c)(2)(A) If, within the 90 days before the commencement of a voluntary case, a creditor supplies the debtor in at least 2 communications sent to the debtor with the current account number of the debtor and the address at which such creditor requests to receive correspondence, then any notice required by this title to be sent by the debtor to such creditor shall be sent to such address and shall include such account number.

(B) If a creditor would be in violation of applicable nonbankruptcy law by sending any such communication within such 90-day period and if such creditor supplies to the debtor in the last 2 communications with the current account number of the debtor and the address at which such creditor requests to receive correspondence, then any notice required by this section to be sent by the debtor to such creditor shall be sent to such address and shall include such account number.

¶8.72 Also check whether the creditors have provided the court with a preferred address. Note that the section only requires that the notice be filed ‘with any bankruptcy court’ regarding notice to be used by ‘all the bankruptcy courts’. Presumably the clerk’s office will have some method of coordinating such notices. Query what if there is a delay between notice to one bankruptcy court and update to the other courts of such notice?

§342(f)(1) An entity may file with any bankruptcy court a notice of address to be used by all the bankruptcy courts or by particular bankruptcy courts, as so specified by such entity at the time such notice is filed, to provide notice to such entity in all cases under chapters 7 and 13 pending in the courts with respect to which such notice is filed, in which such entity is a creditor.

(2) In any case filed under chapter 7 or 13, any notice required to be provided by a court with respect to which a notice is filed under paragraph (1), to such entity later than 30 days after the filing of such notice under paragraph (1) shall be provided to such address unless with respect to a particular case a different address is specified in a notice filed and served in accordance with subsection (e). [See ## below].

(3) A notice filed under paragraph (1) may be withdrawn by such entity.

¶8.73 If notice is sent to an improper address for a creditor, then the creditor will be deemed to be without notice of the pending case until the creditor (or an individual designed by the creditor to receive such notices) has actually received such notice. Further, monetary penalties (sanctions?) cannot be imposed on a creditor for stay violations until such proper notice is given (under §342(c),(e), or (f)) or received (under §342(g)(1)). Query, how is the debtor to determine what procedures all the different creditors have established for delivery of such notices? Perhaps local rules or the US Trustee could designate a national database for such procedures, and provide that failure to list the procedures in this database would constitute such procedures unreasonable.

An area that could spawn substantial litigation is whether a creditor who alleges it was not properly noticed had established reasonable procedures for notices to be provided to the designated person or subdivision. Given electronic noticing, if a creditor has not given an address to the Bankruptcy Noticing Center, and/or has not signed up with BANKO (an online service that notifies creditors of bankruptcy filing), the courts may determine that the creditor’s procedures were not reasonable.¹

§342(g)(1) Notice provided to a creditor by the debtor or the court other than in accordance with this section (excluding this subsection) shall not be effective notice until such notice is brought to the attention of such creditor. If such creditor designates a person or organizational subdivision of such creditor to be responsible for receiving notices under this title and establishes reasonable procedures so that such notices received by such creditor are to be delivered to such person or such subdivision, then a notice provided to such creditor other than in accordance with this section (excluding this subdivision) shall not be considered to have been brought to the attention of such creditor until such notice is received by such person or such subdivision.

(2) A monetary penalty may not be imposed on a creditor for violation of a stay in effect under section 362(a) (including a monetary penalty imposed under section 362(k)) or for failure to comply with section 542 or 543 unless the conduct that is the basis of such violation or of such failure occurs after such creditor receives notice effective under this section of the order for relief.

¶8.8 The petition forms now require disclosure of whether any judgment for possession of residential leasehold property has been obtained against the debtor. If so, and the debtor is willing and able to promptly cure the default, a certification must be filed with the petition to get a short extension to accomplish such cure. See ## below.

§362(l)(5)(A) Where a judgment for possession of residential property in which the debtor resides as a tenant under a lease or rental agreement has been obtained by the lessor, the debtor shall so indicate on the bankruptcy petition and shall provide the name and address of the lessor that obtained that pre-petition judgment on the petition and on any certification filed under this subsection.

¶8.91 Is there a risk that disclosure of the bankruptcy petition information will result in identity theft or some other unlawful injury against the Debtor or Debtor’s property? If so the Court can restrict disclosure of such information (Query, what if child support is owed to an ex-spouse and an order and there is a history of violence by the ex-spouse against the debtor?)

107(c)(1) The bankruptcy court, for cause, may protect an individual, with respect to the following types of information to the extent the court finds that disclosure of such information would create undue risk of identity theft or other unlawful injury to the individual or the individual’s property:

(A) Any means of identification (as defined in section 1028(d) of title 18) contained in a paper filed, or to be filed, in a case under this title.

(B) Other information contained in a paper described in subsection (A).

(2) Upon ex parte application demonstrating cause, the court shall provide access to information protected pursuant to paragraph (1) to an entity acting pursuant to the police or regulatory power of a domestic governmental unit.

(3) The United States trustee, bankruptcy administrator, trustee, and any auditor serving under section 586(f) of title 28 –

(A) shall have full access to all information contained in any paper filed or submitted in a case under this title; and

(B) shall not disclose information specifically protected by the court under this title.

¶8.96 If there was a foreclosure sale pending, record suggestion of bankruptcy or bankruptcy petition in property records prior to sale. §362(b)(24) could be interpreted to except from the automatic stay foreclosure sales where purchaser did not have notice of the sale. Therefore it is critical to record a copy of the bankruptcy petition (and suggestion) in the property records.

§362(b)(24) [The filing of a petition… shall not operate as a stay] under subsection (a), of any transfer that is not avoidable under section 549.

¶9 Additional documents to be filed with the petition:

¶9.1 Individual debtors also must file a certificate from an approved credit counseling agency, a copy of any debt repayment plan developed through such agency, a copy of any interest n an educational IRA or state tuition program (including presumably the Florida pre-paid college fund).

§521(b) In addition to the requirements under subsection (a), a debtor who is an individual shall file with the court –

(1) a certificate from the approved nonprofit budget and credit counseling agency that provided the debtor services under section 109(h) describing the services provided to the debtor; and

(2) a copy of the debt repayment plan, if any, developed under section 109(h) through the approved nonprofit budget and credit counseling agency referred to in paragraph (1).

(c) In addition to meeting the requirements under subsection (a), a debtor shall file with the court a record of any interest that a debtor has in an educational individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) or under a qualified State tuition program (as defined in section 529(b)(1) of such Code).

¶9.2 The Means test computations, showing income and expenses, and stating whether a presumption of abuse exists, shall be included with the schedule of income and expenses.

§707(b)(2)(C) As part of the schedule of current income and expenditures required under section 521, the debtor shall include a statement of the debtor’s current monthly income, and the calculations that determine whether a presumption arises under subparagraph (A)(i), that show how each such amount is calculated.

¶9.3 Rule 1007(b) sets out the list of documents to accompany the petition, and adds to the prior requirements: copy of income records for the last 60 days (it is counsel’s responsibility to redact all the but last 4 digits of the social security number); a record of any interest in an educational IRA, a credit counseling certification and, if any, and unless §707(b)(2)(D) applies, a debt repayment plan (or, alternatively a request for extension under §109(h)(3) or waiver under §109(h)(4)), the means test form (except in chapter 7 when the debtor has primarily business debts).

Rule 1007. Lists, Schedules, Statements, and other Documents; Time Limits.

(b) SCHEDULES, STATEMENTS, AND OTHER DOCUMENTS REQUIRED.

(1) Except in a chapter 9 municipality case, the debtor, unless the court orders otherwise, shall file the following schedules, statements, and other documents, prepared as prescribed by the appropriate Official Forms, if any;

…

(E) copies of all payment advices or other evidence of payment, if any, with all but the last four digits of the debtor’s social security number redacted, received by the debtor from an employer within 60 days before the filing of the petition; and

(F) a record of an interest that the debtor has in an account or program of the type specified in §521(c) of the Code.

…

(3) Unless the United States trustee has determined that the credit counseling requirement of §109 does not apply in the district, and individual debtor must file the certificate and debt repayment plan, if any, required by §521(b), a certification under §109(h)(3), or a request for determination under §109(h)(4).

(4) Unless §707(b)(2)(D) applies, and individual debtor in a chapter 7 case with primarily consumer debts shall file a statement of current monthly income prepared as prescribed by the appropriate Official Form, and, if the debtor has current monthly income greater than the applicable median family income for the applicable state and household size, the calculations in accordance with §707(b), prepared as prescribed by the appropriate Official Form.

…

(6) A debtor in a chapter 13 case shall file a statement of current monthly income, prepared as prescribed by the appropriate Official Form, and, if the debtor has current monthly income greater than the median family income for the applicable state and family size, a calculation of disposable income in accordance with §1325(b)(3), prepared as prescribed by the appropriate Official Form.

¶9.4 The documents described in Rule 1007(b)(1) – (6) must be filed with the petition or within 15 days thereafter. The statement regarding the financial management course in Rule 1007(b)(7) must be filed within 45 days of the first date set for the 341 and no later than the last payment by the debtor in a chapter 13.

Rule 1007. Lists, Schedules, Statements, and Other Documents; Time Limits

(c) TIME LIMITS. In a voluntary case, the schedules, statements, and other documents required by subdivision (b)(1), (4), (5), and (6); shall be filed with the petition within 15 days thereafter, except as otherwise provided in subsections (d), (e), (f), and (h) of this rule. … The statement required by subsection (b)(7) shall be filed by the debtor within 45 days after the first date set for the meeting of creditors under §341 of the code in a chapter 7 case, and no later than the last payment made by the debtor as required by the plan or the filing of a motion for entry of a discharge under §1328(b) in a chapter 13 case. Lists, schedules, statements and other documents filed prior to the conversion of a case to another chapter shall be deemed filed in the converted case unless the court directs otherwise.

¶10 Exemptions and exclusions from estate:

¶10.1 In determining which state’s exemption law to apply, if the debtor has not been in Florida for the past 730 days (2 years), then you use the state where the debtor for the largest portion of the 180 days preceding the 730 days.

If this section makes the debtor ineligible for any exemption (ie they were out of the country for most of the 6 months preceding the 2 year domicile test?), the debtor may elect the exemptions available under §522(d). Alternatively might this mean that if the debtor is ineligible for a single exemption, ie homestead, in the applicable state, they may use the federal homestead exemption for homestead even if other state personal property exemptions are available? Or must no exemptions be available to the debtor in the applicable state?

5^th Circuit

Texas resident who moved from Florida, and who lived in Florida for most of the 730 days prior to filing was allowed to use Federal exemptions rather than Florida since the Florida opt out statute, §220.20 limits its application to residents of the State of Florida. Camp v. Ingalls, 631 F.3d 757 (5^th Cir. 2011). The Debtor had livedin Florida for three years, and moved to Texas over a year prior to filing bankruptcy. The Debtor claimed federal exemption, trustee objected that Florida opt out statute did not allow federal exemption. The bankruptcy court denied the exemption, and the Debtor appealed. The District Court and 5^th Circuit both ruled that the Federal exemption was appropriate. The 5^th Circuit noted that the Florida opt-out law, like that of Alabama, Colorado, Georgia, and South Dakota, are limited to residents of the state. The Court rejected the trustee’s argument that the term resident should be read broadly so as not to treat non-residents differently than residents, and also indicated that to the extent the decision could lead to forum shopping, it was Congress’s decision to defer exemption decisions to the states. A footnote specifically notes that the decision is not based on the savings clause of §522(b)(3)’s hanging paragraph allowing federal exemptions if the state law opts out and prevents extraterritorial application of its exemption statute.

Florida:

Debtor may amend exemption after objection is sustained that they may not claim Florida exemption due to failure to meet domicile requirement. In re Welton, 448 B.R. 76 (Bankr. M.D.Fla. 2011) (J. Glenn). BAPCPA amended §522(b)(3)(A) to lengthen the time the debtor must be domiciled in a state in order to claim that state’s exemptions from 180 days to 730 days. Where a debtor is domiciled is a matter of federal common law. A person can have only one domicile, and once established continues until he renounces it and takes up another. A change in domicile requires both a physical presence in the new location and an intention to remain there indefinitely.

. In the case at bar while Debtor purchased new property in Florida, they continued to use the Georgia property as their principal address for vehicle registration, IRA statements, tax returns, and unemployment compensation claims. Further the bank statements show primarily transactions in Georgia. The wife was employed in Georgia and financial statements showed the Georgia address, If a debtor is not domiciled in the same state for the 730 days, the domicile is the location where the debtor was domiciled for the majority of the 180 days preceding the 730 days.

Rule 1009(a) permits Debtors to amend the schedules as a matter of course anytime before the case is closed. Since Debtors were domiciled in Georgia during the applicable time period, they should be allowed to claim Georgia exemptions.

The court noted that while Debtors may not claim exemptions in property intentionally concealed from the trustee. Handguns, computer, and ipods were not specifically listed on the schedules, and much property was shown in general lists. However, since there was no showing that the debtors attempted to remove an of their assets from the reach of the trustee, or to hinder the trustee’s investigation into the assets, the debtor will still be allowed to amend the schedules to claim these as exempt.

New York:

Court ruled that debtor who moved to NY within last 730 days was not entitled to Colorado exemptions (applicable state under §522(b)(3)) but was still entitled to claim Federal exemptions despite fact that both NY and Colorado both were ‘opt out’ states. In re Jewell, 347 B.R. 121 (Bankr. W.D.N.Y. 2006). Court ruled that NY exemptions were unavailable since debtor had not resided there for 730 days. Colorado exemptions were not available because that state requires that debtor be resident to claim exemptions, and debtor was not, at the time of filing, a resident of Colorado. Under the ‘savings clause’ of the hanging paragraph, debtor was still entitled to Federal exemptions. Court rejected possible reading of statute that would interpret the word ‘applicable’ solely to modify ‘the place in which the debtor’s domicile has been located for the 730 days immediately preceeding the date of the filing’ and not the rest of the subsection. However, this would render the hanging paragraph meaningless in that there would always be a set of exemptions available if the former residence’s state simply provided a fixed set of available exemptions.

Ohio:

Ohio resident who was domiciled in Florida during applicable time period may use federal exemptions as Florida exemptions do not apply to out of state residents. In re Beckwith, 448 B.R. 757 (Bankr. S.D. Ohio 2011). Debtor resided in both Ohio and Florida for the 730 days prior filing chapter 7, and in Florida for the 180 days prior to the 730 day period. Debtors initially claimed exemptions under the Florida statutes, then amended Schedule C to claim federal exemptions. The trustee objected alleging that the choice of law provisions of BAPCPA preempt any residency requirement of the Florida exemptions.

Pursuant to §522(b)(3)(A) if a debtor has not been domiciled in the same state for the 730 days prior to filing, the domicile is based on where the debtor resided for the majority of the 180 days prior to the commencement of the 730 days prior to filing. The ‘opt out’ provision of §222.20 of the Florida statutes states that ‘residents of this state’ shall not be entitled to the federal exemptions provided in §522(d) of the Bankruptcy Code. While neither the Florida Constitution or the majority of the statutory exemptions specifically limit the exemptions to Florida residents, multiple court decisions have held that Florida exemptions are not available to out of state residents.

Federal law can preempt state law in one of three ways: 1) express preemption, 2) field preemption, or 3) conflict preemption. Express preemption applies where Congress statutorily declares an intention to preempt state law. Field preemption applies where the federal interest is so dominant that the federal system is assumed to preclude enforcement of state laws on the same subject. Conflict preemption nullifies state law inasmuch as it conflicts with federal law, either where compliance with both laws is imposs8ible or where state law erects an ‘obstacle to the accomplishment and execution of the full purposes and objectives of Congress’. Congressional authority for states to ‘opt-out’ of the federal exemption scheme shows that field preemption is not applicable.

The trustee argues allowing debtors to use federal exemptions when BAPCPA’s provisions require application of exemption from an opt-out state conflicts with the express will of Congress. Court’s following this rationale conclude that §523(b)(3)(A) constitutes a federal choice of law provision, conflicting with state choice of law provisions. However, this analysis is not applicable in the case at bar, because the Florida statute limits its opt-out limitation to Florida residents. Even if the choice of law provision were to be preempted, the original right to opt-out of the federal exemption was granted prior to BAPCPA, and still stands under BAPCPA.

§522(b)(3) Property listed in this paragraph is–

(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor’s domicile has been located for 730 days immediately preceding the date of the filing of the petition, or if the debtor’s domicile has not been located at a single state for such 730–day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730–day period or for a longer portion of such 180-day period than in any other place;…

§522(b)(3)(hanging paragraph)

If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).

¶10.2 Retirement funds: to the extent the funds are in a fund or account exempt under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the tax code are exempt. They are presumed exempt if they are in a fund that received a favorable determination under §7805 (26 USC 7805 deals with the rule-making authority of the IRS, it is not clear that this is the section intended to be referred to) of the code which determination is still in effect. If there has been no such determination (or if the determination expired?) the funds are exempt if the debtor demonstrates that no prior unfavorable determinations were made by the IRS or a court (no clear explanation how the Debtor could prove this negative) and that either the fund is in substantial compliance with the applicable tax code requirements or that if it is not in substantial compliance, the debtor is not materially responsible for such failure.

BAPCPA also provides in §522(b)(4)(C) that a ‘direct transfer’ of retirement funds ‘from 1 fund or account’ that is exempt shall not lose its protection under §522(b)(3)(C) or §522(d)(12) by reason of such direct transfer. The section refers to the exempt status of the fund or account as a prerequisite to protecting the funds transferred from such account, though the account they are transferred into may not be itself entirely exempt. If the only funds in the account to which the funds are transferred are the funds subject of the direct transfer, then arguable that fund or account qualifies as an exempt account enabling further exempt transfers.

§522(b)(4)(D) further clarifies that rollovers of retirement funds are protected. The rollover qualified either if it meets the requirements of 26 U.S.C. 402(c) or if it comes from a qualified fund and is deposited into another fund or account within 60 days.

§522(d)(12) makes the retirement funds exempt if the federal exemptions are chosen (whereas §522(b)(3) applied if state exemptions were chosen).

IRA exemptions are limited to $1,000,000.00 under §522(n), with more allowed for rollovers. I doubt this will come up with most consumer bankruptcy attorney clientele.

Pennsylvania:

Inherited IRA’s are now exempt under this section (whether state or federal exemptions are chosen) without regard to whether they are reasonably necessary for the support of the debtor or the dependents, so long as they are in fact retirement funds, and are in an account that is exempt from taxation under one of the provision of the IRS Code. In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010) citing In re Nessa, 426 B.R. 312 (8^th Cir. BAP 2010).

§522(b)(3) [exempt property includes]

(C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

§522(b)(4) For purposes of paragraph (3)(C) and subsection (d)(12), the following shall apply:

(A) If the retirement funds are in a retirement fund that has received a favorable determination under section 7805 of the Internal Revenue Code of 1986, and that determination is in effect as of the date of the filing of the petition in a case under this title, those funds shall be presumed to be exempt from the estate.

(B) If the retirement funds are in a retirement fund that has not received a favorable determination under such section 7805, those funds are exempt from the estate if the debtor demonstrates that –

(i) no prior determination to the contrary has been made by a court or the Internal Revenue Service; and

(ii)(I) the retirement fund is in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986; or

(II) the retirement fund fails to be in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986 and the debtor is not materially responsible for that failure.

(C) A direct transfer of retirement funds from 1 fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986, under section 401(a)(31) of the Internal Revenue Code of 1986, or otherwise, shall not cease to qualify for exemption under paragraph (3)(C) or subsection (d)(12) by reason of such direct transfer.

(D)(i) Any distribution that qualifies as an eligible rollover distribution within the meaning of section 402(c) of the Internal revenue Code of 1986 or that is described in clause (ii) shall not cease to qualify for exemption under paragraph (3)(C) or subsection (d)(12) by reason of such distribution.

(ii) A distribution described in this clause is an amount that –

(I) has been distributed from a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986; and

(II) to the extent allowed by law, is deposited in such a fund or account not later than 60 days after distribution of such amount.

§522(d) the following property may be exempted under subsection (b)(2) of this section

(12) Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

§522(n) For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.

¶10.3 Homestead Issues

¶10.31 Homestead: debtor’s principal residence redefined as a residential structure regardless of attachment to land. But, neither §522(b)(3) regarding venue of exemptions; nor §522(d) regarding exemptions specifically reference ‘debtor’s principal residence’. Query: does this make the argument that boats or recreational vehicles are homestead easier?

§101(13A) The term ‘debtor’s principal residence’ –

(A) means a residential structure, including incidental property, without regard to whether that structure is attached to real property; and

(B) includes an individual condominium or cooperative unit, a mobile or manufactured home, or trailer.

§101(27B) The term ‘incidental property’ means, with respect to a debtor’s principal residence –

(A) property commonly conveyed with a principal residence in the area where the real property is located;

(B) all easements, right, appurtenances, fixtures, rents, royalties, mineral rights, oil or gas rights or profits, water rights, escrow funds, or insurance proceeds; and

(C) all replacements or additions.

¶10.32 The value of a residence, homestead or burial plot is reduced if state exemptions apply (the section limits itself to exemption under §522(b)(3)) to the extent that the value is attributable to property that the debtor disposed of within 10 years prior to the filing of the bankruptcy with the intent to hinder, delay, or defraud a creditor and which could not have otherwise been exempted on the date disposed of. The phrasing of the statute is a bit odd. §522(b)(1) states that an individual may exempt from property of the estate the property listed in either paragraph (2) or paragraph (3) of §522. §522(b)(3) described this property (the exempt property under state exemptions) as any property that is exempt under other federal laws, state or local laws. Thus §522(b)(3) property is the exemptions in the property. However, §522(o) does not say the §522(b)(3) property is limited or reduced to the extent of the transfers described, it simply states that for purposes of §522(b)(3) the value of the property is reduced. An argument could be made that the literal language of the statute is directly contrary to the intent of the statute: and that §522(o) reduces the value of referred real estate without reducing the allowed exemptions in such value.

If interpreted to reduce the value of the exemption rather than the value of the property itself, then counsel will need to review any funds either paid down on the mortgage or funds put into the property as improvements for the ten years preceding the bankruptcy filing.

Cases:

Arizona:

In In re McNabb, 326 BR 785 (Bankr. D.Ariz. 2005), the court interpreting this section did not address the issue raised above, but noted that the language may require the same type of intent proof as is required by §548(a)(1)(A).

Florida:

Debtor who sold non-exempt securities while not paying her bills, and used proceeds to purchase and make improvements on homestead, lost homestead exemption notwithstanding Florida constitutional exemption for homestead. In re Osejo, 447 B.R. 352 (Bankr. S.D. Fla 2011). Court indicated that it was the virtually limitless Florida homestead exemption that prompted passage of §522(o), which by virtue of the supremacy clause supercedes the Florida constitutional homestead exemption. The Court also took into consideration that the Debtor initially omitted the proceeds from the sale of the nonexempt securities from the Statement of Financial Affairs, and failed to amend the same until the day of the rescheduled meeting of creditors, after the trustee had employed counsel to investigate the matter. The sales of securities continued up the three months prior to filing and the last sale of $42,309.13 was used to improve the homestead. Further, the debtor failed to disclose on the initial filing a debt of $105,000 from her ex-husband, a 401k valued at $65,036, and a vested retirement account worth $133.230. The trustee requested only a reduction of $40,959.06 in the $50,847.06 homestead, which the Court granted, hinting that a greater reduction might have been granted if requested.

Minnesota:

Use of approximately $20,000 proceeds from the sale of a truck and trailer to pay down a home equity line of credit was deemed to run foul of §522(o) in In re Maronde, 332 B.R. 593 (Bankr. D. Minn. 2005). In this case the debtor sold a trailer and traded in a truck for a cheaper vehicle, netting $19,130 which he used $18,750 to pay off the home equity line of credit. These actions were taken after discussing exemptions with a bankruptcy attorney. The court held that the party objecting to the exemptions (the Chapter 13 Trustee in this case) had the burden of proof. In determining whether the actions were done with an intent to hinder, delay, or defraud creditors; the court looked to the line of cases dealing with exemption planning and fraudulent conveyances. This suggests a similar analysis to when a pig becomes a hog cases. The court then went on to list the badges of fraud that would be examined in such circumstances: 1) whether the transfer was to an insider; 2) whether the debtor retained possession or control of the property after the transfer; 3) whether the transfer was concealed or disclosed; 4) whether the debtor was sued or suit threatened prior to the transfer; 5) whether the transfer was of substantially all the debtor’s assets; 6) whether the debtor absconded; 7) whether the debtor removed or concealed assets; 8) whether the consideration was reasonably equivalent to the value of the asset transferred or debt incurred; 9) whether the debtor was insolvent or became insolvent shortly after the transfer; 10) whether the transfer occurred shortly before or shortly after a major debt was incurred; 11) whether debtor transferred the essential assets of a business to a lienor who transferred those assets to an insider. Quoting Northgate Computer Systems, Inc., 240 BR 328, 360–61, citing Kelly v. Armstrong, 141 F.3d 799, 802 (8^th Cir. 1998). Finding a number of the badges met, such as debtor essentially transferred virtually all of his nonexempt assets to himself when insolvent. The court thus denied $18,750 of the exemption in the homestead under §522(o).

Montana:

Debtors that liquidated $42,500 in non-exempt assets and applied the funds toward the homestead in contemplation of filing bankruptcy but without any fraudulent intent had exemption in homestead reduced by the $42,500. In re Lacounte, 342 B.R. 809 (Bankr. D.Mont. 2005). Debtor admitted that the intent of the transfers was to put assets out of reach of their creditors. Fraudulent intent is not required to reduce the exemption under §522(o).

§522(o) For purposes of subsection (b)(3)(A), and notwithstanding subsection (a), the value of an interest in-

(1) real or personal property that the debtor or a dependent of the debtor uses as a residence;

(2) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;

(3) a burial plot for the debtor or a dependent of the debtor; or

(4) real or personal property that the debtor or a dependent of the debtor claims as a homestead;

Shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of.

¶10.33 BAPCPA Further attempts to limit homestead exemption if a portion of the value of the homestead was acquired within 1215 days (3 & 1/3 years) except to the extent that such value was transferred from a prior principal residence in the same state. Specifically, the exemption in property acquired within the 1215 days is limited to $125,000. Thus, if the debtor’s home is worth $400,000; and $200,000 of the value came from the sale of a prior home in the same state which was purchased more than 1215 days ago, (and assuming no appreciation in value since the purchase), then the allowed exemption should be $325,000. Presumably any appreciation would be applied pro-rata to the rolled over portion and the non-rolled over portion of the purchase price of the home. This section also does not apply to family farmers.

Cases:

Arizona:

The literal language here states that it only applies to exemptions obtain as a result of an election under §522(b)(3) to choose state exemptions. Thus if the state has opted out of the federal exemptions, and the debtor is therefore required to use state exemptions, then arguably this section does not apply. This is the interpretation followed by In re McNabb, 326 BR 785 (Bankr. D.Ariz. 2005), the first case interpreting this section.

Florida:

Judge Mark, from the US Bankruptcy Court for the Southern District of Florida disagreed, finding that the statute was sufficiently clear as to legislative intent to read the statute as applying all states with the larger homestead exemption. In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005).

Judge Freeman, in In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005) while seeming in dicta to disagree with Judge Mark, ruled that the homestead was still exempt even if the equity came not from the immediately preceding house sold within the 3 1/3 years, but the house preceding the sale of that one.

Judge Mark, in the Middle District of Florida, has also ruled that the cap applies whether or not a state has opted out of the federal exemptions. In re Landahl, 338 B.R. 920 (Bankr. M.D. Fla. 2006). This case involved the unusual situation of the chapter 7 trustee pursing the objection to exemptions after the case had been converted to chapter 13. Judge May found that the trustee, as an administrative claimant, had standing to continue to pursue such objection. In determining that the cap applied in opt out states such as Florida, the court noted that the ‘elect’ term in §522(p) is not connected with the term as used in the choice of exemptions in §522(b)(1). Thus, it is entirely plausible to read §522(p)’s reference to electing as simply debtors act of choosing exemptions of property under §522(b)(3)(A).

Judge Briskman found that appreciation in property purchased more than 1215 days prior to filing does not trigger the $125,000 exemption limitation of §522(p). Debtors purchased the property on March 6, 2001 for $783,000, and valued it at $1,400,000 as of filing on 12 October 2005. Debtors show a mortgage of $480,094. An unsecured creditor, Bank One, objected to the exemptions, alleging that any amounts of interst acquired by the debtor during the 1215 day period are subject to the $125,000 limitation. The Court rejected this argument, finding that since it would apply equally to property purchased more than 1215 days prior to the petition, it is contrary to the language of the statute. The court then went on to define acquire as to gain possession or control over something, and interest as a legal share in something or part of a legal or equitable claim to or right in property. The court concluded that title is acquired, and that equity is not. Equity, being the difference between value and debt, is constantly fluctuating. Thus, the court concluded that the interest refered to in §522(p) is an ownership interest in property. Since the property here was obtained prior to the 1215 days, it is not subject to a §522(p) limitation on the exemption. The court went on to examine the legislative history showing the intent to close the mansion loophole regarding recently purchased property. In re Sanlair, 344 B.R. 669 (Bankr. M.D. Fla. 2006).

Judge Williamson has ruled that the $125,000 exemption can be stacked for joint debtors, and that appreciation in property after purchase is not counted in determining the equity for purposes of §522(p). The debtors in this case purchased the property within the 1210 days prior to filing for $350,000, using $35,000 equity from a former Florida homestead, $1,800 cash and a bank loan of approximately $320,000. The property was valued at $750,000 as of filing, due to appreciation of real estate in the area. The morgages totaled approximately $525,000, resulting in an undisputed $175,000 equity in the home as of filing. The trustee objected to the exemption under §522(p).

The court rejected McNabb’s argument that §522(p) did not apply to opt-out states. In determiing that the exemptions could stack, the court noted that the personal property and the automobile exemptions both stack in Florida for joint debtors. The court also examined §302 and Rule 1015 dealing with joint administration of estates, limiting each debtor’s choice only to requiring both to choose either state or federal exemptions. The court also noted that §522(m) would protect stacking of joint debtor exemptions in non-opt out states. Under §522(m), §522(p) shall apply separately with respect to each debtor in a joint case, thus allowing a total joint homestead exemption of up to $250,000 in property purchased within 1215 days.

In examining whether appreciation in property counts toward the exemption limitation, the court parsed the statute, finding three requirements. 1) any amount of interest; 2) acquired by the debtor; 3) aggregate $125,000 in value. Distinguishing Blair and Sainlar, Judge Williamson determined that the interest referred to is equity in the homestead acquired within the 1215 days, rather than ownership interest acquired. This distinction is supported by §522(p)(2)(B)’s exclusion of interest transferred from a prior homestead. As to the second requirement of the statute, a debtor may acquire equity by making a down payment on the house, by paying down the mortgage, or by market appreciation. The first two methods require active conduct by the debtor, while the latter is passive. Since Congress required an interest obtained by the debtor (as opposed to possible language such as limiting the homestead as to any interest acquired within 1215 days); this implies active conduct by the debtor thereby excluding market appreciation as a basis to deny the exemption. Finally the court examined the legislative history that no mention of concern with recent appreciation of property was mentioned to support its conclusion. In re Rasmussen, 349 B.R. 747 (Bankr. M.D. Fla. 2006).

Court ruled that §522(o) and (p) cannot be used to place equitable lien against homestead to extent that transfer of funds to the homestead within 1215 days exceed $136,875 in value. In re Champalanne (Bankr. S.D. Fla. 2010) (J. Hyman). Use of nonexempt funds to purchase a homestead with actual intent to hinder, dealy, or defraud creditors, even if ‘blatantly a move to deceive credtiros and made in bad faith, does not rise to level of fraud nor constitute egregious behavior’ sufficient to render homestead exemption inapplicable. Citing In re Chauncey, 454 F.3d 1292, 1294 (11^th Cir. 2006) citing Havoco II, 255 F.3d 1321 (11^th Cir. 2001). §522(o) does not supercede Havoco, the proper remedy instead is for trustee to file objection to exemptions, decreasing the amount of funds available for homestead exemption. Court also raised, but did not resolve whether §522(o) and (p) could affect spouses exemption. Summary judgment granted as to asserting equitable lien on homestead, trial set on trustee request for monetary judgment.

Nevada

A Nevada bankruptcy court has also disagreed with McNabb, and held that an election occurs by as debtor’s choice under §522(b)(1) to exempt property listed either in §522(b)(2) or §522(b)(3), and that the only consequence of the state’s determination to ‘opt out’ of the federal exemptions is that the effect of the election is limited, not the ability to make such election. The Court reasoned that if a debtor in an opt-out state chose to use §522(b)(2) exemptions, and if no timely objection were made, such property would be allowed exempt. Still, the court noted a further ambiguity, that §522(p) refers to an election under §522(b)(3)(A), when the election comes under §522(b)(1). The court found that clear congressional intent still determined that the intent was to apply the section regardless of the opt–out status of the state. The court also certified the issue for a direct appeal to the Court of Appeals of the 9^th Circuit. In re Virissimo, 332 B.R. 201 and 322 B.R. 208 (Bankr. D. Nev. 2005) J. Riegle However, the debtor did not file an appeal.

Judge Markell has agreed with Juge Riegel in McNabb, at least to the extent of ruling that the statute applies whether or not a state has ‘opted out’ from the federal exemptions. In In re Kane, 336 B.R. 477 (Bankr. D.Nev. 2006) the court was faced with an objection to the exemption of $160,000 equity in a Nevada homestead purchased at the beginning of 2005 after living in California from 1997 through December 2004. Note that the bankruptcy was filed in July 2005, thus while §522(p) applied limiting the homestead exemption, §522(b)(3) requiring use of the state exemptions where the debtor resided for the 6 months prior to the 730 days prior to the filing of the bankruptcy (when debtors had not resided in the same state for 730 days) did not take effect until 17 October 2005.

Debtors initially argued that since §522(p) reduced state law exemptions, it violated the Fifth Amendment as an unconstitutional taking. The court rejected this argument, both because there is no constitutional right to file bankruptcy, and because state exemptions must fail when in conflict with federal law.

Judge Markell ultimately advanced a different theory for not strictly interpreting the statute than advanced either in McNabb or in Virissimo. Judge Markell determined that the legislative history was unequivocal that it was intended to, and believed to have closed the ‘mansion’ loophole which had been a concern of Congress for nearly a decade (citing House and Senate reports). Secondly, the court found no discernable or feasible public policy by linking the homestead cap to a debtor’s choice of federal or state exemptions.

The court then examined under what circumstances the court may correct a legislature’s drafting error in a statute. Judge Markell recognized the possibility that what a court determined was a drafting error was in fact a substantive decision by a legislature, perhaps as a result of an unseen legislative compromise; in which case a court would be rewriting the law. Thus the longstanding policy that if the words of a statute are clear, they should be taken as fully embodying the legislative intent. Further examination is permitted only where the statutory language is ambiguous.

However, an exception to this rule applied where the language of a statute is demonstrably at odds with the intent of the drafters. In such a case, the intent controls. Citing. United States v. Ron Pair Enters., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982). Judge Markell examined Judge Scalia’s statutory interpretation, as one of the strictest textualists active today. In brief, he requires that two conditions be met before such variance is permissible. First, the plain meaning of the statute under consideration must lack any rational purpose-not just what Congress may have intended, but any plausible congressional purpose. A second element for Justice Scalia is that the intended meaning to be used must be obvious.

Judge Markell found that these two conditions were met: that there was no plausible purpose in linking the exemption limitation to whether debtors had a choice of state or federal exemptions; and that is is obvious that Congress intended to close the loophole in opt-out as well as opt-in states. Despite this conclusion, the court recognized a possible policy argument that the result was an intended compromise to have the statute apply to some states and not others. The court rejected this argument since there was no legislative support for it in the legislative history and conflicts with logic in that it would limit Texas unlimited homestead exemption, whose legislators strongly opposed the limitation, while allowing Florida’s unlimited exemption.

Texas:

A fairly aggressive creditor argued that any increase in equity in the homestead acquired within 1215 days of the filing over $125,000 was nonexempt, even though the homestead was purchased more than 1215 days prior to the filing of the case. Judge Hale in Texas rejected this argument, holding that the statute refers to any ‘interest’ acquired by the debtor within 1215 days of filing, and that debtor’s ‘interest’ in the home was the purchase which occurred prior to the 1215 days. In this case, the title was acquired prior to the 1215 day period of §522(p). The court also cited Virissimo, Wayrynen, and McNabb, as well as 4 COLLIER ON BANKRUPTCY ¶522.13 [2]. Further this is consistent with the provisions allowing rollover of equity from a prior homestead within such period. Judge Hale went on to cite legislative history showing the intent of the section to prevent ‘mansion’ exemptions unless the debtor had resided in the state for the specified period, and prevent debtors from moving to states in order to take advantage of substantial homestead exemptions. In re Blair 334 B.R. 374 (Bankr. N.D. Tex. 2005).

§522(p)(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215–day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in-

(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;

(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;

(C) a burial plot for the debtor or a dependent of the debtor; or

(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

(2)(A) The limitation under paragraph (1) shall not apply to an exemption claimed under subsection (b)(3)(A) by a family farmer for the principal residence of such farmer,

(B) For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor’s current principal residence, if the debtor’s previous and current residences are located in the same State.

¶10.34 The last of the three attempts of BAPCPA to limit homestead exemptions is §522(q). Here, the homestead is again limited to $125,000 if the court determines that the debtor had been convicted of a felony which demonstrates that the filing of the case was an abuse of provisions of the bankruptcy code, or if the debtor owes a debt arising from violation of securities laws; fraud, deceit or manipulation in a fiduciary capacity; or with the purchase or sale of any registered security; any civil remedy under 18 U.S.C. 1964 (RICO); or any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.

These could be broadly interpreted to apply in a manner probably not anticipated by the drafters. Under §522(q)(1)(B)(ii) manipulation defined broadly might include virtually any transactions in the stock market thereby triggering the section to limit the homestead exemption. Under §522(q)(1)(B)(iv) the debtor could be liable for debts for reckless misconduct by others causing serious injury or death without himself actually being involved in significant misconduct. For example if a child was using his car and got in a serious accident.

§522(q)(2) protects the exemption even if the section would otherwise apply if the interest above the $125,000 is reasonably necessary for the support of a debtor or dependent.

This section also has the same ‘election under §522(b)(3)’ language found in McNabb to limit its application to states that allow a choice of either federal or state exemptions.

There is a question whether the $125,000 exemptions can be ‘stacked’ by joint debtors. Since a joint case is an administrative procedure but legally treated as 2 separate cases, better law would seem to allow stacking of these exemptions, thus allowing a total of $250,000 in equity for a joint case where both are allowed the property as homestead.

Query: does it make a difference that §522(q)(1) refers to conjunctive as to property described in subparagraphs (A),(B),(C) and (D), instead of using the disjunctive or as found in §522(p)(1)?

Cases:

Florida: see In re Champalanne (Bankr. S.D. Fla. 2010) (J. Hyman). In ¶10.33

Massachusetts:

The first published decision interpreting this section found that a charge of vehicular homicide, along with a transcript of a trial showing the state court found facts sufficient to find the debtor guilty, qualified as a criminal act sufficient to limit the homestead to $125,000 equity even in the absence of a formal conviction. In re Larson, 2006 WL 891532 (Bankr. D.Mass. 2006). The debtor had gone to criminal trial as charged with Motor Vehicle Vehicular Homicide by Negligent Operation under Massachusetts Law. While the transcript of the trial showed that the Judge found fact sufficient to sustain a guilty verdict, the court continued the trial and put the debtor on supervised probation. The victim’s spouse also obtained a civil judgment against the debtor. The debtor argued that in the absence of a BAPCPA definition of ‘criminal act’ the court should find that it’s use alongside such terms as ‘willful or reckless misconduct’ or ‘intentional tort’ requires conduct greater than negligence. Under Massachusetts law, the negligence required for the criminal charge was a lesser charge than reckless misconduct. The creditor countered that under Massachusetts law the debtor’s admission before the trial judge was equivalent to a guity plea.

The court began its analysis with the maxim that the starting point in discerning Congressional intent is the stautory text. Where such language is clear, the sole function of the court, at least where the disposition required by the text is not absurd, is to enforce it according to its terms. The court then looked to dictionary definitions of criminal act and related terms, finding some act of commission or omission lies at the foundation of every crime. In order to constitute a criminal offense, there must be a sufficient criminal act or omission as well as a criminal intent; mere criminal intention is not punishable. ··· A person must participate in all the acts necessary to constitute a particular crime in order to be guilty thereof. The term ‘criminal act’ does not require a conviction or a certain level of culpability. The court found that such definition does not lead to an absurd result, and is sufficiently clear. Further finding that the debtor admitted facts in the state court proceeding sufficient to satisfy the statute, the court ruled that the section did apply. Further trial was scheduled on whether the homestead was necessary for the support of the debtor.

§522(q)(1) As a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of an interest in property described in subparagraphs (A), (B), (C), and (D) of subsection (p)(1) which exceeds in the aggregate $125,000 if-

(A) the court determines after notice and a hearing, that the debtor has been convicted of a felony (as defined in section 3156 of title 18), which under the circumstances, demonstrates that the filing of the case was an abuse of the provisions of this title; or

(B) the debtor owes a debt arising from –

(i) any violation of the Federal securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934), any State securities laws, or any regulation or order issued under Federal securities laws or State securities laws;

(ii) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 or under section 6 of the Securities Act of 1933;

(iii) any civil remedy under section 1964 of title 18; or

(iv) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.

(2) Paragraph (1) shall not apply to the extent the amount of an interest in property described in subparagraphs (A), (B), (C), and (D) of subsection (p)(1) is reasonably necessary for the support of the debtor and any dependent of the debtor.

¶10.4 An objection to exemptions under §522(q) must be filed before the case is closed. If an exemption is made after the case is reopened, the objection to that exemption must be made before the case is again closed.

Rule 4003. Exemptions

(b) OBJECTING TO A CLAIM OF EXEMPTIONS.

(2) An objection to a claim of exemption based on §522(q) shall be filed before the closing of the case. If an exemption is first claimed after a case is reopened, an objection shall be filed before the reopened case is closed.

¶10.5 Educational IRAs. Funds placed in an Educational Individual Retirement Account at least 365 days prior to the filing of the bankruptcy, if the designated beneficiary of the account was a child, stepchild, grandchild, or stepgrandchild of the debtor in the year the funds were so place are generally excluded from the estate. The funds must not be pledged as security and can’t be excess contributions under the tax code. If there is more than $5,000 per beneficiary, only $5,000 is protected unless the balance over $5,000 was placed in the account more than 720 days prior to filing.

Excess contributions is the sum of the amount contributed in excess of $2,000 and that figure for the prior year less the amount payments (other than rollovers) out of the account and less the available maximum contribution for the prior year that was not actually contributed in the prior year. As to relationship between child and debtor for adoptive and foster children, see §541(e).

§541(b) Property of the estate does not include-

(5) funds placed in an educational retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) not later than 4365 days before the date of the filing of the petition in a case under this title, but-

(A) only if the designated beneficiary of such account was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were placed in such account;

(B) only to the extent that such funds-

(i) are not pledged or promised to any entity in connection with any extension of credit; and

(ii) are not excess contributions (as described in section 4973(e) of the Internal Revenue Code of 1986); and

(C) in the case of funds ;placed in all such accounts having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date; only so much of such funds as does not exceed $5,000;

26 U.S.C. 4973(e) Excess contributions to Coverdell education savings accounts

    For purposes of this section--

                           (1) In general

        In the case of Coverdell education savings accounts maintained

    for the benefit of any one beneficiary, the term ``excess

    contributions'' means the sum of--

            (A) the amount by which the amount contributed for the

        taxable year to such accounts exceeds $2,000 (or, if less, the

        sum of the maximum amounts permitted to be contributed under

        section 530(c) by the contributors to such accounts for such

        year); and

            (B) the amount determined under this subsection for the

        preceding taxable year, reduced by the sum of--

                (i) the distributions out of the accounts for the

            taxable year (other than rollover distributions); and

                (ii) the excess (if any) of the maximum amount which may

            be contributed to the accounts for the taxable year over the

            amount contributed to the accounts for the taxable year.

                          (2) Special rules

        For purposes of paragraph (1), the following contributions shall

    not be taken into account:

            (A) Any contribution which is distributed out of the

        Coverdell education savings account in a distribution to which

        section 530(d)(4)(C) applies.

            (B) Any rollover contribution.

§541(e) In determining whether any of the relationships specified in paragraph (5)(A) or (6)(A) of subsection (b) exists, a legally adopted child of an individual (and a child who is a member of an individual’s household, if placed with such individual by an authorized placement agency for legal adoption by such individual), or a foster child of an individual (if such child has as the child’s principal place of abode the home of the debtor and is a member of the debtor’s household) shall be treated as child of such individual by blood.

¶10.6 Funds to purchase tuition credits (qualified prepaid tuition programs) contributed at least 365 days prior to the filing of the bankruptcy if the beneficiary was a child, grandchild, stepchild, or stepgrandchild of the debtor, and if the amount contributed does not exceed the contribution permitted under 26 USC 529(b)(7) of the 1986 tax code adjusted for inflation, and to the extent that the contributions do not exceed $5,000 per beneficiary unless the excess was contributed more than 720 days before the filing of the case. As to relationship between child and debtor for adoptive and foster children, see §541(e).

§541(b) Property of the estate does not include –

(6) funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the petition in a case under this title, but –

(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were paid or contributed;

(B) with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such amount as does not exceed the total contributions permitted under section 529(b)(7) of such Code with respect to such beneficiary, as adjusted beginning on the date f the filing of the petition in a case under this title by the annual increase or decrease (rounded to the nearest then of 1 percent) in the education expenditure category of the Consumer Price Index prepared by the Department of Labor; and

(C) In the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,000;

26 USC 529(b) Qualified tuition program

    For purposes of this section--

                           (1) In general

        The term ``qualified tuition program'' means a program

    established and maintained by a State or agency or instrumentality

    thereof or by 1 or more eligible educational institutions--

            (A) under which a person--

                (i) may purchase tuition credits or certificates on

            behalf of a designated beneficiary which entitle the

            beneficiary to the waiver or payment of qualified higher

            education expenses of the beneficiary, or

¶10.7 Funds withheld from employees wages for contributions to retirement plans, qualified tax deferred annuities, or health insurance plans are excluded from the estate; as are monies received by an employer from employees for contributions to such accounts. Note it does not matter whether the employer or the employee is the debtor.

Cases:

6^th Circuit:

Once Debtor completes payments on the 401k loan, the money no longer being paid on the 401k loan becomes disposable income available to fund the chapter 13 plan. In re Seafort, 669 F.3d 662 (6^th Cir. 2012). The Court notes the majority opinion being that under §541(b)(7) the debtor may continue any 401k deduction that they were making prior to the filing of the chapter 13, and that such funds do not become disposable income, distinguishing from the position of a number of other cited decisions allowing deductions up to the maximum amount permitted by nonbankruptcy law. As §547(b)(7) excludes retirement plan contributions from disposable income, they were never income to be included in §1325(b)(2) and thus do not require a separate deduction from the means test. Rather only the deduction in effect

9^th Cir.:

401k deductions post-petition are not excluded from disposable income for purposes of the means test. In re Parks, 475 B.R. 703 (9^th Cir. BAP, 2012). §541 fixes the property of the estate upon the filing of the case. §1306(a) adds to such property in chapter 13, post-petition earnings of the debtor. To read §541(b)(7)(A) in harmony with these sections, the property excluded from property of the estate must be limited to retirement contributions held by the debtor’s employer on the date of the filing of the bankruptcy.

Montana:

While §1322(f)requires allowance in means test for 401k loan repayments, a voluntary deduction toward the 401k is not an allowed expense in the means test in chapter 13. In re Prigge, 441 B.R. 667 (Bankr. D.Mont 2010). The Court cites §541(b)(7) in a footnote as protecting amounts already in the hand of the employer, and notes without comment that the section further provides that such amounts do ‘not constitute disposable income, as defined in section 1325(b)(2).’ §541(b)(7) only applies to retirement contributions held in the employer’s hands on the date of the filing of the bankruptcy. Since §1322(f) excludes retirement loan payments, and no such exclusion is made for the retirement contributions, then Congress must have intended such omission. Further, the IRS guidelines do not provide for any such deduction.

§541(b) Property of the estate does not include –

(7) any amount –

(A) withheld by an employer from the wages of employees for payment as contributions –

(i) to –

(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a government plan under section 414(d) of the Internal Revenue Code of 1986;

(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or

(III) a tax–deferred annuity under section 403(b) of the Internal revenue Code of 1986;

Except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2); or

(ii) to a health insurance plan regulated by State law whether or not subject to such title; or

(B) received by an employer from employees for payment as contributions –

(i) to –

(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or

(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;

Except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325(b)(2); or

(ii) to a health insurance plan regulated by State law whether or not subject to such title;

¶10.8 Property pledged as security for a loan or advanced by a person licensed to make such loans where the property is in the possession of the lender, and the debtor has no obligation to repay the money or buy back the property at a stipulated price, and neither the debtor nor the trustee have exercised any right to redeem in a timely manner. This would seem to apply to pawn type transactions, but would not apply to car pawning. Also, the fraudulent and preferential transfer provisions may still apply to such transfers.

§541(b) Property of the estate does not include –

(8) subject to subchapter III of chapter 5, any interest of the debtor in property where the debtor pledged or sold tangible personal property (other than securities or written or printed evidences of indebtedness or title) as collateral for a loan or advance of money given by a person licensed under law to make such loans or advances, where –

(A) the tangible personal property is in the possession of the pledge or transferee;

(B) the debtor has no obligation to repay the money, redeem the collateral, or buy back the property at a stipulated price; and

(C) neither the debtor nor the trustee have exercised any right to redeem provided under the contract or State law, in a timely manner as provided under State law and section 108(b); or

¶11 Priority debts:

¶11.1 Divorce obligations: Domestic Support Obligations (nondischargeable in 7 or 13) is somewhat expanded over the original §523(a)(5) liabilities to include such debts owed or recoverable by the child’s parent, legal guardian, or responsible relative; and to include debts voluntarily assigned to nongovernmental units. It also includes post–petition obligations It still does not include debts actually in the nature of property settlements.

Cases:

Alabama:

While child support is given first priority under BAPCPA, this does not require that plans pay it prior to administrative expenses such as attorneys fees. In re Sanders, 341 B.R. 47 (Bankr. N.D.Ala. 2006). (J. Caddell). The Alabama Dept. of Human Resourses objected to confirmation of a plan that paid administrative expenses including attorneys fees prior to other claims, and provided for payment of the child support arrearages by payroll deduction outside the plan pursuant to a prepetition garnishment order. The court sustained the state’s objection under §1322(a)(2) that the plan could not pay child support outside the plan absent consent of the creditor. The debtor then amended the plan to pay the two child support claims from the state in equal payments over 25 and 47 months respectively. BAPCPA moved the priority status of child support claims to first priority under §507(a)(1)(A) and (B) rather than 7^th priority under prior law. Alabama argued that §507(a)(1) requires the child support claim to be paid before any lower priority claim. The court noted that nothing in prior law, or in BAPCPA (with an exception under §1322(a)(4) not applicable to the case at bar) that requires payment of higher priority claims prior to lower priority. §507 only requires payment in full, in deferred cash payments of priority claims. It does not set the order in which such claims may be paid in the chapter 13 plan. This is to be distinguished from chapter 7, where §726(a)(1) requires priority claims to be paid first in the order of the priority. There is no similar provision in chapter 13. Further, §1322(b)(4) permits payment of unsecured claims concsrrenty with secured claims. Thus the plan may provide for concurrent payment of priority child support claims while still paying secured claims.

Colorado:

Where domestic support obligation was assigned not by the spouse or guardian, but by the Court to a non-governmental agency for collection, such debt was excluded from the definition of domestic support obligation by 11 U.S.C. 101(a)(14A)(D). In re Cordova, 439 B.R.756 (Bankr. D.Colo 2010).

Florida

Court looks behind language in marital settlement agreement to find that obligation designated as property settlement is actually spousal support. In re Throgmartin, 462 B.R. 836 (Bankr. M.D. Fla. 2012). (J. Schermer). The ‘Joint Property Settlement Agreement’ entered into the parties in the Indiana divorce proceeding provided for a ‘marital property judgment lien’ to the former wife of $7,490,000 payable by an initial payment of $81,000 followed by monthly payments of $31,000 ‘as and for [her] share of martial property distribution as not as income’. The payments continue for 20 years or the remainder of the former wife’s life, whichever is longer.

The matter came before Judge Schermer in an objection to the claim for the former spouse by the husband in his chapter 7 case, and the motion of the trustee to determine that the claim is a domestic support obligation.

Judge Schermer determined that 11^th Circuit law applied, requiring the Court to focus on the intent of the parties at the time the obligation was created. Cummings v. Cummings, 244 F.3d 1263, 1265 (11^th Cir. 2001). The court cannot rely solely on the labels used by the parties, rather it depends on whether the parties intended the debt to function as support or alimony at the time of its creation. This determination is guided by factors including (1) the agreement’s language, (2) the parties financial positions when the agreement was made, (3) the amount of the division, (4) whether the obligation ends upon the death or remarriage of the beneficiary, (5) the frequesncy and number of payments, (6) whether the agreement waives other support rights, (7) whether the obligation can be modified or enforced in state court, and (8) how the obligation is treated for tax purposes. In re Benson, 441 Fed.Appx. 650 (11^th Cir. 2011).

Judge Schermer determined that the absence of any alimony provision in the agreement, and the provision that the payments continue for the life of the former spouse, are indicative of the parties intent that the money be intended for her support for the remainder of her life.

Thus the claim was allowed as a priority domestic support obligation claim in the chapter 7 case.

Massachusetts:

One of the first cases raising an issue as to what is a Domestic Support Obligation under BAPCPA is In re O’Brien, 339 B.R. 529 (Bankr. D.Mass. 2006). The former spouse and the debtor’s own divorce attorney brought motions for relief from stay alleging that obligation to pay attorneys fees (both the former spouses’s fees and the fees to his own attorney in the divorce) were in the nature of Domestic Support Obligations. After litigation in the divorce court, the court awarded fees to the former spouse of $15,000 and to the debtor’s divorce counsel of $18,320.03, directing that they be paid from debtor’s retirement account. Debtor filed chapter 7 and claimed this account as exempt. The bankruptcy court declined to rule on the motion absent further evidence via an evidenciary hearing, but indicated that factors to be considered included the divorce decree, the separation agreement, Debtor’s divorce counsel’s written engagement terms (if any), the intent of the parties regarding support and their financial condition at the time of their divorce, and the scope of services rendered in respect of the Fee Awards.

Nebraska:

Overpayment of child support by state constitutes a domestic support obligation. In re Hernandez, 2012 WL 5457403 (Bankr. D. Neb. 2012). The debt is owed to a governmental unit, and is in the nature of support for the Debotor’s child, established by the state department of Health and Human Services. The source of the payments is not relevant.

Oklahoma:

Debt to former daughter-in-law for attorneys fees related to child visitation dispute did not constitute domestic support obligation. Tucker v. Oliver, 423 B.R. 378 (W.D. Okla. 2010). Debtors, grandparents of the child in question, sought unsuccessfully to obtain visition rights to the child in Oklahoma state courts. The debt in question is fees awarded against the debtors in this proceeding. §101(14A) expressly defines the persons to whome the court-ordered support related obgliation must be owed for it to qualify. Plaintiff alleged that they were asserting rights akin to those of a parent. However, the Court noted that BAPCPA changed the section relating to DSO’s and identifies specific and additional groups of persons to which it applies. This suggests a conscious decision on Congress’ part to focus on which debtors were, or were not, within the scope of the nondischargeability provision. Additionally, the fact that the statute sets out a distinct subsection for the requirements as to whome the debt is owed separate from the subsection setting forth the nature of the obligation suggests it viewed these as separate requirements to be met. The Court also found that visitation disputes did not qualify as custody disputes to be within the scope of a domestic support obligation.

§101(14A) The term ‘domestic support obligation’ means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is –

(A) owed to or recoverable by-

(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or

(ii) a government unit;

(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;

(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of –

(i) a separation agreement, divorce decree, or property settlement agreement;

(ii) an order of a court of record; or

(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.

§507(a) [The following claims have priority in the following order]

(1) First:

(A) Allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcy law.

(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor or such child’s parent, legal guardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntarily by the spouse, former spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt) or are owed directly to or recoverable by a governmental unit under applicable nonbankruptcy law, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition be applied and distributed in accordance with applicable nonbankruptcy law.

(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expense of the trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paid before payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.

¶11.2 Taxes

¶11.21 Income type Taxes

There appears to be a slight change in the time period for priority status of taxes, adding an additional 30 days to the excluded time regarding pending offers of compromise, and providing that the exclusion period for prior bankruptcies is the duration of the automatic stay plus 90 days.

§507(a)(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for –

(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition;

(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

(ii) assessed within 240 days before the date of the filing of the petition, exclusive of –

(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and

(II) any time curing which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days,

(iii) other than a tax of a kind specified in section 523(a)(1)(B)( or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case; [no changes to subsection (iii)].

¶11.22 Property taxes

BAPCPA makes clear that property taxes only need be incurred, not assessed prepetition to be entitled to priority status, though still needed to be payable without penalty less than one year before the case was filed. Generally such claims will be secured, so this section is rarely applied.

§507(a)(8)(B) [Allowed unsecured claims of governmental units for] a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition.

¶11.23 Computation of time for priority government claims: an unnumbered ‘hanging’ paragraph at the end of §507(a)(8), apparently intended to apply to all of (a)(8) provides that in computing how old the government claims are, the time during which the claim was subject to a prior automatic stay, or collection was stayed due to a confirmed plan, or during which it was stayed due to a non-bankruptcy challenge to the claim, plus an additional 90 days, is excluded from the time computation period. This would seem to conflict with §507(a)(8)(ii)(I) providing for an additional 30 days to be added to an offer of compromise stay; whereas the hanging paragraph would add 90 days. Presumably the more specific provision applying specifically to offers of compromise would control.

§507(a)(8)(hanging paragraph) An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time period during which the stay of proceeding was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.

¶11.3 While debts from death or personal injury from intoxicated operation of a motor vehicle had been nondischargeable under §523(a)(9), now such debts (expanded to include debts from the intoxicated operation of a vessel, but curiously not expanded as was the new §523(a)(9) to include aircraft) are now also priority.

§507(a)(10) Tenth: allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

¶12 Changes to the automatic stay:

¶12.1 The court is now required to make a final ruling on any motion to lift stay within 60 days, unless the parties agree to an extension, or the court extends the stay for a specific time period based for good cause based on findings by the court.</