Bankruptcy Abuse
Prevention and Consumer Protection Act (BAPCPA)
Analysis
of Consumer Provisions
Michael
Barnett, PA, Tampa, Florida
Table
of Contents:
¶1.1 Sharing compensation with referral programs
¶1.2
Debt Relief Agency
¶1.21 Debtor counsel as DRA
¶1.22 Advertisements must refer to bankruptcy
¶1.23 Advertisement required disclosure
¶1.24 Requirement to perform advertised services
¶1.25 Offering to provide assistance triggers DRA
¶1.26 Misrepresentation of services, benefits, risks
¶2.1 Limitation on communications with client
¶2.2 DRA accuracy disclosure
¶2.3 DRA bankruptcy information disclosure
¶2.4 DRA disclosure re filling out information
¶2.5 Requirements for counsel to retain DRA disclosures
¶3 Contract
¶3.1 Written DRA contract
¶3.2 Board certification as fee consideration
¶3.3 Inability to waive DRA rights, obligations
¶3.4 Enforceability of non-complying contract provisions
¶3.5 Notice to Debtors modified
¶4 Sanctions for DRA violations
¶5.1 Whether there are prior filings
¶5.2 Time allowed after prior discharge and chapter 7
¶5.3 Time allowed after prior discharge and chapter 13
¶6 Means Test
¶6.1 Disabled veteran – active duty
¶6.15 Primarily consumer debt
¶6.2 Average income computation
¶6.23 Nonfiling Spouse income/expenses
¶6.3 Median family income comparison
¶6.4 Initial means test computation
¶6.405 Housing Expense
¶6.41 Vehicle Operating Allowance
¶6.42 Charitable Contributions
¶6.43 Allowance of secured payments not to be continued
¶6.44 Vehicle Ownership Allowance
¶6.441 Non-Purchase Money vehicle
¶6.45 Other Expenses
¶6.46 Mandatory Deductions
¶6.5 Rebuttal – Special circumstances
¶6.51 Business mileage
¶6.52 Commuting milage
¶6.53 Student loans
¶6.54 House repairs
¶6.55 Age of Debtor
¶6.56 Old car deduction
¶6.57 401k deductions
¶7 Requirements for Debtor prior to filing
¶7.1 Credit counseling briefing
¶8 Appointment to Sign Schedules
¶8.1 Advice to clients re accuracy of information
¶8.2 Delivery of notice of available chapters
¶8.3 Accuracy of Schedules
¶8.4 Installment/ waiver of Filing fee
¶8.5 Definition of Transfer re fraudulent transfers
¶8.6 Nondisclosure of minor’s names
¶8.7 Creditor Addresses
¶8.71 Creditor address per last 3 months Statements
¶8.72 Court notice of preferred address for creditor
¶8.73 Effect of improper notice to creditor
¶8.8 Disclosure of Judgment for leasehold interest
¶8.91 Procedures if risk from bankruptcy disclosures
¶8.96 Special procedures re pending foreclosures
¶9 Additional documents to be filed with petition
¶9.1 Credit counseling documents
¶9.2 Means test computations
¶9.3 Income records, tax return, educational IRA, redaction of
identifying information
¶9.4 Time deadlines for documents
¶10
Exemptions and Exclusions from the Estate
¶10.1 Applicable state law
¶10.2 Retirement funds
¶10.3 Homestead issues
¶10.31 Homestead definition
¶10.32 10 year lookback
¶10.33 Homesteads acquired within 1215 days
¶10.34 Circumstances limiting to $125,000 equity
¶10.4 Time limit for objection to exemptions under §522(q)
¶10.5 Educational IRAs
¶10.6 Prepaid tuition programs
¶10.7 Employer withheld funds for retirement, annuity, or
health insurance
¶10.8 Property pledged as security
¶11
Priority Debts
¶11.1 Divorce obligations
¶11.2 Taxes
¶11.21 Income type taxes
¶11.22 Property taxes
¶11.23 Time for filing priority government claims
¶11.3 Death/Personal Injury from intoxicated operation of
vehicle/vessel
¶12
Changes to the Automatic Stay
¶12.1 Ruling required within 60 days
¶12.2 Evictions
¶12.21 Residential leasehold judgment for possession
¶12.22 Endangered property/Use of Illegal or controlled
substance
¶12.3 Assumption of Leases
¶12.31 Time to assume nonresidential leases
¶12.32 Effect of failure to assume by trustee/debtor
¶12.4 Effect of failure to file or timely carry out Statement
of Intentions
¶12.5 Good faith belief re termination of stay re Statement
of Intentions
¶12.6 Taxes
¶12.61 Setoff of prepetition refund against liability/
adequate protection re turnover of disputed refund
¶12.62 Stay of tax court litigation
¶12.63 Ad Valorem liens for post-petition taxes
¶12.7 Divorce obligations
¶12.8 Wage deductions for repayment of loans from qualified
retirement accounts
¶13
Prior Filings
¶13.1 Filings as scheme to hinder, delay, and defraud
creditor
¶13.2 No stay if debtor ineligible under §109(g) or case
filed in violation of prior order
¶13.3 Prior case within 1 year, stay terminates in 30 days
¶13.4 Two prior cases within year, no stay unless requested
¶14.1 Post-petition notice by creditor of preferred address
¶14.2 Clerk list of designated address for tax collection
agencies
¶14.3 Taxpayer identification number disclosure on
supplements adding creditors
¶15
Claims
¶15.1 Reduction of claim for unreasonable refusal of credit
counseling plan
¶15.2 Administrative expense for rejection of nonresidential
leases previously assumed
¶15.3 Jurisdiction to determine
ad valorem tax liability when deadline to object expired
¶16.1 Valuation at replacement value
¶16.2 Liens related to DSOs not avoidable
¶16.3 Household good definition, effect
¶16.4 Trustee lien avoidance
¶16.41 Limitation re statutory liens
¶16.42 Expansion of Ordinary Course of Business exception
¶16.43 Unavoidability of bona fide payment of DSO
¶16.44 Transfers of less than $5000 if primarily business
debt
¶16.45 Expanded lookback period/ insider employment
contracts
¶16.46 Self-settled trust: 10 year lookback
¶17
Requirements after filing prior to Meeting of
Creditors
¶17.1 Notice of presumption of abuse
¶17.2 Copy of last filed tax return or transcript
¶18
Requirements at meeting of creditors
¶18.1 Identification
¶18.2 Evidence of social security number, current income,
deposit accounts, expenses
¶19
Requirements after meeting of creditors
¶19.1 Financial management course
¶19.11 Requirement to attend
¶19.12 Statement of completion
¶19.2 Intentions re secured debts
¶19.21 Time limit to carry out statement of intentions
shortened
¶19.22 Effect of failure to carry out intention timely
¶19.23 Ipso Facto Clauses validated
¶19.3 Copies of annual tax returns when requested
¶19.4 US Trustee notice of presumption of abuse, effect of
presumption
¶19.5 Notice by trustee to holders of DSO claims
¶20
Debtors Duties during Bankruptcy
¶20.1 Periodic financial reports
¶21
Reaffirmation
¶21.1 General requirements
¶21.2 Creditor refusal to reaffirm on original contract terms
¶21.3 Effect of court failure to approve
¶22
Dischargeability
¶22.1 Old taxes
¶22.2 Recent purchases and cash advances
¶22.3 Alimony and child support
¶22.4 Student loans
¶22.5 Intoxicated operation of vehicle
¶22.6 Debts incurred to pay nondischargeable state taxes
¶22.7 Debts incurred to pay fines or penalties from Federal
election law violations
¶22.8 Property settlements
¶22.9 Homeowner and Condo fees
¶22.93 Fees, costs, and expenses imposed by court
¶22.96 Debts for loans from qualified retirement plans
¶23
Chapter 13
¶23.1 Tax returns, claims
¶23.11 Filing of last 4 years of tax returns
¶23.12 Extension of time for government to file claim
¶23.13 Requirement to have filed all prepetition tax return
for confirmation
¶23.14 Interest on tax claims
¶23.2 Payments to commence to pmsi creditors to commence
within 30 days
¶23.3 Budget/means test
¶23.31 Definition, effect on plan length
¶23.311 Applicable Commitment Period
¶23.312 Projected Disposable Income from I/J or Means Test
¶23.313 Projected Disposable Income computation
¶23.32 Extension of plan for cause
¶23.4 Domestic Support Obligations
¶23.41 Dismissal if debtor falls behind post-petition
¶23.42 Must be current to confirm plan
¶23.43 Certification required for discharge
¶23.5 Date of confirmation hearing
¶23.6 Secured claims
¶23.61 Valuation of pmsi liens in vehicles incurred within
910 days
¶23.611 Cramdown
¶23.612 Failure of Creditor to object to treatment
¶23.613 Interest
¶23.614 Personal v Business use
¶23.615 Personal v. others use
¶23.616 Status as PMSI
¶23.617 Surrender
¶23.6171 Insurance proceeds of collateral
¶23.618 Equitable Tolling
¶23.62 Requirement of equal monthly payment to secured
creditors not less than adequate protection
¶23.63 Proof of insurance
¶23.64 Application of post-petition payments by secured
creditors
¶23.65 Retention of liens
¶23.7 Special treatment of certain creditors
¶23.71 DSOs assigned to government not for collection
¶23.72 Repayment of loans to qualified retirement accounts
¶23.73 Chapter 7 trustee compensation
¶23.8 Dischargeability
¶23.81 Narrowing of superdischarge
¶23.82 Interest on nondischargeable claims
¶23.83 Deadline to file dischargeability complaint
¶23.9 Good faith filing requirement
¶23.92 Modification of plan for purchase of health insurance
¶23.94 Personal financial management course
¶23.96 Certification re ¶522(q)(1)
¶24.1 Conversion from chapter 13
¶24.11 Redemption
¶24.12 Nonexempt valuations to chapter 7 trustee
¶25
Dismissal of Cases/Denial of Discharge
¶25.1 §707(b) motions to dismiss
¶25.11 Factors in presuming abuse other than means test
¶25.12 Parties who can seek dismissal
¶25.13 Time limit to file motion to dismiss/ content of
motion
¶25.14 Time to file motion if case initially filed under
chapter 7, converted, then reconverted to 7
¶25.15 If case initially filed under chapter 13 then
converted to chapter 7
¶25.2 Conversion or dismissal if debtor falls behind on DSOs
¶25.3 Debtor misstatements or non-cooperation in audit
¶25.4 Victim of crime of violence or drug trafficking crime
¶25.5 Statement of completion of financial management course
¶25.6 Presumption of undue hardship regarding reaffirmation
¶25.7 Application of §522(q)(1)
¶25.8 Notice of closing case without discharge
¶26
Sanctions re Motions to Dismiss & Attorney
Certifications
¶26.1 Sanctions against Debtor’s counsel
¶26.2 Sanctions against creditor filing motion to dismiss
¶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 (11th 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:
US
Requirement is not
unconstitutional under 5th Amendment. Milavetz
Gallop & Milavetz, PA v United States, __ U.S. ___, 130 S.Ct. 1324, 176
L.Ed.2d 79 (2010).
9th
Cir.
Requirement not
unconstitutional under 1st Amendment as false speech. Olsen v Holder,
402 F.Appx 311 (9th 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
¶2.1 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.
US
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.
¶5.1 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 9th 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:
8th 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 (8th
Cir. 2010).
9th Cir: (CA): Private disability insurance is included in CMI. Blausey v US
Trustee, 552 F.3d 1124 (9th Cir., 2009).
Reversing
In re Scholz, 9th 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 (9th
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.
10th 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 (10th
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 (9th 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 3rd 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
4th 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 (4th
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 3rd 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 2nd 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
9th
Cir. BAP
Chapter 13
above-median income debtor not entitled to deduct 2nd 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 (9th 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 2nd
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 2nd
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 (11th 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 (11th 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.
7th 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
(7th 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 7th 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.
9th 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, 105th 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:
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
4th and 5th 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:
8th 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 (8th
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 2nd 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 20th, 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 90th 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 (8th 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 5th day
after filing. The fact that there
was a foreclosure sale prior to the 5th 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 46th 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 46th 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 45th 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 46th 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 46th 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.1 If
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?
5th
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 (5th
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 5th
Circuit both ruled that the Federal exemption was appropriate. The 5th
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;…
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 (8th 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 (8th 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 (11th Cir.
2006) citing Havoco II, 255 F.3d 1321 (11th 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 9th 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:
6th 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 (6th 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
9th Cir.:
401k deductions post-petition are not
excluded from disposable income for purposes of the means test. In re Parks,
475 B.R. 703 (9th 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 –
(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;
¶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 7th 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 11th
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 (11th 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 (11th 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.