Bankruptcy Reform and it's impact


The Bankruptcy Reform Act has passed by Congress. This bill will make filing for bankruptcy almost impossible for the average person. While many may welcome this, you must understand that the vast majority of people that file bankruptcy (98%) do so because of a serious medical problem, divorce or the loss of the primary income. This bill was heavily supported by the credit card industry and the banking industry. MBNA, the largest issuer of credit cards reported NET income last year of $2.68 BILLION. A $340 million increase from the previous year.


Among other things, the new law will require:
Section & Heading Summary
Section 102: Dismissal or conversion changes

    CURRENT LAW  
         "There will be a presumption in favor of granting the 
         relief requested by the debtor"  

    NEW LAW
          "..whether the granting of relief would be an abuse 
          of the provisions of this chapter [Chapter 7], the 
          court shall presume abuse exists if the debtors - 

          income(gross) - expenses( IRS guidelines) x 60 
          months is equal to or greater than $6,000

             See the means test to be applied

          - the debtor is abusing the provisions of this Chapter. 
          The Court can dismiss or force a conversion to 
          Chapter 13

   This change PRESUMES ABUSE from the start....not 
         innocence.

Section 106: Credit Counseling

  See Section 106 for specific changes

  In general 
    "an individual may not be a debtor under this title unless such
    individual has, during the 180-day [6 months] 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 by telephone or on the 
    Internet) that outlined the opportunities for available credit 
    counseling and assisted such individual in performing a related
    budget analysis."
 
       and 

   "complete an instructional course concerning personal financial
   management described in section 111..."

   Who can argue that having debtors attend educational classes 
   on financial management is a bad idea?  Not debtor attorneys.
   But the problem is with whom those classes are going to be 
   provided by.  In the last 8 or nine years, the number of credit
   counseling services available has risen considerably.  And 
   many of them have run afoul of the law.  These nonprofit 
   agencies derive their necessary income FROM THE CREDIT 
   PROVIDING COMPANIES.  That's right.  The non-profit credit
   counseling services get their money from the credit card 
   companies, the banks and lenders that debtors deal with.  And
   now, the law gives them a new source of clients.

Section 214: Exceptions to the Automatic Stay #1

   A new class of actions has been added, all generally related
   to domestic support obligations(DSO).

    1.  income withholding for DSO will continue;
    2.  withholding or restricting a drivers license;
    3.  interception of a tax refund;

   We are stongly in favor of enforcing DSOs, but if the 
   bankruptcy court is charged with managing debts during a 
   bankruptcy, ALL debts should remain under its supervision.

Section 228: Disclosures #1

   Anyone that considers the career of bankruptcy petition 
   preparer will be asking for permanent headache.  This 
   section makes it impossible for a preparer to comply
   with the law in any way that protects them from violation.

Section 302: Discouraging Bad Faith Repeat Filings

  If you filed a bankruptcy and it was dismissed:
         1.  If you file a second bankruptcy within a year
           i. if the automatic stay was lifted in the previous case,
              the automatic stay expires in 30 days in the new 
              case unless a hearing to extend it is held within the 
              30 days and only if you can demonstrate that the 
              second filing is in good faith.
           ii. the second filing is PRESUMED to be in bad faith 
              unless you can show otherwise at the hearing.

        2.   If you file a third bankruptcy within a year
          i.  the automatic stay, is not automatic...no stay is 
              granted without a hearing.
          ii. the third filing is PRESUMED to be in bad faith.

  In many instances, a chapter 13 is filed with substantial 
  unsecured debts.  For general reasons, it fails and it is 
  converted to a chapter 7 to eliminate the unsecured debts.
  Once completed, a second chapter 13 (a third bankruptcy
  case) is filed to effectively deal with secured debts.  In other
  situations, the unsecured portion of the debt makes 
  reorganization very difficult.  By filing a chapter 7 to deal
  with the unsecured debt and then a chapter 13 to deal with the
  secured debt, effective reorganization is possible.  This is often
  called a chapter 20, and this would seriously prevent it's use.

  Often, especially in cases of foreclosure, the stay is 
  necessary to accomplish the actions that will allow the 
  debtor to effectively reorganize.  This section prevents this
  form of reorganization.

  The number of cases that this is designed to stop is less 
  than a fraction of 1% of the filed petitions.

Section 303: Curbing Abusive Filings

   "..an order entered under paragraph (4) shall be binding
   in any other case under this title purporting to affect such
   real property filed not later than 2 years after the date of
   entry of such order by the court."

   Once an order for relief is granted, in general, it stays in
   force for 2 years.  In cases where good faith has been 
   shown, but it has been less than 2 years since relief was 
   granted in a previous case, this is probably going to be 
   used by secured lien holders to keep the property out of 
   the stay.  Litigation is going to occur clearing this conflict 
   up...

Section 304: Debtor Retention of Personal Property

   in a chapter 7
   "the debtor shall...(6)...not retain possession of personal 
   property as to which a creditor has an allowed claim for 
   the purchase price secured in whole or in part by an 
   interest in such personal property unless the debtor, not 
   later than 45 days after the first meeting of creditors...

   reaffirms, or redeems the property.

   Examples of purchase money security:  computers, 
   recreation craft, furniture.   Most attorneys are going to 
   recommend surrendering the property.  In most cases the 
   value of the property is such that it is beneficial to the 
   debtor to give back the personal property and getting 
   credit for the fair market value.

Section 306: Giving Secured Creditors Fair Treatment in Chapter 13

  "For purposes of paragraph (5) section 506 shall not apply
  to a claim....incurred within the 910-day [2.5 years] period
  preceding the date of filing...the collateral for that debt 
  consists of a motor vehicle...or if collateral for that debt 
  consists of any other thing of value, if the debt was 
  incurred during the 1-year period preceding that filing."

  11 USC 506 is used (now) to deal with claims that are 
  secured, but not completely.  If a car is worth $5,000 (using
  acceptable means of determining the value) but the loan 
  against it is $10,000, 506 allows a debtor to pay the $5,000 
  as secured and the balance as unsecured.  The result to the
  creditor is much less (usually) than the $10,000 - and no 
  interest is paid on the unsecured portion.   This section 
  protects the creditor for the first 2.5 years.   If the car is 
  worth $2,000 and the debt is $20,000 but the car was 
  purchased only 2 years prior to filing...the  entire $20,000
  is a secured claim.

  Further, 11 USC 506(d) is used to void a lien when a 
  mortgage holder (usually a second or third) is completely
  unsecured because the first mortgage is more than the 
  value of the house.  This will protect those lenders that 
  offered home equity loans to 125% of the value.

Section 307: Domiciliary Requirements for Exemptions

  If you moved to a state with an exemption for an 
  unlimited amount of equity in your home and then filed
  bankruptcy, you had to wait at least 6 months to do it.

  The change here makes the 'waiting' period 2 years.  This
  is going to have an impact on people with big incomes or
  assets (Ken Lay anyone?) AND on people that moved to a
  new state and got into financial trouble because it didn't 
  work out.

Section 311: Eviction: Automatic Stay #2

    ONE OF THE BIGGEST CHANGES...

   "11 USC 362....does not operate as a stay....

   "of the continuation of any eviction, unlawful detainer
   action, or similar proceeding by a lessor against a 
   debtor involving residential property in which the debtor
   resides as a tenant under a lease or rental agreement
   and with respect to which the lessor has obtained before
   the date of the filing of the bankruptcy petition, a 
   judgment for possession of such property against the
   debtor."

   No longer will the bankruptcy law protect you from getting
   thrown out on to the street by your landlord.  S/He has a
   judgment of eviction, pack up, the federal court will stand
   by and watch it happen.  

   There are some limitations.

Section 313: Definition of Household Goods

    THIS IS VERY IMPORTANT!  CHANGES HERE WILL HAVE
    A DRASTIC EFFECT

   Definitions.

Section 314: Debt Incurred to Pay Nondischargeable Debts

   Some time ago, someone had the wonderful idea of using
   your credit card to pay your taxes. Two benefits:  lots of 
   miles in the cards frequent miles programs, and if you filed 
   bankruptcy, the debt would be discharged.

   Well, it wasn't allowed for your federal taxes before, now...

   "...incurred to pay a tax to a governmental unit, other than
   the United States, that would be nondischareable under 
   paragraph (1);

   You still might get to keep the miles..

Section 315: Giving Creditors Fair Notice in Chapters 7 and 13: Debtor's Duties

  Debtor shall file:
    "(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" 

  The last 60 days pay stubs from all employers for debtor 
  and/or spouse.

   Regarding tax returns

  In brief, if you are in a chapter 13, you have a new deadline
  to file your tax return....March 31st. 90 days after the end of
  the tax year.

Section 318: Chapter 13 plans to have a 5 year duration in Certain cases

  Another means test:

  "If the current monthly income of the debtor and debtor's 
  spouse combined, when multiplied by 12, is not less than --
         (A) in the case of a household of one, the median 
              family income for 1
         (B) in the case of a household of 2, 3 or 4, the 
             highest median family income for a family of the 
             same or fewer individuals, 
              or
         (C) in the case of a household of more than 4, plus
             $525 per month for each individual in excess of 4

   the plan may not provide for payments over a period that
   is longer than 5 years

   3 years (or 5 if approved by the court) if the current 
  monthly income is less than (A), (B) or (C) as applicable...

Section 319: Expansion of Rule 9011

   Congress wants this rule to be expanded to require that all
   documents submitted to the court by debtor attorneys 
   ...have made reasonable inquiry to verify that the 
   informationcontained in such documents is -- well grounded
   in fact.

   What is reasonable inquiry?  We ask, debtors tell?  Probably
   not.  We ask, debtors provide proof?  Probably.   Well 
   grounded in fact.  If the debtors say they only have one TV,
   do we need to go to their house to verify it?  Do we need to 
   lay out all the jewelry and have it appraised? What about a
   hot tub, or golf clubs, or bikes?

Section 322: Limitations on Homestead Exemption

  "..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 [3 years + 4 months] 
  preceding the date of the filing of the petition that exceeds in 
  the aggregate $125,000..."

  There are few states that allow unlimited exemptions on 
  homesteads so this is going to only affect filers in those few 
  states...but, are the states going to allow the federal law to 
  "trump" their own exemptions?

Section 327: Fair Valuation of Collateral

  "(2) If the debtor is an individual in a case under chapter 7 
  or 13, such value with respect to personal property securing
  an allowed claim shall be determined based on the 
  replacement value of such property without deduction for 
  costs of sale or marketing.  With respect to property acquired
  for personal, family, or household purposes, replacement 
  value shall mean the price a retail merchant would charge for
  property of that kind considering the age and condition of the
  property at the time value is determined."

  Replacement value...not the value of the property on the open
  market.   This is a kettle of worms.  Under what conditions 
  would a retail merchant offer for sale a couch 4 years old?  
  And at what price compared to new?  If a pawn shop and a 
  refinishing shop both offered a 4 year old couch, which one do
  you  think creditors will want to use for their  valuation?  The 
  Debtor?  Judge decides...and decides, and decides....

 
and finally... Section 102a: Attorney Certification

  (4)(A) The court, on its own initiative or on the motion of a 
  party in interest, in accordance with the procedures 
  described in Rule 9011..., may order the attorney for the 
  debtor to reimburse the trustee for all reasonable costs in 
  prosecuting a  motion filed under section 707(b)...

  ...(C) The signature of an attorney on a petition, pleading, 
  or written motion shall constitute a certification that the
  attorney has --

      (i) performed a reasonable investigation into the 
          circumstances that gave rise to the petition, pleading
          or written motion; and is well grounded in fact....
 
  ...(D) The signature of an attorney on the petition shall 
  constitute a certification that the attorney has no knowledge
  after an inquiry that the information in the schedules filed with
  such petition is incorrect.

  Frankly, any attorney that signs such a petition or pleading 
  should have his/her head examined.  Clients lie.  What will
  constitute a reasonable investigation is going to be litigated,
  as is "well grounded in fact".

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