25 Changes to Bankruptcy in the Reform Act
Means Test for Chapter 7 Eligibility
The Trustee or any creditor can bring a motion to dismiss under §707(b) if the debtor’s income is greater than the state median income. Abuse is presumed if the debtor’s currently monthly income (as determined by an average of the previous 6 months) less secured payments divided by 60, less priority debts divided by 60, less the allowed expenses permitted by the IRS, less certain other allowed expenses, is greater than $100 per month of a Chapter 13 plan. Debtors who meet this new standard would be shifted to 5 year repayment plan in Chapter 13.
If a debtor’s income falls below the state median, the court may still find abuse but the creditors do not have standing to file the motion.
In determining whether the median threshold has been reached, the law looks at the number of people in the debtor’s household (which the census bureau defines to be all the people occupying a dwelling unit) compared to census figures adjusted by the CPI.
The presumption of abuse may only be rebutted by demonstrating “Special circumstances that justify additional expenses or adjustments of current monthly income.”
Mandatory Credit Counseling
No individual may be a debtor under title 11 unless they have, within 180 days prior to filing, received credit counseling from an “approved nonprofit budget and credit counseling agency”, either in an individual or group briefing. Said counseling agencies are to be approved by the U.S. Trustee. (There are exceptions where there is an emergency and the person could not receive counseling within five days, or where the U.S. Trustee has determined that the approved agencies are not adequate to provide the required counseling.) If a debt management plan is developed it must be filed with the court.A Chapter 13 plan must provide that a secured creditor retain its lien until the payment of the entire debt, not just the secured portion, where the creditor holds a security interest in a motor vehicle purchased within 910 days of the filing.
Mandatory Debtor Education
The court may not grant a Chapter 13 discharge unless the debtor has completed an education course in personal financial management as approved by the U.S. Trustee. A debtor can be denied discharge under §727 if the debtor fails to complete the course.
Scope of Discharge
Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed non-dischargeable; cash advances of $750 within 70 days are similarly treated.
Serial Filings (Chapter 20)
A discharge will not be granted in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 within the 4 years prior to the date of filing of the pending case, or in a Chapter 13 case filed within 2 years of the pending case. However this provision does not prevent the debtor from filing a Chapter 13 case and receiving the benefits of the stay, including the ability to cure arrearages on secured claims over a period of time.
Time between Discharges
Chapter 7 Debtor cannot receive a discharge if a prior discharge was received within 8 years (rather than 6) of the new filing.
Debtors may elect state exemptions in the state in which they have lived for the 730 days prior to the bankruptcy. If they have moved during that 730-day period, the state exemptions are those for the state in which they lived the majority of the time for the 180 days before the 730-day period. Regardless of the level of state exemptions, the debtor may only exempt up to $125,000 of interest in a homestead that was acquired within the 1,215-day period prior to the filing, but the calculation of that amount does not include any equity that has been rolled over during that period from one house to another within the same state. For those who have violated securities laws of engaged in certain criminal conduct, the cap is $125,000, notwithstanding a higher State law allowance. To the extent the homestead was obtained through fraudulent conversion of nonexempt assets during the 10-year period before the filing, the exemption is reduced by the amount attributed to the fraud.
§524 now contains extensive new disclosures detailing the rights that the debtor has and specifying the amount of debt reaffirmed, rates of interest, when payments will begin, filing requirements with the court, the right to rescind, and a certification that the reaffirmation agreement does not impose undue hardship on the debtor. Reaffirmation agreements are presumed to create a hardship if the debtor’s expenses, including the reaffirmed debt, exceed the debtor’s income. If there is such a presumption the debtor must explain to the court why he/she/it can nevertheless still afford to satisfy the debt (but no such requirement applies if the reaffirmed debt is owed to a credit union). The disclosure requirements are satisfies if “given in good faith.” A creditor can accept payments under a non-compliant reaffirmation agreement as long as the creditor “believes in good faith” that the agreement is effective.
Limit on Automatic Stay
The new law limits the application of the stay or provides that it does not go into effect, in certain circumstances, where there are serial filings under circumstances that would indicate bad faith or abusive filings. The stay terminates after 30 days if there is a filing by an individual in Chapter 7, 11 or 13 (but not Chapter 12) within 1 year after the prior case (under any Chapter) was dismissed (except for a case re-filed in another chapter after a dismissal of a Chapter 7 case based on the means test). A party in interest (including the debtor) may move to extend the stay and show that the filing is in good faith. A case is presumed to be in bad faith for this purpose if more than one case was pending in Chapters 7, 11 or 13 (again, not in Chapter 12) and at least one such case was dismissed for failure to file required documents without substantial excuse, to provide adequate protection, or to complete a plan, and there is no showing that the debtor’s financial situation has changed so as to allow a final discharge or completion of a plan. If two or more cases under any Chapter were dismissed during the prior year, the automatic stay does not go into effect at all until the court so orders after a hearing and a demonstration that the filing was made in good faith. The same bad faith factors noted above are also applicable to this determination. The law also provides that the stay will terminate if the debtor does not timely file (i.e., within 30 days after the petition date) its statement of intent with respect to property subject to a security interest and timely (i.e. within 30 days after the first date set for the §341 meeting) complies with the stated intention. The court may extend the stay upon the motion of the trustee if the property is of the value to the estate and adequate protection is afforded to the creditor.
Notice to Creditors
Notice to creditors by the debtor must be directed to the address designated by the creditor in communications to the debtor or by the creditors preferred address as provided to the court. Such notice to creditors must include account numbers.
Duration of Chapter 13 Plans
If the Chapter 13 debtor’s income is greater than the state median income, the plan proposed must be for 5 years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.
Dismissal for Failure to file Documents and Schedules
In addition to the list of creditors and schedules of assets, liabilities, income, and expenses, debtors must provide (among other things):A certificate of credit counseling
A statement of monthly net income and any anticipated increase in income of expenses after filing
Tax returns filed during the case including tax returns for prior years that had not been filed when the case began
Failure to provide all of the above within 45 days after the Petition filing date (or a 45-day extension) results in automatic dismissal of the case.
Attorney Verification Required
Attorneys must make “reasonable inquiry to verify that the information contained” in petitions and schedules is “well grounded in fact.” “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 petitions is incorrect”
Disposable Income Test in Individual Chapter 11 Case
Under the newly-added §1115, property of the estate includes, in addition to the property specified in §541, all property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed or converted” and “earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed or converted.” Under an amendment to §1129, the plan must commit the debtor’s disposable income for the 5 year plan period.
Debtor’s Statement of Intent
Debtor must perform §521 statement of intent as to secured property within 30 days after the date set for the first creditors’ meeting. Failure to either redeem the property of reaffirm the debt within 45 days after the §341 meeting results in termination of the automatic stay (as noted above) and allows the creditor to exercise whatever remedies it has under applicable non-bankruptcy law, subject to a request by the trustee to extend the stay upon providing adequate protection to the creditor.
Domestic Support Obligations
Support obligations are a first priority, but the administrative costs of a trustee are paid ahead of the support costs to the extent that the trustee is administering assets that can be used to pay support costs. To the extent such support claims have been assigned to or are directly recoverable by a governmental entity, such claims are subordinated to the support of claims that are not assigned. The stay does not apply to the payment of a domestic support obligation from property that is not property of the estate or to the enforcement of a wage withholding order under a judicial or administrative order, or statute, including obligations accruing from both before and after the filing. Failure to remain current on support claims is grounds for conversion or dismissal of a case, the debtor must be current on post-petition obligations in order to confirm a plan, the plan must provide for priority payment or support debts (with a limited cram down available for claims assigned to or owed directly to a governmental unit), and the debtor may not obtain a discharge unless such obligations are paid in accordance with the terms of the plan.
Super Discharge in Chapter 13 Reduced
Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
Attorneys as “Debt Relief Agencies”
Bankruptcy Attorneys must now disclose to the public in advertising that “we help people file for relief under the Bankruptcy Code.” They cannot advise a debtor to incur more debt in contemplation of bankruptcy. They must disclose all their costs, enter into a written contract with the debtor, and disclose that an attorney is not necessary to file bankruptcy, among other disclosures.
Asset Protection Trusts
Under new §548(e), a trustee can avoid the debtor’s transfer of an interest in property made within 10 years of the filing if the transfer was made to a self-settled trust or similar device by the debtor for the benefit of the debtor and the transfer was made with the actual intent to hinder delay or defraud any creditor
The “fourth option” in Chapter 7 cases authorized by some circuits, to retain secured property without reaffirmation by continuing payments (installment redemption) is no longer allowed. The provisions of the §521 and §362 overlap, but are somewhat contradictory. §362(h)(1) and §521(a)(2) provide that the requirements to file the intention and timely perform it apply to any debt secured by property of the estate and that failure to comply terminates the automatic stay. §521(a)(6) appears to set out a different process and time period for the subset of property secured by a purchase money security interest, but the rights provided there appear to be less generous than those already provided by the broader language in §§362(h)(1) and 521(a)(2), so it is not clear which would apply.
Changes in Treatment of Taxes
Taxes related to a fraudulent return or that the debtor attempted to evade are made non-dischargeable in Chapter 11. The debtor is required to pay administrative tax claims whether or not the government files a “request”. The new law requires periodic cash payments of priority tax under Chapter 11 over not more than five years from the petition date and, in any event, under terms not less favorable than those accorded to the most preferred unsecured non-priority creditors (excluding “nuisance” claim payments). The rate of interest on tax claims is the rate specified under applicable non-bankruptcy law.
The stay will not prevent or halt a detainer action if the debtor failed to pay rent after filing.
Tax Returns Mandatory
The Debtor must provide a copy of their latest tax return or a transcript at least 7 days before the meeting of creditors or the case “shall” be dismissed. Said information must also be provided to any creditor who requests it. All tax returns must be filed for a plan to be confirmed in Chapter 13. The debtor must file all returns from 4-years prior to the Chapter13 filing.
Nondischargibility of Student Loans Expanded
Student loan nondischargeability is extended to for profit and non-governmental entities.
Adapted for us by the DuPage County Bar Association Bankruptcy Committee by Mazyar M. Hedayat, Esq, 2004-2005 Chair.