The recent amendments to the Bankruptcy Code via the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have provided a number of significant changes to the Code. This article will examine how the courts have been implementing the changes in the law.

The Lack of Clarity in Many Provisions of BAPCPA

Many bankruptcy judges were initially critical of BAPCPA primarily because they believed Congress had not appeared interested in input from their contemporaries regarding bankruptcy reform. Moreover, many provisions of BAPCPA reduced the discretion of bankruptcy judges. Now that BAPCPA has gone into effect, judges have been getting down to the task of actually applying the law. The problem, of course, is that numerous provisions of BAPCPA are written in such a way as to invite different interpretations. Many provisions of BAPCPA are confusing to say the least. In one of the first cases interpreting BAPCPA, Chief Judge Robert A. Mark in the Southern District of Florida observed:

• After reading the several hundred pages of text in the [new law], one conclusion is inescapable. BAPCPA is not a model of clarity. In re Kaplan, 331 B.R. 483, 484 (Bankr. S.D. Fla. Oct. 6, 2005).

As a result of Congress’ lack of clarity, courts likely will come to different interpretations of various sections of BAPCPA. Two recent cases illustrate this point.

The New Limitation on the Homestead Exemption

While most of the changes to the Code affect cases filed on and after Oct. 17, 2005, certain changes actually became effective for cases filed after the President signed BAPCPA in to law on April 20, 2005. One of the changes effective on April 20 related to the $125,000 cap on the homestead exemption contained in new §§522(o), 522(p) and 522(q). Two of the first published opinions involving BAPCPA looked at the sections related to the homestead cap, but came to completely opposite conclusions. The issue is whether the new $125,000 homestead equity cap is applicable in states that prohibit a debtor from electing federal exemptions (in other words, where a state has “opted out” of the federal exemptions, a debtor does not have the right to make this election, and must choose the exemptions allowed in the state where the case is filed).

The first case examining the homestead issue was In re McNabb, 326 BR 785 (Bankr. D. Ariz. 2005). In McNabb, Judge Randolph J. Haines found the language of §§522(b) and 522(p) related to the homestead cap clear and unambiguous. As a result of what he deemed the clear and unambiguous language of the statute, Judge Haines found he could not look to the legislative history or the “intent of Congress” to interpret the language in the statute. While he noted the result might seem curious, the court found it was bound by the “clear and unambiguous” language of the statute. The court held that the $125,000 cap on the homestead exemption was not applicable in Arizona, and as a practical matter would be applicable in only two states.

Judge Mark of Florida looked at the same sections of the statute and came to the opposite conclusion in In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005). Judge Mark rejected Judge Haines’ strict analysis of the statute in In re McNabb, finding that the language in the statute contained sufficient ambiguity to allow him to examine the intent of Congress. Judge Mark then noted that there was no doubt that Congress intended BAPCPA to address the abuses related to the so-called “mansion loophole,” where debtors would move to states with an unlimited homestead exemption, such as Florida, purchase a large house, and then file bankruptcy and keep their house. Based on the ambiguity in the statute and after looking at the clear intent of Congress, Judge Mark held that the homestead exemption limitations imposed by BAPCPA applied to most states, including Florida:

• Looking to the legislative history of the Reform Act, there is no doubt about what Congress intended. Contrary to the assertion in McNabb that the legislative history “is virtually useless as an aid to understanding the language and intent,” the Reform Act is replete with references demonstrating that the new homestead limitations in §522(p) and (q) were intended to apply to all states in which debtors could previously exempt amounts in excess of $125,000.

Judge Mark’s analysis was adopted by another Florida bankruptcy court, In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005) (J. Friedman) and followed by a court in Nevada. In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005) (J. Riegle).

Attorneys May Not Be a Debt-Relief Agency

BAPCPA appears to impose significant new obligations on attorneys representing debtors. These obligations are imposed on any entity defined as a “debt-relief agency," which includes anyone who provides “bankruptcy assistance” to an “assisted person." The conventional wisdom has been that a debt-relief agency includes any attorney representing a debtor. On the first day BAPCPA became effective, however, one judge rejected this conventional view.

On Oct. 17, 2005, Judge Lamar W. Davis Jr., Chief Bankruptcy Judge for the Southern District of Georgia, entered an order declaring that attorneys are not debt-relief agencies under new Code §§101(12A), 526, 527 and 528. See 332 B.R. 66 (Bankr. S.D. Ga. 2005). Interestingly, the court’s order was not entered in a case, but stated it would apply to all cases in Davis' court. Among other reasons, Judge Davis observed that “it is hard to imagine that the language which...conspicuously omits the word ‘attorney’ really requires an attorney to tell an assisted person that he/she has the right to hire an attorney....” This order is now on appeal. Judge Davis’ order has been criticized by those who point out that, among other things, “bankruptcy assistance” by a debt-relief agency includes “providing legal representation,” which certainly should include attorneys. Nevertheless, Judge Davis’ order points out that the courts will play a large role in how BAPCPA is interpreted and implemented.

Debtors Are Not Complying with the BAPCPA Requirements

While much of the information is anecdotal, in the few bankruptcy cases that have been filed since Oct. 17, 2005, it appears that debtors have failed to follow many of the BAPCPA requirements. For example, debtors have failed to include the calculation of the means test, or file a certificate of completing the required pre-petition credit counseling. Many of the cases filed since Oct. 17 have been dismissed by the courts as a result of these filing deficiencies. In the Tampa Division of the Middle District of Florida, for example, 89 of the 200 cases filed since Oct. 17 were dismissed. The majority of these cases were filed by pro se debtors, who many people speculated would be most likely to not follow the BAPCPA requirements. Of course, a case dismissal now has more significant consequences for a debtor who later re-files bankruptcy. In that event, the automatic stay may either be limited to 30 days (in the event there was one prior pending case dismissed within one year) or may never go into effect at all (in the event two prior cases were dismissed that were pending in the prior year).

Interestingly, the early published cases under BAPCPA have shown that courts will not rewrite the statute in order to give the debtor a “break” contrary to the law. For example, in In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 2005), a case involving the new credit counseling requirement, the debtor failed to obtain credit counseling prior to filing bankruptcy. The debtor moved the court to extend the time to obtain the credit counseling certificate. Judge Dennis R. Dow found that the debtor had failed to follow the specific requirements of BAPCPA in requesting an extension of time, and dismissed the case:

• Debtor requests that under the circumstance of this case, and because of the need for an immediate filing, the court waive the requirements contained in paragraphs (1) through (3) of §109(h), including the requirement of 109(h)(3)(A)(ii). The statute grants the court the authority to postpone the credit counseling requirement, but only if each of the stated conditions is satisfied. Debtor is essentially asking the court to ignore one of the plainly stated requirements for granting such a waiver. However, the court cannot rewrite the statute and declines the debtor’s invitation to do so.

Judge Dow’s reasoning position was followed in In re Davenport, 2005 W.L. 3292700 (Bankr. M.D. Fla. Dec. 6, 2005) (J. May) (similar post-Oct. 17 cases cited in footnote 2).

In a case involving a debtor’s request to extend the automatic stay, which had expired based on the debtor’s prior case dismissal, the court would not extend the stay without sufficient evidence and compliance with the statute. Judge Isgur found that the court “is obliged to implement Congress’ intent. Taken in context, Congress intended to direct the court to conduct an early triage of re-filed cases. Debtors whose cases are doomed to fail should not get the benefit to an extended automatic stay.” In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 2005).

Is Anything Really Going to Be Different?

The McNabb and Kaplan decisions illustrate how two judges can look at the same section of BAPCPA and come up with completely different interpretations. Bankruptcy judges will struggle to harmonize the language of the statute with the intent of Congress. As Judge Mark mused in Kaplan, “implementing the changes will present a daunting challenge to judges, clerk's offices, attorneys and the parties who seek relief in the bankruptcy court after Oct. 17, 2005....”

It is too soon to tell whether the practice and results in consumer bankruptcy cases will change significantly in light of BAPCPA. Many had speculated there would be minimal real changes in practice, or at best, the changes made by BAPCPA would be followed as an exception rather than the rule. The first published cases under BAPCPA discussed above, however, indicate that bankruptcy judges are ready to view the statute narrowly and follow the pro-creditor congressional intent expressed throughout BAPCPA – even where the court may feel that the intent of Congress is flawed or misguided.

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With his decision in In re Attorneys at Law and Draft Relief Agencies, 332 B.R. 66, (Bank. S.D. Ga. 2005), on the applicability of the Debt Relief Agency provisions to attorneys, Judge Lamar W. Davis Jr. not only takes the bull by the horns, but literally throws it to the ground.  Unfortunately, this particular bull is not likely to stay thrown and will doubtlessly rise to gore lawyers who provide bankruptcy advice to assisted persons.  The group of lawyers gored by the DRA sections, as many commentators have already noted, is not limited to those representing consumer debtors.  Attorneys that represent creditors who themselves fall within the definition of an assisted person may also acquire the DRA taint.

While I, as do many others, like Judge Davis' result, his analysis and reasoning simply do not withstand critical analysis.  Judge Davis acknowledges that the language of §101(12A), "all persons," is certainly broad enough to encompass attorneys.  With that starting point, one must analyze §101(12A) to determine whether Congress intended to exclude attorneys from the definition of a debt relief agency.  Judge Davis' analysis starts with the observation that, while extremely broad, the definition of a DRA in §101(12A) does not include the term "attorney".  He then uses this point coupled with various theories to conclude that Congress did not intend to include attorneys within the scope of the Debt Relief Agency provisions of the Code, §§526, 527 and 528.

Judge Davis starts with the nonremarkable proposition that as a matter of plain language, the terms "attorney" and "debt relief agency" are not synonymous, nor under common understanding do they each include the other. Applying the plain-meaning rule, Judge Davis reaches a conclusion that the terms be applied using their ordinary meaning. Whatever the ordinary meaning of "debt relief agency" may be, what Judge Davis overlooks is that in §101(12A) Congress is providing a definition of that term. It is therefore necessary to examine the plain meaning of the words in §101(12A), not the plain meaning of the phrase "debt relief agency." A debt relief agency is defined by §101(12A) as "any person who provides bankruptcy assistance to an assisted person." "Person" in turn is defined as including an individual, partnership or corporation [§101(41)]. Attorneys clearly fall within the definition of a person. Consequently, we must look to the rest of §101(12A) to see if attorneys are excluded. There are five exceptions in §101(12A): (1) the agent/employee of the person providing the assistance, (2) IRC §501(c)(3) organizations, (3) a creditor assisting the assisted person in restructuring the debt owed to the creditor, (4) certain financial institutions and (5) authors, publishers and distributors of copyrighted works. An individual attorney may fall within one or more of the enumerated exceptions; however, attorneys, as a class, do not. Since Congress has specifically enumerated the exceptions to the definition of a DRA, the canon of statutory construction expressio unis est exclusio alterius creates an inference that items not mentioned were excluded by deliberate choice, not inadvertence. This point is bolstered by one of the points relied upon by Judge Davis: that §101(12A) includes a bankruptcy petition preparer, but the definition of a bankruptcy petition preparer in §110(a) specifically excludes attorneys.¹ When Congress intends to exclude attorneys it knows how to do so, and it, as noted below, steadfastly declined to accept the invitation to exclude attorneys from the definition and operative effects of a DRA.

While I wholeheartedly agree with Judge Davis that a law should be given a sensible interpretation, and a literal interpretation avoided where it would lead to absurd consequences, the problem in applying that maxim of statutory construction in this case is that excluding attorneys would be inconsistent with the legislative purpose.  The provisions of §§526, 527 and 528 are easily applied to debtors' attorneys, and in fact, some of the provisions would not apply to nonattorneys.  On the other hand, application to attorneys who represent creditors falling within the scope of the definition of an assisted person, while within the scope of the plain meaning, is problematical and possibly an absurdity.  Most of the requirements of §§526-528 would be inapplicable, and it certainly does not appear to be consistent with the legislative purpose that was, at least ostensibly, to provide added protection to consumer debtors.

While Judge Davis is unable to "conceive that Congress would ever take such an astounding step toward the federal regulation of professionals without forthrightly and expressly stating its intent," the long history of this provision that shows Congress did in fact loudly telegraph its intent.  In its initial two incarnations, Congress clearly indicated that the definition of a DRA included attorneys as well as nonattorneys [see, e.g., H.R. Rep. 105-540, pt. 1 at 77 (1998) (H.R. 3150); H.R. Rep. 106-123, pt. 1 at 120 (1999) (H.R. 833)].  In the 107th, 108th and 109th Congresses, the section-by-section analyses of the bills did not use the express language including attorneys that appeared in connection with the committee reports in the 105th and 106th Congresses.  However, the history of S. 256, which became Pub. Law 109-8, does not support Judge Davis' conclusion; in fact, it eviscerates it.  When S. 256 came on for debate on the Senate floor, Sen. Feingold offered a series of amendments, including Senate Amendment 93, to add " other than an attorney or an employee of an attorney" after the word "person" in §101(12A).  Senate Amendment 93 was withdrawn as part of a compromise agreement on the package [151 Cong. Rec. S2462-63 (daily ed. March 10, 2005)].  During the markup session in the House Judiciary Committee, Rep. Watt offered an identical amendment.  That proposed amendment was rejected by voice vote [H.R. Rep. 109-31, pt. 1, at 520, 522-23 (2005)].

Congress was certainly not unaware of the fact that, as written, the net cast by §101(12A) was interpreted as ensnaring attorneys. See, e.g., ABA Letter to Sen. Leahy, Chairman of the Senate Judiciary Committee, dated Aug. 30, 2001 (recommending an amendment to §101(12A) as was proposed in the 109th Congress by Sen. Feingold and Rep. Watt);² ABA Letter to Rep. Cannon, Chairman of the House Subcommittee on Commercial and Administrative Law, Committee on the Judiciary, dated March 4, 2003 (same recommendation as in 2001);³ and ABA Letter to Rep. Sensenbrenner, Chairman of the House Committee on the Judiciary dated March 11, 2005 (reiterating the position of the ABA of 2001 and 2003).⁴ Judge Davis also cannot conceive that this would have gone unnoticed and undebated by the states. However, many state bars also opposed these provisions, including the state bars of Arizona, Illinois, Iowa, Maryland, Missouri, Minnesota, North Carolina, Ohio, Oregon, Tennessee, Utah, Virginia, Washington and Wisconsin.⁵

While no one can dispute that the regulation of the practice of law has historically been left for the most part to the states, Judge Davis cites no authority that precludes Congress from regulating practice in federal courts. Indeed, Congress does regulate practice and procedure in federal courts, including regulation of attorneys, both directly and through the Rules Enabling Act.⁶ Nor do I doubt that Judge Davis would even fleetingly entertain the argument that the Southern District of Georgia lacked the power to regulate attorneys practicing before that court, which power, to the extent it exists, while considered inherent, is subject to Congressional fiat.

While I, as do most if not all those with whom I have discussed the subject, believe that the DRA provisions are an unwise exercise of that power, the inescapable conclusion must be that Congress did not intend to exclude attorneys from the definition of a Debt Relief Agency in §101(12A). This is indeed unfortunate, as application of the provisions of §§526, 527 and 528 to attorneys, whether representing debtors or creditors, will have a very debilitating impact of the attorney-client relationship where the client is an "assisted person." But as the Supreme Court has stated, [t]he fact that Congress may not have foreseen all of the consequences of a statutory enactment is not sufficient reason for refusing to give effect to its plain meaning.⁷"

¹While Judge Davis appears to imply that §110(a) excludes all attorneys, as amended by BAPCPA the exclusion is limited to attorneys for the debtor.
²Accessible at http://www.abanet.org/poladv/letters/107th/bankruptcy083001.html.
³Accessible at http://www.law.unlv.edu/faculty/bam/bkreform2003/aba‑letter.pdf.
⁴Reprinted in H.R. Rep. 109-31, pt. 1 at 527B32 (2005).
⁵ABA Fact Sheet Bankruptcy Attorney Liability Legislation, Feb. 25, 2005, accessible at http://www.abanet.org/poladv/priorities/brattyliabilityfactsheet_109thC….
⁶28 U.S.C. §§2071-2077; see e.g., FED. R. CIV. P. 11; FED. R. BANK. P. 9011.
⁷Union Bank v. Wolas, 502 U.S. 151, 158 (1991).

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The Judicial Conference has approved Official Forms 22A and 22C for use in making the means test calculation in chapter 7 (OF 22A) and determining disposable income in chapter 13 (OF 22C). Both forms utilize the same methodology in applying the transportation standards and the housing and utilities standards. In the transportation standards, the debtor is allowed the greater of the maximum ownership costs standard or the debtor's secured vehicle payments determined under §707(b)(2)(A)(iii). For housing and utilities expenses, the debtor is allowed the greater of the maximum standard for mortgage/rent or the debtor's house payment determined under §707(b)(2)(A)(iii). This begs the question: Is this the correct interpretation of §707(b)(2)(A)(ii)(I)? For the following reasons, it is this author's opinion it is not.

One, as always, starts with the language of the statute.  "The debtor's monthly expenses shall be the debtor's applicable monthly expense amount specified under the National Standards and Local Standards . . . issued by the Internal Revenue Service for the area in which the debtor resides" [§707(b)(2)(A)(ii)(I)].  The official forms are predicated upon the assumption that the "amount specified" in the standards for transportation and housing and utilities is a set amount.  It is true that in those standards, an amount is specified, but unlike the amounts specified in the National Standards for food, clothing, etc., it is not a set amount.  The amount specified in the National and Local Standards for transportation and housing and utilities is a maximum, not-to-exceed amount.  The Internal Revenue Manual Financial Analysis Handbook, of which the standards are an integral part, specifically provides that for the transportation and housing and utilities standards, a [debtor] is allowed the lesser of the [debtor's] actual expenses or the amount specified [IRM 5.15.1.7].  The official forms reverse this: The debtor is allowed the greater of the amounts specified or the debtor's actual expense.

The official forms allow as an expense deduction the amount specified for transportation ownership costs in the National Standards (currently $475/month for the first car and $338/month for the second).  However, to avoid "double dipping," the debtor is required to reduce that amount by the amount of the secured debt payments determined under §707(b)(2)(A)(iii), but not below zero.  With respect to housing and utilities, the debtor is allowed the amount specified in the standards for mortgage/rent.  As with transportation ownership costs, the debtor is required to reduce that amount by the house payments determined under §707(b)(2)(A)(iii), but not below zero.  The net result is that in both instances the debtor gets at least the amount specified, but if the secured debt monthly payment exceeds that amount, the debtor is allowed the amount of the secured debt payment.

Because §707(b)(2)(A)(iii) places no limit on the amount of secured debt that is allowed as an expense, the official forms correctly allow debtors to deduct the full amount of payments on secured debts coming due during the five-year period. What the official forms fail to take into account is the situation in which the debtor's secured payments are substantially less than the amount specified in the standards. For example, assume a debtor owns one car with payments of $500/month and 30 months left on the contract. The debtor's allowed monthly expense under §707(b)(2)(A)(iii) is $250 ($15,000/60). However, the debtor is allowed $475; the debtor gets to expense $28,500 ($475 x 60) while only repaying $15,000. The situation worsens if the debtor has a second car that is paid for. In that case, the debtor would be allowed a transportation ownership expense of $813/month. The debtor will essentially be paying $15,000 but getting "credit" for repaying $48,780 ($813 x 60), more than triple the amount actually paid!

The approach taken in the official forms does not present a significant problem when applying §707(b). While §707(b)(2) creates a presumption of abuse, it is not the sole vehicle for a finding of abuse under §707(b)(1). The totality of the circumstances . . . of the debtor's financial situation demonstrates "abuse" is available where the presumption of abuse does not arise [§707(b)(3)]. The foregoing example with respect to automobiles may very well fall within the scope of §707(b)(3).

The real problem is in chapter 13. Where a debtor's annualized income exceeds the applicable median income, in computing disposable income, allowable expenses "shall be determined in accordance with subparagraphs (A) and (B) of §707(b)(2)" [§1325(b)(3)]. The rules of statutory construction mandate that §707(b)(2)(A)(ii)(I) be construed as applied in §1325(b)(3) the same as it is for §707(b)(2). Indeed, OF 22C does just that. In the transportation example above, the result may be that the debtor retains $33,780 that should be actually available to pay unsecured creditors through the plan! This coupled with the lack of any limit on either the amount or the nature of secured debt under §707(b)(2)(A)(iii) could effectively result in §1325(a)(4) setting the amount that must be paid to unsecured creditors under the plan. A debtor might be required to pay unsecured creditors only the present value of excess equity in exempt property plus the present value of nonexempt assets. If the Judicial Conference's interpretation of §707(b)(2)(ii)(I) is correct, Congress may have created a system that could result in less recovery by unsecured creditors not more than they would under pre-BAPCPA law. Unsecured creditors may be lamenting, "say it ain't so, Joe!"

It may be difficult, if at all possible, to apply §1325(a)(7) to the situation where the debtor's actual transportation or housing expenses are less than those allowed. First, transportation and housing involve necessities, not luxuries. It is no more unfair, inequitable or a lack of good faith for a debtor to take full advantage of what Congress has specifically allowed for transportation or housing, notwithstanding the fact that it is more than the debtor actually expends, than it is has clearly and unequivocally done with respect to food, clothing, etc., which, under the IRM, are applied without regard to actual expenses. The issue here is more akin to exemptions, the taking of advantage of which has not been held to be indicative of a lack of good faith.

Second, in the absence of a lack-of-good-faith argument, under §1325(b)(1), if a creditor (or the trustee) objects, all disposable income must be paid to unsecured creditors. Disposable income for those whose annualized current monthly income exceeds the applicable median income must be determined using the expenses allowed by §707(b)(2)(A) and (B) [§1325(b)(2), (3)]. Congress has decreed that the remedy and the maxim of statutory construction, expressio unius est exclusio alterius, may exclude any other remedy.

The bottom line is that creditors are likely left with only the argument that the Judicial Conference's interpretation is incorrect. If it is correct, then chapter 13 debtors should be able to take full advantage of the maximum amounts allowed for transportation and housing expenses irrespective of actual expenses. But whether it is correct or not, the interpretation adopted by the official forms is likely to spawn a plethora of litigation in chapter 13 cases.

Facts:

On Nov. 1, 2005, an involuntary petition is filed against the debtor who, seven months previously, had moved from a state with a maximum homestead exemption (State A) of $15,000 in value to a state with an unlimited homestead exemption (State B). The debtor's new state of residence is an opt-out state, which prohibits its citizens from electing the federal exemptions. The value of the debtor's new residence is $500,000 and it was purchased in part from the proceeds of the sale of the debtor's former residence and part from the proceeds of the liquidation of certain previously nonexempt investments. Four and one-half years prior to the filing of the petition, the debtor had been involved in an automobile accident in which he caused serious physical injury to another person as a result of driving while intoxicated. What are the debtor's rights to exempt his recently acquired residence? What challenges can a creditor raise?

Analysis:

1. Effect of failure to complete pre-bankruptcy credit counseling.

The first consideration is whether this individual is eligible to be a debtor under 11 U.S.C. 109(h) if he has not received a pre-bankruptcy briefing from an approved credit counseling agency, nor performed a related budget analysis. Accordingly, he cannot file a certificate from the agency as required by §521(b) and therefore may be dismissed from bankruptcy.

There are two exceptions to the requirement for pre-bankruptcy credit counseling. First, a debtor is excused from the requirements of §109(h) if the debtor resides in a district for which the U.S. Trustee has determined that the credit counseling agencies in the district are not able to provide the required services. §109(h)(2)(A).

Second, there is an exigent-circumstance exception to the requirement for pre-filing counseling that waives the requirement if a debtor describing the exigency states that he attempted to obtain credit counseling services from an approved agency but was unable to obtain the services within the five-day period beginning on the date the request was made. §109(h)(3). In this case, the debtor cannot take advantage of this provision because he cannot show that he attempted to obtain counseling prior to being placed into bankruptcy. Accordingly, because the debtor is ineligible to be a debtor, the petition may be void, or voidable. (A discussion of the practical and procedural aspects of a filing against an ineligible debtor is beyond the scope of this article.)

As a result of this anomaly, the question has been raised as to whether an involuntary bankruptcy can ever be successfully maintained against an individual under BAPCPA, the argument, of course, being that the debtor is almost never going to comply with the counseling requirements of §109(h). On the other hand, it may be argued that §109(h) is not applicable to an individual against whom an involuntary petition has been filed. By the precise terms of §109(h), pre-bankruptcy credit counseling is required in the 180-day period preceding the filing of the petition by such individual. Since an involuntary petition is not filed by the debtor, an argument can be made that the counseling requirement does not apply.

2. Which state’s exemptions apply?

Assuming that the debtor passes the hurdle of credit counseling, the first question is whether the debtor can invoke the unlimited homestead provisions of his “new” state (State B) of residence. BAPCPA amended §§522(a)(2) and (3) of the Code to extend the residency requirement for invoking the exemptions of a particular state from the current 180 days to 730 days. Specifically, §522 (a)(3)(A), as amended, states that an individual debtor may exempt "any property that is exempt under…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 at least 730 days immediately preceding the date of the filing of the petition….”

In this case, the debtor has only lived in State B for seven months. Therefore, he has not met the 730-day residency requirement and cannot take advantage of the more generous homestead exemption in State B. Under this circumstance, amended §522(3)(A) goes on to state that “if the debtor’s domicile has not has not been located [in] a single state for such 730-day period, [the applicable exemption is that of] 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….”

As long as the debtor lived in State A for the greater part of 180 days before the 730-day period (2 to 2-1/2 years) before the filing of the petition, he would be entitled to use the exemptions allowed in state A. Here, assuming State A is not an opt-out state, the debtor will be entitled to either the $15,000 state homestead exemption or the $18,450 federal homestead exemption.

3. Effect of BAPCPA on the homestead exemption.

Assuming that the debtor is eligible to use the unlimited homestead exemption allowed by State B, several of the amendments to the Code would impact the result, as would as the first case decided under BAPCPA, In re McNabb, 326 B.R. 725 (Bankr. D. Ariz. 2005).

BAPCPA amended §522 to limit the amount of equity a debtor can exempt, even in a state with unlimited homestead exemptions, in certain circumstances. First, §522(o) reduces the amount a debtor can exempt in a residence to the extent that the equity resulted from the liquidation of nonexempt property, within 10 years before filing, with the intent to hinder, delay or defraud creditors. Second, §522(p) limits a debtor to $125,000 in equity to the extent that the equity was acquired in the 1,215-day period prior to filing. This limitation does not apply to a roll-over of equity from the sale of a previous residence in the same state. Third, §522(q) limits an exemption to $125,000 in several other situations. First, if the court determines that the debtor has been convicted of a felony that demonstrates that the filing of the case was an abuse of Title 11, or second, if the debtor owes a debt arising from 1) a violation of security laws; 2) fraud, deceit or manipulation in a fiduciary capacity in connection with the purchase or sale of any securities; 3) a violation of §1964 of Title 18; or 4) any criminal act, intentional tort or willful or reckless misconduct that caused serious physical injury or death to another individual in the previous five years. The limitations of §522(q) do not apply to the extent that the equity is reasonably necessary for the support of the debtor and any dependent of the debtor.

4. Effect of BAPCPA on the liquidation of nonexempt investments.

In this case, the debtor liquidated certain previously nonexempt investments and added the proceeds to his residence in State B, creating potentially nonexempt equity in the residence. The ability of the debtor to exempt the full amount depends on whether the debtor liquidated those nonexempt assets in an attempt to avoid his creditors. If so, §522(o) will operate to reduce the debtor’s exemption by that amount.

Additionally, to the extent that the debtor liquidated his nonexempt investments within 1,215 days (3.3 years) before the petition was filed, the creditors will argue that under §522(p), the debtor is limited to $125,000 in equity from the liquidation of those assets.

Although it does not appear relevant in this case, a debtor who files jointly with his spouse may claim that each individual (see §522(a) is entitled to $125,000 under §§522(o) and (p)).

5. Effect of BAPCPA on the rollover of equity from previous residence.

The equity that the debtor received from the sale of his first home, which was subsequently used to pay, in part, for the current home, is not exempt from the $125,000 ceiling in §522(p)(1). Section 522(p)(2)(B) states: “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 1,215-day period) into the debtor’s current principal residence if the debtor’s previous and current residences are located in the same state.” Since the debtor moved from another state, he does not qualify for this exception.

6. Effect of BAPCPA on the debt arising from drunk-driving injuries.

The injuries the debtor caused as a result of driving drunk also have an impact on his allowable exemptions. Under §522(q)(1), if a debtor elects to use state exemptions, he is limited to $125,000 in equity in his residence if the debtor owes a debt arising from “any criminal act, intentional tort, or willful or recklessness conduct that caused serious physical injury or death to another individual in the preceding five years.” (§522(q)(1)(B)). The debtor caused the accident within the five-year period, so §522(q) may apply. To the extent that the debtor owes a debt as a result of the accident, and because driving while intoxicated is clearly a criminal act, the creditors will argue that the debtor is limited to $125,000 of equity because he caused serious physical injury to another person.

7. The McNabb effect.

In In re McNabb, supra, the debtors filed a motion to abandon property because they believed that they were entitled to exempt the full amount of the homestead equity under Arizona’s exemption laws. The creditors opposed the motion, alleging that both §§522(o) and (p) were potentially applicable to limit the amount of the debtor’s exemptions. The court noted that both sections became effective immediately upon the President’s signing of the bill and therefore applied to the case, even though the majority of the provisions of BAPCPA, including the residency requirement, are not effective until Oct. 17, 2005.

In determining the possible limits of the debtors’ exemptions if the creditor’s allegations of fraud were well-grounded, the court strictly construed the amendments made by BAPCPA. It began by noting that, by the precise terms of the amendment, §522(p) applied if a debtor elected the state, rather than the federal, exemptions. The court noted that Arizona is an “opt-out” state, prohibiting the use of federal exemptions. Therefore, according to the court, the debtor did not elect the state exemptions. As a result, the court, citing its duty to interpret strictly unambiguous statutory language, held that the limits imposed by §§522(o) and (p) were not applicable in Arizona, and "[t]he fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning." McNabb, supra n.11.

8. Other considerations.

Other issues that may be raised in the context of exemption laws and the increased residency requirements in BAPCPA include:

Effective date:

 The provisions of §§522(o), (p) and (q) all became effective immediately upon the President’s signing of the bill.

Domicile:

New §522(a)(3) allows the debtor to choose the exemptions of the state in which the debtor’s “domicile” is located in the 730-day period before filing. However, "domicile" is not necessarily defined as the place in which a debtor’s house is located. Rather, "domicile" is a more fluid concept that is determined by both facts and intent. This is explained by the court in In re Vaughan, 188 B.R. 234 (Bankr. E.D. Ky. 1995):

[Domicile] is of more extensive signification and includes, beyond mere physical presence at the particular locality, positive or presumptive proof of an intention to constitute it a permanent abiding place. "Residence" is of a more temporary character than "domicile." "Residence" simply indicates the place of abode, whether permanent or temporary; "domicile" denotes a fixed, permanent residence to which, when absent, one has the intention of returning.

Id. at 237 (quoting Minick v. Minick, 149 So. 483 (Fla. 1933)).

If justified by the facts, a debtor might argue that even though he had a “residence” in State A, his domicile was in State B for the required 730 days, thus affording him the benefit of the exemptions available in State B.

Extraterritoriality:

This concept operates to allow parties in one jurisdiction to operate under the laws of another jurisdiction. In the bankruptcy context, extraterritoriality would permit the exemption laws of one state to be operative in another state. Here, even though the petition was filed in State B, the exemption laws of State A will be invoked. However, the law of at least one state, Texas, bars the application of its homestead exemption outside of its boundaries. In other states where exemption laws are silent, courts have nevertheless held that their homestead laws do not have extraterritorial effect. See, e.g., In re Drenttel, 309 B.R. 320 (8th Cir. BAP 2004), and cases cited therein. The pre-emptive effect of the Bankruptcy Code over conflicting state laws will be at issue for courts facing this question.

This small sortie into the convolutions of the homestead exemptions of BAPCPA, as demonstrated by the McNabb decision, provides some indicia of the mountains of court decisions and case law to come.

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Once the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) goes into effect, a critical computation for any consumer bankruptcy case will be the debtor's "current monthly income" (CMI).  BAPCPA defines this new term, to paraphrase, as a six-month average of the debtor’s income, and specifically includes amounts paid by entities other than the debtor for regular household expenses. See 11 U.S.C. §101 (10A) (quoted below).  Though undoubtedly intended to provide clear guidance in means testing in chapter 7 and the calculation of disposable income and maximum plan length in chapter 13 cases under BAPCPA, the use of the term may result in volumes of litigation as each court weighs in on what it means in cases involving a non-filing spouse with income.  This article will examine the ambiguity created by the newly defined term “current monthly income” with respect to a non-filing spouse's income in the context of both chapter 7 abuse analysis and chapter 13 disposable income analysis under BAPCPA.

Do the statutory definition of CMI and the sections of the law using that new term read such that in a married bankrupt’s solo filing, the income of the debtor’s non-filing spouse should be considered to assess that debtor’s ability to pay in a chapter 7 case or in a chapter 13 plan? The answer to this question carries significant consequences. The term is used in the new means test of revised §707 to determine a debtor’s ability to repay in chapter 7 and in chapter 13 with respect to the required plan term and, most importantly, by cross reference to §707, to determine a chapter 13 debtor’s available disposable income. Although the definition of the term should provide an answer as to just what is included in CMI, Congress’ choice of words and use of parenthesis create confusion. Following is the relevant part of the definition:

(10A) ‘current monthly income’—

    (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…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,…

11 U.S.C. §101(10A).

The language in the parenthesis in the first lines of subparagraphs (A) and (B) seems to suggest that Congress intended to include just the debtor’s income regardless of whether there is a spouse in the household with income because the joint filing is being treated distinctly as evidenced by the parenthetical. This interpretation, which would be preferred by debtors, results in a married debtor filing bankruptcy alone utilizing all income except the income of that debtor’s non-filing spouse. Put another way, Congress must have intended to take into account a spouse’s income only if that spouse is also in bankruptcy, since a joint filing was treated separately by use of the parenthesis.

On the other hand, Congress’ use of the phrase “from all sources” in subparagraph (A) supports an interpretation that would be preferred by creditors. A creditor would argue that a nonfiling spouse’s income should always be counted in CMI because it falls within income “from all sources.” This may seem inconsistent with the language in the parenthesis referenced above; however, further support for this view can be found when looking further into the definition at subparagraph (B), which is connected to subparagraph (A) in the conjunctive. Subparagraph (B) of the CMI definition expands on (A) by including, in relevant part, “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….” A creditor would argue that Congress intended to include the income of a nonfiling spouse in CMI, at the very least where it is being used to regularly pay household expenses of the debtor and the debtor’s dependents.

While the position favorable to debtors seems to make more sense upon initial review, the argument that CMI includes the income of a nonfiling spouse is also supported by the language as discussed above and additionally, pre-BAPCPA case law on the treatment of a nonfiling spouse’s income. Prior to the effective date of BAPCPA, the majority of bankruptcy courts across the country, when considering whether a non debtor spouse’s income should be counted to determine a debtor’s ability to repay in a chapter 7 and whether that income should be included in disposable income in a chapter 13, have ruled that a non debtor spouse’s income is part of the analysis.1 Turning from the ambiguity in the CMI definition, the contexts in which this term is found in new BAPCPA provisions also appear to leave room for interpretation in at least three pivotal consumer bankruptcy sections of the Code, §§707, 1322 and 1325.

In §707, which has been substantially revised by BAPCPA to provide for means-based testing of a chapter 7 debtor’s ability to repay, CMI is used in three critical places. First, it is used in the means-test calculation itself to provide an income number from which to subtract expenses and arrive at a monthly amount that the debtor has available to pay. Clearly, the higher the CMI in this equation, the better for creditors, as there will be more money available for repayment. Conversely, the lower the CMI (which would obviously result from excluding a nonfiling spouse’s income), the better for debtors, as there would be less money available for repayment.

CMI is also used in two “standing” provisions within revised §707. Under new subsections (b)(6) and (b)(7) of revised section 707, the term CMI is used to determine standing to bring any abuse motion under §707(b) and abuse motions based on the means test presumption, respectively.

Under subsection (b)(6), only the judge or U.S Trustee may file any motion to dismiss for abuse of chapter 7 if the CMI of the debtor, “or in a joint case, the debtor and the debtor’s spouse,” falls below the state median income. Subsection (b)(7) generally provides that no party, not even the judge or the U.S. Trustee, can file a motion to dismiss for means-test failure when the CMI of both the debtor “and the debtor’s spouse combined” exceeds the state median income level. Interestingly, Congress has explicitly stated in subparagraph (B) of subsection (b)(7) the limited circumstance (a physically separated spouse) under which a nonfiling spouse’s income is to be excluded for that standing calculation.2 The position could be taken that if Congress intended to exclude a nonfiling spouse’s income in other places where CMI is used, then it would be stated as explicitly as it is in subsection (b)(7). Of course, the counter argument could attempt to explain this away as poor draftsmanship.

For chapter 13 debtors, the interpretation of CMI is also critical. Revised §§1322 and 1325 use the term to limit the permissible length of a repayment plan and to define “disposable income,” respectively.

In §1322(d), the term is used in the following context: “If the [CMI] of the debtor and the debtor’s spouse combined…is not less than” the state median income, the plan may not provide for payments for more than five years.3 Thus, it may be clear to the reader that CMI in this context is to include a debtor’s spouse’s income regardless of whether the bankruptcy is joint. However, the definition of CMI, as explained above, could be read to exclude the debtor’s spouse’s income, and arguably that reading could trump what seems to be the clear reading of § 1322(d).

Subsection (b)(2) of §1325 defines “disposable income” as CMI less certain allowed exclusions. Once those exclusions are deducted, the remaining expenses are reviewed under the allowances as provided in §707(b), and thus, the same issue that occurs in chapter 7 abuse analysis will arise in chapter 13 once an objection to confirmation is filed. Chapter 13 debtors, in countering an objection, will have to prove that all of their disposable income is being applied to make payments under the plan. These debtors will, of course, want to exclude their nonfiling spouse’s income to reduce the amount of disposable income and, consequently, their repayment obligation.

The real question is one of statutory construction. Of course, to answer that question, an examination of the language in light of Congress’ intentions should be undertaken. At this point, it is only certain that the use of the term CMI will create confusion and a fair amount of litigation, at least in those cases where there are income earning nondebtor spouses.

Footnotes:

1. See, e.g., the substantial abuse cases of In re Schmonsees, No. 01-10844C-7G, 2001 Bankr. LEXIS 1896, 2001 WL 1699664 (Bankr. M.D.N.C. Sept. 21, 2001);In re Engskow, 247 B.R. 314 (Bankr. M.D. Fla. 2000); In re Dempton, 182 B.R. 38 (Bankr. W.D. Mo. 1995); In re Messenger, 178 B.R. 145 (Bankr. N.D. Ohio 1995);In re Strong, 84 B.R. 541 (Bankr. N.D. Ind. 1988); and the chapter 13 cases of In re Bottelberghe, 253 B.R. 256 (Bankr. D. Minn. 2000); In reMcNichols, 249 B.R. 160 (Bankr. N.D. Ill. 2000); In re Ehret, 238 B.R. 85 (Bankr. D. N.J. 1999); In re Bottorff, 232 B.R. 171 (Bankr. W.D. Mo. 1999); In re Carter, 205 B.R. 733 (Bankr. E.D. Pa. 1996); In re Pickering, 195 B.R. 759 (Bankr. D. Mont. 1996); In re Wilkinson, 168 B.R. 626 (Bankr. N.D. Ohio 1994); In re Cardillo, 170 B.R. 490 (Bankr. D. N.H. 1994); In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993); In re Belt, 106 B.R. 553 (Bankr. N.D. Ind. 1989); In re Carbajal, 73 B.R. 446 (Bankr. S.D. Fla. 1987); In re Saunders, 60 B.R. 187 (Bankr. N.D. Ohio 1986).

2. In relevant part, §707(b)(7)(B) states:

(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 requirement 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.

11 U.S.C. §1322(d)(1). Subsection (d)(2) of this section uses the term CMI similarly.

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One provision added by BAPCPA 2005 that will impact all attorneys who represent consumer debtors is that concerning Debt Relief Agencies (“DRA”). All attorneys who represent consumer debtors are, by definition, Debt Relief Agencies: any person who provides any bankruptcy assistance to any assisted person in return for the payment of money or other valuable consideration [§101(12A)]. An assisted person is any person whose debts are primarily consumer debts and the value of whose nonexempt property is less than $150,000 [§101(3)]. Bankruptcy assistance includes:

• goods or services provided to an assisted person, the purpose of which is to provide:
  
  • information
  • advice
  • counsel
  • document preparation or
  • filing;
• attendance at a creditors’ meeting
• appearing in a case or proceeding on behalf—or providing legal representation—of another in a case or proceeding under title 11 [§101(4A)].

Sections 526–528 contain numerous provisions governing a DRA.

A debt relief agency may not with respect to any assisted person [§526(a)]:

• Fail to perform any service that the assisted person was informed would be provided;
• Make any statement, or counsel or advise any assisted person or prospective assisted person to make a statement in a document filed in the case that is untrue and misleading, or that upon the exercise of reasonable care, should have been known to be untrue or misleading;
• Misrepresent to any assisted person or prospective assisted person, directly or indirectly, affirmatively or by material omission, with respect to the services that will be provided or the benefits and risks that may result if the person files a bankruptcy petition; or
• Advise an assisted person or prospective assisted person to incur more debt in contemplation of filing bankruptcy 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 the case.

Any waiver of these restrictions by a debtor is unenforceable [§526(b)].

Not later than three business days after first offering to provide services to the debtor, the debtor must be provided substantial information and notices.

1. The notice required by §342(b) [the form notice (B201) may be obtained online] and a clear and conspicuous notice advising the debtor that [§527(a)]:
   
   • All information that the debtor is required to provide with a petition and thereafter during the case is required to be complete, accurate and truthful;
   • All assets and all liabilities are required to be completely and accurately disclosed, and the replacement value of each asset must be stated where requested after reasonable inquiry to establish such value;
   • Current monthly income, the amounts specified in §707(b)(2), and, in a case under chapter 13 of this title, disposable income, are required to be stated after reasonable inquiry; and
   • All information provided by the debtor is subject to audit and failure to provide the required information may result in dismissal or criminal prosecution.
2. A separate notice must be given that clearly and conspicuously provides the assisted person with “important information about bankruptcy assistance from an attorney or bankruptcy petition preparer” to help the debtor understand what must be done in a routine bankruptcy case and evaluate how much service is required [§527(b)]. The format and content of this notice is set forth in specific detail in §527(b).
3. Except to the extent that the attorney provides the information after a reasonably diligent inquiry of the debtor and others to obtain information reasonably accurate for inclusion on the petition, schedules, and statement of financial affairs, the attorney must provide the debtor, in a clear and conspicuous writing, instructions on how to provide all the information required, including [§527(c)]:
   
   • How to value assets at replacement value, determine current monthly income, the amounts specified in §707(b)(2) and, in a chapter 13 case, how to determine disposable income and related calculations;
   • 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
   • How to determine what property is exempt and how to value exempt property at replacement value as defined in §506.

Certain requirements are imposed on debt relief agencies [§528].

1. Within five business days of first providing assistance to the debtor but, in any event prior to filing the petition, execute and provide the debtor with a copy of a written contract that clearly and conspicuously—
   
   • specifies the services to be provided, and
   • the fees or charges for the services and the payment terms.
2. Clearly and conspicuously disclose in any advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public (whether in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise) that the services or benefits are with respect to bankruptcy relief.
3. Include in any advertisement the following statement “We are a debt relief agency. We help people file for bankruptcy relief under the Code,” or a substantially similar statement. An advertisement includes a statement that:
   
   • Contains descriptions of bankruptcy assistance in connection with chapter 13 whether or not chapter 13 is specifically mentioned, e.g., “federally supervised repayment plan” or “[f]ederal debt restructuring help” or similar statement that could lead the debtor to believe that debt counseling was being offered when in fact the services were directed to providing assistance in the form of bankruptcy relief.
   • Advises that the DRA provides assistance with respect to credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressures, or inability to pay any consumer debt.

Failure to comply with the requirements of §§526–528 subjects the attorney to possible sanctions.

1. Any contract that does not comply with the requirements of §§526, 527 or 528 is void and unenforceable [§526(c)(1)].
2. The debtor may recover the amount of any fees or charges received, actual damages and reasonable attorneys’ fees and costs if it is found that the attorney intentionally or negligently [§526(c)(2)]—
   
   • failed to comply with §§526, 527 or 528,
   • failed to file any required document and the case is dismissed or converted, or
   • disregarded the material requirements of the Code or the Federal Rules of Bankruptcy Procedure.

While most of the required disclosures simply codify matters that a prudent, conscientious attorney would ordinarily make, there are at least two that an attorney may be understandably reluctant to make in many, if not most, circumstances, i.e., “you can represent yourself” and “or get help in some localities from a bankruptcy petition preparer.” Even prior to the enactment of BAPCPA rarely would an attorney suggest to a client that going it alone was advisable. With the myriad of pitfalls and traps created by BAPCPA and draconian adverse effect of falling into one of them it is even less, if at all, advisable for an individual to be a pro se debtor. Under the current state of the law governing bankruptcy petition preparers it would, in this author’s opinion, be a substantial ethical breach and a blatant misrepresentation for an attorney to even remotely suggest that an individual can get “help” from a bankruptcy petition preparer. Use of the term “help” is deceptive in that it carries with it a connotation that a bankruptcy petition preparer can assist the debtor in navigating the somewhat convoluted labyrinth of consumer bankruptcy law under BAPCPA. Nothing could be further from the truth, if for no other reason than if the petition preparer did so, the petition preparer would violate §110! Consequently, while §527 may require that an attorney make the disclosures, nothing appears to preclude an attorney from—and an attorney should—adding the caveat “but, I do not recommend that you do.”

Practice Pointers

• At the initial consultation, whether or not the attorney charges, provides a “free consultation,” or is taking the case on a pro bono basis, provide the notices required by §527(a), (b). It may be earlier than required but by so doing as a matter of course at that point the likelihood that the three-day time limit to comply will be missed is eliminated. Even though compliance with §527(a) is not required if there is no charge for the consultation and the debtor does not retain the attorney or the case is taken on a pro bono basis, it is “cheap insurance.”
• Any retainer agreement must comply with the requirements of §528(a)(1). If at the time of the initial consultation the debtor has not decided to retain the attorney, the attorney should provide the debtor with a copy of the retainer agreement. While not required, as a standard practice it will enable the debtor to make a better informed decision about retaining the attorney. If the debtor indicates a desire to retain the attorney at that initial consultation, execute the retainer agreement at that time—do not wait for the five days permitted.
• If retained, provide the debtor with the information required by §527(c) in all cases. Even though not required if the attorney will be providing or verifying the information required, providing the debtor with instructions on how that information is derived will materially assist the debtor in providing the attorney with the necessary factual data to complete the petition and schedules completely and accurately.

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Has Learned Hand Finally Come Home?

The new Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA, Title 11 U.S.C.), has made some controversial and sweeping changes in the area of adequate protection in chapter 13 cases. While the case law throughout the circuits recognizes that secured creditors were entitled to some form of adequate protection, it is a fair statement of the law throughout the circuits to say that enforcement was varied. For example, in the Ninth Circuit, the case of In re Andrews, 49 F.3d 1404 (9th Cir. 1995), held that a plan would not be confirmable unless before, and after confirmation, adequate protection could be provided to secured creditors. The Ninth Circuit also held however, in another decision, that adequate protection would be payable only from the point the creditor asked for it, In re Deico Electronics Inc., 139 B.R. 945 (9th Cir. BAP 1992). In a recent thoughtful decision, In re Stembridge, 394 F.3d 383 (5th Cir. 2004), the Fifth Circuit reiterated the rights of a personal property creditor to adequate protection from petition filing.

Perhaps to recall the historical underpinnings of adequate protection, a review of the holding of Judge Learned Hand in In re Murel Holding Co., 75 F.2d 941 (2nd Cir. 1935), is helpful to gain a bit of perspective. In the oft-quoted passage, Judge Learned Hand holds that a creditor is entitled to not only adequate protection but “the indubitable equivalent” of its collateral. In the context of personal property loans, and in particular auto loans, creditors do not believe they are consistently getting this treatment in chapter 13 cases.

Apparently to address this perception and also to make chapter 13 plans more uniform throughout the country, 11 U.S.C. §1326(a) was modified. Additionally, it should be noted that 11 U.S.C. §1325(a)(5)(B)(iii) was added. It provides plan payments shall be “equal” and “shall not be less than an amount sufficient to provide the holder adequate protection.” Section 1326(a) now appears to require the following:1

1. Adequate protection must be made by the debtor “within 30 days of filing” unless the court orders otherwise.
2. Sections 1325 and 1326 require that all plan payments be level and thus, the pro-rata plan payments for secured creditors appear to be no longer confirmable. The literal reading of the statutory language appears to be the debtor must calculate in his or her plan what amount is to be paid on the claim and that amount must be paid to the trustee monthly, for disbursement.
3. Finally, failure to so perform makes the case subject to relief from stay by the creditor or a motion to dismiss.

I would like to consider each in order.

First, as to the payments by the debtor, this is probably the most controversial provision of this statute and, maybe even of some 230 pages of changes Congress legislated. The author’s perception is that all the parties at the bankruptcy table, in considering this, seem to have uniformly agreed that the debtor making payments after 30 days might not be the best idea. The reasons for this belief arise from the correct perception that the trustees’ accounting and payment tracking will be far superior to that of the debtors’. Trustee payments will provide a reliable and readily accessible record of what was paid when and to whom. Rather, the courts will be asked throughout the country to “order otherwise,” through either local rule or general order. In one of the jurisdictions where we practice, there is already a final draft of a rule, which provides exactly this.2 The rule has not been passed and is not part of the local rules as of the date of this writing. The author believes that this, or a similar rule, will be in place by Oct. 17, 2005. Other jurisdictions are opting for standing general orders, and corresponding plan provisions.

Second, secured creditors have varying success in pro rata plans that provide for their claim. In a pro rata plan, the secured creditor can never be sure what will be received in any given month, therefore, making calculation of default rather difficult. Additionally, claims for fees, support or other matters, always threatened to dilute the pro rata payment. Finally, at times such plans actually accelerate payments on the claims to the detriment of other creditors. The changes call for monthly payments which are level and are paid and disbursed monthly. (But see §1326(a)(2) as to plan payments). The changes mandated by §1325(a)(5)(B)(iii) appear to contemplate paying the scheduled plan amount to the trustee for disbursement. This would obviate pro rata plans for secured claims. These payments would be the regularly scheduled “level” plan payments.

Third, a blend of the new provisions of §1326 and an unchanged portion of §1307(c) create a powerful enforcement mechanism. Under the prior Code, failure to make payments was a ground to dismiss the case. Simple enough. This, of course, remains the same under the new Code. However, §1307(c)(4) mandates that payments pursuant to §1326 must be made or the case shall be dismissed. Thus the §1326(a) mechanism outlined above is subject to enforcement, presumably both by the trustee and an injured creditor, on the grounds of §1307(c)(4).

Are These Changes in Any Way Beneficial to Debtors?

Many chapter 13 cases fail early on because of motions for relief from stay filed by secured lenders. If §1326 is successfully implemented, its effect could lead to a precipitous decline in the frequency of these motions, therefore a higher success rate for plans. Moreover, it is certainly believed by many that the payments by the trustee on these claims will be extremely reliable and eliminate the related litigation that detracts from the debtors’ main goal, which is of course, plan confirmation.

This additional role by the trustee may also lead to earlier intervention in those plans that are not likely to achieve confirmed status.

Is There Prior 13 History That May Predict the Success of the Trustee’s Payments?

Again, the author would suggest that there is. Many jurisdictions require all monthly payments to be through the trustee, by wage directive. Studies have found that chapter 13 cases that are subject to the mandatory wage deduction are much more likely to succeed than those that leave the discretion of making payments to the debtor. The trustee’s intervention cannot help but be a boon to the administration of this confirmation process and speed up confirmation.

Conclusion

Section 1326(a) has mandated that payments on secured property be made commencing 30 days after the filing. Trustees, debtors and creditors appear to be in accord that the best way to make this disbursement is through the Office of the Chapter 13 Trustee. Implementation can be by local rule, general order, plan provision or a combination of all three. The fact that the trustee will be making these payments should be beneficial both to the debtor and to the creditor. The provision likewise appears to eliminate pro rata plans to secured creditors, and also appears to require adequate protection in the amount of the plan payment from the outset. Similar requirements regarding debtors’ payments, to ensure completion of plans, have been successful in the past and it is hoped (I believe) by both bench and bar, this will be successful under the new version of §1326(a).

To answer the original question posed; Yes, in chapter 13 cases, Judge Learned Hand’s words may finally have come home. Only time and how the courts confront interpretation and enforcement of §1326(a) will tell.

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