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A Look at the New Bankruptcy Law
A paralegal's guide to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
(Originally appeared in print as "Final Notice")
On Oct. 17, 2005, the most sweeping bankruptcy reforms in decades took effect — the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Unsecured creditors such as credit card companies perceived that individuals and married couples were cheating them by filing Chapter 7 liquidation cases when they had the income to pay some portion of their unsecured debts. The creditors lobbied Congress for several years, resulting in BAPCPA, which includes a number of hurdles intended to discourage debtors with primarily consumer debts from seeking a Chapter 7 discharge. The new requirements make the role of paralegals in debtor practices more important than ever before.
A New Burden for Attorneys
BAPCPA adds a number of disclosures that attorneys must give to potential clients. It also specifically requires attorneys who represent consumer debtors in Chapter 7 cases to certify that they have performed a reasonable investigation into the debtor’s circumstances and determined that the filing is well grounded in fact and warranted by existing law or a good faith argument for extension, modification or reversal of existing law. The attorney must certify that the filing doesn’t constitute an “abuse” as defined by the statute. By signing the debtor’s bankruptcy petition, the attorney certifies that, after an inquiry, the attorney has no knowledge that the information in the debtor’s schedules is incorrect. According to 11 U.S.C.A. § 707(b)(4)(C) and (D), if the court finds abuse and the attorney violated rule 9011 of the Federal Rules of Bankruptcy Procedure, it can order the attorney to reimburse the trustee who brought the motion to dismiss for reasonable costs for the motion, including attorneys’ fees. The court also can assess a civil penalty against the debtor’s attorney, payable to the trustee.
The old law contained a presumption in favor of granting relief to the debtor, permitted only the court or the U.S. Trustee to bring the motion to dismiss and required a showing of “substantial abuse” to overcome the presumption. In contrast, BAPCPA has a “presumption of abuse” against the consumer debtor if the debtor doesn’t meet certain income and expense standards, allows any party in interest (including unsecured creditors) to move for dismissal of the debtor’s case and has dropped the term “substantial abuse” to just “abuse.”
These changes and others have made debtors’ attorneys re-evaluate their practices. Many have given up on bankruptcy rather than expose themselves to the greater risk of liability. Others have changed the way they practice and have doubled their fees to account for the increased risks, time, paperwork and investigation the new law requires.
Many firms that used to give free initial consultations now only take the debtor’s name and address over the phone. Then, the paralegal typically sends out the debtor’s questionnaire, a consultation agreement and statements (disclosures) required by BAPCPA with a cover letter explaining that everything should be filled out before the potential client comes in for the initial paid consultation. The paralegal briefly reviews the papers when the potential client arrives, and then the attorney goes over the documents with the potential client.
For an individual who is going broke, finding the money to hire a lawyer is a problem. The increased costs of providing competent representation are making it even more difficult for consumer debtors to get the advice they need and the fresh start they seek.
On the other end of the representation spectrum, BAPCPA increased the disclosures by (and the penalties against) bankruptcy petition preparers — nonattorneys that help debtors fill out the required forms (sometimes known as typing services). BPPs must give clients a disclosure form explaining that they can’t give legal advice or represent the clients in court. BPPs that follow the rules can do nothing more than type the information they receive from the clients onto the official forms. Even giving the clients a questionnaire explaining the information needed for the bankruptcy schedules and putting the information into a software program that places it appropriately into the forms can constitute the unauthorized practice of law. BPPs can’t provide any guidance to debtors regarding their rights under the law, so their comparatively small fees actually are no bargain at all.
Credit Counseling and Debtor Education
Another new requirement that affects a debtor is the need to seek credit counseling. The credit counseling provisions call for the debtor to go to a nonprofit credit counseling organization approved by the U.S. Trustee’s office. The approved organizations are different in each federal district and are listed on the U.S. Trustee’s Web site (www.usdoj.gov/ust). The debtor can go through credit counseling in person, by telephone or by Internet. Credit counseling generally costs about $50. A debtor must present a certificate that proves the counseling took place as part of the initial filing with the Bankruptcy Court.
Some law firms that represent consumer debtors help their clients with the counseling by establishing accounts with counseling organizations, registering the clients, reviewing the clients’ budget worksheets with them before the counseling session and providing an office telephone or computer for the session itself.
Consumer debtors must also file a certificate proving participation in a personal financial management instructional course (debtor education) to receive a discharge in Chapter 7 or Chapter 13. The course should provide information on creating a budget, managing money wisely and using credit safely. The U.S. Trustee’s office also approves nonprofit debtor education providers and has a list for each district. Many providers are on both lists, but in some districts, there are two or three times more debtor education providers than credit counseling providers.
Law firms handle the debtor education requirement in much the same way they deal with the credit counseling certification. Paralegals often provide clients with contact information and give debtors a deadline for finishing the course and providing the certificate. Paralegals make sure the certificate and all other documents are filed with the court.
Chapter 7 and Chapter 13
Probably the biggest change for individual debtors is the unprecedented requirement of means testing. The idea is to determine whether the debtor has the means to pay unsecured creditors a certain amount or percentage per month for the next five years. If the answer is yes, filing a Chapter 7 petition raises the presumption that the debtor is abusing the system and should be filing a Chapter 13 petition instead.
Being able to file a Chapter 7 petition rather than a Chapter 13 in many ways is an advantage to a consumer debtor. The goal of most debtors is to get a fresh start as quickly as possible by discharging their current debts. A discharge releases the debtor from liability for certain debts and prevents creditors from taking any action against the debtor to collect the debts. Chapter 7, with its no monthly payments and its typical four months to discharge, always has been preferred by those with no assets. Normally, the debtor would only voluntarily choose Chapter 13 when monthly payments would help to cure a default on a mortgage or car loan, or pay other nondischargeable debts, or when nonexempt assets would be taken in Chapter 7 and could be saved by paying creditors through a Chapter 13.
In a Chapter 7 case, the debtor uses state or federal exemptions to protect and keep certain property while a trustee sells the debtor’s nonexempt property, if any, and distributes the proceeds to creditors. The case only is open a few months, and at the end the debtor receives a discharge.
In a Chapter 13 case, however, the debtor pays all disposable income to a trustee, usually for a planned period of three to five years. The trustee distributes the funds to the debtor’s creditors based on the type and relative amount of the creditors’ claims. At the end of the plan, the debtor receives a discharge. Chapter 13 requires the debtor to wait much longer to achieve a fresh start.
Means Test Calculations
The law spawned a new six-page form for Chapter 7 filers called the Statement of Current Monthly Income and Means Test Calculation (Form B22A). On Form B22A, debtors first list their average monthly income for the six calendar months before the month in which they file. Married debtors who are not filing jointly must include their spouse’s income unless they can declare under penalty of perjury that “[m]y spouse and I are legally separated under applicable non-bankruptcy law or my spouse and I are living apart other than for the purpose of evading the requirements of § 707(b)(2)(A) of the Bankruptcy Code.”
The income sources are:
Debtors must list the monthly average in each category for the previous six months. For example, a debtor who was earning $5,000 per month but lost his/ or her job two months before filing would have four months of $5,000 and two months of no wages. The $20,000 total would be divided by six to give an average monthly income of $3,333.33. After this calculation is completed for all income categories, the debtor computes the total Current Monthly Income.
Next, the debtor multiplies the CMI by 12 to get an annual income. That number ($3,333.33 x 12 = $40,000 in the example) then is compared to the median family income for the debtor’s state and household size according to U.S. Census Bureau figures available from the U.S. Trustee’s Web site. If the number is less than or equal to the median family income, there is no presumption of abuse. The debtor is finished with Form B22A. For an individual debtor with no dependents, $40,000 would be below the median in New Hampshire, Maryland, Alaska and 17 other states.
If the debtor’s annual income is greater than the median family income, the debtor must go on to calculate deductions using Internal Revenue Service standards and some actual living expenses. Idaho, Texas and Alabama, for example, all have median family incomes (for an individual with no dependents) below $40,000. Median family income figures are adjusted periodically to reflect Census Bureau updates. The most recent adjustments became effective Oct. 1, 2006.
Debtors above their state’s median family income must plug in allowable expenses as deductions against their income to see if their disposable income is enough to trigger the presumption of abuse. Several standard expenses that the IRS uses in collection cases to determine how much delinquent taxpayers can afford to pay are also used in BAPCPA. The IRS has national standards for food, clothing, household supplies, personal care and miscellaneous. One person with a gross monthly income of $3,333 can claim to spend $556 on those items. BAPCPA lets debtors claim an additional five percent expense for food and clothing if they can provide documentation showing that the additional amount is reasonable and necessary (in the example, an extra $19).
The IRS has local standards by county for housing and utilities. Location truly matters. In California, a single debtor with no dependents could deduct $622 for utilities, repairs and maintenance (nonmortgage expenses) in Marin County, but only $311 in Kern County. The mortgage/ rent expense allowed in Marin County is $1,808 as compared to just $430 in Modoc County. Debtors can try to show that their home energy costs are higher than the IRS figures. Also, actual mortgage debt in excess of the IRS numbers is allowed. Renters with higher rent expenses have to argue for the additional amount on the form.
Local standards for transportation costs are broken into census regions. In the Northeast region, for example, Boston, New York, Philadelphia and Pittsburgh (along with certain named surrounding counties) each make up their own Metropolitan Statistical Area. Each MSA has its own allowances; anyone outside an MSA uses a regional figure. An individual with one car in Boston would deduct $300 for operating expenses, in New York $402 and in the Northeast region outside an MSA $311. The second component of transportation costs is ownership or lease costs. Monthly ownership or lease costs are national: $471 for the debtor’s first vehicle and $332 for the second. Like a home mortgage, the debtor’s actual secured vehicle debt and other ownership expenses can offset and even exceed the IRS figures.
After the IRS standard allowances, BAPCPA lets debtors deduct their actual expenses in several specific categories under what the IRS calls “Other Necessary Expenses.” These include:
Next, the debtor lists future payments on secured claims. Since the goal of the calculations is to find out how much the debtor could pay to unsecured creditors over five years by filing a hypothetical Chapter 13 case, the debtor has to calculate the Average Monthly Payment on secured debts for the next 60 months. Mortgage debts include taxes and insurance required by the mortgage.
A debtor with one more year to pay off a $400-per-month car loan would still owe a total of $4,800. That amount would be divided by 60 to reach the Average Monthly Payment of $80. The $80 gets deducted from the CMI in the calculation rather than the debtor’s current actual $400 monthly payment.
Another deduction accounts for an expense the debtor might have in a Chapter 13 plan. When a Chapter 13 debtor is behind in payments on a secured debt such as a home mortgage or a car loan at the time of filing, the debtor generally can “cure” the default and keep the house by making current loan payments and paying back the missed payments and other costs through the trustee-supervised plan. A Chapter 7 debtor can include one-sixtieth of that “cure amount” as a monthly deduction on Form B22A.
Congress has determined that certain unsecured claims have priority over general unsecured claims; they will be paid in full before general unsecured claims get a penny. The debtor can deduct one-sixtieth of all priority claims, which include:
The last deduction the debtor can claim is the projected average monthly Chapter 13 administrative expense. Debtors who are eligible to file a case under Chapter 13 (individuals and couples with regular income who owe less than $307,675 in unsecured debts and less than $922,975 in secured debt) must calculate what their monthly Chapter 13 plan payments would be. This calculation involves actual post-filing income and expenses that might vary greatly from the CMI and standard expenses used in Form B22A. The administrative expense is a predetermined percentage of the debtor’s monthly plan payment that will cover the Chapter 13 trustee’s expenses in accepting the payment and distributing funds to the debtor’s creditors.
Once again, location matters. The trustee’s administrative expenses are as high as 10 percent of the debtor’s plan payments in several districts, including the Central District of California, the Eastern District of New York and the Western District of Texas. In contrast, the Western District of Pennsylvania has actual administrative expenses of only 2.8 percent of the debtors’ plan payments. For Form B22A, debtors can deduct the portion of their hypothetical Chapter 13 plan payments that their hypothetical Chapter 13 trustee would be keeping.
Determination of the Presumption
The debtor now adds up all allowed monthly deductions and subtracts the total from the CMI to get monthly disposable income. The second level of presumption determination begins. The debtor multiplies disposable income by 60 (for the 60 months in a five-year plan). If the total is less than $6,000 (less than $100 per month), the presumption of abuse doesn’t arise. The debtor is finished and deemed worthy (or worthless) enough to file a Chapter 7. If the total is more than $10,000 (a little more than $166 per month), the presumption of abuse arises. Again, the debtor is done, but this time is presumed to be cheating creditors by filing a Chapter 7 instead of a Chapter 13.
If the 60-month disposable income total falls between $6,000 and $10,000, the debtor moves to the third and final level of presumption determination. The total is compared to 25 percent of the debtor’s total nonpriority unsecured debt. If the total is less than the 25 percent, the presumption doesn’t arise. If the total is more than the 25 percent, the presumption arises. In other words, if the unsecured creditors with nonpriority claims would get at least 25 cents on the dollar in the debtor’s fictional Chapter 13 case with fictional monthly income and fictional expenses, the debtor should not be filing a Chapter 7.
More Work for Paralegals
Bankruptcy was a practice area full of paperwork long before BAPCPA. Besides the petition, debtors had to file 10 schedules listing all their real and personal property; the exemptions they were claiming; their secured and unsecured priority and unsecured nonpriority debts; executory contracts and unexpired leases; co-debtors; and current income and expenditures. There also was a statement of financial affairs, a statement of intention (what the debtor planned to do with property that secured a debt), a matrix of all creditor addresses, and several other notices, disclosures and declarations.
In addition to Form B22A, BAPCPA has added a certification of employment income (with two months of pay stubs attached), the certifications of pre-bankruptcy debt counseling and post-filing debtor education, as well as other new notices, disclosures and declarations.
Bankruptcy paralegals generally have to keep track of all the paperwork, deadlines, appointments and rules. In most firms, paralegals prepare the petition, schedules, means test and other documents for review by their supervising attorney. Using petition filing software, they translate the information on the questionnaires — along with the debtor’s pay stubs, tax returns, bills, loan documents, eviction papers, etc. — into the format of the official bankruptcy court forms. Paralegals track down any missing information from the debtor, the creditors or the court to complete the forms. Also, as previously mentioned, many firms make sure a paralegal is close by to assist the client, if necessary, with the credit counseling and debtor education requirements.
The bottom line is bankruptcy paralegals make sure everything is done, everything is filed and everything happens when or before it should. Therefore, bankruptcy paralegals need to know the new requirements and timelines as well as the attorney.
Fortunately for paralegals in consumer bankruptcy practices, the burden placed on debtors by the new law means that leveraged practices need efficient legal assistants to handle much of the increased workload. Paralegals are having a greater impact than ever on the successful management of debtors’ cases.
Tim Wilkerson is a paralegal educator and former bankruptcy attorney. After 16 years in private practice in California, he returned to Colorado in 2003. He now teaches a variety of classes for the ABA-approved paralegal studies program and the business department at the Community College of Aurora. He has also presented classes on bankruptcy and legal writing at Estrin LegalEd’s Paralegal SuperConferences. His e-mail address is firstname.lastname@example.org.
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