The Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005

Scott A. BachertHarned, Bachert & Denton, LLP

Bowling Green, Kentucky

New Bankruptcy Exemptions• KRS 427.170 was amended this year to allow

debtors in Kentucky to use the federal exemptions located at 11 U.S.C. §522(d).

• Debtors may elect state exemptions in the state in which they have lived for 730 days prior to bankruptcy. If they have moved within 730 days, the state exemptions are those for the state in which they lived for the majority of time for 180 days before the 730 day period.

• Residence: $18,450.00

• Motor Vehicle: $2,950.00

• Household Goods: $9,850.00– The exemption amount may not exceed

$475.00 in any particular item.

• Jewelry: $1,255.00

• Professional Books and Tools: $1,850.00

New Bankruptcy Exemptions

• Unmatured Life Insurance Contract

• Certain Transfers of Life Insurance Policies– Code § 542(d)(8) provides details connected to

this exemption.

• Professional Health Aids

• Certain Alimony Payment and Retirement Plan Benefits– Code §§ 542(d)(10) and (d)(12) explain in detail

the requirements of exempting these types of benefits.

• Certain Payments Connected to Civil Judgments– Code § 522(d)(11) provides which types of

payments are exempt including payments for an award under a crime victim’s reparation law.

New Bankruptcy Exemptions

• The “Wild Card” Exemption:

– Code § 522(d)(5) provides for the exemption of the debtor’s aggregate interest in any property, not to exceed $975 plus up to $9,250.00 of any unused amount of the exemption provided for a debtor’s residence.

“Debt Relief Agencies”

• Code § 101(12) defines “Debt Relief Agencies” as “any person who provides bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.”

• Code § 101(3) defines “Assisted Person” as “any person whose debts consist of primarily consumer debts and the value of whose nonexempt property is less than $150,000.00.”

– Note: An assisted person as defined by the BAPCPA could be a creditor. E.g., A landlord pursing a claim in bankruptcy.

Affirmative Obligations Imposed on Debt Relief Agencies.• General Disclosures and Notice

Requirements:

– A brief description of Chapters 7, 11, 12 and 13

– A brief description of the services available from credit counseling agencies

– A statement advising of the consequences that can result from concealing assets and the fact that all information supplied by the debtor is subject to audit by government entities

• Code §§ 342(b) and 527(a)

Affirmative Obligations Imposed on Debt Relief Agencies• General Notice and Disclosure Requirements:

– The 527(b) Statement must be supplied within three business days of the first consultation. The Statement is statutorily prescribed and informs the Debtor, that it is not necessary to hire an attorney for bankruptcy representation.

– The 527(c) Statement must also be supplied within three business days of the initial consultation. The Statement must provide the Debtor with information including: how to value assets at replacement value, determine current monthly income, how to determine disposable income, how to complete the list of creditors, and how to value exempt property at replacement value as defined in § 506.

– NOTE: Many of the notices and disclosures required by the BAPCPA must be maintained by Debt Relief Agencies for two years.

Affirmative Obligations Imposed on Debt Relief Agencies• Retainer Agreements:

– A retainer agreement with the debtor must be executed within five business days after the first date when any bankruptcy assistance is provided to an assisted person.

– The BAPCPA dictates certain provisions that must be in the agreement, including:

• The services that will be provided;• The fees or charges for such services;

and• The terms of payment.

– Code § 528(a)

Affirmative Obligations Imposed on Debt Relief Agencies• Advertisements:

– Advertisements indicating that a debt relief agency provides services in the areas of credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, or inability to pay any consumer debt is required to include the phrase: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”

• Code §§ 528(a)(3), (4) and (b).

Restrictions on Debt Relief Agencies

• The BAPCPA prohibits Debt Relief Agencies from advising assisted persons to incur more debt in contemplation of filing bankruptcy or to pay an attorney for services connected to a bankruptcy case. Code § 526(a)(4).

Restrictions on Debt Relief Agencies

• Failure to comply with the new restrictions can result in an attorney’s liability for any fee charged to bankruptcy clients. Further, the Attorney General may bring an action to enjoin violations, recover monetary damages, and recover the costs of brining any such action. The United States Trustee and the Bankruptcy Court is granted similar authority along with statutory support for imposing civil fines.

Means Testing

• The Trustee or any creditor can bring a motion to dismiss under Code § 707(b) if the debtor’s income is greater than the state median income. Abuse is presumed if the debtor’s current monthly income (as determined by an average of the previous six months) less secured payments divided by sixty, less priority debts divided by sixty, less allowed expenses permitted by the IRS, less certain other allowed expenses, is greater than $100 per month. Debtors who meet this new standard can be shifted to Chapter 13. The presumption of abuse may only be rebutted by demonstrating “Special circumstances that justify additional expenses or adjustments of current monthly income.”

Means Testing: Official Form 22

• Official Form 22 is to be utilized and filed with the court to determine if the Debtor is eligible for Chapter 7 relief under the Means Test.

• Official Form 22 is available at the uscourts website http://www.uscourts.gov/rules/interim.html.

Means Testing: Official Form 22

• Part I: Certain Disabled Veterans are excluded from any form of means testing.

Means Testing: Official Form 22• Part II Computation of Current

Monthly Income (“CMI”): CMI is a monthly average of defined “income” received in the six calendar months prior to the bankruptcy. The “income” to be included in this average is:– Income from all sources; and– Any amounts paid on a regular basis

for the household expenses of the Debtor, the Debtor’s dependants, and the Debtor’s spouse.

• Note: benefits received under the Social Security Act are not included.

Means Testing: Official Form 22

Means Testing: Official Form 22

• Part III: Comparison of CMI to the applicable state median income.

• The Means Test presumptions of abuse are inapplicable to Debtors whose income is below the state median.

Means Test: Median Income for Kentucky

• 1 Earner = $32,172

• 2 People = $37,932

• 3 People = $46,383

• 4 People = $55,001

– Median Income figures found at: www.usdoj.gov/ust

Means Testing: Official Form 22

• Part IV: Adjustment to CMI of a married Debtor, not filing jointly, whose spouse’s CMI was included to determine standing related to median income.

Means Testing: Allowed Deductions

• Deductions under IRS Standards– The IRS National Standards provide a

single allowance for food, clothing, household supplies, personal care, and miscellany, depending on income and household size.

– The IRS Local Standards provide deductions for housing and utilities and for transportation, with different amounts for different areas of the country, depending on the debtor’s family size and number of vehicles.

– Other Necessary Expenses as categorized by the IRS: The Debtor may deduct actual expenses in these specified categories.

– Allowable Expenses found at www.usdoj.gov/ust

• Additional statutory expense deductions– The Code allows six special expense

deductions.

Means Testing: Official Form 22

• Part V: Allowed Deductions

– The form provides lines to enter all of the numerous allowed deductions.

– Note: Part V of the form also provides spaces to enter deductions from CMI for payment of secured and priority debt, as well as a deduction for administrative expenses that would be incurred if the debtor paid debts through a Chapter 13 plan.

Means Test: Determination of Eligibility for Chapter 7.

• The Debtor’s CMI less the Allowed Deductions determines if a presumption of abuse is applicable:

– Monthly Income < $100 per month = no abuse

– Monthly Income > $100 per month = potential abuse

• Abuse if debtor could pay 25% of non priority unsecured debt

– Monthly Income > $166.67 per month = abuse

Means Test: Official Form 22• Part VI: Determination of Presumption.

– The form provides lines to calculate whether the Debtor’s CMI after Allowed Deductions generates the abuse presumption.

New Educational Requirements for Debtors in Bankruptcy• Credit Counseling: No individual may file

bankruptcy unless they have received credit counseling from an approved counseling agency within 180 days of filing. The United States Trustee has approved two agencies for this district that provide the counseling in person, over the telephone, or over the internet. The websites are: http://www.credit.org/ and http://www.moneymanagement.org/.

– Additionally, a third agency that provides counseling in person or over the telephone only has been approved for this district. Its website is: http://www.greenpath.com/.

• Personal Financial Management Classes: Debtors must complete classes from an approved agency to receive a discharge. The Bankruptcy Court’s clerks office has stated that classes will be available over the internet.

Reaffirmation Agreements• New Information is Required:

– Debtor’s Monthly Income

– Current Monthly Expenses

– Amount available for debt reaffirmed

– Statement from Debtor in support of Reaffirmation Agreement; “No undue hardship”

• Presumption of Hardship:

– If Debtor’s Monthly Expenses and Payment on Reaffirmation is greater than Monthly Income.

Reaffirmation Agreements• The signature of a Debtor’s

attorney constitutes certification that:– The Debtor was fully informed;– The Agreement does not represent an

undue hardship; and– If a presumption of undue hardship

exist, that counsel believes the Debtor will be able to make the payments.

• Code §524• Note: The new reaffirmation

agreement requirements do not apply when the debt reaffirmed is owed to a credit union as defined in § 19(b)(1)(A)(iv) of the Federal Reserve Act.

Time Between Discharges• Code § 727(a)(8) is amended to

subject a Chapter 7 debtor to denial of discharge if the debtor received a Chapter 7 or 11 discharge in a case filed within 8 years. Similar limitations are imposed for other chapters.

Automatic Dismissal for Failure to File Documents and Schedules• In addition to the list of creditors,

schedules of assets, liabilities, income and expense, Debtors must provide:– A Certificate of Credit Counseling;– Pay stubs for the Prior 60 days;– Statement of monthly net income and any

anticipated increase in income or expense after filing;

– Tax returns or transcripts for the most recent tax year;

– Tax returns filed during the case; and– A photo ID, among other items.

• Failure to provide the documents within forty-five days after filing (with a possible forty-five day extension) results in automatic dismissal.

Notice to Creditors

• Code § 342 provides that notice to a creditor will not be effective unless it is served at an address filed by the creditor with the court or at an address stated in two communications from the creditor to the debtor within the 90 days prior to filing. To be effective, the notice must also include the account number used by the creditor.

• Preferred addresses and forms to submit preferred addresses for creditors can be found at the National Credit Registration Website: www.ebnuscourts.com (the “electronic bankruptcy noticing” website).

Attorney Certifications and Sanctions under Code § 707

• The signature of a debtor’s attorney on the petition constitutes certification that:

– the attorney has “performed a reasonable investigation under the circumstances”;

– the filing of the petition is not abuse; and

– “the attorney has no knowledge after an inquiry that the information in the schedules filed with [the] petition is incorrect.”

Attorney Certifications and Sanctions under Code § 707

• The court has authority to award costs and fees, payable by Debtor’s counsel, to a trustee that successfully pursues a motion to dismiss or convert due to abuse.

• If the court finds any violation of Rule 9011 by the Debtor’s attorney, it may award a civil penalty payable to the trustee.