The Associated Press yesterday released its findings on the recent surge in bankruptcy filings throughout the country. Despite a series of changes to the Bankruptcy Code in October of 2005 which were intended to make it harder for individuals to file bankruptcy and discharge their debts, the report finds that on the contrary, filings — particularly Chapter 7 filings — are on a dramatic rise across the country.
BAPCPA — What Is It?
For years leading up to the enactment of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the consumer lending companies had lobbied Congress for further protections from the losses they claim were attributable to fraudulent bankruptcy filings. Over the years as this bill was introduced, then re-introduced, and finally approved, it became clear to those of us in the industry that the final version was going to be something that did little more than muddy the waters of a system that had worked extremely well for more than 200 years.
Of the many provisions which make up BAPCPA, perhaps the two most directly aimed at preventing bankruptcy fraud were the inclusion of “Means Testing,” and the additional liability and diligence requirements placed on attorneys who represent debtors in Bankruptcy. A third road-block to filing bankruptcy was included, but has proved to have little consequence other than to create a new industry — credit and financial management counseling.
If filing bankruptcy after October 17, 2005, a debtor must now complete one of three “Means Test” forms. The means test is an analysis of the debtor’s financial situation, and must be completed before filing, as it indicates which chapter of bankruptcy you should start in. For the average consumer debtor, they are only concerned with chapters 7 and 13 bankruptcies (the third form being for chapter 11). A chapter 7 bankruptcy is a liquidation in which the Court will liquidate your non-exempt assets in return for discharging your liabilities (debts). A chapter 13 bankruptcy is a plan of repayment in which a debtor with regular income repays some or all of his or her debt to creditors in a court-approved repayment plan. To dissuade people from going straight to a chapter 7 bankruptcy (which is easier, less costly and generally results in all debts being discharged fully), Congress implemented the “Means Test” which evaluates your finances on two levels. First, the means test compares your gross household income to national standards for median income. If, for example, you have a household of two people living in California, then so long as your gross annual household income is less than $65,097.00 (as of the date of this article), you can proceed to file a chapter 7 bankruptcy. If over that amount, then you move on to the second part of the test.
I’ll briefly deviate from the means test calculation to cover an important point. The means test is a kind of “pass-fail” test, however, even if you fail you are not absolutely guaranteed to have to file a proceeding under chapter 13 of the bankruptcy code. Failing the means test means that a presumption arises that your proceeding straight to a chapter 7 bankruptcy is “Abusive.” The presumption is rebuttable, and there are circumstances in which you may fail the means test, but be able to overcome the presumption of abuse.
So, back to means testing. If your gross household income exceeds the median, then the next step is to analyze your income as compared to your expenses. However, under means testing, you are only allowed in most expense categories to deduct IRS’ National Standards for Allowable Living Expenses and Local Standards for Transportation and Housing and Utility Expenses. These standardized expense amounts can be obtained from the U.S. Trustee’s website — www.usdoj.gov/ust/ which also has a great discussion of the BAPCPA. The sole exceptions to the use of national standardized expense figures involves secured debt on your primary residence and necessary vehicles. In these categories, where they exceed the national and local standards, you may deduct the actual expense to a degree. There have been some instances of the U.S. Trustee’s office challenging the claim by debtors of what they believed to be “excessive” secured debt —primarily as it relates to the debtor’s home, however, those cases have generally run in favor of the debtor.
One final note on means testing — it is not applicable in three areas. First, where a debtor’s debt is primarily non-consumer, or business debt, the debtor need not submit to means testing. Second, means testing does not consider social security income, so debtors collecting SSI are not required to include that income in their means testing. Finally, since 2008 members of the National Guard and Armed Forces Reserve are not required to submit to means testing so long as they are on active duty and up to 540 days after the end of your active duty, so long as the active duty was 90 days or longer.
In the end means testing may have steered some debtors into chapter 13 rather than chapter 7, however, I strongly believe that for the most part, means testing has done little more than create a lot more work for debtors and attorneys pre-filing, and has not changed much the statistics of who files, how many bankruptcies are filed, and what chapter of bankruptcy people file. The statistics in the AP report indicate a tremendous surge of filings — in the last year, filings are up 91% in Arizona, 82% in California, 127% in Delaware (where a lot of large companies are organized), 84% in Idaho and 79% in Nevada. In the past 12 months, nearly 1.2 million debtors filed for bankruptcy protection, an overall increase of 46% from 2008 and 81% from 2007.
Attorneys as Gatekeepers
A second control implemented by BAPCPA was the increased scrutiny and liability placed on the shoulders of attorneys representing debtors in bankruptcy. Several of the provisions implemented with BAPCPA are controversial, however, perhaps the most controversial is the lumping of attorneys representing debtors with “Debt-Relief Agencies.” Sections 526, 527 and 528 of the Bankruptcy Code delineate the new duties imposed on attorneys as a result of this new classification. In some districts, the Courts have held that Attorneys are not bound by the provisions of 526-528, however, where the issue has either not been decided, or has been decided against attorneys, we are now handcuffed to a degree in our representation of debtors. The complaint from attorneys is that the provisions of 526-528 create a micro-management of the attorney-client relationship when an attorney is hired in a bankruptcy or debt assistance context. Further, the provisions of BAPCPA that deal with attorney due diligence effectively treat everyone filing for bankruptcy, or considering doing so as if they were the “moral equivalent of a shoplifter” (quoted from In re Ott, 343 B.R. 264 (Bankr. D. Colo. 2006)).
In effect, the BAPCPA has turned attorneys into gatekeepers for the bankruptcy system — forcing us to assume, in part, the role of Trustee and Judge by investigating and scrutinizing the information provided to us by our clients. Again, as with the means testing, this provision has created a substantial amount of additional work required to be done by attorneys who represent debtors, and has actually created a whole new industry — bankruptcy attorney due diligence firms. These firms give attorneys the ability to pull credit reports to ensure that their clients have disclosed all debts, and in some instances provide additional services including asset valuation and searches. From my perspective, the entire concept of having to second-guess your client runs afoul of the intended nature of the attorney-client relationship which is built on mutual trust. It also reduces the bankruptcy attorney to a technician rather than a professional. That being said — does my firm perform the required due-diligence? Absolutely — until this provision is struck down by a court of proper jurisdiction, we are stuck with the laws as written by Congress and the consumer creditor lobby.
The AP report is a good indication that the intended and stated basis for the BAPCPA — to dissuade abusive and fraudulent bankruptcies — was merely a rouse for consumer creditors to further bully people who find themselves in desperate financial circumstances. Sure, there were cases filed prior to 2005 which were abuses of the bankruptcy system, but I would venture to say that given the numbers being filed today, the statistics remain roughly the same. Consumer bankruptcies filed by competent, professional insolvency attorneys represent true relief for those in real need. I do not know any attorneys in the bankruptcy bar who value their license to practice law, or before the US Bankruptcy Court so little that they would risk losing it by filing abusive bankruptcies; especially in light of the slim margins on consumer bankruptcy cases.
As a prospective bankruptcy client, you need not be afraid of the rumors of bankruptcy having been made harder, or impossible to file. Legitimate candidates for bankruptcy can obtain in most cases the same relief they did prior to 2005. Today, it just requires more work on both our parts.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.