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BANKRUPTCY LAW
Costs of the New Act
By Craig Rankin and Christopher Alliotts
O
n march 10, the U.S. Senate
passed the Bankruptcy Abuse
Prevention and Consumer
Protection Act of 2005. It is
widely expected that the
president will sign the bill shortly. If and
when he does, the new law will represent
the most significant revision to the
Bankruptcy Code, particularly as it relates
to consumers, since the Bankruptcy Reform
Act of 1978. Credit card companies and
other consumer lenders are championing the
new law as a major victory in their
campaign to significantly curb claimed
abuses of the current bankruptcy system by
individual debtors.
In general, the new law creates a
labyrinth of administrative, procedural and
substantive requirements that will certainly
make it more difficult for an individual to
obtain a discharge of his or her obligations.
These additional requirements place most of
the responsibility for their enforcement on
the bankruptcy courts and U.S. trustees. In
order to undertake such responsibilities, both
will need to increase their staffs, at no small
cost, in order to have the personnel
necessary to fulfill their new duties. But
individual debtors will bear the significant
burdens of navigating the requirements of
the new law. They will be hard-pressed to
afford the additional costs in terms of time
and legal fees in exchange for the limited
Craig Rankin is a partner at Los Angeles-based
bankruptcy boutique Levene, Neale, Bender,
Rankin & Brill. Christopher Alliotts is of
counsel to the Menlo Park, Calif., office of Los
Angeles-based SulmeyerKupetz.
MONDAY, APRIL 11, 2005
debt relief of the new law.
To be sure, a discharge in bankruptcy
should be limited to the “honest, but
unfortunate debtor.” And the new law has
helpful provisions relating to the disclosure
and filing of financial information that
should help to prevent abuse. Nonetheless,
the new bill removes the fact-intensive
question of abuse and how to remedy it from
the traditional province of the courts in
favor of a cumbersome set of rules, which
will probably discourage debtors and their
counsel from seeking relief under the
Bankruptcy Code.
Several sections address the
notion of consumer abuse
The principal provisions of the new
law addressing consumer abuse are
set forth in revised §§ 707, 521 and 362.
This article will discuss the principal
concepts of these provisions.
■ Presumption of abuse. Section 707(b)
sets forth a new substantive standard for
determining abuse. Among other things,
new § 707(b) will create a presumption of
abuse in every Chapter 7 liquidation case in
which the debtor’s current monthly income
less permitted expenses multiplied by 60
(which is the maximum number of months
for a payment plan under Chapter 13) is not
less than 25% of the debtor’s general
unsecured claims or $10,000, whichever is
less. Costs that can be deducted are limited
primarily to actual monthly expenses for
certain prescribed household expenses,
reasonably necessary health insurance,
disability insurance and health savings
accounts, support for dependents, payments
on account of secured debt and priority
claims, and costs of administering a plan
under Chapter 13.
The presumption of abuse may be
rebutted only upon a showing of “special
circumstances” justifying additional deduc-
tions from the debtor’s current monthly
income. The statute refers to such special
circumstances as a “major medical condi-
tion” or a “call or order to active service.” To
qualify, the debtor will have to submit a
statement under penalty of perjury
explaining the nature of the special
circumstances, itemize and document such
expenses and show that the additional
allowed deductions bring the debtor’s
current monthly income below the threshold
of 25% of general unsecured claims or
$10,000. Given the limited scope of this
exception, the presumption of abuse will
rarely be rebutted.
If the presumption applies, the court may
dismiss or, with the debtor’s consent, convert
the case to Chapter 11 or Chapter 13. As
one of the purposes of the new law is to
require debtors to repay a portion of their
debts as a condition to receiving a discharge,
debtors should expect that cases to which
the presumption of abuse applies will be
converted to Chapter 13. Under new § 362,
THE NATIONAL LAW JOURNAL
a dismissal, unlike under current law, will
have an impact on future cases brought by
the same debtor.
■ Mandatory budget counseling. Given the
presumption of abuse and its determinative
impact on whether a debtor receives an
outright discharge under Chapter 7 or is
forced into a payment plan under Chapter
13, the calculation of the debtor’s adjusted
monthly income is a critical document.
Section 707(b)(2)(C) specifically requires
the debtor to submit such a calculation (cer-
tified by counsel). Certainly, a debtor’s
calculation can lead to the same type of
disputes currently seen in Chapter 13 cases,
in which creditors contest the validity and
amount of specific items in the debtor’s
schedules of monthly income and expenses.
In addition to the detailed information
already required by the schedules and
statement of financial affairs, which is
discussed below, new § 521 will require a
debtor to meet with a “debt relief agency”
(DRA) for the purpose of preparing a budget
of income and expenses and file the budget
in the debtor’s subsequent bankruptcy case.
Undoubtedly, the DRA’s budget will serve
as a benchmark in the debtor’s case,
particularly as it relates to the presumption
of abuse, and any variation from it will have
to be well justified.
This approach raises four immediate
concerns. First, if the DRA’s budget is going
to be accorded importance, the DRA must
be truly independent and not subject to
influence by debtors, creditors, U.S. trustees
or the courts. Second, the fees and time
arising from this requirement are additional
burdens on debtors, who can ill afford them.
Third, this approach reduces the discretion
of bankruptcy judges and largely transforms
them into an enforcement arm of the DRAs.
In addition, the cost of providing the
courts and U.S. trustees with the necessary
personnel to construct, maintain and
monitor the DRA system contemplated by
§§ 526, 527 and 528, in addition to the other
burdens placed on them under the new law,
will be nothing short of enormous. Similarly,
the regulation of bankruptcy petition
preparers and other debt counselors under
§§ 110, 111 and 112 also calls for substantial
expenditures. These provisions also cannot
become effective without having the institu-
tional support in place, which could take
months or years to obtain and allocate the
necessary government funding.
■ Additional financial disclosures. Section
521 requires a debtor to file tax returns,
identification of third parties that are sources
of income or support and other information
relating to personal identity. If a debtor does
not provide such information in a timely
manner, the debtor faces conversion or
dismissal automatically or upon motion,
depending upon the circumstances. To avoid
these outcomes, the debtor will need to show
“justification” or “circumstances beyond the
control of the debtor.”
While government will
bear substantial costs,
individual debtors will
bear significant
burdens of navigating
the law’s
requirements.
As it is, trustees typically request such tax
and other personal information as part of
their 341 examination of a debtor. The new
statutory mandate to turn over this informa-
tion, along with the DRA’s budget, early in
the case may expedite resolution of the
matter. Further, the process should be more
transparent and less subject to manipulation.
Burden shifts to debtor to
protect private information
However, § 521 also expands the right of
creditors to obtain what may be sensitive
personal and proprietary information. Under
current law, creditors could typically obtain
this information pursuant to Rule 2004 of
the Federal Rules of Bankruptcy Procedure.
Under the new law, a creditor merely has to
make a “request” to the debtor. While § 107
provides a basis for protecting such informa-
MONDAY, APRIL 11, 2005
tion, it shifts the burden to the debtor to
obtain such protection from the court.
Given the inclusion of “Consumer
Protection” in the title of the new law, one
may fairly expect to find other provisions
protecting a debtor’s personal or proprietary
information. While there are specific
provisions protecting the privacy of
nondebtors, such protections for debtors are
otherwise virtually absent. Clearly, the
drafters placed supreme importance on the
early and complete disclosure of financial
information and viewed the surrender of a
debtor’s right to privacy as the quid pro quo
for bankruptcy relief.
■ Serial filings. Most abusive situations
involve multiple bankruptcy filings by the
same debtor who fails to comply with his or
her obligations under the Bankruptcy Code,
thus forcing a creditor to file multiple
motions to dismiss the case or for relief from
the automatic stay imposed by § 362. In an
attempt to remedy this abuse, several pages
of text have been added to § 362. The
additional provisions have a myriad of
substantive and procedural consequences to
the serial filer. As most practitioners know,
abuse takes many forms and it is virtually
impossible to anticipate, let alone draft
legislation that applies to, all kinds. Further,
the provisions add little to the inherent
authority of the courts to address and fashion
remedies for such abuses.
On balance, the new law represents a
cumbersome attempt to address claimed
abuses to the bankruptcy system. While
abuses certainly occur, the degree to which
they do remains subject to debate. It is also
unclear the extent to which abuse could be
prevented by better lending practices. The
bill actually commissions a study on
“indiscriminate lending,” one that many
practitioners believe should have been
undertaken before enacting this bill. Instead,
they are left to ponder the considerable cost
of bankruptcy reform and whether the cure is
worse than the ailment. NLJ
This article is reprinted with permission from the
April 11, 2005 edition of THE NATIONAL LAW
JOURNAL. © 2005 ALM Properties, Inc. All rights
reserved. Further duplication without permission is
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