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On 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 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 deductions from the debtor’s current monthly income. The statute refers to such special circumstances as a “major medical condition” 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, 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 (certified 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 institutional 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.” 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 information, 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 information, 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. 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.

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