The State of Bankruptcy 18 Months after BAPCPA

The State of Bankruptcy 18 Months after BAPCPA

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As we all know, the number of bankruptcies filed this year is substantially lower than the number filed 12 months prior. The consensus appears to be that the lower filings are the result of a large number of filings just prior to the effective date of BAPCPA (our court's filings for October 2005 were up 525 percent) and due to misinformation on the part of consumers. Even Sen. Grassley (R-Iowa), a leading sponsor of the legislation, stated in the Sept. 29, 2006, Congressional Record that after enactment, "many consumers who truly need bankruptcy were scared away."

A portion of the drop may also be due to the fact that it has become both more expensive (chapter 7 filing fees increased from $209 to $299) and more of a hassle to file bankruptcy. There are now many more filing requirements, so both pro se debtors and represented debtors have more pleadings to complete and "hoops" to jump through. There is also a greater risk of liability for debtors' attorneys, so debtors' attorneys have had to raise their fees, to cover both the additional work required and the additional risk.

Abusive Filings Minimal

In the Eastern District of Kentucky, perceived abuse was far greater than any actual abuse, so the number of debtors who still qualify to file chapter 7 bankruptcy is virtually the same. In fact, in a review of our cases just prior to the effective date of BAPCPA, the income of the majority of our chapter 13 debtors was below the new median levels, so they could have qualified to file chapter 7 instead of chapter 13 if they had filed under the new law. A speech given by Clifford J. White III, Acting Director of the Office of the U.S. Trustees, at the ABI conference on Oct. 16, 2006, indicates that this same situation exists across the nation. The U.S. Trustees' Office found that in 94 percent of the cases filed, the income of the individual debtors was below their state's median income. In the remaining 6 percent of the cases, "slightly less than 10 percent were 'presumed abusive.'" If my math is correct, then 6/10 of 1 percent of the cases filed are "presumed abusive."

Many Unresolved Issues

The results of a survey performed by the Federal Judicial Center and completed by 157 bankruptcy court judges in April 2006, and a review of the case law since Oct. 17, 2005, indicates that there are many unresolved issues.

When a case is presented without proof of prior credit counseling and with no request for a temporary or permanent exemption, 91.2 percent of the courts accept the case as "filed." However, there is a lot of variation in how the matter is handled from that point—35.9 percent of the time a deficiency notice is issued giving the debtor a specific amount of time to cure the defect; 28 percent of the time a Show Cause Order is issued; 16.4 percent of the time no action is taken unless requested by a party; and in 10.9 percent of the time the case is dismissed.

There is also disagreement among courts as to what qualifies as "exigent circumstances" that would allow a temporary exemption from the credit counseling requirement. The majority of the reported cases appear to be taking a fairly tough stance on what qualifies. Of those who responded, 34.5 percent of the judges consider imminent foreclosure/ eviction to be an exigent circumstance. Opinions differ on whether a hearing must be held when the issue of "exigent circumstances" is raised. The variable practices continue even after a court determines that there were no exigent circumstances. Some courts dismiss the case, and other courts treat the matter as if a case had never been filed and strike the case. This difference in treatment could have great impact on a future filing by the same debtor as it could affect whether the automatic stay was only temporarily in effect or perhaps not in effect at all in the future case.

The majority of judges (87.5 percent) have processed applications by debtors to waive the payment of filing fees. There is a difference of opinion, however, on whether such a matter requires a hearing or not, and a wide variety of bases are used to deny such an application. The number one reason for denial is the ability by the debtor to pay in installments, followed by a number of denials based upon a debtor's income being above 150 percent of poverty level. Judges' thoughts also vary over whether the payment of attorney fees is a basis to deny a request for waiver of payment of filing fees. Interestingly, 13 percent of the responding judges have waived part, but not all, of the filing fee due. This may be a result of a desire to have funds with which to pay trustee fees.

Disparate opinions on automatic dismissal of a case under §521(i) exist. Some judges issue Show Cause Orders and others issue warnings, while others take no action unless a party requests an Order of Dismissal. Another unresolved issue related to automatic dismissal is whether the 45 days extends the time within which a debtor has a right to file required documents or whether 45 days is the outside limit—but a court may dismiss a case sooner.

On handling motions to impose or extend the automatic stay, 66.4 percent of the responding judges require a hearing to be held, and 61.8 percent grant more than two-thirds of the motions. There is a great deal of variation, however, on what the moving party must establish to prevail and how it must be presented. Some courts require live testimony, some courts require only affidavits, and other courts require affidavits and live testimony in the event of a dispute. Interestingly, a major area of variance is the judges' opinions on who must be served with notice of these types of motions. There seems to be agreement that the trustee and the affected secured creditor must receive notice, but some courts required all parties, others require notice to all creditors and some require notice to all "interested parties"—including attorneys for secured creditors in a previously filed case.

There are some provisions, controversial at the time of passage, that seem to be nonissues up to this point in time. Only six judges who responded to the survey had issued opinions on whether "debt relief agency" provisions applied to debtors' attorneys. All six concluded that debtors' attorney are "potentially" debt relief agencies. It is also somewhat surprising that 83.2 percent of the judges have had no issues arise regarding means testing. Of the 16.8 percent that have had a means test issue, the issue was generally related to calculation of the current monthly income or whether a particular expense was deductible.

Protection for Consumers?

It appears that little progress has been made to implement the "consumer protection" aspects of BAPCPA, with the exception of reaffirmation agreements. While the provisions of BAPCPA ostensively provide greater protection of retirement savings and education savings, the reality is that most debtors do not have retirement or educational savings accounts. In addition, it does not appear that most credit card companies have revised their monthly statements to warn consumers of the impact of only making "minimum payments."

In the cases filed in our court, it does appear that the number of reaffirmation agreements being filed is less than prior to BAPCPA. It appears that the warnings given to debtors in the new official reaffirmation agreement form may be a deterrent.

Other Impacts

There have been other peripheral, but major, impacts on the bankruptcy courts clerks' offices during this timeframe. In order to accommodate the collection of the many new statistical figures required by BAPCPA, the courts were forced to switch their computer systems to a new operating system. The total cost is unknown. The Statistical Division of the Administrative Office of the Courts was also required to upgrade the computers that they used to compile statistics. Since through BAPCPA Congress legislated vast revisions in statistical data collection, the Judicial Conference proceeded with its own changes in order to collect statistical information that would be beneficial to the Administrative Office of the Courts for long-range planning. Courts were already scheduled to test and install a new release (Version 3.0) of the case management/electronic case filing (CM/ECF) software shortly after BAPCPA was enacted. BAPCPA required the creation of a further release of the CM/ECF software (Version 3.1) as a result of the E-Government Act and the Judicial Conference Privacy Guidelines. Since Version 3.1 was essentially an upgrade of Version 3.0, bankruptcy courts had to rush to install Version 3.0 before they could install Version 3.1. Due to the rapid transition required between two different operating systems and two new releases of software, there was little time for troubleshooting and testing during each stage, so for many courts, the transitions did not occur smoothly.

Conclusion

The passage of BAPCPA and other closely related changes caused much uproar and angst in the legal community, including the bankruptcy courts. The immensely poor drafting of the legislation has already generated a lot of case law and appeals and has necessitated endless hours of effort by bankruptcy court judges and clerk's staff to interpret what is, in fact, required. I agree with Sen. Grassley on one thing about BAPCPA when he stated, "so far, I think it is too soon to make firm judgments."


Footnotes

1 I appreciate the assistance of Grace Dupree, our training manager, with this article.

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Friday, December 1, 2006