The Journal of The DuPage County Bar Association

Back Issues > Vol. 17 (2004-05)

The New Bankruptcy Code: Goodbye Consumer Chapter 7 Cases
By Michael J. Davis

On April 20, President Bush signed what has been termed the biggest rewrite of U.S. bankruptcy law in a quarter century. The bill, titled the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Bill"), takes direct aim at the ability of consumers to discharge their debts through Chapter 7 Liquidation and Chapter 13 Reorganization by making the process more difficult and more expensive for consumers. Unfortunately, in the wide net cast by Congress in approving this bill, they have also made it much more difficult for lawyers to represent consumer clients who want to file bankruptcy.

Though the changes in the U.S. Bankruptcy Code (the "Code") wrought by the Bill impact every single chapter of the Code, the main changes are directed at consumers and the lawyers that represent them. This article will focus on the practical interaction between an attorney and a potential bankruptcy client under the new Code.

First, let us visit the world of bankruptcy as it is today. If a client wants to file bankruptcy, a series of questions are asked regarding the Debtor’s assets and liabilities to calculate the liquidation value of a Debtors estate, if any, and to determine if there are any issues as to whether the debts are dischargeable. The attorney then makes an appointment to meet with the potential Debtor and obtain information on the Debtor’s creditors, income, past earnings, and transfers of property. After this meeting, the petition, schedules and statement of financial affairs is prepared, reviewed by the client, and signed. It is worthy to note that the information is provided by the client and certified by the client, and reaffirmations that Debtor’s may want to enter into are the product of negotiations between the creditor and the Debtor. In addition, if a Debtor continues to make payments to a secured creditor but doesn’t reaffirm the debt, the secured creditor will oftentimes allow the Debtor to keep the collateral as long as the Debtor continues to make payments.

The world of bankruptcy under the new Code is vastly different. First, and most important, if you counsel clients about bankruptcy, you must advertise yourself as a "debt relief agency." You must disclose to the public in advertising that "we help people file for relief under the Bankruptcy Code." You cannot advise a Debtor to incur more debt in contemplation of bankruptcy and you must disclose all costs associated with your representation ahead of time, enter into a written contract with the Debtor and disclose that an attorney is not necessary to file bankruptcy. There are significant other disclosures that an attorney must make and are all contained in the new Code1.

Because you help clients in bankruptcy and thus have been branded a "debt relief agency," there is even more good news. Attorneys who represent Debtors must make "reasonable inquiry to verify that the information contained" in petitions and schedules are "well grounded in fact."2 The new Code reads, "The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petitions is incorrect."3 In other words, an attorney who represents clients in bankruptcy is certifying that the information on the petition is correct. If the information on the petition is not correct and results in the case being dismissed, the attorney must reimburse the U.S. Trustee for any costs associated with the case, and the court may impose a civil penalty against the attorney.4

If you are still reading this article, and are still interested in representing clients in bankruptcy cases, let us review the information that must now be included in the petition. The information required to file for bankruptcy under the new Code is significantly more detailed, and includes the following additional information:

1. A certification that a Debtor has been through credit counseling must be attached to any petition filed under the new Code.5 No individual may be a debtor under the new Code unless they have received credit counseling from an "approved nonprofit budget and credit counseling agency," either in an individual or group briefing, within 180 days prior to filing.6 A credit counseling agency must be approved by the U.S. Trustee,7 and must qualify as a credit counseling agency under the guidelines laid out in a completely new section of the Code.8

2. Satisfaction of the "means test." Before a Debtor can file, they must pass muster under the new means test mandated by the Code.9 The purpose of the "means test" is to assist in identifying Debtors who have the financial capacity to pay some money to their creditors. Though this requirement is already part of the implied, if not stated, intention of the current Code, the new Code makes the requirement much more explicit. The means test involves comparing a potential Debtor’s income to the average income of the state where the Debtor is located. If a Debtor’s income is above that, then whether the potential debtor can file a Chapter 7 case, or are required to file a Chapter 13 case, depends on ratios of their debt to excess income. The formula is contained in Sec. 707(b) of the new Code.10 The median income for Illinois can be located on the U.S. Census Bureau website

3. Much more extensive list of supporting documents that a Debtor must provide. Under Sec. 521 of the new Code, in addition to the list of creditors, and information on the schedules and statement of financial affairs, Debtors must provide a certificate of credit counseling; evidence of payment from employers, if any, received 60 days before filing; statement of monthly net income and any anticipated increase in income or expenses after filing; tax returns or transcripts for the most recent tax year; tax returns filed during the case including tax returns for prior years that had not been filed when the case began; and a photo ID, among other items.11

Notice to be given by a Debtor to creditors must be to the address designated by the creditor, either in communications to the Debtor or by the creditors preferred address as provided to the court by the creditor. Any notice to creditors must include account numbers.12 Failure to provide information within 45 days after the petition has been filed (with the possibility of a 45-day extension) results in automatic dismissal of the case.13 At this point it is important to recall that any miscue in a petition resulting in dismissal of the case results in costs to the Debtors attorney, since the Debtors attorney is certifying all documents and analysis.

Issues regarding discharge of debts have also been changed. Under Section 523 of the current Code, a debt incurred by the Debtor for purchases of luxury goods or services within 60 days preceding the filing, in excess of $1,225, are presumed to be non-dischargeable; and cash advances made within 60 days preceding the filing, in excess of $1,225, are presumed to be non-dischargeable. Under the new Code, a debt incurred by the Debtor for purchases of luxury goods within 90 days preceding the filing of the bankruptcy, in excess of $500, are non-dischargeable; and cash advances made within 70 days preceding the filing, in excess of $750, are non-dischargeable. This change is the section most directly attributable to the credit card lobbying groups who were responsible for the eight year battle resulting in the new Code being passed.

The rules regarding reaffirmation of debts have also changed considerably. A Debtor must perform the Section 521 statement of intention as to secured property within 30 days after the date set for the first creditors meeting. If the Debtor fails to either redeem the property or reaffirm the debt within 45 days after the Sec.341 meeting of creditors, the automatic stay is automatically terminated without any requirement to bring a Motion, and the creditor is allowed to exercise whatever remedies it has under applicable non-bankruptcy law, subject to a request by the trustee to extend the stay upon providing adequate protection to the creditor. In addition, Section 524 of the new Code now contains extensive new disclosures, detailing the rights that the Debtor has and specifying the amount of debt reaffirmed, rates of interest, when payments will begin, filing requirements with the court, the right to rescind, and a certification that the agreement does not impose an undue hardship on the debtor. In Section 524 of the new Code, such agreements are presumed to create a hardship if the Debtor’s expenses, including the reaffirmed debt, exceed income. If there is such a presumption, the Debtor must explain to the court why they can still afford to satisfy the debt .

Last, but not least, the court may not grant a Chapter 7 or 13 discharge unless the Debtor has completed an education course in personal financial management approved by the U.S. Trustee.

Although there are many other changes contained in the new Code, the ones noted here give examples of how the new Code affects attorneys who currently practice bankruptcy. Needless to say, between these changes and the new requirements regarding mandatory electronic filing of all documents that takes effect July, 2005, practicing bankruptcy law is changing rapidly. An attorney who does consumer bankruptcy cases must now advertise themselves as a debt relief agency, collect a vast amount of documents, make sure that all the correct creditor addresses and account numbers for creditors are on a petition, certify that the information on a Debtor’s bankruptcy petition has been reviewed and that it is the result of a reasonable inquiry, make sure that a Debtor reaffirms any debt for collateral that the Debtor wants to keep, and that the Debtor takes their financial management course. In effect, an attorney must audit a Debtor’s life for the two year period before the filing of the bankruptcy case, and should not list anything on the bankruptcy petition without first seeing documents that support the information. If information is not listed, there may be a presumption that the case can be dismissed and the Debtor and the Debtors attorney held personally liable for the missing information.

Any discussion regarding the costs of bankruptcy among attorneys who concentrate in bankruptcy law indicate that the cost of a consumer bankruptcy case will triple, and that the costs of malpractice related to bankruptcy cases will increase because of the requirements of attorney certification. The effect of the new Code is somewhat reflected in the provisions that treat creditors more favorably, but the real heart of the changes that make the new Code more onerous for consumers is contained in the vastly increased procedural requirements mandated for consumers and attorneys which makes a consumer bankruptcy case more costly. These procedural changes will result in fewer consumer bankruptcy cases and fewer bankruptcy attorneys in the long run.

1 See Sec. 526-528 of the U.S. Bankruptcy Code.

2 See Sec. 707(b)(4) of the U.S. Bankruptcy Code.

3 See Sec. 707(b)(4)(C) of the U.S. Bankruptcy Code.

4 See Sec. 707(b)(4)(A) of the U.S. Bankruptcy Code.

5 See Sec. 521 of the U.S. Bankruptcy Code.

6 See Sec. 109(h) of the U.S. Bankruptcy Code.

7 Id.

8 See Sec. 111 of the U.S. Bankruptcy Code.

9 See Sec. 707(b) of the U.S. Bankruptcy Code.

10 See Sec. 707(b) of the U.S. Bankruptcy Code.

11 See Sec. 521 of the U.S. Bankruptcy Code.

12 See Sec. 342 of the U.S. Bankruptcy Code.

13 See Sec. 521(i)(2) of the U.S. Bankruptcy Code.

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