There are those of the legal brotherhood and sisterhood who may liken bankruptcy practice to performing autopsies or treating cancer patients, and recoil from the horror of the circumstances confronting the prospective bankruptcy client.
There are others of us who may hold the sanctity of contracts in such high regard that they will not sully themselves with such impure actions as nullifying legally enforceable contacts, be they leases, purchase agreements or extensions of credit.
Nonetheless, if one has the stomach, nay the compassion, to represent such bereft souls in their depths of financial and economic despair, one can not only legally rescue said souls from their financial hells, but counsel them how to climb out of their dungeons of destitution.
This article identifies some of the challenges faced by debtors in bankruptcy cases and their attorneys in light of the 2005 BAPCPA1 amendments. For all attorneys, a basic understanding of bankruptcy law is a useful tool in the continuing practice of law.
II. The Debtor’s Plight
Often times, bankruptcy clients have castigated themselves and are in the throes of desperate shame and humiliation. They may reckon that their failure to live up to their financial obligations has stigmatized them, now and forever, as a loser - a failed human being - who will nevermore experience the security of economic stability. They cannot conceive of ever obtaining credit again.
However, armed with your vast grasp of BAPCPA and your pittance of knowledge concerning the Fair Credit Reporting Act, you may be able to help your client safely through the obstacle course of the Bankruptcy process and the minefield of self imposed slings and arrows.
You may tell your client that should they file for relief as a debtor under the current incarnation of the law that they will neither have to wear Scarlet letter ‘B’ as did Hester Prynne in The Scarlet Letter, nor place any other humiliating designation on their person or property.
Furthermore, credit bureaus may only list any negative events for ten years, but your client should realize that there are several other items which impact their credit scores including, late payments, exceeding credit limits, repossessions, foreclosures and bounced checks.
Rather than resort to filing for relief in Bankruptcy, clients may have resorted to desperate measures which only exacerbated their situation. They may have needlessly lost assets that the rather sparse exemptions under Illinois Law (as applied by the Bankruptcy Code) would have allowed them to keep.
For instance, too often, in a last attempt to salvage credit worthiness, debtors needlessly liquidate retirement plans, merely effecting a temporary remedy and then a massive 25% tax and penalty. Consequences will be imposed against them as a reward for their valiant efforts to maintain their monthly payments, even at unconscionable (in this writer’s opinion) but legal interest rates of rates of 32% for credit cards, or 750 % for "payday loans".
III. What You Keep: Exempt Property for Illinois Debtors:
A source of comfort for all Debtors’ should be that with the advent of the 2005 BAPCPA law, the State of Illinois continued to "opt out" of the federal law property exemption provisions. In addition, in 2005, the Illinois Legislature amended the longstanding Illinois property exemptions (See: 735 ILCS 5/121001) doubling the existing exemptions. The "new" exemptions, however, still only barely met those as set by the federal government in the 1997 Bankruptcy Code.
Illinois lawmakers doubled five (5) key exemptions: personal property, from $2000 to $4,000, motor vehicles from $1,200 to $2,400, tools of trade from $750 to $1,500, homestead real estate from $7,500 to $15,000 and personal injury settlement or awards from $7,500 to $15,000 per person, (these amounts are double for a joint filing of a married couple). Note that corporate entities do not have any such exemptions nor do they receive a discharge.
Though debtors in Illinois have benefitted from the increase in exemptions, debtors in the State of Florida have an unlimited real estate homestead exemption and Californians enjoy homestead exemptions over $100,000 for a joint filing. However, Illinois does allow unlimited exemptions for funds held in retirement plans, IRA’S and 401(k) accounts. In addition, our legislature has also exempted the entire amount of a Workers Compensation award or settlement from attachment by creditors. (See: Illinois Workers’ Compensation Act, 820 ILCS 305/1 et seq.)
IV. BAPCPA and Restraints on Repeat Filers:
On April 20, 2005, Congress increased the time for filing from six (6) years to eight (8) years before a debtor could obtain a discharge of debts after having previously obtaining a discharge (as measured from the date of filing in a previous case). As a result, that year saw a near panic among prospective clients to rush to file before the new law took effect in October, 2005.
Many of those that rushed to file were seeking a discharge of their debts as allowed by the Code. A Discharge is a wonderful thing for the debtor. To quote Judge Wedoff , Bankruptcy Judge for the Northern District of Illinois, Eastern Division, "the debtor [has] a fresh start after emergence from bankruptcy." ( See: In Re Carlo M Greco 08 B 03088 - Joel Levin v. Carlo M. Greco -08 A 00251.) Though a client may have sought Bankruptcy relief previously and now may need to file for Bankruptcy relief again because of health issues or job loss, the eight year bar complicates the situation.
There are still options, however. Although not eligible for an additional Discharge before the 8 year interval requirement, that client might be able to still obtain protection from his Creditors by filing for relief pursuant to Chapter 13. The debtor can propose a payment plan for up to 60 months to reorganize his or her debts, provided that all disposable income is being paid and that the discharge order is waived by the Client in the Plan of Reorganization.
V. BAPCPA Strict Pre-Requisites and Other Hurdles:
News stories in 2005 leading up to the October 17, 2005 effective date, detailed not only the dramatic increase in numbers of filers but also the concerns driving that increase. Horror stories of anticipated problems abounded. Many predicted a much more complicated process in which the documentation in the post-BAPCPA world would more than double. Debtors whose income was above the state’s median income might face tough challenges in a Chapter 7 case and perhaps would be required to file a Chapter 13 instead.
Others predicted that the law would unfairly impact low-income working people, single mothers, minorities and the elderly and that the changes would remove a safety net for those who have lost their jobs or face mounting medical bills. At the same time, these commentators noted that the law did nothing to restrain aggressive marketing of debt products or control the high rates charged by credit card issuers.
Evidence of this is that as part of BAPCPA, debtors are now required to obtain a Certificate of Credit Counseling from an agency approved by the United States Trustee’s office within 180 days of filing a new case. In order to receive a discharge, the debtor must also obtain a Certificate of Financial Management Education to be filed with the Bankruptcy Court. Additionally, and perhaps most notably, a bankruptcy debtor must now qualify through a Means Test predicated upon a comparison of the average income earned by the debtor (and spouse) during the last 6 months and the median income in the state for a similar sized household.
The application of the means test sometimes produces uneven results. Sometimes the debtor has too much income to file a Chapter 7 Petition for total discharge of their debt but not enough income to pay the amount required in a Chapter 13 reorganization. This now infamous process has produced what one Chapter 13 Trustee has called "Means Test Hell". In addition, some trustees will not recommend a debt repayment plan if the debtor is paying less than 100 % to their unsecured creditors while seeking to maintain a secured debt payment for a second home or such "luxury" items as a snow mobile or boat.
Finally, there is little doubt that the amount of documents as mandated by BAPCPA has increased. Typically, the debtor must submit four years of tax returns as well as 60 days pre-filing pay advices (a/k/a pay stubs). None of these requirements existed before BAPCPA, and it appears that these burdens were added to make it more difficult for Debtors to file.
VI. But which Chapter? (7 or 13):
Along with all of the new requirements and the additional paperwork, a bankruptcy practitioner still has to answer the most basic of questions: When should a client file a Chapter 13 reorganization plan instead of a Chapter 7 petition for complete discharge of their unsecured debt?
Some threshold questions to be answered include:
1) Are there non-exempt assets such as a house or car which would be sold by the Trustee in a Chapter 7 liquidation? (If yes, then perhaps a Chapter 13 should be closely considered)
2) Is the filer behind in their monthly payments for house or car because of a job loss or health crisis? (A Chapter 13 plan can be used to cure the arrearage)
3) Is household income too high to meet the Means Test standard? (If yes, a careful application all of the permutations of the Means Test may still yield Chapter 7 eligibility, otherwise a Chapter 13 is still an option)
4) Would their debt be otherwise non-dischargeable, such as most IRS obligations and Student Loans? (Chapter 13 plans can be used to pay these debts under court supervision and protection from creditors)
The answer to these questions will determine the direction the Debtor must take. Careful analysis in coming up with these answers is the key to a successful bankruptcy.
Electronic Case Filing Requirement:
As if the additional requirements of the new Code were not enough, now attorneys must electronically file anything connected with a Bankruptcy case; meaning you must be equipped with a high speed internet connection and a scanner for your computer. You probably also have to have a high functioning version of Adobe Acrobat to transform documents in the "PDF" format. In order to be allowed to file anything connected with a Bankruptcy case or the case itself, you must be certified by the Bankruptcy Court Clerks office. This requires attendance and completion of a training session on site at their offices. The Bankruptcy Clerk’s Office now functions as the gatekeeper to anyone who wants to file anything in a bankruptcy case.
Despite the attempts of BAPCPA, bankruptcy is still a viable option for consumers in today’s world. Bankruptcy, for better or worse, serves a necessary function in our nation’s current economic model. Despite the voluminous requirements of BAPCPA, many dedicated bankruptcy attorneys have soldiered on in the face of adversity, ambiguity and uncertainty. For potential debtors, there are a host of challenges which must be addressed before any actual relief can be achieved and for the practitioner, more analysis, more work, and more risk must be undertaken. But, as stated, bankruptcy still serves a valuable function in a capitalist society. So, for those who have decided to stay the course in the world of bankruptcy and master all the changes in law and procedure which have occurred, I can only wish, as Roy Rogers used to say, "Happy Trails to You".
1 BAPCPA refers to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.
Jay Reese is an attorney with offices is Addison and Bolingbrook, Illinois. He received his B.A. in 1971 with Honors from the University of Illinois Chicago and J.D. from the University of Illinois College of Law in 1975. Prior to starting his private practice in 1979, he held positions as a Hearing Officer at the Illinois Commerce Commission, Cook County Assistant Public Defender, Illinois Assistant Attorney General and Counselor to Commissioners - Illinois Industrial Commission. Jay loves to bike and golf with his spouse Kim who is pursing a PhD. at the UIC College of Nursing. They have 5 children from Epidemiologist to high school sophomore.