One idiomatic expression that translates well in any language is "his bark is worse than his bite" (which I suppose is a testament to the universality of both dogs and common sense).  This expression comes to mind when considering BAPCPA’s new bankruptcy "means test."  This eighth installment of the BAPCPA Consumer Bankruptcy Outline for cases decided between 6/1/05 and 5/31/06 addresses issues arising in the chapter 7 context, including BAPCPA’s barking dog, the "means test."

In signing BAPCPA, President Bush issued a statement in which the "means test" was cited as one of BAPCPA’s prime movers.  The President said:

In recent years, too many people have abused the bankruptcy laws. They’ve walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for low-income workers who already face financial obstacles. The bill I sign today helps address this problem.

Well, it turns out there’s more bark than bite to the means test, and that the many modifications to the means test over the nine years it took to get BAPCPA enacted diluted it to such a great extent that only a handful of debtors will ever flunk it.  Even before BAPCPA became effective, however, Chicago’s Judge Eugene Wedoff was among the first to have predicted as much.  He wrote:

Perhaps the best-known and most discussed feature of [BAPCPA] is its means test. Indeed, means testing has been a central feature of the bankruptcy reform legislation that Congress has considered in every term since 1997.  As reflected in the comments of Senator Grassley set out above, means testing has a simple purpose: to measure the ability of Chapter 7 debtors to repay debt and then, if they have sufficient debt-paying ability, to make them repay at least some of their debt–likely through Chapter 13–in order to receive a bankruptcy discharge. This Article suggests, however, that BAPCPA’s means test is not simple and is not likely to achieve what its sponsors intended.  See Hon. Eugene R. Wedoff, Means Testing in the New § 707(b), 79 Am. Bankr. L. J. 231 (2005). 

Still, even if the new law’s bark is worse than its bite, the new law has taken a significant bite out of bankruptcy filings by consumers, at least in the short term.  As reported here, with consumer bankruptcy filings down to about 1/3 of last year’s levels, Sam Gerdano (the American Bankruptcy Institute’s executive director, and former chief legal counsel to BAPCPA’s sponsor, Senator Charles Grassley) remarked, "[t]he big story is, Congress wanted to suppress the number of filings, and they have succeeded mightily."

In the past year, cases interpreting the means test in the chapter 7 context have been few and far between, with no reported cases addressing the nuances of the means test head on (at least in the chapter 7 context).  Still, as Judge Wedoff’s article makes clear, calculating whether someone passes or flunks the means test is one of BAPCPA’s most mystifyingly mind-numbing tasks, and fundamental misunderstandings still abound among experienced practitioners. 

I think the most interesting of all cases cited below is that of Judge Leslie J. Tchaikovsky in In re Pak, 343 B.R. 239 (Bankr. N.D. Cal. 2006) (see Section D, below), where the court held that there is no safe harbor for debtors who flunk the means test on the petition date such as would prevent the court from exercising its own discretion and dismissing the case under Code section 707(b)(3)(B)’s "totality of circumstances" test.  Most notably, Judge Tchaikovsky weighed in on the raging debate between "respected academics" Marianne B. Culhane and Michaela M. White on the one hand, and Judge Wedoff, "also highly respected for his expertise on BAPCPA," on the other. In the end, Judge Tchaikovsky rejected Culhane and White’s views, reflected in this article (entitled Catching Can-Pay Debtors: Is the Means Test the Only Way?, 13 Am. Bankr. Inst. L. Rev. 665 (2005)), which they wrote for purposes of rebutting certain of Judge Wedoff’s views in the article cited above (which views were adopted by Judge Tchaikovsky).  In conclusion, Judge Tchaikovsky held, "while BAPCPA did severely limit judicial discretion…, [it] has not been entirely eliminated."

Thanks for reading.Continue Reading BAPCPA Outline: Part VI, Sections A-I: Chapter 7 Liquidations — Means Testing: Is Its Bark Worse Than Its Bite?

This seventh post of the BAPCPA Consumer Bankruptcy Outline for cases decided between 6/1/05 and 5/31/06 addresses one of BAPCPA’s worst provisions, the requirement that all consumer debtors obtain credit counseling in order to be eligible for bankruptcy.  Because these provisions determine whether a debtor is eligible to file for bankruptcy relief, courts were forced to address the meaning of BAPCPA’s new credit counseling provisions early on.

BAPCPA’s rigid credit counseling provisions have spawned perhaps the best BAPCPA-bashing that we’ll likely ever again witness.  The most famous (discussed here) was Judge Frank Monroe who — while ordering the dismissal on Christmas eve of a petition filed by another hapless consumer who failed to seek pointless credit counseling — ripped into Congress for selling consumers out to special interest groups, courtesy of BAPCPA.  Other judges inquiring into the purpose of the credit counseling requirements have similarly been left scratching their heads wondering, for example, why the case of an indigent debtor who couldn’t afford credit counseling should be dismissed when the debtor’s so poor that "cause" exists to waive the bankruptcy filing fee.  Still, courts agree that BAPCPA’s inflexible wording compels such dismissals.

In sum, what started out as an nice idea in theory (encourage people to think about bankruptcy alternatives) has sadly degenerated into an expensive shakedown, with consumers being charged about $50 on average by some faceless entity who provides "instant counseling" and "instant certification" (including over the internet) in about as much time as it takes to get a passport photo.  Not surprisingly, recent studies conclude that only about 3% of those receiving mandatory credit counseling since October 17 have opted for the non-bankruptcy workout alternative (though that percentage is likely to come down over time), thus proving that BAPCPA’s credit counseling requirement is truly an exercise in futility (though perhaps without all its Sisyphean implications).

So who are these credit counseling agencies in whose hands Congress entrusted our fellow bankrupt Americans?  Well, they’re quite well to do, to be sure, with industry revenues topping about $1 billion annually.  As such, they likely had $ignificant influence over the pa$$age of these provi$ion$.  As reported here, they’re also teeming with potential and actual conflicts.  Then, of course, there’s that remarkable IRS news release of a couple of months ago in which the IRS reported that a two-year examination of the "tax-exempt" status of the top 41 credit counseling agencies (representing about 40%-50% of the industry’s revenues) will result in the revocation of the tax-exempt status of  EVERY ONE of the 41 agencies examined (with the prospects looking equally grim for the next 22 on the list)!

In short,  BAPCPA’s credit counseling additions are a debacle.  It doesn’t matter much anymore, however, as the law’s not going to change for a good long while.  So we’re stuck with it whether we like it or not.  I suppose, as Judge Monroe said, you can thank the House and the Senate for that.  (And wouldn’t it be nice to see just one aspiring politican make a campaign issue of this in the upcoming election?) [NB: Anyone wondering why Sen. Hillary Clinton missed the vote will find the answer here.  What better day for her husband to schedule elective surgery?]

As for the cases involving credit counseling, if there’s a single area of BAPCPA’s developing jurisprudence where you’re sure to find a case to support pretty much any proposition you need, this outline demonstrates that credit counseling is that area.  Some issues generating the most splits include:Continue Reading BAPCPA Outline: Part V, Sections A-J: Credit Counseling — BAPCPA’s Exercise in Futility

This sixth post of the BAPCPA Consumer Bankruptcy Outline for cases decided between 6/1/05 and 5/31/06 addresses homestead exemptions.  As reported here, this area absorbed a signficant amount of judicial energy in the early days following BAPCPA’s enactment as courts wrestled with the conflict between the "plain meaning" of BAPCPA’s inartfully drafted "homestead cap" and the apparent legislative intent to extend the $125,000 cap to all states.   As Arizona’s Judge Randolph J. Haines (who is no stranger to philosophical debates) noted in BAPCPA’s first reported decision, the language "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law" is clear, and its "plain meaning" is that the $125,000 homestead cap applies to debtors in states that allow the debtors to elect between federal and state exemptions, but not in states like Arizona (or Florida or Nevada) that do not.  In reaching this conclusion, Judge Haines had this to say about BAPCPA’s legislative history:

Legislative history is virtually useless as an aid to understanding the language and intent of BAPCPA. The section-by-section analysis in the Report of the House Committee on the Judiciary merely provides a gloss of the statutory language of BAPCPA § 322. It does not provide an example of the kind of problem or abuse it was intended to correct, nor a citation to a case whose result it sought to alter. Consequently it provides no clue to the intended significance of the "as a result of electing" language. Both the majority and the dissents to the 1997 Commission Report are similarly unhelpful as to the significance of this language.  In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005).

Judge Haines’ remark about the uselessness of legislative history as an aid to understanding BAPCPA surely carries some merit, as the "common wisdom" in this post suggests.  It just hasn’t carried the day as regards BAPCPA’s homestead cap provisions, and courts around the nation have uniformly rejected Judge Haines’ literalist approach.

Other parts of the homestead exemption outline offer little of interest to anyone other than those toiling in the trenches of consumer bankruptcy (and perhaps acute insomniacs too).  Stay tuned, however, for upcoming summer required reading lists of recent bankruptcy-related articles of interest. Continue Reading BAPCPA Outline: Part IV, Sections A-N: Homestead Exemptions — “To Cap or Not to Cap?” — That’s No Longer a Question

This fifth post of the BAPCPA Consumer Bankruptcy Outline addresses the issue of attorney liability under BAPCPA arising from the new "debt relief agency" provisions of Sections 526, 527, and 528 (see pdf at pp. 88-91).  Absent a court order holding otherwise (like the one entered here), it’s generally agreed that these provisions regulate the day-to-day relationships between consumer bankruptcy lawyers and their clients.

I and others have wondered why it is that consumers, treated under BAPCPA as the "moral equivalents of shoplifters" (at least according to Judge Brooks in In re Ott, cited here at Outline Section I.A.5), can’t get the same type of unfettered representation from their attorneys that persons charged as shoplifters (and much worse) get from their criminal attorneys.  

In the end, the "debt relief agency" provisions look more like an effort to create a consumer bankruptcy lawyer clone who, much like the ever-multiplying "Agent Smith" from The Matrix-Reloaded, speaks and does precisely as directed with ruthless efficiency.  Such micromanagement of the attorney-client relationship and attorney speech has spawned three important court challenges to the DRA provisions.  Links to important pleadings filed in these three cases are found below.

Section A of this Part III references bankruptcy court decisions that address (or refuse to address) whether attorneys are "debt relief agents" under BAPCPA.  Section B cites to two federal court cases in which local attorneys have brought suit against local US Trustees to directly challenge the constitutionality of BAPCPA’s DRA provisions.
Good luck to all you agents out there!Continue Reading BAPCPA Outline: Part III, Sections A & B: Attorneys as “Debt Relief Agencies” — Court Decisions and Constitutional Challenges

This fourth post of the BAPCPA Consumer Bankruptcy Outline for cases decided between June 1, 2005 and May 31, 2006 addresses the so-called "hanging paragraph" at the end of Section 1325(a), a good example of how BAPCPA could have used a few good proofreadings before being finalized.  Even though the "hanging paragraph" follows subparagraph Section 1325(a)(9), its real consequence relates to Section 1325(a)(5), and is generally understood as preventing a "cram-down" of an auto lender’s secured claim at less than the full amount of the lender’s claim — regardless of the car’s true value (which is almost always less than the claim amount) — if the loan was made within 910 days of the debtor’s filing of the case.  The "hanging paragraph" (see pdf at pp.170-71) is perhaps the greatest proof that auto lenders are BAPCPA’s big winners.  It provides:

For the purpose of paragraph [1325(a)](5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] preceding the date of the filing of the petition, and the collateral for the debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for the debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

Part II of my BAPCPA consumer outline that follows addresses the "law of intended consequences" (i.e., as the auto lobby intended, no bifurcation of the auto lender’s secured claim into secured and unsecured parts based on the value of the collateral) and the "law of unintended consequences" (i.e., as the auto lobby likely didn’t intend, other features of the loan — such as interest at the contract rate — may stripped from the loan in a "cram down" of the secured auto lender)Another unintended consequence, as provided in Ezell (see section II.B.3 below), is that chapter 13 debtors who surrender their cars may have no obligation to the auto lender at all (even if the value of the car is less than the amount owing on the loan) on the theory that the lender can’t assert an unsecured deficiency claim on surrendered collateral, but rather must accept the car back in full satisfaction of its claim against the debtor.

Interestingly, given the number of 0% or very low interest rate auto loans made in recent years, the "unintended consequence" of a court’s not requiring the contract rate to be applied in a cram-down may actually favor non-subprime auto lenders as to whom, under Tilla "market" rate of interest that is substantially higher than the low interest rate associated with the original loan may be ordered.  Subprime auto lenders, however, would be expected to lose out if the Till rate of interest is applied because the interest rates associated with such subprime loans typically exceed the interest rate that would be applied under Till.

In the outline below, "910 cars" refer to cars purchased by the debtor within 910 days of the filing and secured by a purchase money security interest in the car.  A "910 creditor" is the lender holding such a  "910 claim."Continue Reading BAPCPA Outline: Part II, Sections A & B — The Hanging Paragraph: Section 1325(a)(*) — The “Car Loan Protection” Provision: The Law of Intended and Unintended Consequences

This third post of the BAPCPA Consumer Bankruptcy Outline addresses attempts at uniformity by the bench in rendering decisions on BAPCPA’s confusing laws.  These attempts have been manifested in various forms, including: 

  • En banc review established by rules of the local court;
  • Expedited appeals (reported here) (Virissimo case);
  • Jointly drafted opinions; and
  • Combination of multiple cases under a single caption to address a common issue of law (such as reported here). 

The goal of this outline, which will surely become tiresome for most by the final post with the outline’s 180th subsection, is to contribute to these valiant attempts at uniformity.  When I first learned bankruptcy in the early 1980’s following passage of the Bankruptcy Code of 1978, it was often said that "you can find a bankruptcy opinion to support just about any proposition you need." 

Readers of this outline will see that BAPCPA’s onerous, conflicting, poorly drafted, incomplete, and hanging provisions have — in the short time since the Act’s passage — given rise to a myriad of conflicting opinions that simply cannot be reconciled and as to which the conflicts of bankruptcy’s early days pale in comparison.  At least back then you didn’t have to ignore the statute’s "plain meaning" quite as often.  Still, litigants are likely to find a BAPCPA opinion to support just about any proposition they need.

Hopefully this outline will help those debtors, litigants, judges, and clerks wanting to "see the forest (or wood) for the trees" be better equipped to choose among conflicting options.

Good luck to all!Continue Reading BAPCPA Outline: Part I, Section C – Judicial Commentary: Attempts at Uniformity

This second post, corresponding to Part I, Section B of the BAPCPA / Consumer Bankruptcy Law Outline is titled:  BAPCPA’s "Plain Meaning" Not Followed.

This section points to 5 cases over the past year where bankruptcy judges were so confounded by BAPCPA that they felt compelled to deviate from its "plain meaning" in order to avoid virtually nullifying certain of its key provisions.Continue Reading BAPCPA Outline: Part I, Section B – Judicial Commentary: BAPCPA’s “Plain Meaning” Not Followed

The "Great American Consumer Bankruptcy Outline" — a 102 page treatise on consumer bankruptcy case law developments in the past year — is now (thankfully) complete.  Special thanks to my wife and two children, without whose unwavering support, this project never would have been completed.

This first post, corresponding to Part I, Section A of the Outline is titled:  "Judicial Commentary on BAPCPA:  Venting."  This section points to 7 cases over the past year where bankruptcy judges, with varying levels of frustration, told us what they really thought about BAPCPA.  [NB:  Thanks to Professor Jean Braucher who coined the term "venting" in describing some judicial reactions to BAPCPA.]

Links are to Westlaw.  Those who do not have access to Westlaw may contact me directly if they would like to view a particular case, though all federal courts maintain their own websites where judicial opinions may be accessed by the public free of charge (e.g., Bankr. N.D. Ill. – Judge Wedoff opinions).  Because all the outline’s case references identify the deciding judge, you should be able to find the opinions online with minimal effort.

Thanks for reading.  I’ve updated the table of contents here.

Continue Reading BAPCPA Outline: Part I, Section A – Judicial Commentary on BAPCPA: Venting

Early this spring, when BAPCPA bashing had become “so very smashing!” (culminating in this post about the latest BAPCPA bashing opinion), I returned to my desk one sunny afternoon and retrieved from my voice mail a message from someone identifying himself as Marvin Isgur, who wanted to know if I’d like to come down to Galveston, Texas in late June to speak before about 300 consumer bankruptcy lawyers at this conference on recent consumer bankruptcy case law developments.

My initial reactions to Judge Isgur’s voice message were much akin to those of Noah, as portrayed by Bill Cosby in this classic skit.  First, when I heard the message say “Steve, this is Marvin Isgur…,” I thought — like Noah — “what do you want, I’ve been good?”  Then when the message continued, and Judge Isgur said he’d like me to deliver the opening presentation on recent consumer bankruptcy law decisions, I thought — like Noah — “what’s an ark?” (i.e., what’s consumer bankruptcy law)?

Yet, having placed the “don’t mess with

Texas” label on Judge Isgur here (following his issuance of the first opinion clearly demonstrating BAPCPA’s harsh new world for consumers), I pretty much viewed his proposal as an “offer you can’t refuse.”

A few days after accepting, the organizers at University of Texas Law School’s Center for Continuing Legal Education made sure to let me know “the most popular event every year at the conference has been the opening presentation by Professor Elizabeth Warren from Harvard and by Professor Jay Westbrook of the

University of

Texas.”  In fact, they added, “the presentation is so popular each year that we thought that we would find an expert to try to fashion a comparable program on recent developments in Consumer Bankruptcy Law.”  As for preparing an outline on the topics you’ll be speaking about, attached you’ll find the 113 and 119 page outlines that Professors Warren and Westbrook, respectively, distributed at previous conferences.  Oh, and good luck!

It was then that I truly understood the perils of accepting the “offer you can’t refuse.”  As noted here, such career choices may well spell one’s doom.  Judge Isgur, however, encouraged me to have no fear, and that everything would turn out fine.

Well, many panic-driven, sleep-deprived days and nights later, I’ve now completed that “Great American Consumer Bankruptcy Outline,” a 90 page magnum opus encapsulating pretty much every consumer bankruptcy opinion worth reading (or not so worth reading) in the past 12 months.

So, for those of you who’ve wondered what happened to me these past couple of months, and why I have cut down on my blogging–well, now you know.

In the coming days and weeks, I’ll publish here periodic installments from each of the outline’s 17 sections.  Alternatively, you can get the glossy version by signing up for the conference (be sure to bring your Hawaiian garb, though).

Here’s the Table of Contents to the Outline:Continue Reading The “Mother of All BAPCPA Consumer Bankruptcy Law Outlines,” Soon Available for Your Reading Pleasure