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