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2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
2005-10-14

I. PASSAGE AND EFFECTIVE DATE.

A. On April 20, 2005, President Bush signed into law Section 256, entitled the ?Bankruptcy Abuse Prevention and Consumer Protection Act of 2005? (hereinafter the ?Reform Act?). The Reform Act is the most substantial revision of the bankruptcy law since the 1978 Bankruptcy Code. The Reform Act aims to curb the amount of consumer filings given that personal bankruptcies outweigh business filings by more than 45 to 1.

B. The general effective date of the Reform Act is October 17, 2005.

C. With respect to the interest of creditors, the Reform Act?s provisions were enacted to respond to many of the factors contributing to the increase in consumer bankruptcy filings such as:

? lack of personal financial accountability;
? serial filings; and
? abuses in the bankruptcy system.


II. THE IMPACT OF THE REFORM ACT ON BUSINESS BANKRUPTCIES

A. Assumption and Rejection of Leases.

1. Pre Reform Act- A Debtor had to assume or reject a non-residential real property lease within 60 days of the petition date. If no action was taken, the lease was deemed rejected and the debtor had to surrender the property. However, Courts extended the 60-day time limit if the debtor was able to show ?cause?. In practice, the limitation period would be extended for months and in larger cases years.

2. The Reform Act provides that a debtor must assume a non-residential real property lease (a) within 120 days after commencement of the case, or (b) prior to confirmation of a reorganization plan, whichever comes first. 11 U.S.C. ?365(d)(4) (as amended).

The Court may extend the 120 day time period for an additional 90 days if the debtor can show cause. The non-residential lease assumption or rejection date can only be extended beyond the 210 days with the landlord?s ?prior written consent.?

3. Recognizing that a debtor may be forced to prematurely assume a lease, the Reform Act limits the administrative claim arising from the later rejection of a lease which was previously assumed to future rent ?for a period of 2 years following the later of the *rejection date or the date of actual turnover of the premises.? 11 U.S.C. ?503(b)(7) (as amended). Damages for ?going dark? and penalties are expressly excluded from the administrative claim under revised ?503(b)(7).

B. Preference Actions/Fraudulent Conveyance Actions.

1. Modification of the Ordinary Course Defense Under ?547 (c)(2). The Reform Act modifies the ordinary course of business defense, creating a less rigorous standard for establishing the defense.

(a) Pre Reform Act both subjective AND objective tests had to be satisfied. A creditor wishing to establish the ordinary course of business defense had to demonstrate that the disputed payment was:

o in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;

o made in the ordinary course of business or financial affairs of the debtor and transferee; AND

o made according to ordinary business terms.


(b) The Reform Act provides that the subjective OR objective test be satisfied to establish the ordinary course of business defense. A creditor asserting the defense must now only prove the disputed payment was in payment of a debt incurred by the detor in the ordinary course of business or financial affairs of the debtor and transferee, and was:

o made in the ordinary course of business or financial affairs of the debtor and transferee; OR

o made according to ordinary business terms.



2. Preference Cap - Pre Reform Act there was no monetary limit on a business debtor?s (Trustee?s) ability to pursue a preference payment. The Reform Act provides that a business debtor (Trustee) may not avoid transfers of less than $5,000.00. 11 U.S.C. ?547(c)(9) (as amended).

3. Fraudulent Transfer Look-Back Period- Pre Reform Act the Trustee could avoid any transfer made within one (1) year before the date of filing. The Reform Act provides that the Trustee may avoid any transfer made within two (2) years before the date of filing. 11 U.S.C. ?548(a)(1) (as amended). This change takes effect for cases filed after April 20, 2006.

C. Reclamation Rights.

1. Pre Reform Act, a creditor wishing to reclaim goods sold to an insolvent debtor could demand reclamation of such goods:

(a) within 10 days after the debtor received such goods;
(b) if the 10 day period expired after the debtor filed bankruptcy 20 days after the debtor received such goods.

2. The Reform Act provides that a creditor may now reclaim goods if they demand in writing reclamation of such goods:

(a) not later than the 45 days after the receipt of such goods by the debtor; OR
(b) not later than 20 days after the date of commencement of the case, if the 45 day period expires after commencement of the case.
11 U.S.C. ?546(c) (as amended).

3. The Reform Act also provides that if a seller of goods fails to provide the notice in the manner described above, the seller still may assert an administrative expense claim for ?the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor?s business.? 11 U.S.C. ?503(b)(9) (as amended).


D. Small Business Provisions.

1. The Reform Act defines a ?small business debtor? as a debtor who: (i) is engaged in commercial or business activities other than owning or operating real estate, (ii) that had debts less than $2 million dollars (excluding debt to insiders or affiliates); and (iii) has not had an unsecured creditors? committee appointed by the U.S. Trustee or has an unsecured creditors? committee that is not sufficiently active and representative to provide effective oversight of the debtor. 11 U.S.C. ?101 (51C) and (51D).


2. A small business debtor must comply with substantial periodic reporting requirements that will be developed by the Judicial Conference. If the small business debtor fails to comply with the reporting requirements without ?reasonable justification? then the Court is mandated to dismiss or convert the case upon motion of any interested party. It is unknown at this time whether the additional reporting requirements will replace the current monthly operating reports.

3. The Trustee or the debtor-in-possession is required to comply with new duties including, but not limited to:

? specific financial information such as balance sheet, statement of operations, cash-flow statement, Federal income tax return;
? attend meetings scheduled by the Court or the U.S. Trustee;
? timely filing all schedules and states of financial affairs;
? all post-petition financial and other reports;
? maintain insurance customary and appropriate to the industry

11 U.S.C. ?1116.

4. Section 1129 (e) of the Reform Act provides that a small business debtor must confirm a plan no later than 45 days after it is filed with the Court.


III. CONSUMER CHANGES TO THE BANKRUPTCY CODE.

A. Mandatory Credit Counseling.

1. The Reform Act provides that individuals are ineligible for relief under any chapter of the Code unless, within 180 days of their bankruptcy filing, they receive an individual/group briefing from a credit counseling agency, approved by the United States Trustee or Bankruptcy Administrator. ?109(h).

Exceptions are made for the following:

(a) For districts in which adequate counseling services are not available;

(b) For debtors who submit to the Court a certification describing exigent circumstances requiring immediate
bankruptcy filing and stating that the
debtor had sought the required briefing
at least 5 days prior to the bankruptcy
filing without being able to obtain it (in
which case the debtor is required to
complete the counseling within 30 days
after the bankruptcy filing); and

(c) For debtors who are incapacitated, disabled,
or on active military duty in a combat zone.

*** To date, the Approved Credit Counseling List has not been developed by the W.Va. U.S. Trustee?s Office.

B. Mandatory Debtor Education.

1. Section 106 (b) and (c) of the Reform Act provides that a discharge will be denied if a Chapter a 7 or 13 debtor does not complete a personal financial management instructional course.

(a) The United States Trustee or the Bankruptcy Administrator must determine that there are adequate approved educational programs available and the debtor is not disabled or incapacitated.

(b) Debtor must submit to the Court a certificate from an improved non-profit budget and credit counseling agency describing the services that have been provided to the debtor, as well as a copy of any repayment plans developed by the agency.

C. Means Testing Under Chapter 7

1. Section 707(b) of the Reform Act provides that a chapter 7 case will be dismissed or converted (with the debtor?s consent) to a Chapter 13, upon a finding of abuse by an individual debtor with primarily consumer debts.

2. Abuse is found:

? Unrebutted presumption of abuse under new means test if the Debtor?s income exceeds a defined state median (elements include debtor?s current monthly income; list of allowed deductions; and trigger points; and
? General grounds, including bad faith, determined under a totality of circumstances test.


IV. DEBTOR?S OPTIONS ON SECURED CLAIMS.

A. Pre Reform Act Section 521 provides that an individual debtor?s schedule of assets and liabilities disclose the Debtor?s ?intention? with respect to claims secured by the property of the estate within 30 days. Three options currently exist: voluntary surrender, redemption or reaffirmation. The Debtor is obligated to perform the intention within 45 days after filing of the Statement of Intention.

B. Section 521 led to a dispute as to whether a Chapter 7 debtor could continue making regular payments on a secured consumer debt without entering into a written Reaffirmation Agreement. The Fourth Circuit recognized that nothing in Section 521(2) requires the debtor to choose redemption, reaffirmation or surrender of collateral to the exclusion of all other alternatives. Thus, the Fourth Circuit held that Section 521 was not exclusive and the debtor could make regular payments on secured consumer debt without entering into a written agreement known as ? a ride- through jurisdiction.?


C. The Reform Act has abolished the ?ride-through? jurisdictions. If the debtor chooses to retain personal property and either reaffirm or redeem, Section 521(a)(6) provides that it must be accomplished within 45 days after the date first set for a 341 hearing. If the debtor fails to either reaffirm or redeem, then the automatic stay is vacated on the 46th day and the property ceases to be the property of the estate.

V. REAFFIRMATION AGREEMENTS.

A. The Reform Act has added new requirements to reaffirmation agreements and mandatory disclosures. For example, Section 524(k)(3), provides that the reaffirmation agreements must now include:

1. The rights of the debtor;

2. Specify the amount of the debt being reaffirmed;

3. Specify additional charges or costs imposed upon the debtor;

4. Specify the annual percentage rate and simple interest rate;

5. Provide a statement of the repayment schedule if elected by the creditor;

6. Provide a description of the property to which the lien is attached in the case of a secured debt;

7. Specify the original purchase price;

8. Provide a statement that the debtor has the right to consult an attorney;

9. Provide a statement that the reaffirmation agreement must be filed with the Court before it becomes effective; and

10 Provide a statement that the debtor has a right to rescind the reaffirmation within 60 days of filing.

B. A creditor may accept payments from the debtor before and after the filing of a Reaffirmation Agreement if the creditor believes in good faith that the Reaffirmation Agreement and the disclosure requirements are satisfied.

VI. REDEMPTION.

A. Pre Reform Act, an individual debtor had the right to redeem tangible personal property intended primarily for personal, family, or household use from a lien securing a dischargeable consumer debt if such property is exempted under Section 522 or has been abandoned under Section 554 by paying the holder of such lien the amount of the allowed secured claim.

Pre Reform Act, there was an issue as to whether the redemption amount could be paid in installments. The Reform Act has amended Section 722 to explicitly require that the redemption amount be paid in full at the time the property is redeemed.

B. Section 506 has also been amended to provide that the value for redemption shall be the replacement value without deducting for the cost of sale or marketing. Replacement value has been defined as ?the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time the value is determined.?

VII. DISCHARGE AND DISCHARGEABILITY.

A. Section 727 of the Reform Act has expanded the time between Chapter 7 discharges from 6 years to 8 years.

1. A debtor can be denied a discharge for the failure to complete an instructional course concerning personal financial management after filing his Petition. Entry of a discharge may also be delayed if there is an action pending in which the debtor may be found guilty of a felony or liable for a debt arising from violation of Federal Securities Exchange Act, a criminal act, intentional tort or willful reckless misconduct or a RICO civil penalty.

2. Luxury goods or services/ extensions of credit: Section 523(a)(2)(c) currently provides that consumer debts owed to a single creditor and aggregating more than $1,150.00 for luxury goods or services incurred by an individual debtor on or within 60 days before the Order for Relief, or cash advances aggregating more than $1,150.00 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days before the Order for Relief, are presumed to be non-dischargeable.


3. Section 523(a)(2)(c) has been amended to extend this presumption to debts incurred for luxury goods or services incurred within 90 days prior to the filing of the Order for Relief in the amount of $500.00. Extensions of credit on an open-end credit plan as defined in Section 130 in the Truth-in-Lending Act are presumed to be non-dischargeable if incurred within 70 days prior to the Order of Relief if the amount is equal to or in excess of $750.00.

VIII. ALTERNATIVE DISPUTE RESOLUTION.

The Court can decrease a consumer claim that is unsecured and dischargeable by an amount up to 20%, if:

1. the creditor refused to negotiate a reasonable alternative repayment schedule that was properly proposed by an approved counseling agency for the debtor;
2. the debtor?s offer was made at least 60 days before the petition was filed;
3. the repayment scheduled would have provided for at least 60 % payment of the debt over the repayment period of the loan or a reasonable extension of the repayment period; and
4. the repayment schedule?s debt is non-dischargeable.
5. If the transfer is made as part of an alternative repayment schedule made via an approved counseling agency, the trustee cannot avoid the transfer.
6. The new law does not define ?unreasonable?


IX. MISCELLANEOUS NOTEABLE PROVISIONS

A. Homestead Exemption. The Reform Act disallows the debtor?s homestead exemption if the house was acquired within 3.3 years of filing the petition. In-state purchases where the debtor rolls the equity from his other previous homestead to a new homestead remain exempt, but the debtor cannot increase his equity in the homestead by more than $125,000 in the 3.3 year period. Such changes are effective for cases filed on or after April 20, 2005.

B. IRA Exemption. If an IRA is tax exempt, it is also exempt from the debtor?s bankruptcy estate, up to $1,000,000 plus eligible rollover amounts. This exemption amount may be increased ?if the interests of justice so require.?


C. Lien Stripping Against Consumer Goods. The Reform Act limits a controversial debtor technique for reducing secured claims. In certain circumstances, Ch. 13 debtors will no longer be permitted to divide a creditor?s claim into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral and the unsecured portion discharged. If (1) the creditor has a purchase money security interest (PMSI); (2) the collateral for the debt consists of a personal automobile, purchased within two and one half years before the filing of the bankruptcy petition; or (3) the collateral for the debt consists of other consumer goods purchased within one year of the filing of the bankruptcy petition, then the debtor will be stuck with paying the debt in full or giving the collateral back.


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