Bankruptcy Laws: Page 2

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• 3.  Credit counseling an debtor education

Under new § 109(h), individuals are ineligible for relief under any chapter of the Code unless, within 180 days of their bankruptcy filing, they received “an individual or group briefing” from a non-profit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator under standards set forth in a new § 111 and published by the clerk of court. Typically, this will involve the interaction of the debtor with a 501 (c) (3) tax-exempt credit counseling agency. Among these standards is a requirement that the agency provide its services without regard to the debtor’s ability to pay any fee. The required briefing that may take place by telephone or on the Internet must “outline” the opportunities for credit counseling and “assist … in performing a related budget analysis.” Exceptions are made (1) for districts in which adequate counseling services are determined by the U.S. trustee or bankruptcy administrator not to be available (a determination that must be reviewed annually); (2) for debtors who submit to the court a certification describing circumstances requiring immediate bankruptcy filing and stating that the debtor had sought the required briefing at least five (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 (3) for debtors who are incapacitated, disabled or on active military duty in a combat zone (with limiting definitions for incapacity and disability). The debtor is required to file a certificate from the credit counseling agency describing the services provided, and file any debt payment plan developed with the agency. Recently, the IRS has been cracking down on credit counseling organizations and revoking their 501(c)(3) status. Based on past abuses, many credit counseling firms do not provide appropriate credit educational materials and have been cited for making improper referral fees and in accepting “fair share” payments from the underlying creditors for whom payment plans are arranged. The loss of many of these firms at the exact time that the new law is to be implemented may create a substantial backlog of cases waiting to meet these requirements. This may result in an unintentional pool of assets being tied up in the process.

The Office for United States Trustees is required to develop a financial management and educational training curriculum and materials to educate individual debtors “on how to better manage their finances.” The curriculum is to be tested in six (6) judicial districts over an 18-month period beginning no later than 270 days after enactment of S. 256. The Director is required to evaluate the effectiveness of the curriculum and materials, as well as other consumer education programs, and report to the Congress no later than three (3) months after the end of the test period as to the effectiveness and cost of the programs.

Even while the U.S. trustees’ test program is being evaluated, debtors in both Chapter 7 and 13 will be required to complete “an instructional course concerning personal financial management” to assure their discharge, as long as the United States trustee or bankruptcy administrator determines that there are adequate approved educational programs available and the debtor is not disabled or incapacitated as defined in § 109(h), or on active military duty in a combat zone. Non-excepted Chapter 7 debtors would be subject to denial of discharge under a new § 727(a) (11) for failure to complete an approved program, and non-excepted Chapter 13 debtors would be denied a discharge under new § 1328(g) unless they completed such program. This adds a layer of administrative complexity to the process whereby creditors are sure to be waiting to take advantage of the dilatory debtor. Telephone and Internet would be permissible “if effective.” As with credit counseling agencies (1) the clerk of court must maintain a list of educational courses approved for each district by its United States trustee or bankruptcy administrator under standards set out in new § 111, and (2) among the standards for approval is a requirement that the course be approved without regard to the debtor’s ability to pay any fee charged for the course. In several jurisdictions, various attorney-run programs or cooperatives have sprung up in an attempt to meet these criteria.

• 4.  Automatic Stay Provisions

A new § 362(c) (3) provides that if a Chapter 7, 11, or 13 case is filed within one year of the dismissal of an earlier case (other than a Chapter 11 or 13 case filed after a § 707(b) dismissal), the automatic stay in the second case terminates 30 days after the filing, unless a party in interest demonstrates that the second case was filed in good faith with respect to the creditor sought to be stayed. Again the purpose of this procedure is to prevent repeated or “piggyback” filings which serve to delay pending state court procedures including foreclosures and executions. In some states this practice may add six months or more to what would otherwise be an uncontested foreclosure action. And if a second repeat filing takes place within the one-year period, the automatic stay will not go into effect (and the court is required promptly to enter an order confirming the inapplicability of the stay on request of a party in interest). However, a party interest may obtain imposition of the stay by demonstrating that the third filing is in good faith with respect to the creditor sought to be stayed. For both second and third filings within one year, circumstances are described that generate a presumption that the new filing was not made in good faith, and such a presumption would be required to be rebutted by clear and convincing evidence. Under a new § 362(I), this presumption would not arise in “any subsequent case” if a debtor’s case is dismissed “due to the creation of a debt repayment plan.”

In rem relief and ineligible debtors

“In rem” relief from the automatic stay is authorized by a new § 362(d) (4). In cases involving either (A) transfers of real property collateral without the consent of the secured creditor or court approval or (B) multiple bankruptcy filings involving the same real property, the court may issue an order of relief from the automatic stay, which order, properly recorded, is binding on all owners of the property for two (2) years from the date of entry. A party in interest may file a request for imposition of the stay within 30 days of a subsequent case filing, and the court may impose the stay only if the party demonstrates that the case was filed in good faith as to the creditors sought to be stayed. Where in rem relief is effective, new § 362(b) (20) creates an exception to the automatic stay for lien enforcement activity for later cases. In certain circumstances, debtors have used tactics that included property transfers and multiple successive filings to “stall” lifting the stay for purposes of effectuating a speedy foreclosure process, particularly in non-judicial foreclosure states with a relatively rapid foreclosure procedure. If a debtor were to transfer a property to another entity (with the security interest in place), then that entity could file an independent bankruptcy petition, with the attendant automatic stay. Even though this is a violation of the due on sale clause, the net effect is to cause delay and litigation — especially if a bona fide purchaser is involved.

A new § 362(b)(21) excepts from the application of the stay any act to enforce a lien or security interest in real property if the debtor was ineligible or filed the case on violation of an order “prohibiting the debtor from being a debtor” in another case under Title 11.

Exceptions for leased residential real estate.

Two new exceptions from the automatic stay are established for landlords seeking to evict tenants. The first, § 362(b) (22), allows the continuance of any eviction proceeding in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition. In many jurisdictions the court will issue a judgment for possession based on the non-payment of rent wherein the court order may require enforcement by the Sheriff or constable. The supervening filing of a bankruptcy would have the effect of staying such proceeding were it not for this new provision. The second, § 362(b) (23), deals with evictions based on “endangerment” of the rented property or “ illegal use of controlled substances” on the property. Paragraph (b) (23) excepts the eviction proceedings from the stay: (a) it was commenced before the filing of the bankruptcy case, or (b) if the endangerment or illegal use occurred within the 30 days before the bankruptcy filing. In either situation, the landlord will be required to file with the court and serve on the debtor a certificate or affidavit setting out the facts given rise to the exception which would include waste or other vandalism being undertaken at the property or illicit drug use. While this may solve a temporary “free rider” status in the rental market, it compacts the time whereby adjustments can be made by those who left to their own devices would find alternative living quarters. The process may cause dispossession issues in the market.

A new § 362(I) allows the debtor to contest the applicability of the (b) (22) lease exception by filing timely certifications under penalty of perjury. The debtor would be able to keep the stay in effect for 30 days by certifying that applicable non-bankruptcy law allowed the lease to remain in effect upon the debtor’s cure of the default that was the basis of the eviction order. The debtor would be able to keep the stay in effect after 30 days by filing a further certification that the cure amount had been paid within 30 days of the bankruptcy filing. As to (b)(23), a new § 362(m) provides that if a debtor files a certificate denying the assertions in the landlord’s certificate, the court is required to conduct a hearing within 10 days “to determine if the situation giving rise to the lessor’s certification…existed or has been remedied.” Practical application of these procedural safeguards would tend to favor the Landlord insofar as it is unlikely that a defaulted tenant would go to such trouble for purposes of delay of eviction. Condominium and homeowner association members are required to pay their regular fees, even if they have filed for bankruptcy relief. Accordingly bankruptcy cannot be used as a way to temporarily avoid such payments which may be independently foreclosed upon.

Notices to creditors.

Section 342(c) is amended to remove the provision that a failure by the debtor to supply notice to creditors in the prescribed form does not invalidate the notice. Instead, a new § 342(g) provides that no monetary penalty may be imposed on a creditor for violating the automatic stay or for failing to turn over property, unless notice is given in a form effective under amended § 342. As amended by new provisions in (c)(2), (e), and (f), § 342 now provides that notice to a creditor will not be effective unless it is served at an address filed by the creditor with the court or at an address stated in two communications from the creditor to the debtor within 90 day of the filing of the bankruptcy case (or between 90 and 180 days if the creditor was prohibited from communicating with the debtor during the more recent 90-day period). This is designed to rectify sloppy noticing by debtors, which is often turned around on the creditor because notice of the automatic stay was sent to some obscure or incorrect address and the creditor continues collection efforts. To be effective, the notice must also include the account number used by the creditor in the two relevant communications. An otherwise ineffective notice will only subject the creditor to liability if the notice was “brought to the attention of the creditor,” which is defined as receipt by a person designated by the creditor to receive bankruptcy notices.

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