Bankruptcy Laws: Page 7

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• 13.  Sanctions that can now be imposed on debtor's counsel

Section 707(b) is amended to add several new duties and liabilities of debtor’s counsel:

• Subparagraph (4)(A) allows the court to award costs and fees to a trustee who successfully pursues a § 707(b) motion, payable to the debtor’s counsel, if it finds that the Chapter 7 filing violated Fed. R. Bankr. P. 9011.

• Subparagraph (4)(B) specifies that if the court finds any violation of Rule 9011by the debtor’s attorney, it may award a civil penalty against the attorney, payable to the trustee, U.S. trustee or bankruptcy administrator. Pursuant to § 103(b) of the Code, this provision would apply only in Chapter 7 cases.

• Subparagraphs (4)(C) and (D) set out a statutory parallel to Fed. R. Civ. P.11, providing that the signature of a debtor’s attorney constitutes a certification that the attorney has “performed a reasonable investigation”  and determined that signed documents is well grounded in fact, that any Chapter 7 petition is not an abuse under § 707(b), and that “the attorney has no knowledge after an inquiry that the information in the schedules filed with [the] petition is incorrect.” This statutory restatement of Rule 11 includes no provision for sanctions in the event that its signature certification is incorrect.

Under new § 526, debtor’s counsel are subject to loss of fees, damages, injunctive remedies, and imposition of costs for any failure to meet new disclosure and record-keeping requirements imposed on “debt relief agencies” in new § 527 and 528. This adds a new layer of record keeping to the pre-existing requirements set forth by the applicable state bar organization. “Debt relief agency” is defined in new § 101(12A) as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.” “Assisted person” is defined in new § 101(3) as “any person whose debts comprise primarily consumer debts and the value of whose nonexempt property is less than $150,000.” Accordingly, bankruptcy lawyers who represent only nonpaying debtors or owners of businesses and other relatively wealthy individuals would not be covered. Among the new provisions are an obligation to retain for two years a copy of each of several notices required to be given to any “assisted person” (§ 527). It is clear that these new requirements will result in increased attorney fees as substantially more scrutiny is required before filing new petitions least the attorney involved be subject to the noted sanctions.

• 14.  Support priority; dischargeability of marital property settlements

Pursuant to an amendment to § 507(a), domestic support obligations of the debtor will have the first priority in distribution, less expenses of a trustee in administering assets that might otherwise be used to pay the support obligations. Within this first priority, support owed to or recoverable by a spouse, former spouse or child is given priority over support obligations that have been assigned or owed directly to any government unit.

Section 523(a)(15) was amended to remove the affirmative defenses previously included. As a result, all property settlements arising from divorce or separation proceedings that are not covered by the support provisions of § 523(a)(5) are non-dischargeable under (a)(15). Thus, another tier of non-dischargeable debt has been created.

• 15.  Reaffirmation Agreements

A new paragraph (2) is added to § 524(c), requiring as a condition for the effectiveness of a reaffirmation agreement that the debtor receive an extensive set of disclosures, set out in new § 524(k). Although these requirements for effectiveness are limited to the debtor’s receipt of the disclosures, § 524(k)(6) requires the debtor to sign – prior to filing the reaffirmation agreement – a statement disclosing the debtor’s income, the debtor’s actual current monthly expenses, and the resulting balance available to pay the debt proposed to be reaffirmed. In the past, reaffirmation agreements were haphazard and in some cases no such agreements were ever put in place notwithstanding the fact that the debtor listed the creditor on the petition but continued to pay under the original agreement. This occurs typically with regard to automobile finance or furniture leasing contracts.

• 16.  Redemption

Section 722 of the Code is amended to make clear, in accord with the case law, that redemption requires full payment of an allowed secured claim at the time of the redemption.

A new § 506(a)(2) to the Code reverses the majority interpretation that the value of collateral for purposes of redemption should be measured by what the creditor would receive upon possession. The new provision requires that the value of personal property securing a claim in the case of an individual in Chapter 7 will always be based on the cost to the debtor of replacing the property — without deduction of costs of sale or marketing — and that if the property was acquired for personal, family, or household purposes, this replacement cost will be retail price for property of similar age and condition. Fed. R. Bankr. P. 4008 does provide that a motion by the debtor for approval of a reaffirmation agreement must be filed before or at the time of a hearing under § 524(d), but approval of reaffirmation agreements is not required for represented debtors and § 524(d) hearings are optional with the court. Section 524(c)(1) requires only the agreement be “made before the granting of the discharge. ”

Section 521 of the Code is amended to add a new paragraph (a)(6), requiring that an individual debtor in a Chapter 7 case “not retain” any personal property that is subject to a purchase money security interest, unless the debtor, “not later than 45 days after the first meeting of creditors,” either redeems the property or enters into a reaffirmation agreement with respect to the debt secured by the property. It is unclear whether this 45-day period should from the first date set for the meeting of creditors, the date that the meeting actually commences, or the date that it concludes; there is no provision for judicial extension of the 45-day period. Section 521(a)(6) goes on to provide that a failure to exercise one of these two options results in termination of the automatic stay and removal of the property from the estate unless the court (1) determines on a motion filed by the trustee within the 45-day period, that the property is “of consequential value or benefit to the estate” (2) orders appropriate adequate protection, and (3) orders the debtor to deliver the collateral to the trustee.

Section 362(b) is amended to add a new subsection (h), applicable in individual bankruptcy cases, that terminates the automatic stay with respect to, and removes from the estate, personal property that is collateral for any secured clam (not just property subject to purchase money security interests) or that is subject to an unexpired lease, in the event that the debtor fails either to file the statement of intent required by § 521 (a)(2) within 30 days of the case filing or fails “to take timely the action specified in such a statement … unless such a statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refused to agree to the reaffirmation on such terms.” Section 521(a)(2)(B) is amended to require performance of the debtor’s intention within 30 days of the first date set for the meeting of creditors unless during this 30-day periods the court extends the period for cause. Barring such an extension by the court, the 30-day period for debtor action in § 362(h) would always end prior to the 45-day period specified for similar action in new § 521(a)(6). As under § 521(h), the automatic stay would remain in effect, and the property would remain in the estate, if the court (1) determined on motion filed by the trustee within the applicable period, that the property is “of consequential value benefit to the estate” (2) ordered appropriate adequate protection, and (3) ordered the debtor to deliver the collateral to the trustee.

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