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Questions and Answers (Q & A) about the New Bankruptcy Law Amendments (continued)

9. ETHICS: Can a debtor attorney avoid personal exposure from a 707(b) motion being granted by contracting with the consumer debtor to provide the attorney will prepare the petition documents for “pro se” filing, and provide the attorney will substitute in as counsel for the debtor after the case is filed.

a. Your contract can say that, and someone should try it and take it up on appeal to test it. But some judges will try to take your fee as being excessive if you do this. There is some caselaw contrary to this kind of idea, but not at Circuit level. On the other hand, freedom of contracting, and unbundling of legal services should allow this.

10. How did this New Law get enacted?

a. New Law bought by over 2 billion dollars of credit card company lobbying money spent lobbying Representatives and Congresspeople, over 8 years.

11. What date did the New Law become law?

a. Answer: On April 20, 2005, the date Pres Bush signed the “Bankruptcy Absue Prevention and Consumer Protection Act of 2005" into law

12. Why will it be more expensive for consumers to do a bankruptcy under the New Law?

a. Consumer Bankruptcy will be more expensive for at least six reasons:

i. First, debtors will have to pay a fee to a “credit counseling agency” for mandatory credit counseling before they file bankruptcy, or they will be ineligible to file bankruptcy per 11 USC §109(h) added mandatory credit counseling pre-bankruptcy requirement.

ii. Second, consumer debtor attorneys will have to do so many additional tasks to comply with the New Law that consumer debtor attorneys will have to raise the prices they charge debtors; I’ve heard: whatever you are charging now, raise it by $1,000.

iii. Third, Chapter 7 Court filing fees will apparently go up as of October 17, 2005 from $209 for filing a Chapter 7 case to $274. [28 USC §1930(a) will charge $220, plus 28 USC §1930(b) will charge $54 additional (to be paid to US Trustee) = $274 total Chapter 7 filing fee]. There will be a possibility of fee waivers for the poorest debtors. Court filing fees for Chapter 13 will change also on 10/17/05, how is unclear. The filing fee changes are so ambiguous they will probably be clarified by a technical correction bill, before October 17, 2005.

iv. Fourth, as already discussed, consumer debtor attorneys will have more personal exposure, and will have to raise rates to compensate themselves for the additional risk.

v. Fifth, consumer debtors will have to have during bankruptcy mandatory debtor financial education before they can receive a discharge, and will likely have to pay a fee for that also.

vi. Sixth, the New Law will force more debtors into Chapter 13 that could be in Chapter 7 under existing law. And most Chapter 13 plans will have to be 5 years, not the present 3 years. That’s a lot of payments under New Law, that debtors wouldn’t be making, under existing law.

13. Is there a phase in period for the new law.

a. Yes: most of the provisions in the Bankruptcy Reform Amendments only apply to cases that are filed 180 days or more AFTER April 20, 2005, the date Pres.Bush signed the bill into law.

14. What date is the 180 days after signed date?

a. October 17, 2005.

15. Are there some provisions in the New Law which do NOT have a 180 day delay in going into effect, so that the provisions apply to cases filed on April 20, 2005 or any day thereafter?

a. Yes: some provisions are effective in any bky case filed on or after April 20, 2005, the day the Bankruptcy Reform amendments were signed into law by President Bush

16. What provisions are effective in any case filed on or after April 20, 2005?

a. A few are include:

i. The most significant New Law provision that applies to all bankruptcy cases filed on or after April 20, 2005 are the changes to the homestead exemption in 11 USC 522, exemptions.

ii. In addition a New Law 11 USC §1104(e) which requires the US trustee to move for appointment of a trustee in a Chapter 11 case where there are reasonable grounds to suspect fraud, dishonesty or criminal conduct on the part of certain corporate officials, applies in any case filed on or after April 20, 2005.

iii. New Law 11 USC § 1114 requiring reinstatement of retiree benefit plans modified within 180 days before Chapter 11 bankruptcy was filed, where debtor was insolvent when benefits modified, is effective in any case filed on or after April 20, 2005.

iv. The increase in the priority amounts of unpaid wages earned prepeititon ($10,000 earned within 180 days prior to filing of bky) applies in any case filed on or after April 20, 2005. [11 USC §507(a)(4) and (5)]

17. Explain the changes the New Law makes in homestead exemptions, starting with whether, under the New Law, consumer debtors residing in California use the California State exemptions, or the Federal exemptions

a. 11 USC §522(a)(3)(A) retains the language that provides that a debtor in bankruptcy can exempt:

“any property that is exempt under Federal law, other than subsection (d), or State or local law that is applicable on the date of the filing of the petition at the place in which the debtors domicile has been located”.

b. The State of California previously elected to use CA state exemptions–which are either the CA CCP 703 set of exemptions, or the CA CCP 704 set of exemptions–instead of using the federal exemptions listed in 522(d).

i. This election to use CA exemptions instead of the 522(d) list of exemptions does NOT appear to be changed by the New Law, because the 522(a)(3)(A) language I just quoted has not changed.

ii. However, there are other subsections of 11 USC §522, other than the 522(d) federal exemptions, and these additional “federal exemptions” subsections apply to ALL individual debtors , nationwide, regardless of whether that state, like CA, has opted to use the state exemptions instead of the 522 (d) exemptions, because “opt out” only applies to 522(d).

iii. So though 522(d) can be opted out of, the rest of 522 cannot be opted out of, an applies to all individual debtors nationwide.

c. What does the New Law change about exemptions?

i. Existing Law: For states that have opted to use state exemptions instead of the 522 (d) federal exemptions, the state exemptions under existing law are the state exemptions of the state where the debtor’s domicile was located for the 180 days immediately preceding the date of filing of the petition. This lets people who are about to get big judgments against them move to states that have almost unlimited homestead exemptions, like Florida and Texas, and then file bankruptcy 181 days later, and claim the unlimited homestead exemptions of the state they moved to so they could take advantage of the unlimited exemption.

ii. New Law 11 USC §522(a)(3)(A) provides that the state exemptions to be used are either the state where the debtor has been domiciled for the730 days –that’s 2 years--immediately preceeding the date of filing of the petition; or, if debtor resided in multiple states within the 730 day period, the place in which debtor’s domicile was located for the 180 days immediately preceeding the 730 day period, which would be days 910 to 731 before the bankruptcy was filed.

18. CA CCP §704.130 allows a homestead exemption of $150,000 if a person is over 65 years old or disabled, or over 55 years old with low income. What happens to the CA maximum $150,000 state law homestead exemption under the New Law?

a. NOTHING, if you’ve owned your residence for 1215 days before you file your bankruptcy, and haven’t committed any frauds or crimes. But if not, the New Law 522 changes may “cap” your homestead exemption at $125,000, regardless of what state law provides

19. Explain how the NEW Law “$125,000 homestead caps work:

a. Time Cap: First, New Law 11 USC §522(p) places a cap of $125,000 on higher homestead exemptions provided by state law, such as the CA $150,000 homestead exemption, if the debtor acquired the interest in the residence during the 1215 day before filing the petition, except that $125,000 cap does not apply if the debtor is a family farmer, and does not apply to rollovers of equity from one residence to another.

b. Cap if you did fraudulent conveyance within 10 years: Second, New Law 11 USC §522(o) requires that the homestead exemption shall be reduced to the extent the value in the homestead is attributable to any portion of any property that the debtor disposed of in the 10 years before filing bankruptcy that was disposed of with an intent to hinder, delay or defraud creditors.

c. Selected Felonies Cap: Third, New Law 11 USC §522(q) puts a $125,000 cap on any higher state law homestead exemption if the debtor has been convicted certain felonies, including securities law violations, deceit in a fiduciary capacity, and certain other torts, unless the debtor or debtor’s dependants need the higher exemption provided by applicable state law as “reasonably necessary for the support of the debtor and any dependant of the debtor”

20. Are ANY of the New Law 522 exemption changes actually beneficial to debtors

a. Answer: Surprise, the ONE MILLION dollar IRA exemption added by the New Law: New Law adds exemption provisions 11 USC §522(n) allows individual debtors to exempt up to ONE MILLION dollars of “assets in an individual retirement account [IRA] described in section §408 or §408A of the Internal Revenue Code of 1986", with certain exceptions.

b. Moreover the ONE MILLION dollar figure “may be increased if the interests of justice so require”.

c. Allowing exempting IRAs is similar to the result in the recent US Supreme Court decision, Rousey v. Jacoway, US Supreme Court, 2005 DJDAR 3851 (4/4/05), which held that existing exemption 11 USC §522(d)(10)(E) allowed debtors to exempt IRAs, as being within the §522(d)(10)(E) “...payment under a stock bonus, pension, profitsharing, annuity or similar plan or contract on account of ...age”.

d. Second, New Law adds 11 USC §522(b)(2)( C ), which states that a debtor can exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986.”

i. That provision does NOT appear to have a one million dollar limit, so if the debtor had MORE than $1 million in a 401kplan, the debtor could exempt it.

21. How does the New Law pension and IRA amendments to §522 square with the US Supreme Court Paterson v. Shumate case, which held that “ERISA qualified” pension plans are not property of estate at all.

a. Reasoning is different, but Result is same: debtor gets to keep the money in IRS tax exempt pension plan, creditors don’t get that money.

(Section 2 of 10)
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