Q & A about the New Bankruptcy Law Amendments

(continued) Questions 34 - 42

34. Contrast existing law and NEW Law regarding WHO can bring a 707(b) motion claiming the debtor is abusing Chapter 7?
    1. Existing Law: Only the Office of the US Trustee can bring a 707(b) motion under existing law.
    2. New Law: Any creditor, the Chapter 7 Trustee, the US Trustee, or any other party in interest can file a 707(b) "abusing chapter 7" motion, whenever the debtor's monthly income is greater than the CA median income as reported by the US Census bureau, as adjusted using the consumer price index. 11 USC 707(b)(10 and (b)(6). If the debtor's monthly income is below the state median, only the judge or US Trustee can bring a 707(b) motion, or maybe no on can move. §707(b)(6) and (7) [(6) and (7) when read together seem contradictory].
       1. Practice Pointer: Expect creditors will threaten to bring and bring 707(b) abuse motions where debtors don't reaffirm debt owed to that creditor, to pressure debtor to reaffirm.

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35. The standard for a Court granting a 707(b) Motion was "substantial abuse" of chapter 7 under existing law. What is it under the New Law?
    1. The word "substantial" is deleted from 707(b)(1), so the standard is whether debtor being in Chapter 7 is "an abuse" of Chapter 7, not whether it is a "substantial abuse of chapter 7".

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36. Do you have to do the §707(b) "means testing" calculation if you file a Chapter 13 or 11 case?
    1. Directly-no. The "means testing" provisions are in 11 USC §707, and 700 series Code sections only apply in Chapter 7 cases,
    2. But indirectly yes, in both Chapter 13 and 11.
       1. Chapter 13 cases have always had the requirement that the debtor pay the debtor's full "surplus" each month to fund the Chapter 13 plan;
       2. Per New Law 11 USC §1325(b)(3), surplus ("disposable income") in Chapter 13 has to be calculated using the same "means testing" formula in 11 USC §707(b). Thus in Ch 13, when you do the monthly income minus reasonably necessary expenses = surplus/disposable income that must be paid into plan to fund plan, income and expenses are calculated using the §707(b) means testing formula, which means that instead of the actual expenses of the debtor, many items are calculated by State median income minus a bunch of "average" expenses set forth in IRS tables. This may help debtors who pay less than the IRS averages, but there aren't many of those in California. It will hurt debtors whose mortgage payments or car payments are higher than the IRS averages, because the part of the mortgage or car payments that the debtor in fact pays, but which are higher than the IRS averages, will NOT be counted as being reasonable expenditures, and so will end up as sur
    3. Ditto in Chapter 11 , as we will now discuss.

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37. How does the New Law change the treatment of post-petition earnings of individuals who file Chapter 11 cases?
    1. Yes, and it's a HUGE change.
       1. Existing Law: Under existing law, the earnings of an individual chapter 11 debtor after the bankruptcy is filed, from the personal services of the individual chapter 11 debtor, are not property of the bankruptcy estate, and do not have to be contributed to help fund the Chapter 11 plan, unlike Chapter 13, where the debtor has to pay his/her full surplus (income minus necessary expenses) to fund the Chapter 13 plan, for the life of the plan.
       2. New Law: The New Law adds 11 USC §1115(a)(2), which provides that earnings for any services performed by an individual Chapter 11 debtor after commencement of the Chapter 11 case are property of the bankruptcy estate, which means that those net earnings (surplus) will have to be contributed to fund the Chapter 11 individual plan, for 5 years. [ Newly added New Law section11 USC §1115 states property of the bankruptcy estate for an individual chapter 11 debtor includes 3 things:
          1. All property specified in section 541 (ie debtor's pre-petition assets) plus
          2. all property the debtor acquires after the commencement of case but before case is closed, dismissed or converted" , and
          3. "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed or converted."
       3. And the New Law requires the individual chapter 11 debtor to pay all the debtor's disposable income (surplus) into the Chapter 11 plan, to fund the debtor's Chapter 11 plan, for a 5 year plan period [11 USC §1129(a)(15)(B)], if any allowed general unsecured claim objects to confirmation of the plan. [§1129(a)(15)(preamble)]. Or the plan can pay 100% of the amount owed to that objecting unsecured creditor's claim. [1129(a)(15)(A)]. This will result in all general unsecured creditors filing objections to the plan, so they can get paid 100%.
       4. And per New Law §1129(a)(15)(B), disposable income (surplus) of the individual chapter 11 debtor is calculated per 1325(b)(2), ie same as disposable income in Chapter 13.

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38. Can the Chapter 13 plan be shorter than 5 years under New Law?
    1. Under existing law, the average Chapter 13 plan is 3 years. Per New Law 11 USC §1325(b)(1)-(4), where the trustee or any unsecured creditor objects, the Chapter 13 plan must be 5 years long, if the debtor's income is greater than or equal to the median income of the State [§1325(b)(4)(A)(ii)], unless the plan pays the objecting creditor 100%.
    2. Section 11 USC 1325(b)(4) says the chapter 13 plan is required to be 3 years, except where it is required to be "not less than 5 years", and that the chapter 13 plan is required to be not less than 5 years:
       • "if the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12, is not less than...the median family income of the applicable State" for the debtor, if only one person in household, or is not less than the median family income of the applicable State for a family of the same number of people as the debtor's family has, up to 4 people.
    3. For families with over 4 people, add $525 per month for each individual in excess of 4 to determine if debtor family is over or less than the median family income of the applicable state [11 USC 1325(b)(4)(A)(i),(ii) and (iii)].

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39. What proportion of Chapter 13 debtors will have greater than state median income, and so be forced to do 5 year Chapter 13 plans, instead of 3 year Chapter 13 plans?
    1. A large proportion: (1) First, everyone forced in to Chapter 13 by the 707(b) means testing "presumption of abuse" of the New Law will have income above the state median income (see TOP line of the 707(b) FLOW CHART, you only have to perform the 707(b) "means testing" calculation where the debtor has greater than state median income). (2) Second, most people in major metropolitan areas who are able to afford to buy homes have above median state income, filing chapter 13 to cure default in home mortgages is a common use of Chapter 13, so people who file Chapter 13 to cure a default in a home mortgage will have to do 5 year Chapter 13 plans.

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40. Does anyone get to do a 3 year Chapter 13 plan under the New Law?
    1. Yes, per 11 USC §1325(b)(4)(A)(i) and (ii) the "applicable commitment period" (aka Chapter 13 plan length) is 3 years, where the debtor/debtor family group has income less than the state median income. But those people will be filing 7s , not 13s, even under the New Law, because if your income is less than the state median, there is no presumption of abuse of Chapter 7. So basically, people who won't be filing 13s could do 3 year plans, but the people who will be filing 13s will be required to do 5 year plans.

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41. Are there new notices that the Consumer debtor attorneys has to give, under the New Law, that were not previously required?
    1. Yes, first, the consumer debtor attorney must give all the written notices required by the "Debt relief agency" provisions we just went over, 11 USC §526, 527 and 528.
    2. Second, though the New Law says Clerk of Court which has to give consumer debtor the 11 USC 342(b) notice of available Chapters, services available from credit counseling agencies, statements specifying that debtor can be imprisoned if debtor knowingly and fraudulent conceals or makes false oath. But though New Law says "Clerk", it's the debtor's attorney that has to give the consumer debtor this notice, see 11 USC §522(a)(1)(B)(iii), and debtor must file a certificate that debtor has received and read this notice, or the case gets dismissed.

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42. Are there new documents which must be filed under New Law, in consumer bankruptcy cases?
    1. Yes, per New Law amendments to 11 USC §521, in addition to filing all the schedules and other petition pleadings the debtor is required to file under existing law, under New Law 521 the debtor has to file the following additional documents with the Court, as follows:
       1. Per 521(a)(1)(iv): copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition;
       2. Per 521(a)(1)(v) statement of amount of monthly net income, itemized to show how the amount is calculated [individual debtors have been doing this under existing law, in Schedule I (Income ), but corporate and partnership debtors under existing law do not file Schedule I (income) or J (personal expenditures. Because the 500 series code sections apply to all Chapters, all debtor in all chapters, including corporate and partnership debtors, will have to file the itemized monthly net income statement.
       3. Per 521(b)(1) individual debtors shall file with the Court the certificate from the approved credit counseling agency proving the debtor has completed his/her pre-bankruptcy credit counseling, and
       4. Per 521(b)(2) individual debtors shall file with the Court a copy of the debt repayment plan, if any, developed by the credit counseling agency for that debtor;
       5. Per 521( c ), debtors shall file with the court a record of any interest the debtor has in an education IRA; and
       6. Per 521(e) (2)(A), the individual chapter 7 or 13 debtor, not later than 7 days before the date first set for the 341a meeting, shall provide the Chapter 7 or 13 trustee a copy of the debtor's federal income tax return for the most recent tax year ending before the case, for which the debtor filed a return, and at the same time shall send a copy to any creditor which requests same; and
       7. Per 521(f), shall at the request of the Court, US Trustee or any party in interest, an individual 7, 11 or 13 debtor shall file with the court each return filed during the bankruptcy case at the same time the debtor files it with the tax authority; and each return not filed as of the date of the petition, but filed for any tax year ending in the 3 years before the bankruptcy was filed;
       8. Per 521(f)(4) in Chapter 13, annually after the case is filed, file "a statement under penalty of perjury, of the income and expenditures of the debtor during the tax year most recently concluded, and of the monthly income of the debtor, that shows how income, expenditures , and monthly inco9me are calculated.", plus additional information.
       9. Per §521(h)(1) and (2), if requested by US Trustee or Trustee, the debtor must prove his/her identity by showing a driver's license, passport or other document containing a photograph of the debtor, or other personal identifying information to establish the identity of the debtor. [Not a change in CD CA, because Trustees have been requiring this at 341a for several years].

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