Q & A about the New Bankruptcy Law Amendments

(continued) Questions 63 - 76

63. ETHICS: How much investigation is "reasonable investigation" to keep consumer debtor attorney from being held personally liable?
    1. Will take 10 years of case law to find out.
    2. Consumer bankruptcy attorneys should ask the Court local rules to state if you have x, y, z, this will be enough; Court by local rules should do that

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64. ETHICS: Which debtors will be particularly dangerous for consumer bankruptcy attorney?
    1. Debtors that are not W-2 employees, because they work 1099, run their own businesses, because its very hard to double check what the income of the non W-2 employee is, other than by getting copy of their tax returns. Don't take one if they haven't filed all returns.

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65. ETHICS: If the consumer debtor attorney is held personally liable for an inaccuracy in the consumer bankruptcy debtor's schedules, petition, statement financial affairs, per 11 USC 707(b)(4)( C), or because the attorney knew something was incorrect, contrary to 11 USC 707(b)(4)(D), what is the amount/measure of damages.
    1. Not specified in 707(b)(4)( C ) or (D); will have to be developed by caselaw, probably the same damages as for Rule 9011 violation, which includes paying other sides attorneys fees and costs, plus possibly additional damages to deter.

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66. ETHICS: Are there techniques debtor attorneys for consumer debtors should employ to reduce your exposure to being personally liable to pay sanctions if turns out the debtor's schedules or petition or statement of financial affairs are inaccurate? [∗∗Rule 9011 sanctions∗∗?]
    1. Yes, do a "reasonable investigation under the circumstances" before filing the consumer debtor bankruptcy case. Get a credit report on each client, each client in CA can get a credit report free once a year. Can download on computer in your office. Also services you can subscribe to and buy credit reports from them, but cheaper for your clients to tell them how to download,
    2. Bill requires last 60 days of pay stubs, but possible local rule could say that single YTD paystub is equivalent of last 60 days
    3. Have a detailed written worksheet, and when they turn it in, make them sign at the end stating under penalty of perjury that info they are giving you is true and correct
    4. Make them bring you their bills and checking account records, and have staff compare those items to make sure consistent with what they put on their worksheet
    5. If debtor self employed and record keeping so bad you can't verify their income, can you contract with them to prepare petition papers to be filed "pro se" and then substitute in after they file? Duty to check when you sub in??
    6. Put in your contract that if at any time appears that not giving you all information about what they own and owe, or that not giving you correct information, that you can keep what they have paid you and NOT file the bankruptcy.
    7. Stop representing debtors

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67. ETHICS: Explain how New Law Expressly restricts what advice debtor's attorneys can give to their debtor client, and what challenges can be made to this:
    1. New Law 11 USC 526(a)(4) makes it a violation of law for consumer debtor attorney to advise consumer debtor client that consumer debtor should take on more debt before filing bankruptcy.

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68. ETHICS: Why do consumer debtor attorneys sometimes need to advise their consumer clients to take on more debt before filing bankruptcy?
    1. As part of pre-bankruptcy planning

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69. ETHICS: Give some common examples of why consumer debtor attorneys may need to counsel debtor to take on more debt prebankruptcy, as part of pre-bankruptcy planning:
    • 1. If debtor has stocks, bonds, bank accounts, cash that are NOT exempt, would counsel debtor as part of prebankruptcy planning to buy a house or condo and move in so residing there on day file bankruptcy, and using stocks, bonds, bank accounts, cash that are NOT exempt, as downpayment on residence, and then claiming homestead exemption on that equity in house.
    1. Give an example re how financing a car may be used as a prebankruptcy planning device under present law:
       1. If debtor has a surplus, meaning money left over each month after subtract reasonable and necessary monthly expenses from monthly income, and car is paid off, a common pre-bankruptcy planning technique at present is to counsel debtor to go buy or lease a car on a financed basis, so have a monthly car payment to eat up the "surplus", and by eliminating surplus, debtor will be able to file Ch 7 instead of Ch 13.
    2. Could you as debtor's attorney give this advice under New Law?
       1. Yes and No. Provision is probably illegal as interference with First Amendment speech and interference with attorney / client relationship, but until someone appeals and overturns this section, it will chill all consumer attorneys from giving this advice.

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70. ETHICS: What is penalty on lawyer if you tell client to take on more debt?
    1. Per New Law 11 USC 526( c )(5) the court, on its own motion or on the motion of the US trustee can enjoin violation of this section or impose "an appropriate civil penalty" against a person who violates the section. Note: unclear what this section refers to, all of 526 or just 526( c )? Will be litigation for sure over this.

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71. ETHICS: But what you tell your clients is privileged, how is anyone going to find out you gave this advice:
    • 1. Never trust your client. The client always has the right to waive privilege and rat you out, and will likely do so when offered a deal by creditor in exchange for telling creditor how the client came to buy house, finance car, etc. right before filing bankruptcy.

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72. ETHICS: If you need to tell your consumer debtor client to take on more debt to buy a house so they can use the homestead exemption, or so they can avoid having a surplus, but its personally dangerous to you the attorney to do so, what is your ethical duty, to yourself or to your client?
    1. In general, lawyers are supposed to put good of client above the lawyer's personal good. But I don't think there can be an ethical duty to give advice New Law forbids you to give.

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73. What challenges can be made to this provision in New Law?
    1. This provision can be attacked as being an unconstitutional restriction on First Amendment, free speech, and it can be attacked as incursion into attorney client relationship.

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74. What is unusual about this restriction:
    1. Telling client to take on debt is not like telling client to commit a crime. Its illegal to commit a crime, and its illegal to tell a client to commit a crime or to help them commit a crime. But its not illegal for client to take on debt, so long as client intends to pay the debt, which if they buy a house or car before filing bankruptcy they usually intend to (and do) pay those debts. What is unusual-actually unprecedented-about this provision of the New Law is that the New Law makes it illegal for the lawyer to tell client to do something that it is legal for the client to do.
    2. What will effect of this provision be:
       1. Unless and until its appealed and held unenforceable, its certainly going to chill the ; and how this will make it extremely difficult to advise consumer debtors to do legal, and much needed pre-bankruptcy planning
    3. ETHICS: Can you give your client a copy of the provision that says its illegal to tell them to take on more debt, and then tell them if they had more debt they wouldn't have to file Chapter 13, but tell them you are not suggesting they do so, because you aren't allowed to suggest this; or tell them that if they used their stocks/bonds/money as a down payment on a house/condo that they could exempt the house condo, whereas they can't exempt the stocks/bonds/money, but do not tell them they should do so, just let them figure it out
       1. Yes, but still risky some judge will hold you were giving them advice
    4. ETHICS: What should you have your consumer clients sign on this topic?
       1. Make your consumer clients sign a form stating that you have not advised them to take on more debt, so they can't claim later you told them to take on more debt

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75. OMITTED

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76. What changes does the New Law make in the bankruptcy automatic stay? What changes does the New Law make in the bankruptcy automatic stay?
    1. The New Law makes extensive changes to 11 USC §362, the automatic stay.
       1. Automatic Stay will Only last 30 days, in the new Chapter 7 bankruptcy filed by an individual who has had an earlier 7, 11 or 13 case dismissed within 1 year of the new filing. [11 USC § 362(c)(3)(A)]
          • (1) An exception is made for refiling under another chapter after a dismissal under the new means test limitations of 707(b). [§ 362(c)(3)] Under the New Law, you will recall that 707(b)(2) includes the new provisions presuming an abusive filing if the debtor could fund a 5-year plan which will pay 25% of his or her debts or $10,000.
       2. The debtor must move the Bankruptcy Court to extend the automatic stay beyond the 30 day period.
          • (1) The Court can extend the 30-day stay if the Court finds the new case was filed in good faith (which is presumed subject to rebuttal). [§ 362(c)(3)(B)]
          • (2) Evidence of bad faith includes:
            • (a) more than 1 chapter 7, 11 or 13 case in the prior 1 year [§ 362(c)(3)(C)(i)(I)]
            • (b) a prior case that was dismissed for failure to amend the petition or other documents w/o substantial excuse [inadvertence or negligence is not substantial excuse unless that of attorney and not debtor], provide adequate protection per a court order or perform the terms of a confirmed plan. [§ 362(c)(3)(C)(i)(II)]
            • (c) there has not been any substantial change in financial condition or personal affairs of the debtor since the prior case and there is no other reason to conclude that the current case will be successfully concluded to discharge [§ 362(c)(3)(C)(i)(III)]
            • (d) relief from the automatic stay or an adequate protection order had been granted in the prior case [§ 362(c)(3)(C)(ii)]
            • (e) NO bad faith is presumed if a case was dismissed to allow debtor to enter into a debt repayment plan. [§ 362(i)]
       3. For individual chapter 7 debtor who had more than two chapter 7, 11 or 13 cases dismissed within 1 year of the new filing the automatic stay does not go into effect at all upon the filing of the new bankruptcy case. [11 USC §362(c)(4)(A)(I)].
          • (1) However, a noticed motion can be made within 30 days after the new case is filed, requesting that the court order a stay as to some or all of the creditors, but only if the movant demonstrates that the latest filing was in good faith as to the creditors sought to be stayed. [11 USC §362(c)(4)(B)]
          • (2) However, there is a presumption of bad faith in such cases unless there is clear and convincing evidence to the contrary [§ 362(c)(4)(D)]
          • (3) As with cases of a single prior filing, there is a presumption of bad faith where:
            • (a) a prior case was dismissed when amendment required unless there was a substantial excuse [§ 362(c)(4)(D)(i)(II)]
            • (b) the financial or personal circumstances of the debtor did not change substantially since the previous case [§ 362(c)(4)(D)(i)(III)] or
            • (c) As to a particular creditor, the creditor had sought relief from stay and its motion was either still pending or had been granted wholly or conditionally. [§ 362(c)(4)(D)(ii)]
    2. Another significant change in the automatic stay provisions relates consumer debts secured by personal property - cars, furniture, appliances. etc., which is that the automatic stay terminates as to that consumer property, if:
       1. If consumer debtor does not file his/her statement of intentions within 30 days or the 341(a) meeting [§362(h)(1)(A)] , or
       2. The consumer debtor does not perform his/her statement of intention as to that consumer property, within 30 days after the date first set for the 341a meeting. [§362(h)(1)(B)
          • (1) In addition, per 521(a)(6) if the debtor does not either reaffirm the secured personal property debt or redeem the property from the security interest within 45 days after the first meeting of creditors, then the property ceases to be property of the estate and the creditor may proceed regarding that property as allowed by state law (repo and sell it if default), unless the court after notice and hearing orders adequate protection and orders debtor to deliver the collateral to the trustee];
       3. Once they stay terminates, the creditor can proceed as allowed by nonbankruptcy law to repossess and sell the personal property the consumer has its lien on;
       4. Only the trustee can request stay be extended, by motion filed before the time periods expire, showing that such personal property "is of consequential value to the estate", and the Court must order adequate protection to the creditor if it grants trustee the extension of the stay, stay, and the debtor must deliver the personal property in question to the trustee [§ 362(h)(2)]
    3. What used to be Section 362(h), but is now renumbered as Section 362(k), still provides:
       • "....an individual injured by any willful violation of that stay provided by this section shall recover actual damages, including costs and attorneys' fees, and in appropriate circumstances, may recover punitive damages".
    4. However, subparagraph §362(k)(2) is added by the New Law, to provide that the damages awardable for violation of the stay shall be limited to actual damages suffered by the individual debtor, where a creditor violates the stay regarding consumer goods on which the creditor had a lien, but does so in a "good faith belief" that the stay had terminated due to debtor's failure to file or perform debtor's statement of intention.[§ 362(k)(2)]
    5. The revisions in the New Law also provide for new exceptions to the existence of the automatic stay, so that there will NOT be any automatic stay where under various enumerated conditions as follows
       1. Actions for enforcement of a lien or security interest in real property will not be stayed as to Debtors who are ineligible to file bankruptcy under 109(g) because of a 180 or 365 day bar, or because the Court in a prior case had ordered the debtor was barred from filing a further bankruptcy. [§ 362(b)(21)]
       2. A residential unlawful detainer proceeding, including eviction, will not be stayed as to
          • (1) landlords who obtained a judgment for possession of the real property before the bankruptcy was filed [§ 362(b)(22)].
            • (a) Exception to this: Per §362(l) {that's "L"} there is a complicated procedure where a debtor can get a stay for 30 days after the bankruptcy is filed if the debtor with the bankruptcy petition files a certification attesting that nonbankruptcy law allows curing the default, and the debtor deposits with the clerk of court the rent that will come due in that 30 days after the bankruptcy is filed, the creditor can object, etc. [§362(l)(1)-(5)] {that's ("L")(1) -(5)]A further stay will apply upon certification that the monetary default has been cured. [§ 362(l)(2)] The creditor has the right to object to the certifications and seek a court determination of the facts. [§ 362(l)(3)]
            • (b) A stay will be in effect for only 15 days after the certification of a landlord that there are pending eviction proceedings relating to the debtor's residence that involve the endangerment of the rental property or the use of controlled substances on the property, subject to the debtor's objection to that certification and a determination by the court of the truth of the certification. [§ 362(b)(23), (m)]
       3. In the successive bankruptcy situation, where a there will be no automatic stay for two years , as to any creditor whose claim is secured by real property and who obtained an order in an earlier bankruptcy case that found, under Section 362(d)(4), that the earlier bankruptcy was part of a scheme to delay, hinder and defraud creditors that involved the transfer all or part of the secured real property without the consent of the court or the secured creditor , or which involved multiple bankruptcies affecting that same real property. [§ 362(b)(20)]
          • (1) The new law also provides that a debtor may seek relief from the no automatic stay for two years on account of changed circumstances or other good cause. [§ 362(d)(4)]
       4. The New Law clarifies that the automatic stay does not apply to the following family law proceedings:
          • (1) child custody or child visitation matters [§ 362(b)(2)(A)(iii)]
          • (2) to the dissolution of a marriage - except with respect to the division of the marital property [§ 362(b)(2)(A)(iv)]
          • (3) to civil actions relating to domestic violence. [§ 362(b)(2)(A)(v)]
          • Note: The New Law does not differentiate between proceedings for restraining orders and civil actions for damages. Expect litigation about this ambiguity.
          • (4) The automatic stay also does not apply to garnishments for child or spousal support [§ 362(b)(2)(B)]
          • (5) Similarly, the child support provisions in the Social Security Act are not subject to the automatic stay, including both:
            • (a) reporting of overdue child support obligations [§ 362(b)(2)(E)] and
            • (b) withholding of tax refunds for child support. [§ 362(b)(2)(F)]
            • (c) enforcement of medial obligations [§ 362(b)(2)(G)]
       5. Filing a "small business bankruptcy is mandatory under the New Law if the debtor falls within the definition of "small business debtor". The New Law modifies Section 362 so that there is no stay in successive small business bankruptcy cases as follows: no stay if debtors had a Small Business Case bankruptcy pending at the time of the bankruptcy, that had been dismissed within the prior 2 years or had a chapter 11 plan confirmed within the prior 2 years, then no stay will go into effect upon filing of the new case. Except: the automatic stay will apply if
          • (1) the new case is an involuntary bankruptcy or
          • (2) the debtor establishes that the petition resulted from circumstances that were beyond debtor's control and not reasonably foreseeable at the time of the prior bankruptcy or
          • (3) that it is more likely than not that the court will confirm a feasible, non-liquidating plan within a reasonable time. [§ 362(n)].
       6. The New Law clarifies the no stay exception for ad valorem property taxes also applies to special assessments on real property [§ 362(b)(18)]
       7. The New Law also clarifies that there is no stay regarding suspension or restriction of a driver's license.
       8. The automatic stay does not apply to a wage withholding order or agreement where debtor, as employer, which is withholding for the benefit of a pension, profit sharing or similar employee benefit plan. [§362(b)(19)]
       9. There is No stay regarding proceeding with an unlawful detainer action if the debtor failed to pay rent after filing. 11 U.S.C. §362
       10. There is no stay regarding transfers that are not avoidable by a trustee per 11 USC §544 and 549 (whatever that means) [§ 362(b)(24)]
       11. There is no stay regarding various non-criminal government actions:
           • (1) SEC investigation or enforcement actions [§ 362(b)(25)]
           • (2) an action to exclude the debtor from the medicare or other health care program. [§ 362(b)(28)]
           • (3) governmental setoff of an income tax refund. [§ 362(b)(26)]
       12. Master netting agreements not subject to stay [§ 362(b)(27)] (Master netting agreement is defined in § 101(38)).

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