Recent Changes in Personal Bankruptcy LawsSouthwest Area Bar Association Blake Owen Brewer Co. L.P.A. www.blakebrewerlaw.com 216-642-8234 With Grateful Acknowledgment for the research of: Brian Cerasuolo, David Villwock, Deepanker Mathur, Erwin Grabisna, Josh Kuhnash of the OSU Fischer School of Business
Types of Bankruptcies • Chapter 7 - Liquidation • Chapter 13 - Adjustment of Debts of an Individual with Regular Income. • Debts must be less than $307,675 and secured debts must be less than $922,975. • Chapter 11 – Reorganization. Done if entity does not qualify under Chapter 13. • Much more complex, but more flexible. Companies usually use this type • Chapter 12 - Adjustment of Debts of a Family Farmer with Regular Annual Income source : 11United States Code § 701, 1101, 1201, 1301, et seq.
Chapter 7 • Liquidation • All of the debtor's assets, with the exception of "exempt" property, will be sold, and the proceeds will be used to pay their debts. Any debts that are not paid will be discharged • Exempt assets may usually include some equity in a person's home, vehicle, clothing, retirement savings, and other personal items • Cannot file chapter 7 if your monthly income greatly exceeds your expenses • Debt: Secured, unsecured, non-dischargeable • Secured debts will get paid off before non-secured debts. • Non-secured debts are the last type of debts to be paid. These debts may end up being discharged altogether if there are not enough assets to pay them • Some debts are non-dischargeable (ex. child support, student loans, and taxes)
Chapter 13 • Reorganization • Entity is allowed to keep their assets • Pay off some or all of debts in 3 to 5 years • Must pass confirmation test • Creditors will receive at least under Chapter 13 what they would have gotten under Chapter 7 • All disposable income goes towards payment of debts • Home • In foreclosure, liens not paid from proceeds of sale are discharged • Payments must be equal to value of property. No cram downs. Interest rate may be changed. Secured debt is paid first • Unsecured creditors share whatever amounts are left over after priority claims and secured claims have been satisfied. They share based on the percentage of what is owed. Any unpaid amount is discharged as if paid in full.
Comparing the difference between Chapter 13 and Chapter 7 Ch.7 Ch. 13 Benefits of Chapter 13 Credit Report may show debts repaid? no yes Avoids foreclosure because of past due mortgage payments? no yes Avoids repossession because of past due auto payments? no yes Keep non - exempt property? no yes Restructure past due IRS taxes? no yes "Cram down" amount owed to collateral value? no no Disadvantages of Chapter 7 Future payments required? no yes Proof of income necessary? no yes Monthly trustee fee? no yes Court supervision of monthly living allowance? no yes Comparisons
Timeline • H.R. 3150 - Reform Act of 1999, new bankruptcy laws defeated. • H.R. 833, H.R.2415 - Reform Act of 2000 passed - vetoed by President Clinton. • H.R. 333 - Abuse Prevention and Consumer Protection Act of 2001 -passed the House on March 2001, rejected by the Senate. • November 2002, again passed the House, stalled in the Senate. • H.R. 975 - Abuse Prevention and Consumer Protection Act of 2003 - passed the House, blocked by Senate • Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Senate Bill 256) passed, and signed into law on April 20, 2005 • Sections 308, 322 and 330 (homestead exemption) took effect immediately. Rest of provisions took effect on October 17, 2005
Major Changes • Means Test – more difficult to file Chapter 7 • If Income is more than the State median (looks at number in household), full blown means testing is required. • Consider timing of filing and definition of income • Excess income = (Current monthly income - secured payments)/60 – (less priority debts/60) - allowed expenses by IRS – certain other allowed expenses • If excess income is greater than $167.67, only Chapter 13 can be filed, if less go to next test • If excess income is between $100 and $167.67, and debtor can repay 25% of his unsecured debt over 5 years, Chapter 13 must be filed, if not Chapter 7 can be filed • Time between discharge – addresses serial filers • No Chapter 13 if previous discharge of Chapter 7, 11,12 within 4 years, or Chapter 13 with 2 years • No Chapter 7 if prior discharge within 8 years (formerly 6 years)
Limit of Ohio exemptions • Homestead Exemptions • limited to $125,000 out of state if the property was acquired within the previous 1215 days. Ohio exemption is $5,000 • File in State they have lived in the last 730 days prior to filing. If they moved during that 730 days, they use the State they lived in for the majority of the time 180 days, prior to the 730 days • Limits on Auto lien stripping • Secured debtor keeps title until all debt is paid, not just secured part if vehicle purchased within 910 days • Scope of Discharge • Luxury goods over $500 within 90 days of filing • Cash Advances of $750 within 70 days • Non exempted - Support payments, drunk driving injuries, criminal restitutions, civil restitutions rewarded, student loan discharge expanded, adding for profit and non-governmental entities
Other Major Changes • Educational and counseling requirement • Credit Counseling within 180 days of filing (some exceptions do exist) • Educational course in financial management required to receive a discharge of debts in 7 or 13 • Child Support and Alimony debts increase in priority • Bankruptcy stay will not halt eviction proceedings for failure to pay rent • Attorney must verify that a “reasonable inquiry” is made to verify all information submitted in support of filing is “well grounded” in fact • Creditor changes • required to disclose more about the effect of paying only the minimum payment • Limits ability of closing account because creditor pays bill in full every • establishes new penalties to encourage good-faith pre-bankruptcy settlements with debtors.
Financial Institution Perspective • The bankruptcy reform bill does not prevent the neediest Americans from obtaining bankruptcy protection. • Only 10% of filers are above the median income level. • Because of means test, 90 % of filers will continue to have the same bankruptcy options that are available under the current framework. • The rise in bankruptcies is not a result of too much credit extended by banks and credit card companies. • Medical crisis, divorce and job loss are the leading reasons that individuals seek bankruptcy protection. • Credit cards are frequently used during these times to make ends meet • In the average bankruptcy petition, credit card debt represents less than 16 percent of total debt. • The total percentage of bank card debt is 5 percent of all consumer debt or up to 9 percent if retail cards, private label cards and gas cards are included. Source: American Bankers Association
Financial Institution Perspective • The bankruptcy reform bill is not a windfall for credit card companies. • The new needs-based bankruptcy system will mean fewer losses for all businesses that extend credit to their customers – from the local auto repair shop and furniture outlet to the largest and smallest of credit unions, retail stores, banks and medical providers. • It reduces the economic burden passed on to American families • Each American household pays an additional $400 a year in higher prices for goods and services because of bankruptcy losses • Bankruptcy costs are spread to bill paying customers • Average amount discharged in a personal bankruptcy is around $41,000 • Creditors earn on average $1,261a year per household • As a result – it takes 33 paying households to make up for a single bankruptcy case Source: American Bankers Association
Financial Institution Perspective Financial Sector ROE drops in absolute terms as Bankruptcies increase Financial Sector ROE is negatively correlated to Bankruptcy filings, relative to S&P 500 Bankruptcies have been on the rise since 2000. It represents the fastest rising costs for Credit Card companies in terms of Loss Reserves
Political Perspectives • Sen. Edward Kennedy D-Mass. Who do we represent in this party, the credit card companies who have had record profits? They are the principle beneficiary of this legislation. Thirty billion dollars in profits last year, and they want thirty five billion. March 2, 2005
Political Perspectives • Sen. Orrin Hatch, R-Utah I think it’s a nice populist appeal to blame all the credit card companies for the problems that everybody has in our society today. Look, we have an intelligent society, a highly educated society, and I think everybody knows when they take those credit cards and they accrue debt, they are supposed to pay that debt. March 2, 2005.
Emerging Legal Issues • Incurring Debt Before Filing Hersh v. United States (05 CV 2330) N.D. Tex. July 26, 2006 Olsen v. Gonzales (05 CV 6365) D. Or. (filed Aug. 11, 2006) • Freedom of Speech Connecticut Bar Assn. et al. v. United States of America (06-CV-729) D. Conn. (filed May 11, 2006)
Emerging Legal Issues • In re Carey, 341 B.R. 798 (M. D. Fla. 2006) Must file CCC certificate BEFORE filing, not after
Emerging Legal Issues • Must submit tax forms to Trustee prior to first meeting of creditors In re Grasso, 341 B.R. 821 (Bank. N.H. 2006
Emerging Legal Issues • What exactly is “disposable income” In re Schanuth, 3421 B.R. 601 (Bk. W.D. Mo. 2006) Nobody Knows
Emerging Legal Issues • Surrender of a vehicle in full satisfaction of a claim In re Ezell, 338 B.R. 330 (Bk. E.D. Tenn. 2006) Surrender satisfies the creditors claim in full
EMERGING LEGAL ISSUES • “Can any rational human being make a cogent argument that this stuff makes any sense at all.” (Dismissal for failure to complete pre-filing counseling) In re Sosa 336 B.R. 113 (Bankr. W.D. Tex. 2005)