15 March 2006

Bankruptcy Abuse Prevention Act Section 109(h)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which took effect on October 17, 2005 (with certain exceptions) is just starting to be litigated. In preparation for a talk I'm giving to a financial planner's function on Tuesday, I reviewed the case law on the subject.

A surprisingly large share of the litigated cases to date under the new Act, certainly more than any other matter, have involved 11 U.S.C. 109(h), which mandates consumer credit counseling before filing for bankruptcy. Dozens of trial court opinions on this issue from bankruptcy courts are already available from computerized legal research firms. This makes sense. A 109(h) dismissal is the quickest way to end a case under the new act, and hence is the first to appear in court opinions.

The subsection reads as follows:

(h)(1) Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.

(2)(A) Paragraph (1) shall not apply with respect to a debtor who resides in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services to the additional individuals who would otherwise seek credit counseling from such agencies by reason of the requirements of paragraph (1).
(B) The United States trustee (or the bankruptcy administrator, if any) who makes a determination described in subparagraph (A) shall review such determination not later than 1 year after the date of such determination, and not less frequently than annually thereafter. Notwithstanding the preceding sentence, a nonprofit budget and credit counseling agency may be disapproved by the United States trustee (or the bankruptcy administrator, if any) at any time.

(3)(A) Subject to subparagraph (B), the requirements of paragraph (1) shall not apply with respect to a debtor who submits to the court a certification that--
(i) describes exigent circumstances that merit a waiver of the requirements of paragraph (1);
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.
(B) With respect to a debtor, an exemption under subparagraph (A) shall cease to apply to that debtor on the date on which the debtor meets the requirements of paragraph (1), but in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days.

(4) The requirements of paragraph (1) shall not apply with respect to a debtor whom the court determines, after notice and hearing, is unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone. For the purposes of this paragraph, incapacity means that the debtor is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities; and `disability' means that the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing required under paragraph (1).

In each case, someone who has filed for bankruptcy did not obtain consumer credit counseling prior to filing for bankruptcy. The reasons vary, but the results do not. Every single one of the reported cases on the issue in bankruptcy court have been resolved against the debtor. Sometimes the problem was a procedural flaw, such as not even trying to claim in the proper legal motion that there was a valid reason to a waiver of the requirement. In at least one case, a fax from the agency saying that the course had been completed but that they would not issue a certificate until their $50 fee was paid, accompanied by a statement from the debtor that he didn't have the $50 was insufficient.

At other times, the reason has been rejected as insufficient proof of "exigent circumstances" under Section 109(h)(3). Most notably, an imminent foreclosure, eviction or other creditor actions has been uniformly held not to constitute a valid reason for postponing credit counseling until after filing a petition for bankruptcy relief. As the law reads, no one who failed to request credit counseling at least five day prior to filing a petition, no matter how good their reason may be, can ever qualify to file for bankruptcy, without completing credit counseling. In practice, this means that debtors who seek bankruptcy protection on the eve of some creditor action (a common circumstance under the pre-October 17, 2005 law), will almost always fail in their attempt, unless their savy attorney can quickly get them in and out of a credit counseling session.

Given that about 97% of the time, debtors are not eligible for a debt management plan, and that about 80% of the time, the bankruptcy is due to forces beyond the debtor's control, this seems a harsh consequence of what was basically a feel good procedural requirement.

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