President Signs New Bankruptcy Law

June 2, 2005

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Twenty of the new provisions in the Act have federal tax implications, including some that: affect the treatment of employee benefit plans in a bankruptcy; exclude education individual retirement accounts; and eliminate the advantages that Chapter 13 filings and Chapter 11 corporate filings previously enjoyed over other types of bankruptcy. Most of the changes in the Act have an effective date of October 17, 2005.

Highlights

Permits the bankruptcy court to convert a Chapter 7 case to either Chapter 11 or 13 with a debtor’s consent. (Current law requires the debtor’s request for such a conversion.)

(Sec. 102) Permits the court upon its own motion, or upon the motion of the bankruptcy trustee, bankruptcy administrator, or any party in interest, to move for a dismissal. (Current law prohibits a party in interest from entering such motions.)

Lowers the “substantial abuse” standard for dismissal or conversion to one of simple abuse.

Replaces the presumption in favor of granting the relief sought by the debtor with a presumption that abuse exists if the debtor’s current monthly income exceeds an amount determined according to specified formulae.

Prohibits inclusion of any payments for debts within the statutory calculation of debtor’s applicable and actual expenses. Includes within the calculation of debtor’s monthly expenses: (1) reasonably necessary expenses incurred to maintain the safety of the debtor and the debtor’s family from family violence as identified under the Family Violence Prevention and Services Act; (2) continuation of actual expenses paid by the debtor for the care and support of an elderly, chronically ill, or disabled household or nondependent immediate family member; and (3) an additional allowance for housing and utilities based upon documented home energy expenses.

Provides that the presumption of abuse may only be rebutted with detailed documentation of special circumstances requiring additional expenses or adjustment of current monthly total income for which there is no reasonable alternative.

Prohibits the court from dismissing or converting a case based on any form of means testing, if the debtor is a disabled veteran and the indebtedness occurred primarily during a period during which he or she was: (1) on active duty or (2) performing a homeland defense activity.

Requires the debtor’s counsel to reimburse the bankruptcy trustee for legal fees in prosecuting a dismissal or conversion motion if the court finds that counsel’s filing under Chapter 7 was in violation of certain bankruptcy rules.

Requires the court, upon motion by the victim of a crime of violence or a drug trafficking crime (or at the request of a party in interest), to dismiss a voluntary case filed by an individual debtor convicted of that crime (unless the debtor establishes that filing of the case is necessary to satisfy a claim for a domestic support obligation).

Redefines “disposable income” of a chapter 13 debtor to exclude a domestic support obligation that first becomes payable after the date the petition is filed.

Cites circumstances under which a chapter 13 wage earner’s plan may be modified after confirmation to include a special allowance for health insurance coverage.

(Sec. 103) Expresses the sense of Congress that the Secretary of the Treasury has the authority to alter Internal Revenue Service (IRS) standards established to set guidelines for repayment plans as needed to accommodate their use under the Bankruptcy Code.

Instructs the Director of the Executive Office for U.S. Trustees to report to certain congressional committees regarding the use of IRS standards for determining specified monthly debtor expenses and the impact of such standards upon debtors and the bankruptcy courts.

(Sec. 104) Revises procedural guidelines to mandate a written notice to the individual consumer debtor before commencement of a case stating: (1) the types of services available from credit counseling agencies; (2) the criminal penalties for fraudulent concealment of assets; and (3) that all creditor-supplied information is subject to examination by the Attorney General.

(Sec. 105) Instructs the Director of the Executive Office for U.S. Trustees to: (1) develop a financial management training curriculum and materials to educate individual debtors on how to better manage their finances; and (2) test, evaluate, and report to Congress on the curriculum’s effectiveness.

(Sec. 106) Prohibits an individual debtor from filing under Federal bankruptcy law unless the individual has received a briefing from an approved nonprofit budget and credit counseling service prior to filing a bankruptcy petition, unless the U.S. trustee or bankruptcy administrator determines that the service for the district in which the debtor lives is not reasonably able to provide adequate services to the additional individuals who would otherwise seek credit counseling because of such requirement.

Exempts from such prerequisite a debtor whom the court determines is unable to comply due to incapacity, disability, or active military duty in a military combat zone.

Conditions a Chapter 7 or Chapter 13 discharge in bankruptcy upon the debtor’s completion of an approved instructional course concerning personal financial management.

Requires the clerk of each district to maintain a public list of credit counseling agencies and instructional courses concerning personal financial management. Prescribes criteria for approval of such agencies and courses.

Prohibits such a counseling service from informing a credit reporting agency whether an individual debtor has received or sought personal financial management instruction. Establishes civil penalties for noncompliance.

(Sec. 107) Requires the Director of the Executive Office for United States Trustees to issue schedules of reasonable and necessary administrative expenses of administering a chapter 13 plan for each judicial district of the United States.

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