BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 ©

By

ROBERT E. MCKENZIE, EA, ATTORNEY

 

ARNSTEIN & LEHR

SUITE 1200

120 SOUTH RIVERSIDE PLAZA

CHICAGO, ILLINOIS 60606

(312) 876-7100

 

Means Testing

Guideline Regarding Dismissal

(Sec. 101) Amends Federal bankruptcy law to revamp guidelines governing dismissal or conversion of a Chapter 7 liquidation (complete relief in bankruptcy), to one under either Chapter 11 (Reorganization), or Chapter 13 (Adjustment of Debts of an Individual with Regular Income). Permits the bankruptcy court to convert a Chapter 7 case to either Chapter 11 or 13 with a debtor's consent. (Prior law required the debtor's request for such a conversion.)

Needs-Based Bankruptcy

The new bankruptcy reform was signed into law by the president in April, 2005. It  become effective on October 17, 2005.  . Generally families earning more than the state median, $72,742 in Illinois, will be will face huge roadblocks to filing a Chapter 7 bankruptcy on consumer debts and only be allowed to file Chapter 13. Prior to seeking the protection of bankruptcy debtors will be required to pay for debt counseling as a first step. The following is brief summary of the major tax related provisions of the act.

IRS Allowable Expense Guidelines

Debtors are required to use modified IRS expense guidelines in most cases to determine their ability to make payments pursuant a Chapter 13 plan. (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.

The Basic Test

Under the means test, a Chapter 7 filing is presumed to be abusive if the debtor’s monthly income, reduced by numerous allowances and living expenses (discussed below), and multiplied by 60 (that is, over a five-year period), is greater than $10,000. If income thus adjusted is less than $6,000, there is no presumption of abuse, and the debtor is free to choose Chapter 7. If adjusted income is between $6,000 and $10,000, abuse is presumed only if income exceeds 25% of nonpriority, unsecured debt in the case. An abusive Chapter 7 filing is subject to dismissal or conversion.

Living Expenses and Allowances

A key determinant in whether a debtor passes the means test is the amount by which actual monthly income is reduced by various allowances and living expenses. The law sets out several categories of allowable monthly expenses. Debtors’ monthly expenses are calculated primarily by referring to a set of allowances established by the Internal Revenue Service (IRS) that are used to help determine a taxpayer’s ability to pay a delinquent tax liability. The allowances, which the IRS calls Collections Financial Standards, set out monthly living expenses in three basic categories: (1) food, clothing, and other items; (2) housing and utilities; and (3) transportation. The allowable living expenses are subject to several variables.   The U. S. Trustee's office has chosen to modify the IRS standards to provide for greater flexibility.

Food, Clothing, and Other

In the food, clothing, and other category, the IRS sets out living expenses that vary according to the size of the household and gross monthly income. For example, a single person with a gross income of $/month would be allowed $856  in living expenses, while a family of four earning $5,834/month would be allowed $1,546 for expenses in this category. These amounts are national standards — uniform across the contiguous 48 states — except that higher schedules are provided for Alaska and Hawaii. The allowance for housing and utilities varies according to size of household and geographical location.

Housing

The standards provide separate dollar figures for each county in the nation, for households of one or two, three, and four or more persons. A single person living in Glenn County, California , would be allowed to deduct $573/month, while a family of four in Marin, California would be allowed $2446.

Transportation Standards

The transportation standards provide regional allowances, with variations for persons living in any of 28 specified metropolitan areas. Allowable living expenses include ownership costs ($475 for one car, an additional $338 for a second car) and operating costs (or public transportation costs, for those with no car). Operating or public transportation allowances range from relatively low for non-driving individuals using public transportation to high of $479 for New York City residents with two cars. These allowances are not reduced if a bankruptcy petitioner’s actual expenditures are less than the standard. In some cases, the IRS recognizes actual expenses that exceed the standards; under the reform act, a debtor’s monthly expenses may include actual expenses.

Beyond the IRS allowances, the bankruptcy reform law permits current income to be reduced by several other types of expenses. Monthly expenses for purposes of the means test may include:

1.      reasonable and necessary spending to care for an elderly, chronically ill, or disabled member of the debtor’s immediate family or household;

2.      reasonably necessary expenditures for health insurance, disability insurance, and health savings accounts;

3.      actual expenses for the primary or secondary education of a dependent child (under age 18), up to $1,500 per child per year;

4.      home energy costs in excess of the IRS housing and utility standards, with proper documentation and justification;

5.      average monthly payments on secured debts (most commonly home mortgages and car loans);

6.      average monthly payments on priority claims (e.g., child support, student loans, alimony, etc.);

7.      reasonable and necessary expenses to maintain the safety of the debtor’s family from family violence, as identified under Section 309 of the Family Violence Prevention and Services Act;8 and

8.      administrative costs incurred in a Chapter 13 bankruptcy plan.

Finally, a debtor may claim higher monthly expenses if special circumstances exist that require additional expenditures. To establish special circumstances, the debtor must itemize such expenses and explain in detail why each of them is reasonable and necessary. Given the number of factors that may reduce monthly income for purposes of the bankruptcy means test, it is clear that simple gross income is not a good indicator of whether a debtor will be allowed to file Chapter 7.The U. S. Trustee's office has chosen to be much more flexible in applying the standards than the IRS. Other provisions of the reform legislation address this potential disparity by creating safe harbors for lower income individuals and households.

Safe Harbor Provisions

Under P.L. 109-8, a motion must be filed in bankruptcy court to dismiss or convert a Chapter 7 petition. Who may bring such a motion depends on the debtor’s income. The law provides that if the debtor’s income exceeds the median family income (adjusted for household size) as calculated by the Bureau of the Census for the applicable state, any party in interest, including a creditor, may bring an abuse motion under section 707(b).

If the income of the debtor (or debtor and spouse, in a joint filing) is less than or equal to the median family income (taking household size into account) for the applicable state, only the judge or a bankruptcy trustee or administrator may file a motion to dismiss or convert a Chapter 7 petition.

If the combined income of the debtor and the debtor’s spouse is equal to or less than the state median income for a single-earner household (again adjusted for household size), no motion to dismiss or convert may be filed. In addition, P.L. 109-8 creates an exemption from means testing for disabled veterans whose debts were incurred while they were on active duty or performing a homeland defense activity.

Dismissal and Substantial Abuse

(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. (About $46,000 in Illinois)

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 non-dependent 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.

Fees Assessed to Bankruptcy Counsel

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.

IRS Allowable Expense Guidelines

(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.

Notice to Debtor

(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.

Non-profit Briefing

(Sec. 106) Precludes 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. Conditions a Chapter 7 or Chapter 13 discharge in bankruptcy upon the debtor's completion of an approved instructional course concerning personal financial management.

Reasonable and Necessary Administrative Expenses

(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.

Title II: Enhanced Consumer Protection - Subtitle A: Penalties for Abusive Creditor Practices

Creditors Refusal to Negotiate

(Sec. 201) Cites circumstances under which the court may reduce a claim based upon unsecured consumer debts by up to 20 percent if the debtor can show by clear and convincing evidence that the claim was filed by a creditor who unreasonably refused to negotiate a reasonable alternative repayment schedule proposed by an approved credit counseling agency acting on the debtor's behalf.

Failure to Credit Payments

(Sec. 202) States that a creditor's willful failure to credit payments received from a debtor is a violation of a discharge operating as an injunction against a collection action if such failure caused material injury to the debtor (with certain exceptions).

Reaffirmation

(Sec. 203) Modifies debt reaffirmation guidelines governing wholly unsecured consumer debts to mandate specified detailed disclosures and explanations to the debtor for dischargeable debt agreements. Exempts a Credit Union creditor from such detailed disclosures and explanations.

Amends Federal criminal law to instruct the Attorney General to designate U.S. attorneys and agents of the Federal Bureau of Investigation (FBI) to implement enforcement activities relating to:

1.      abusive reaffirmations of debt; and

2.      materially fraudulent statements in bankruptcy schedules that are intentionally false or misleading. Directs the bankruptcy court to establish procedures referring those cases to the U.S. attorneys and FBI agents.

Predatory Loans

(Sec. 204) Preserves consumer claims and defenses against predatory loans that have been sold by the bankruptcy trustee and that are subject to either the Truth in Lending Act or any consumer credit contract.

Subtitle B: Priority Child Support

Claims for Domestic Support

(Sec. 212) Revises priority payment guidelines to place within the first priority claim category certain unsecured claims for domestic support obligations, if the funds received by a governmental unit are applied in a prescribed order. Grants priority over such claims, however, to specified administrative expenses of certain trustees.

Payment of Domestic Support

(Sec. 213) Conditions court confirmation of a debt repayment plan under Chapters 11, 12 (Debts of a Family Farmer), and 13 upon certification that the debtor has paid in full all adjudicated domestic support obligations that become due after the petition filing date.

Domestic Litigation

(Sec. 214) Excepts from an automatic stay specified choses-in-action pertaining to domestic support obligations proceedings including:

1.      child custody or visitation;

2.      dissolution of marriage;

3.      domestic violence;

4.      withholding of income that is property of the bankrupt estate for payment of domestic support obligations;

5.      suspension of drivers' licenses and professional licenses;

6.      reporting of overdue support owed by a parent to certain consumer reporting agencies;

7.      interception of specified tax refunds; and

8.      enforcement of medical obligations under title IV, part D (Child Support and Establishment of Paternity) of the Social Security Act.

Non-dischargeability of Alimony and Maintenance

(Sec. 215) Revamps guidelines governing the non-dischargeability of certain debts for alimony, maintenance, and support to repeal the exceptions granted the debtor under specified conditions.

No Exempt Property from Support

(Sec. 216) Modifies guidelines governing property exempt from the bankruptcy estate to declare such property liable for a debt arising from domestic support obligations.

Additional  Domestic Support Provisions

(Sec. 217) Prohibits the bankruptcy trustee from avoiding a transfer that is a bona fide payment of a debt for a domestic support obligation.

(Sec. 218) Excludes income payments for postpetition domestic support obligations from "disposable income" for purposes of a Chapter 12 confirmation plan.

(Sec. 219) Sets forth the duties of the bankruptcy trustee to notify the claim holder and the appropriate State child support agency of the debtor's last known address.

(Sec. 220) Declares dischargeable debts for certain qualified educational loans which, if not discharged, would impose an undue hardship upon either the debtor or the debtor's dependent.

Subtitle C: Other Consumer Protections

Non-attorney Preparers

(Sec. 221) Modifies guidelines governing non-attorney bankruptcy petition preparers to mandate that as a prerequisite to any collection of fees for services: (1) such preparers officially disclose to debtors that they cannot practice law or give legal advice; and (2) such disclosure be signed by the debtor and filed with the requisite court documents. Prescribes enforcement and penalty guidelines for preparer noncompliance.

Priority for Drunk Driving Claims

(Sec. 223) Places in tenth order of priority death or personal injury claims against the bankrupt estate that arise from debtor's unlawful operation of a motor vehicle or vessel while under the influence of drugs or alcohol.

Retirement and Taxes

(Sec. 224) Permits an individual debtor to exempt from the property of the bankrupt estate certain tax-exempt retirement funds that have not been obligated in connection with any extension of credit.

Excepts from an automatic stay certain income withheld from debtor's wages.

Excepts from a discharge in bankruptcy amounts owed by the debtor to certain plans established under the Internal Revenue Code.

(Sec. 225) Sets forth criteria for excluding certain education individual retirement accounts from the property of the bankruptcy estate if the designated beneficiary is the debtor's child or grandchild.

Title III: Discouraging Bankruptcy Abuse

Prisoner Litigation

(Sec. 301) Modifies exceptions to a discharge in bankruptcy to prohibit discharge of a filing fee imposed by any court upon a prisoner.

Serial Filings

(Sec. 302) Terminates the automatic stay 30 days after filing of a petition if a chapter 7, 11, or 13 petition was pending and dismissed within the preceding year, unless the subsequent filing is in good faith. Delineates conditions under which a history of previous petitions in bankruptcy gives rise to a rebuttable presumption that the case is not filed in good faith.

Mortgage Foreclosures

(Sec. 303) Directs the court to grant two-year relief from the automatic stay upon request of a party in interest in connection with certain real property actions if the court finds that filing the bankruptcy petition was part of a scheme to delay, hinder, and defraud creditors.

Retention of Personal Property by Debtor

(Sec. 304) Modifies debtor's duties to mandate specified affirmative actions incumbent upon a chapter 7 debtor, including reaffirmation of the debt, or redemption of the property within 45 days, in order to retain possession of personal property. Allows a creditor to take action with respect to such property under nonbankruptcy law if the debtor fails to act within 45 days, unless the court determines upon trustee motion that such property is of consequential value or benefit to the estate.

Termination of Automatic Stay

(Sec. 305) Terminates the automatic stay governing property of the debtor's estate that secures a claim, or is subject to an unexpired lease, if the debtor fails to complete within a revised, accelerated time frame an intended surrender of consumer debt collateral, or an intended property redemption, or debt reaffirmation to retain such collateral (unless the court determines upon trustee motion that such property is of consequential value or benefit to the estate).

Retention Of Liens

(Sec. 306) Requires the bankruptcy court to confirm a Chapter 13 plan if it provides that the holder of a secured allowed claim shall retain the attendant lien until payment or discharge of all debts.

Provides that if a Chapter 13 proceeding is dismissed or converted without completion of the plan, the holder shall retain such lien to the extent recognized by applicable non-bankruptcy law.

States that statutory guidelines to determine the secured status of a creditor's claim do not apply if:

 

1.      the creditor has a purchase money security interest securing the debt;

2.      the underlying debt was incurred within the 910 day period preceding the filing of the petition; and

3.      the collateral for that debt consists of a motor vehicle acquired for the debtor's personal use (or if the collateral consists of any other thing of value if the debt was incurred during the one-year period preceding such filing).

Restrictions on Generous Homestead Exemptions

(Sec. 307) Increases from 180 days to 730 days the duration of debtor's domicile for purposes of determining which State law governs the debtor's selection of property exempt from the bankrupt estate. Provides for determination of an immediately earlier domicile if the debtor's domicile has not been located in a single State for the 730-day period. Allows a debtor to exempt certain property if the effect of the domiciliary requirement is to render the debtor otherwise ineligible for any exemption.  NOTE: It will be harder to move to Florida and change your homestead exemptions of $7,500 to an unlimited exemption.

(Sec. 308) Requires reduction of the value of the homestead exemption to the extent that it is attributable to any portion of property disposed of in the ten-year period before the petition filing date with the intent to hinder, delay, or defraud a creditor.

Conversion From Chapter 13

(Sec. 309) Revises requirements governing the effects of conversion from chapter 13 to another chapter. Declares that:

1.      valuations of property and of allowed secured claims in a chapter 13 case shall not apply in a case converted to chapter 7; and

2.      with respect to cases converted from Chapter 13, the claim of any creditor holding security as of the date of the petition shall continue to be secured by that security unless the full claim amount, as determined under applicable nonbankruptcy law, has been paid in full as of the conversion date. States that a prebankruptcy default shall have the effect given under applicable nonbankruptcy law unless it has been fully cured pursuant to the plan at the time of conversion.

Provides for a Chapter 7 debtor's assumption of unexpired leases of personal property. Declares that in a Chapter 11 case in which the debtor is an individual, and in a Chapter 13 case, if the lease is not assumed in the plan, it is rejected (thus no longer subject to an automatic stay).

Delineates a cash payment plan for chapter 13 debtors for payments to any lessor of personal property and to any creditor holding a claim secured by personal property in order to ensure adequate protection to the claim holder during the payment period. Requires a debtor-in-possession to provide reasonable evidence of any requisite insurance coverage with respect to the use or ownership of such property.

Credit Card Restrictions

(Sec. 310) Revamps nondischargeability guidelines to narrow the window of dischargeability from $1,075 to $500, for aggregate consumer debts owed to a single creditor on luxury goods incurred within 90 days (currently 60 days) prior to the order for bankruptcy relief. Reduces, likewise, from $1,075 to $750, nondischargeable cash advances that are extensions of consumer credit under an open end credit plan if acquired within 70 days (currently 60 days).

Evictions

(Sec. 311) Denies an automatic stay of specified residential real property eviction proceedings by a lessor against a debtor if:

1.      the lessor obtained judgment for possession prior to the bankruptcy filing date; or

2.      lessor furnishes certification of specified debtor offenses.

Time Between Bankruptcies

(Sec. 312) Extends the time between Chapter 7 discharges from six to eight years. Denies a chapter 13 discharge to any debtor who has received a discharge:

1.      in a chapter 7, 11, or 12 case within the preceding four years; or

2.      in another chapter 13 case within the preceding two years.

Household Goods

(Sec. 313) Defines a debtor's household goods to include specified items. Excludes from such goods:

1.      electronic entertainment equipment, antiques or jewelry with more than $500 in aggregate fair market value;

2.      works of art;

3.      more than one personal computer and related equipment; and

4.      motor vehicles, boats, motorized recreational devices, conveyances, vehicles, watercraft, or aircraft

Restrictions on Chapter 13 Bankruptcies

(Sec. 314) Includes as nondischargeable chapter 13 debts those incurred:

1.      to pay a  tax to a non-Federal governmental unit;

2.      for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime;

3.      for fraud or defalcation while acting in a fiduciary capacity; or

4.      for restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury or death to an individual.

Reports and Filing Duties

(Sec. 315) Prescribes notice procedures for Chapter 7 and Chapter 13 creditors. Expands debtor's duties to require filing with the bankruptcy court of:

1.      Federal tax returns;

2.      evidence of employer payments received;

3.      monthly net income projections; and

4.      anticipated income or expenditure increases.

Permits a Chapter 7 or chapter 13 creditor to request the debtor's petition, tax schedules, and statement of affairs, including the debt adjustment plan filed by the debtor.

Requires dismissal of a Chapter 7 or 13 case upon debtor's failure to provide to the bankruptcy trustee within seven days before the initial date for the first meeting of creditors a tax return for the latest taxable period prior to filing.

Mandates that, at the time of filing with the taxing authority, a Chapter 7 or 13 debtor file with the bankruptcy court specified tax documentation pertaining to the period from case commencement until case termination.

Requires a Chapter 13 debtor to file with the court a statement of income and expenditures in the preceding tax year, and monthly net income, showing how calculated.

Makes debtor's mandatory documentation available for inspection and copying to certain bankruptcy officers and any party in interest. Requires debtors to furnish driver's license, passport, or other photograph-containing documentation establishing debtor identification.

Dismissal for Failure to Submit Documentation

(Sec. 316) Mandates automatic dismissal if a voluntary Chapter 7 or 13 debtor fails to furnish all mandatory information, or fails to timely file the requisite schedules within 45 days of filing a petition. Requires the court to order dismissal within five days of a request by a party in interest for debtor's failure to timely submit requisite documentation. Permits the court, upon trustee motion, to decline to dismiss a case if the debtor made a good faith effort to file all required information and the best interests of creditors would be served by administration of the case.

Formula to Readjust Payments

(Sec. 318) Sets forth a statutory formula to determine whether a Chapter 13 debt readjustment payment plan shall be of either three-year or five-year duration.

Easier to Avoid Automatic Stay

(Sec. 320) Revises automatic stay guidelines to provide that in the case of an individual filing under Chapters 7, 11, or 13, the automatic stay shall terminate 60 days after a request for its release by a party in interest, unless the court orders, or the parties agree to a longer time.

Limits on Homestead Exemptions

(Sec. 322) States that a debtor may not exempt a homestead interest acquired during the 1215-day period preceding petition filing which exceeds in the aggregate $125,000 in value in specified real or personal property. Exempts from such limitation the principal residence of a family farmer.

Employee Benefit Plans

(Sec. 323) Excludes employee benefit plan participant contributions from the property of the bankruptcy estate.

Replacement Value of Collateral

(Sec. 327) States that if the debtor is an individual chapter 7 or 13 debtor the value of personal property securing an allowed claim shall be determined based on its replacement value as of the date of petition filing without deduction for costs of sale or marketing.

Assumptions

(Sec. 328) Revises requirements for the assumption by a trustee of a defaulted executory contract or unexpired lease. Exempts from the requirement that the trustee cure such a default any default that is a breach of a provision relating to the satisfaction of any non-penalty provision relating to a default arising from any failure to perform nonmonetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing nonmonetary acts at and after the time of assumption. Provides, however, that if such default arises from a failure to operate in accordance with a nonresidential real property lease, then such default shall be cured by performance at and after the time of assumption in accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with specified law.

Makes the same exception to requirements a plan must meet to avoid impairing a class of claims or interests. Requires a plan, to avoid impairment, to compensate a claim holder for any actual pecuniary loss incurred by such holder resulting from a failure to perform a nonmonetary obligation, other than a default arising from failure to operate a non-residential real property lease subject to certain requirements.

Awards to Prior Employees as Administrative Expense

(Sec. 329) Expands permissible administrative expenses to include certain wages and benefits awarded as back pay (resulting from a debtor employer's violation of law), if the court determines that the award will not substantially increase the probability of layoff or termination of current employees or nonpayment of domestic support obligations during the case.

Pending Criminal Cases

(Sec. 330) Instructs the court to withhold a debtor's discharge upon its reasonable belief that a proceeding is pending in which debtor may be found guilty of a felony, or become liable for specified debts.

Denial of Bonuses

(Sec. 331) Prescribes guidelines for the denial as an allowance as an administrative expense certain retention bonuses, severance pay, and transfers or obligations incurred for the benefit of officers, managers, or consultants hired after the date of the filing of the bankruptcy petition.

Title IV: General and Small Business Bankruptcy Provisions - Subtitle A: General Business Bankruptcy Provisions

Securities Regulation

(Sec. 401) Denies a debtor an automatic stay of: (1) the commencement of an investigation or action by a securities self-regulatory organization to enforce compliance with its regulations; (2) the enforcement of any order or decision obtained by such an organization, other than for monetary sanctions; or (3) any act taken by the securities self-regulatory organization to delist, delete, or refuse to permit quotation of any stock that does not meet applicable regulatory requirements.

Pre-packaged Plans

(Sec. 402) Authorizes the bankruptcy court, upon request of a party in interest, to order that the U.S. trustee not convene a meeting of creditors or equity security holders if the debtor has filed a plan for which acceptances have been solicited before commencement of the case.

Trustee's Avoidance Powers

(Sec. 403) Increases from ten days to 30 days the length of time for the perfection of a transfer of property with respect to a trustee's authority to avoid such a transfer.

Rejection of Contracts and Leases

(Sec. 404) Amends guidelines for rejection and surrender of executory contracts and unexpired leases.

Creditors Committees

(Sec. 405) Authorizes a Chapter 11 trustee to increase the membership of a committee of creditors and equity security holders to include a creditor that is a small business concern following the court's determination that such creditor holds claims of the kind represented by the committee, the aggregate amount of which is disproportionately large in comparison to the creditor's annual gross revenue. Requires such committee to provide access to information to certain creditors who are not committee members.

Soliciting Claim Holders

(Sec. 408) States that acceptance or rejection of a chapter 11 plan may be solicited from a holder of a claim or interest if:

1.      the solicitation complies with applicable nonbankruptcy law; and

2.      it was made before commencement of the case in a manner complying with applicable nonbankruptcy law.

Prohibition of Avoidance Actions of Less Than $5,000

(Sec. 409) Prohibits the bankruptcy trustee from avoiding a transfer if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.

Extensions of Time to File Plans

(Sec. 411) Limits the extensions of time permitted for filing a Chapter 11 reorganization plan.

Condo and Co-op Assessments

(Sec. 412) Denies a discharge in bankruptcy for a debt for a fee or assessment arising from a debtor's interest in a lot in a homeowners association for as long as the debtor retains specified interests in such lot.

Subtitle B: Small Business Bankruptcy Provisions

Disclosure Statements

(Sec. 431) Sets forth mandatory factors for court consideration in determining whether the disclosure statement regarding a small business reorganization plan provides adequate information.

 

Small Business Defined

(Sec. 432) Defines a small business debtor, generally, as a person (including a debtor affiliate) with not more than $2 million in aggregate non-contingent, liquidated secured and unsecured debts as of the date of the petition or the order for relief (excluding debts owed to affiliates or insiders).

National Reporting Requirements

(Sec. 434) Sets forth uniform national reporting requirements for small business debtors.

Conversion and Dismissal

(Sec. 436) Sets forth duties and administrative procedures in small business reorganization cases, including serial filer provisions and expanded grounds for dismissal or conversion and appointment of a trustee.

Real Estate and the Automatic Stay

(Sec. 444) Revises the circumstance precluding relief from an automatic stay of an act against secured single asset real estate by a creditor whose claim is secured by an interest in such real estate. Precludes such relief where a debtor has commenced monthly payments to each such creditor that may, in the debtor's sole discretion, be made from rents or other income generated before or after the commencement of the case by or from the property. Requires such payments to be in an amount equal to the interest at the then-applicable nondefault contract interest rate (currently, at the fair market rate) on the value of the creditor's interest in the real estate.

Title VII: Bankruptcy Tax Provisions

Tax Liens

(Sec. 701) Amends the bankruptcy code to modify the treatment of certain tax liens.

Addresses for Notices

(Sec. 703) Requires the clerk of each district to maintain a listing under which a governmental entity responsible for the collection of taxes within such district may designate an address for service of requests and describe where further information for filing such requests may be found.

IRS Statutory Rate

(Sec. 704) Prescribes the rate of interest to be paid on mandatory interest payments on tax claims will be the IRS statutory rate.

Tolling of Priority

(Sec. 705) Revises the specifications for income tax claims receiving eighth priority (allowed unsecured claims of governmental units). Provides for tolling of the time periods covering such tax claims for stays of proceedings in a prior bankruptcy case, and the pendency or effect of offers in compromise.

Tougher to Discharge Taxes in Chapter 13

(Sec. 707) Prohibits a Chapter 13 discharge of any debt for fraudulent tax payments.

Fraudulent Activities

(Sec. 708) States that confirmation of a bankruptcy plan does not discharge a corporate debtor from any debt for:

1.      money or credit obtained by false representation owed to a domestic governmental unit or to a person as the result of an action filed with respect to certain claims against the Federal or a State government; or

2.      a tax or customs duty with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat such tax.

Stay and the U. S. Tax Court

(Sec. 709) Limits the automatic stay of U.S. Tax Court proceedings to prepetition taxes.

Plan Provision for Taxes

(Sec. 710) Sets as a prerequisite for court confirmation of a Chapter 11 bankruptcy plan that includes tax claims, that the debtor make regular cash installment payments over a period ending not later than five years after the date of entry of the order for relief, and in a manner not less favorable than the most favored nonpriority unsecured claim provided for in the plan.

Avoidance of Tax Liens

(Sec. 711) Prohibits the avoidance of statutory tax liens by certain purchasers. This provision makes it much harder for trustees and debtors in possession to avoid state and federal tax liens.

Payment of Taxes During Proceedings

(Sec. 712) Amends the Federal judicial code to require officers and agents conducting any business under court authority to pay all Federal, State, and local taxes when due in the course of the business, unless it is a property tax secured by a lien against estate property which is abandoned by the bankruptcy trustee, or payment of the tax is excused under a specific bankruptcy law. Cites circumstances in which payment of such taxes may be deferred in a case pending under chapter 7 until final distribution is made.  Entitles to administrative expense priority payment certain secured and postpetition unsecured taxes incurred by the bankruptcy estate, including ad valorem property taxes.

Declares that a governmental unit shall not be required to file a request for the payment of administrative expenses relating to a tax liability or tax penalty. Allows a trustee to recover from property securing a claim for the payment of all ad valorem property taxes relating to such property.

Tardy Tax Claims

(Sec. 713) Requires as a condition for payment of tardily filed priority tax claims that they be filed either before the trustee commences distribution, or ten days following the mailing to creditors of the summary of the trustee's final report, whichever is earlier (currently, before the trustee commences distribution of the estate).

Sec. 6020(b) Returns

(Sec. 714) Returns involuntarily prepared by tax agencies for a taxpayer are included in the definition of tax returns.

Conditions for Chapter 13 Confirmations

(Sec. 716) Conditions court confirmation of a chapter 13 bankruptcy plan upon filing by the debtor:

1.      of all prepetition tax returns for the prior 4 years; and

2.      before the day on which the first meeting of the creditors is convened, of all tax returns for taxable periods ending in the four-year period that ends on the date of the filing of the petition. Directs the court to dismiss a plan or convert it to chapter 7, whichever is in the best interests of the creditors and the estate, if a chapter 13 debtor fails to comply with such time frame.

Expresses the sense of Congress that the Judicial Conference of the United States should propose for adoption amended Federal Rules of Bankruptcy Procedure pertaining to objections to tax returns and to plan confirmation.

Chapter 11 Disclosure of Tax Consequences

(Sec. 717) Redefines "adequate disclosure," for Chapter 11 postpetition disclosure and solicitation purposes, to include full discussion of the potential material Federal and State tax consequences of the plan to the debtor and to a hypothetical investor that is representative of the holders of claims or interests in the case.

Setoff of Tax Refunds

(Sec. 718) Denies an automatic stay (unless specified conditions are met) to the setoff of an income tax refund for a taxable period which ended before the order for relief against an income tax liability for a taxable period which also ended before the order for relief.

Conforms State and Federal Taxable Estate Rules

(Sec. 719) Revises special provisions related to the treatment of State and local taxes, including the creation of a separate taxable estate when such is done for Federal tax purposes.

Conversion for Late Filed Returns

(Sec. 720) Permits a taxing authority to petition the court to convert or dismiss a case if the debtor fails to timely file a tax return or obtain an extension, whichever is in the best interests of creditors and the estate.

 

Title XII: Technical Amendments

(Sec. 1201) Makes technical corrections to Federal bankruptcy, judicial, and criminal law.

Redefines single asset real estate to exclude family farms and to repeal the $4 million ceiling on the amount of noncontingent, liquidated secured debts on such property.

Defines the term "transfer" to include: (1) creation of a lien; (2) retention of title as a security interest; (3) foreclosure of the debtor's equity of redemption; and (4) every mode of disposing of property or parting with an interest in property holders' committee.

Drunk Driving

(Sec. 1209) Declares nondischargeable in bankruptcy a debt for death or personal injury caused by the debtor's operation of a vessel or aircraft while intoxicated from alcohol, a drug, or other substance.

Special Tax or Assessment

(Sec. 1225) Denies an automatic stay with respect to creation or perfection of a statutory lien for a special tax or special assessment on real property whether or not ad valorem, if the tax or assessment comes due after the filing of a petition for debtor relief.

Reclaim of Goods

(Sec. 1227) Cites conditions under which the rights of the trustee are subject to the right of the seller to reclaim goods received by the insolvent debtor within 45 days before commencement of the case. Sets a time-frame for seller's written demand for reclamation.

Tax Documents

(Sec. 1228) Prohibits a court from granting a discharge in a chapter 7 case, or from confirming a reorganization plan in a chapter 11 or 13 case, unless requested tax documents have been provided to the court.

Title XIII: Consumer Credit Disclosure

Credit Card Disclosures

(Sec. 1301) Amends the Truth in Lending Act to require:

1.      specified minimum payment warnings applicable to an open end credit plan upon which finance charges are accruing; and

2.      disclosure of a toll-free number to call for an estimate of the time required to repay the balance making only minimum payments. Requires the Federal Trade Commission (FTC) to establish a toll-free number for the same purpose in the case of a creditor with respect to which the FTC is enforcing compliance with such Act. Directs the Board of Governors of the Federal Reserve System (the Board) to promulgate implementing regulations.

Disclosure for Home Loans

(Sec. 1302) Mandates additional disclosures for credit extensions secured by a dwelling that exceed such dwelling's fair market value, including a statement that the interest on the excess portion of such extension is not tax deductible for Federal income tax purposes.

Additional Disclosures

(Sec. 1303) Requires specified additional disclosures for:

1.      introductory rates and temporary annual percentage rates of interest;

2.      Internet-based credit card solicitations; and

3.      late payment deadlines and penalties.

Termination of Open End Financing

(Sec. 1306) Prohibits a creditor from terminating an open end consumer credit account before its expiration date solely because finance charges have not been incurred on such account.

Title XIV: Preventing Corporate Bankruptcy Abuse

Look-Back Period

(Sec. 1401) Extends the look-back period for such priority wages and benefits from 90 days to 180 days prior to bankruptcy (or cessation of debtor's business). Raises the ceiling for employee wages and benefits entitled to third order priority from $4,000 to $10,000.

Two Years to Avoid Fraudulent Transfers

(Sec. 1402) Extends from one year to two years the look-back period during which the bankruptcy trustee may avoid fraudulent transfers and obligations incurred by either a debtor or partnership debtor (including any transfer to or for the benefit of an insider, or obligation incurred to or for the benefit of an insider, under an employment contract and not in the ordinary course of business).

Retiree Benefits

(Sec. 1403) Instructs the court, upon motion of a party in interest, to order reinstatement of retiree benefits if the debtor modified them during the 180-day period prior to petition filing, and was insolvent on the date of modification (unless the court finds that the balance of the equities clearly favors such modification).

Officer and Director Fraud

(Sec. 1405) Requires the bankruptcy trustee to move for the appointment of a trustee if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtor's chief executive or chief financial officer, or members of the governing body who selected the debtor's chief executive or chief financial officer, participated in actual fraud, dishonesty, or criminal conduct in the management of the debtor or the debtor's public financial reporting.

 

Dischargeability Checklist

Income taxes are dischargeable if:

1.      The tax return was due (including extensions) more than three years before the bankruptcy filing, §§ 507(a)(8)(A)(i) and 523(a)(1)(A);

2.      A tax return was filed and, if late, was filed more than two years before the bankruptcy filing, § 523(a)(l)(B);

3.      The return was not fraudulent and the taxpayer did not willfully attempt to evade the tax, § 523(a)(1)(C);

4.      The tax was assessed more than 240 days before the petition date (excluding any time an offer in compromise was outstanding, plus 30 days), §§ 507(a)(8)(A)(ii) and 523(a)(1)(A); and

5.      Any unassessed tax is no longer assessable by law or agreement, §§ 507(a)(8)(A)(iii) and 523 (a)( 1 )(A).

CHECKLIST NO. 1

DISCHARGEABILITY AT A GLANCE

PERSONAL INCOME TAXES

CHAPTERS 7 & 13

Personal income taxes are dischargeable (wiped out) in a Chapter 7 if each of the following elements exist:

1.      The tax year in question is more than three years prior to filing the bankruptcy;

2.      The tax in question has been assessed more than 240 days prior to filing the bankruptcy;

3.      The tax return for the year in question was filed at least more than two years prior to the bankruptcy filing;

4.      The tax return in question was non fraudulent and there is no showing of willful evasion of payment of a lawful tax;

5.      The claim is unsecured; (If secured, the tax is discharged as to the debtor personally (in personam liability) but the lien is still valid as to any property it has attached to (in rem liability).

 

CHECKLIST NO. 2

PAYROLL WITHHOLDING TAXES

CHAPTERS 7 & 13

Payroll withholding taxes are never dischargeable (wiped out) in a Chapter 7 (unless, of course, there are assets in the estate to liquidate and pay the claim).  However, the question of whether or not the debtor is or is not the responsible officer and thus personally liable for the 100% penalty is a matter the bankruptcy court has jurisdiction to determine.  And the court has jurisdiction to determine the amount of the claim, unless it has already been adjudicated by a prior court of competent jurisdiction (i.e. the tax court).

 

CHECKLIST NO. 3

SALES TAXES

CHAPTERS 7 and 13

If the sales tax is a true sales tax (a tax imposed on the buyer and computed based on the amount of the purchase, where the tax is to be collected by the retailer and forwarded to the taxing entity) most courts hold that it is a nondischargeable trust fund tax.

Where, however, the sales tax is actually an excise tax (a tax imposed on the retailer for the privilege of doing business, computed on the amount of the purchase) it is dischargeable if the event on which the tax arose is more than three years prior to the filing of the bankruptcy.  It is important to note that what is called a sales tax in some states is actually an excise tax under bankruptcy law (such as, for example, California’s so called sales tax).  The dischargeability of the tax does not depend on what it is called by the state, but rather by the actual nature of the tax as determined by the bankruptcy court.

Note that where in a Chapter 13 the taxing entity fails to file a timely proof of claim and the claim is unsecured, it is discharged.

 

CHECKLIST NO. 4

EMPLOYMENT TAXES

CHAPTERS 7 and 13

The employment tax (the employer’s contribution to the payroll withholding) is dischargeable under certain circumstances.  Such taxes may be dischargeable if over three years old, or if over 90 days old, or entirely dischargeable, depending on how the Bankruptcy Code is interpreted.  Scarce case law leaves this issue unsettled.  The one case extant which deals with this issue held that any such tax over 90 days old prior to bankruptcy is dischargeable.  However, Collier’s on Bankruptcy makes a flat statement that such taxes are dischargeable only if over 3 years old, without citing authority.

 

CHECKLIST NO. 5

DISCHARGEABILITY AT A GLANCE

PENALTIES

CHAPTERS 7 & 13

The majority rule is that penalties that are punitive in nature only (which includes most penalties such as penalties for non filing, late filing, non payment, late payment, etc.) are dischargeable if:

1.      The penalty is attached to a tax which is dischargeable; or

2.      The transaction or event giving rise to the penalty is more than three years before the bankruptcy filing.

 

A non dischargeable penalty is one which is for reimbursement to the taxing entity for pecuniary loss, or is a penalty that represents the actual tax owed, such as the 100% penalty for payroll withholding.  The typical penalties assessed against taxpayers are not in these categories.

Note:   The 240 day assessment period is not applicable to tax penalties.  Hence, it makes no difference when the penalty was assessed, as long as it meets one of the two criteria listed above it is dischargeable.

Note:   The minority rule is that a penalty is dischargeable only if the tax is dischargeable, regardless of how old the penalty is.

Note:            Penalties, even in Chapter 7, are not priority claims, but are included in exceptions to discharge under § 507.

SOURCE:  “DISCHARGING TAXES IN BANKRUPTCY”

Chapters 7, 11 and 13

Morgan D. King J.D

 (Cases Filed on or After February 13, 2006)

(The U.S. Trustee Program will apply this median family income data to all cases filed on or after February 13, 2006. This median family income data will be adjusted again in August/September 2006, shortly after the Census Bureau updates the data.)

	FAMILY SIZE
	I EARNER	2 PEOPLE	3 PEOPLE	4 PEOPLE *
STATE
ALABAMA	$33,873	$41,103	$50,617	$56180
ALASKA	$45,191	$62,013	$70,450	$78,958
ARIZONA	$36,856	$48003	$53,089	$60,160
ARKANSAS	$29,930	$38,438	$42,629	$51,478
CALIFORNIA	$43,436	$55,320	$61,655	$70,626
COLORADO	$41,401	$56,024	$60,550	$68,924
CONNECTICUT	$54,311	$63,455	$79,100	$91,269
DELAWARE	$40,264	$53,716	$63,593	$74,444
DISTRICT OF COLUMBIA	$39,649	$64,274	$64,274	$64,274
FLORIDA	$37,099	$46,351	$51,294	$61,825
GEORGIA	$35,562	$47,327	$51,545	$60,028
HAWAII	$47,056	$56,383	$66,742	$78,354
IDAHO	$33,634	$44,447	$48,891	$57,809
ILLINOIS	$43,012	$53,320	$64,286	$72,742
INDIANA	$36,572	$48,183	$52,526	$65,421
IOWA	$36,518	$48,095	$55,933	$64,051
KANSAS	$37,795	$50,258	$56,386