The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter "the Act") was signed by the President on April 20, 2005. Most of the Act's, amendments to the Bankruptcy Code will apply only to cases under Title 11 commenced on or after October 17, 2005. However, there are exceptions to the effective date of the Act which may affect future bankruptcies. In an effort to inform our clients of issues which may affect their business and commercial activities, we have prepared a summary of some of the changes to the Bankruptcy Code. We hope you find this useful and would encourage you to contact us with questions or concerns.

Consumer Protection Issues

    The Act provides that a Court may reduce a Creditor's claim based on unsecured consumer debts by up to 20% 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.

    The Act provides 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.

    The Act provides extensive detail disclosures that must be made by a Creditor before a debt may be reaffirmed, including essentially the form and language that must be used, together with the timing of payments.

    The Act amends the Bankruptcy Code to add a priority for debts for death or personal injury resulting from operating a motor vehicle or vessel if the operation was unlawful due to intoxication from alcohol, drugs, or other substance.


    The Act excludes funds from the bankruptcy estate that were contributed more than 365 days before the petition to an education IRA if the beneficiary is a child, step-child, grandchild, or step-grandchild of the Debtor. Certain exceptions apply to this rule which may reduce the amount excluded.


Domestic Support Obligations

    The Act places certain domestic/child support payment obligations within the first priority claim category if the funds received by a governmental unit are applied in a prescribed order according to the Act.

    The Act conditions Confirmation of a Debt Repayment Plan under Chapters 11, 12 and 13 upon certification that the Debtor has paid in full all adjudicated domestic support obligations that become due after the petition filing date.

    The Act revises guidelines concerning the nondischargeability of certain debts for alimony, maintenance, and support to repeal the exceptions granted the Debtor under specified conditions.

    The Act provides that certain property exempted from the bankruptcy estate may now be liable for a debt arising from domestic support obligations.

    The Act prohibits a Bankruptcy Trustee from avoiding a transfer that is a true payment of a debt for a domestic support obligation.

Bankruptcy Abuse Prevention

    To be eligible for bankruptcy relief, an individual Debtor must receive a briefing on Credit Counseling and Budget Analysis from a non-profit Budget and Credit Counseling Agency approved by the United States Trustee and meeting standards set forth in the Act. To receive a discharge in a Chapter 7 or Chapter 13 case, an individual Debtor must attend a personal financial management instructional course approved by the United States Trustee. The Act provides significant detail concerning the definitions, restrictions, disclosures and requirements for debt relief agencies that assist Debtors with financial counseling.

    The act creates a means testing approach to Chapter 7 eligibility. The means test establishes whether the granting of relief under Chapter 7 to a Debtor whose debts are primarily consumer debts, would be presumed to be an abuse of the provisions of Chapter 7. Monthly income as defined by the Act has compared against allowed expenses as provided by the Internal Revenue Service are used to determine a Debtor's income for purposes of the means test. If a Debtor's income prevents him or her from qualifying for a Chapter 7 case, the Debtor must look to other provisions of the Code including Chapter 13. Certain Debtors with monthly income over the applicable state median income as defined by the act may be required to file a five year plan if their plans do not propose payment of 100% of unsecured claims.                                 

    The Act now provides that a Debtor's attorney's signature on a bankruptcy petition is a certification that the attorney has no knowledge after an inquiry that the information on the schedules is incorrect.

    Section 523 of the Bankruptcy Code is amended to create a presumption of fraud if the debtor incurs debt to a single creditor for purchases over $500.00 of luxury goods within 90 days before the order for relief or obtains cash advances on an open-end credit account in excess of $750.00 within 70 days before the order of relief is entered.

Automatic Stay

    The Act modifies Section 362 of the Bankruptcy Code in several areas. In certain cases, debtors who have previously filed for bankruptcy protection are now required to request the Court extend the automatic stay in the new case after they show the new case was filed in good faith. Additionally, the automatic stay is terminated as to creditors with a purchase money security interest and personal property if the debtor has not reaffirmed the debt or redeemed the property within certain deadlines set forth within the Code.

    The new Act provides several new exceptions from the automatic stay to allow creditors to continuing pursuing to evict residential tenants in certain cases if a judgment is obtained prior to the filing of the petition.

    Numerous changes were made to Section 362 concerning the automatic stay in a bankruptcy case as it affects personal property leases.

Chapters 11 and 12

    The time period governing discharge after a prior Chapter 11 discharge, is changed from 6 to 8 years under the Act.

    Chapter 11 Bankruptcies have been amended under the Act to include several features of a Chapter 13 case involving individual debtors.

    A debtor may not exempt any amount of interest in excess of $125,000 acquired in the debtor's homestead within 1,215 days before the bankruptcy petition is filed. This limitation does not apply to family farmers or an interest in a homestead transferred from a previous principal residence in the same state.

    The Act amends Section 506 of the Code to provide that personal property for secured claims shall be valued at replacement value.

    Numerous changes were made by the Act concerning Chapter 11 cases for small business bankruptcies. Many of these changes are procedural in nature and appear to be intended to help streamline these cases.

    Chapter 12 was permanently reenacted by the Act effective July 1, 2005. Chapter 12 now includes family fisherman as well as family farmers as the intended debtors for these cases. The debt limitation for a family farmer is increased from $1,500,000.00 to $3,237,000.00. However, the debt limitation for a family fisherman was set at $1,500,000.00.

    This is only a summary of a few provisions of the Act. Many more changes were made to the Act as well as the Federal and local Bankruptcy Rules. Nothing herein is intended as a legal opinion or to address questions or issues with regard to specific facts or circumstances of a particular matter. Further, no opinion is rendered in this correspondence by this law firm or the attorneys as to compliance with and/or violation of any laws or regulations, either federal or state. We would appreciate the opportunity to discuss the new Act with you and hope you will call with questions or concerns.

Field, Manning, Stone, Hawthorne & Aycock, P.C.
                        
Robert A. (Andy) Aycock *



*    Andy Aycock is a shareholder in the law firm of Field, Manning, Stone, Hawthorne & Aycock, P.C. He practices in the areas of Bankruptcy, Banking and Commercial Litigation. He recently served as panelist discussing Chapter 12 in the new Act at the Twenty-First Annual Farm, Ranch and Agri-Business Bankruptcy Institute held September 15-16, 2005. Andy may be reached at (806) 792-0810 or at aaycock@lubbocklawfirm.com.