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n march 10,theU.S. Senatepassed the Bankruptcy AbusePrevention and ConsumerProtection Act of 2005. It iswidely expected that thepresident will sign the bill shortly. If andwhen he does, the new law will representthe most significant revision to theBankruptcy Code, particularly as it relatesto consumers, since the Bankruptcy ReformAct of 1978. Credit card companies andother consumer lenders are championing thenew law as a major victory in theircampaign to significantly curb claimedabuses of the current bankruptcy system byindividual debtors.In general, the new law creates alabyrinth of administrative, procedural andsubstantive requirements that will certainlymake it more difficult for an individual toobtain a discharge of his or her obligations.These additional requirements place most of the responsibility for their enforcement onthe bankruptcy courts and U.S. trustees. Inorder to undertake such responsibilities, bothwill need to increase their staffs, at no smallcost, in order to have the personnelnecessary to fulfill their new duties. Butindividual debtors will bear the significantburdens of navigating the requirements of the new law. Theywill be hard-pressedtoafford the additional costs in terms of timeand legal fees in exchange for the limiteddebt relief of the new law.To be sure, a discharge in bankruptcyshould be limited to the “honest, butunfortunate debtor.” And the new law hashelpful provisions relating to the disclosureand filing of financial information thatshould help to prevent abuse. Nonetheless,the new bill removes the fact-intensivequestion of abuse and how to remedy it fromthe traditional province of the courts infavor of a cumbersome set of rules, whichwill probably discourage debtors and theircounsel from seeking relief under theBankruptcy Code.
Several sections address thenotion of consumer abuse
The principal provisions of the newlaw addressing consumer abuse areset forth in revised §§ 707, 521 and 362.This article will discuss the principalconcepts of these provisions.
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Presumption of abuse
. Section 707(b)sets forth a new substantive standard fordetermining abuse. Among other things,new § 707(b) will create a presumption of abuse in every Chapter 7 liquidation case inwhichthe debtor’s current monthly incomeless permitted expenses multiplied by 60(which is the maximum number of monthsfor a payment plan under Chapter 13) is notless than 25% of the debtor’s generalunsecured claims or $10,000, whichever isless. Costs that can be deducted are limitedprimarily to actual monthly expenses forcertain prescribed household expenses,reasonably necessary health insurance,disability insurance and health savingsaccounts, support for dependents, paymentson account of secured debt and priorityclaims, and costs of administering a planunder Chapter 13.The presumption of abuse may berebutted only upon a showing of “specialcircumstances” justifying additional deduc-tions from the debtor’s current monthlyincome. The statute refers to such specialcircumstances as a “major medical condi-tion” or a “call or order to active service.” Toqualify, the debtor will have to submit astatement under penalty of perjuryexplaining the nature of the specialcircumstances, itemize and document suchexpenses and show that the additionalallowed deductions bring the debtor’scurrent monthly income below the thresholdof 25% of general unsecured claims or$10,000. Given the limited scope of thisexception, the presumption of abuse willrarely be rebutted.If the presumption applies, the court maydismiss or, with the debtor’s consent, convertthe case to Chapter 11 or Chapter 13. Asone of the purposes of the new law is torequire debtors to repay a portion of theirdebts as a condition to receiving a discharge,debtors should expect that cases to whichthe presumption of abuse applies will beconverted to Chapter 13. Under new § 362,
THE WEEKLY NEWSPAPER FOR THE
LEGAL PROFESSION
BANKRUPTCY LAW
Costs of the New Act
By Craig Rankin and Christopher Alliotts
Craig Rankin
is a partner at Los Angeles-basedbankruptcy boutique Levene, Neale, Bender,Rankin &Brill.
Christopher Alliotts
is of counsel to the Menlo Park, Calif., office of Los Angeles-based SulmeyerKupetz.
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