The flat prohibition on attorneys advising clients to incur new debt in contemplation of bankruptcy is unconstitutional, says the 8th Circuit Court of Appeals.  Thank you.

Hostility to bankruptcy lawyers (and debtors) permeates the “new” bankruptcy law.  This particular provision required lawyers to identify themselves as “debt relief agents” in advertising and tried to prevent lawyers from pointing out ways in which a new loan or resort to credit might benefit the client in legitimate ways.

I’m now free to tell the client openly that if you have no loan on your car, under the present BAP decision on the application of the means test, you lose the “ownership allowance” expense.  That allowance in California is $489 a month.  If you have a loan secured by the car, you get the allowance, regardless of the balance owed on the car.

I have long wanted to tell my clients that it makes sense to borrow against your car for any purpose in order to get the benefit of the ownership allowance.  Borrow to pay for your bankruptcy, borrow to put money in an IRA, or to get health insurance, or your car tuned up.  Whether the loan originated in the purchase of the vehicle or for some other purpose, the existence of the lien entitles one to the allowance according to the 9th Circuit BAP.

Often, my clients are driving junker cars. Some have respectable credit scores, although their balance sheets are a mess.  A replacement vehicle  will give them reliable transportation going forward.  Yet Congress wanted to limit my ability to discuss the range of options with my client.  Somehow, Congress seems to have a slippery hold on the truths found in the First Amendment.

I keep encountering posts on internet bankruptcy boards from individuals who have “filled out the means test” and then proceed to announce their conclusions. Given the uncertainties in the legal community about how to apply the means best and the think and re-think I engage in preparing Form 22, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family member; and how to handle business expenses for the self employed. (One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!) Then there is the dispute on the deduction side about operating expenses for paid for cars; allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test. Get an experienced bankruptcy lawyer involved.

The stupidity of the means test as a metering device in bankruptcy was apparent as I worked through the case of a single debtor. Because she is a renter with an old, paid-for car, and no unpaid taxes, the means test will compel her to pay a significant amount monthly to her Chapter 13 plan.

Whereas, if she had mortgages that were double or triple the amount of her rent, or an upscale new car, or years of unpaid taxes, those payments would be deductions from her income in calculating what she must pay in Chapter 13. Her unsecured creditors would get nothing: all the available money would be diverted to secured claims or taxing authorities.

Does it seem to anyone else that we are rewarding the wrong sort of behavior?

I’m always delighted when I uncover another aspect of the bankruptcy “reform” act of 2005 that operates in my client’s favor. We all know that the law was written to skewer the consumer debtor who was painted as irresponsible and profligate, a picture absolutely at odds with the world as I’ve seen it in 28 years of bankruptcy practice.

Yesterday’s discovery was how the law treats broken families better than intact families. My client is a single woman with a teenage child for whom she receives substantial and regular support. (Thank you, Dad). In preparing the Chapter 13 version of Form B22 to determine what Mom will have to pay to unsecured creditors, one includes the child support she receives in income; takes the deductions based on a household of two; then subtracts the support from the final number!

End result: Mom, my client, gets to figure her expenses including the cost of housing, feeding, and educating her daughter, but then gets to back out of the equation the support she gets for the child. In this case, it made a $1000/month difference, a $1000 less per month that she must pay to creditors.

I wonder if the cock sure Congressmen who wrote and passed this bill realized that the “new” law treats divided families better than the traditional, intact family. In the meantime, I will take every advantage I can find in this wretched law where it benefits my clients.

The first hurdle in the newly enacted means test for Chapter 7 eligibility is the median income for a household of comparable size in that state. Those under the median pass the means test at the first hurdle; those above the median go on to calculate if their allowed expenses yield “disposable income” sufficient to repay creditors a portion of their claims.

The Census Bureau has just released new figures that are used in bankruptcy cases filed after February 1. For California, those figures are

• 1 person household $44,499
• 2 person household 59,086
• 3 person household 64,118
• 4 person household 72,996

One of the glitches in the drafting of the 05 amendments is that the language of the statute talks about comparing the size of the “household” to the census figures for “families”. Thus the household may be measured by the Census Bureau’s “heads on beds” standard, irrespective of the degree of economic interdependence of those sleeping in those beds. Yet we indulge in the fiction that Congress knew what is was thinking when it passed this act. The more we work with the “new law”, the more fictional it becomes.

The Bankruptcy Code attempts to exclude from its shelter those who “abuse” the system. Chapter 7 has a provision in Section 707(b) that allows a challenge to the entitlement of a debtor to get a dishcarge under that chapter. However, only a debtor whose debts are “primarily consumer” debts is subject to this scrutiny. One whose debts result from business failure or failure to pay their taxes are not subject to review for “abuse”, regardless of their ability to pay.

That came home to me as I interviewed a single man with a fine salary, yesterday. He is exempt from the means test because his debt was incurred in business. There is certainly a policy argument for making the consequences of business failure tolerable. That is, I think, a hallmark of the American business ethic, the acceptance of failure and the encouragement of trying again.

The exclusion from the “can-pay” scrutiny for those who haven’t paid taxes seems to me to be harder to justify. Our society isn’t stronger for a policy protecting those who haven’t paid their fair share of maintaining our infrastructure.

Which leads you back to the unstated premise underlying the means test, that all consumers who can’t pay their bills are to some degree dishonest. My learned opinion is HOGWASH.

I sat this afternoon in a 341 meeting for Chapter 13 in which another debtor testified that he had converted his Chapter 7 case to one under Chapter 13 because the UST objected to the support he provided to his 70 year old mother. The UST proposed to take the mother’s deposition in a city 200 miles away. To save his mother from this inquiry, he converted his case to a Chapter 13.

What kind of public policy is it that tells an adult son he can’t support his aged mother because MBNA or Citibank has a prior claim on his earnings? Where is this compassionate conservatism?

Remember, the policy makers at the UST’s office are political appointees of our President. All hat and no cattle? All talk and no substance?

Cathy Moran
Bankruptcy in Brief

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I looked back to see how my advice to clients considering bankruptcy has changed since the amendments of 05 took effect. Deceptively dubbed bankruptcy reform, the changes were designed to narrow the door to the bankruptcy court and shackle debtor’s attorneys whom Congress blamed for inciting people to file bankruptcy.

Where I used to tell most clients who were unemployed that there was little point in spending precious cash on filing bankruptcy when they had nothing that creditors could take from them. Wait until things have improved and you have a salary to protect, then we’ll file your case.

Now, with the uncertainty about just what constitutes abuse in Chapter 7 and the varying judicial decisions about whether CURRENT MONTHLY INCOME, the backward looking six month average income or the actual income at filing control, I am far more inclined to say file now, when you have neither CMI nor actual excess income. Scrape up the money and file while there can be no doubt that you have no ability to pay existing debt. Funny that the new law has made me a far more vocal promoter of filing bankruptcy than before.

I am also much more likely to promote Chapter 13, not because the client must file a repayment plan, but because it allows a client to pay the increased cost of the bankruptcy over time. These plans usually pay little or nothing to creditors, but they do let the financially strapped buy my help on credit. Ah, the unintended consequences… Between increased attorneys fees, prebankruptcy counseling and post filing financial management classes, higher filing fees, and the production of all the required paper, it simply costs more to be broke.

The Congressional attempt to prohibit lawyers from advising clients to take perfectly lawful acts, such as buying a replacement vehicle or borrowing to file the bankruptcy, has been ruled unconstitutional by the trial courts who have considered the matter. We can hope that the new Congress may eliminate some of the worst of the other idiocies in the amended law.

Cathy Moran