BAPCPA Anniversary

BAPCPA – the Bankruptcy Abuse Prevention and Consumer Protection Act – went into effect for cases filed on or after October 17, 2005.  At the time – most people didn’t know what BAPCPA meant, or how it would affect bankruptcy.  Most believed – erroneously – that they would not be allowed to file bankruptcy once BAPCPA went into effect.
The result being a massive spike in bankruptcy filings in the month prior to BAPCPA went into effect.
This October 17, 2013, will be the eight year anniversary of BAPCPA.  This anniversary is significant because there are hundreds of thousands of people who filed just before BAPCPA went into effect who – because of the limitations on multiple discharges – are going to become re-eligible to file this autumn.
Many people filed for bankruptcy in 2005 out of fear, with little or no regard to their long-term finances.  It is generally agreed that when possible, it is best to wait to file for bankruptcy after one reasonably expects any financial hardship has ended.  People who filed in 2005 may have been in the middle of receiving substantial health care, for example, and because they filed before they were finished with their medical care, they continued to accrue massive medical debt after their case was filed, and therefore were unable to fully benefit from their discharge.
This is just one way in which the 2005 hysteria would have caused people to file bankruptcy prematurely.  We anticipate there will be a number of people needing to re-file after October 2013 when they become re-eligible for a Chapter 7 discharge.
Here at Holbus Law Office, we encourage our clients to contemplate bankruptcy with great care.  Bankruptcy is a serious process, and while it may not be the financial crippler that it once was (yes, people can recover financially after bankruptcy), it does still have consequences.
I personally do not believe that people should rush into bankruptcy.  So, for those of you who are waiting for October 17, 2013 to roll around…  For those of you who are getting ready to file bankruptcy again to stop a pressing problem – such as wage garnishment, utility shut-off, repossession, or foreclosure – I urge you to talk to an attorney now.
We offer free, no-obligation consultations so we can evaluate what options (including non-bankruptcy options) are best for you.  By meeting with an attorney now, you can afford yourself plenty of time to decide if bankruptcy is right for you.  For those who need to file soon after October 17, meeting with an attorney now can also help make sure that you are ready to file as soon as you become eligible, and that you are doing all the right things financially so that there are no problems with your next bankruptcy case.

Residency Requirements for Exemptions

In a Chapter 7 or Chapter 13 bankruptcy case, debtors must make a full disclosure of all of their assets.  Assets range from the tangible (furniture and appliances) to the intangible (stocks and intellectual property), from the valuable (real estate and vehicles) to the invaluable (clothing and timeshares), from the known to the contingent (tax refunds and personal injury claims), and include future, partial, and equitable interests.
Assets, particularly in Chapter 7, can be seized by a trustee and sold for the benefit of unsecured creditors unless the asset’s full value can be taken as exempt.  Each state has its own respective property exemption laws (and the federal bankruptcy code also provides for its own exemptions).  But you can only select one exemption set.  Which one should you choose?  Which ones can you choose?
It probably won’t come as much of a surprise that you can’t use California exemptions if you do not currently reside in California, nor have you resided there at any time in the past.
What might surprise you is that you can be a legal resident of California and not be eligible to claim its exemptions.
Let’s take a look at and parse the controlling rule, 11 U.S.C. § 522(b)(3)(A).

Property listed in this paragraph is […] any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor’s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor’s domicile has not been located in a single State for such 730-day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place;

Quite a mouthful, eh?
Scenario #1.  For simplicity’s sake, 730 days is two [non-leap] years.  So, what this statute is saying is that – the state whose exemptions control is the state that the debtor has resided in for two years.  So, let’s start with a simple example.  John Doe is a resident of Wisconsin.  Today’s date is May 29, 2013.  John moved to Wisconsin from Rhode Island in 2006.  Therefore, John Doe has been a resident of Wisconsin for more than two years.  Therefore, John is entitled to use Wisconsin’s exemptions.
Before we continue any further, I should mention that Wisconsin is one of a few states that allows its qualifying residents to elect to choose Wisconsin’s state exemptions or the federal exemptions.  As a practical matter, most attorneys use federal exemptions because the federal wildcard exemption protects certain assets like tax refunds that Wisconsin’s state exemptions do not.  Wisconsin exemptions are favored when there is a lot of equity in a particular asset (such as a homestead) where the state exemptions are much more favorable than the federal exemptions.
Scenario #2.  So, let’s change the facts around a little bit.  Let’s say John Doe moved to Wisconsin from Rhode Island on June 12, 2012.  Let’s further assume that John Doe began living in Rhode Island since 2003.  John has had two residences in the past 730 days – Wisconsin and Rhode Island.  Now, we have to look past the 2 year mark and look at the timeframe of 2.5 years ago to 2 years ago.  During that time, John Doe was a resident of Rhode Island, which means Rhode Island exemption laws still control in John Doe’s case.  In order to be eligible to use Wisconsin exemptions, John must wait to file his case until June 13, 2014.
Scenario #3.  Now, let’s make it REALLY confusing.  John Doe moved from Rhode Island to Wisconsin on June 12, 2012, and today is May 29, 2013.  Prior to Rhode Island, John lived in Nebraska from 1999 to May 1, 2011.  In the last 2 years, John lived in Wisconsin and Rhode Island.  So, we shift our focus from the past 2 years, to the range of 2.5 years to 2 years ago.  During that time, he lived in Nebraska and Rhode Island.  Also during that time, he spent the majority of his time in Nebraska.  Therefore, Nebraska exemptions control in this case.
In scenario #2, we are stuck with Rhode Island exemptions.  Rhode Island allows nonresidents to claim its exemptions.  Like Wisconsin, Rhode Island residents may also use federal exemptions.  So, in this scenario, John Doe can choose between federal exemptions and Rhode Island state exemptions.
In scenario #3, we are stuck with Nebraska exemptions.  Nebraska also allows nonresidents to claim its exemptions, but does not allow federal exemptions.  Therefore, in this scenario, John would be limited to claiming Nebraska exemptions.
Other states, such as Arizona, do not allow nonresidents to claim its exemptions, but allow the use of federal exemptions.  If Arizona was the controlling state, John Doe would have to use federal exemptions.
What about a state like Idaho, which does not allow nonresidents to use its state exemptions, but also forbids federal exemptions?  In that case, the hanging paragraph in 11 U.S.C. § 522(b)(3) (just below subsection ‘C’) kicks in, and federal exemptions are available.  This is also true if there is no controlling state (the debtor resided outside of the 50 states and D.C. in the qualifying time period).

If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).

Lanning… for Chapter 7

We have just celebrated the three year anniversary of Hamilton v. Lanning, the U.S. Supreme Court decision that finally put to rest whether bankruptcy judges had authority to consider factors other than historical data when computing projected disposable income in a Chapter 13 Plan.  In the decision, the Court asserted that judges could consider factors that were known or virtually certain, and adjust the Means Test result accordingly.
That’s fine and dandy for someone who wants to be in Chapter 13, but disputes how much money they can afford to pay unsecured creditors.  What about the individual who believes that they cannot afford to pay anything to unsecured creditors, yet an inaccurate means test is showing that they have too much disposable income to qualify for Chapter 7?
The answer to that conundrum has existed all along in the nearly 8 years since BAPCPA was enacted.  11 U.S.C. § 707(b)(2)(B).  In a similar fashion, debtors may file a rebuttal of the presumption of abuse to show why certain figures on Form B22A should be allowed to deviate from the formulaic approach.  This is most effective if the debtor had a source of income within the past six months, but that source of income no longer exists and is skewing the means test result.  The change is relatively easy to prove and justify.
You should still expect that the U.S. Trustee (who, by the way, is not the same as the trustee who has been assigned to administer your case) will file a Statement of Presumed Abuse – which is often a procedural placeholder that is filed with the Bankruptcy Court, allowing the UST time to investigate your case a little more closely.  If the rebuttal form is appropriate, the UST won’t challenge it.  But if the UST feels that the Chapter 7 filing is abusive, they will either file a motion to convert the case or a motion to dismiss the case, and have 30 days to do so from the time they file their statement.

Separately classified unsecured debts in Chapter 13.

Chapter 13 of the bankruptcy code provides for, among other things, the curing of priority debts, such as taxes and child support.  This is a good thing, because most priority debts are non-dischargeable, so by having them fully paid in a Chapter 13 Plan, it helps the debtor exit bankruptcy with less surviving debt.
However, not all non-dischargeable debts are priority debts.  Student loans are a prime example.  Since interest continues to accumulate on student loans, what is a debtor to do to avoid coming out of Chapter 13 with bigger student loan problems than he or she had going into bankruptcy?
Bankruptcy courts in this district have ruled that debtors can provide for separate classification of student loans – to pay them separately, outside of the Chapter 13 Plan.  Two of those cases that we will be looking at today are In re Truss, 404 B.R. 329 (Bankr. E.D. Wis. 2009) (Judge McGarity) & In re Hanson, 310 B.R. 131 (Bankr. W.D. Wis. 2004) (Judge Kelley).
Both cases declined to allow the debtor to deduct payments to a student loan creditor on the Means Test (Form B22C).  However, the debtors were allowed to maintain payments on the student loans.  In order for the plans to be confirmable, the judges weighed two seemingly contradictory statutory provisions.  11 U.S.C. § 1322(b)(1) (which prohibits unfair discrimination amongst classes of unsecured claims) and 11 U.S.C. § 1322(b)(5) which allows the maintenance of long term debts.
To avoid scrutiny under (b)(1), the maturity date of the student loan had to be out past the term of the Chapter 13 Plan.  The debtors were also required to maintain the loan (they couldn’t propose to accelerate payments, and they couldn’t propose to make less-than-contractual payments).
Other special classifications have been allowed under what is referred to as the Crawford test.  Examples of these are creditors who may file criminal charges and creditors who can revoke occupational licenses.  In these cases – should the debtor not be allowed to pay these creditors in full and face the consequences, the result would most assuredly be that the debtor would lose his or her source of income and be unable to fund the plan – a lose-lose scenario for both the debtor and the other unsecured creditors.  In such cases, it is better to have one or two creditors paid with preference over all other creditors, rather than see all creditors get paid nothing at all.