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Practical Bankruptcy after BAPCPA "Reform" Legislation (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 - Public Law 109-8)

As you have most likely heard, April 20th of 2005 President Bush signed the BAPCPA bankruptcy "reform" legislation into law. There was much press coverage and public speculation about the practical meaning of these pervasive legislative changes to the Bankruptcy Code, (Title 11 of the United States Code). Some critical portions of that legislation were immediately effective on April 20th, 2005, especially those where this new federal legislation pre-empted state constitutional homestead in states like Florida which allow exemption of potentially unlimited homestead value. The majority of the legislation became effective later, applying to bankruptcy cases filed October 17th, 2005, or thereafter.

The public perception of the drastic and draconian nature of the changes was such that in the sixteen days of October, 2005, just prior to the effective date of the new legislation, approximately nineteen thousand cases were filed in our local bankruptcy court. Since our local Bankruptcy Court's normal case filings are approximately two thousand for each normal whole month, the case filings for that one-half month of October were nineteen times the normal rate. Looked at another way, the filings in the first sixteen days of October, 2005, equaled numerically all cases that would normally have been filed through August 1, 2006. As you may imagine, the Bankruptcy Court in all its aspects operated in near chaos as this glut of cases was processed through the system.

In later paragraphs I will provide some summaries of critical changes of which non- bankruptcy Florida practitioners and financial professionals should be aware. Before that I would like to make you aware of a fundamental truth regarding the new legislation that the press and the grapevine have not known to, or have been unwilling to, convey generally to professionals and the public.

Simply put, most people who would traditionally be considered in need of bankruptcy will be still be eligible for relief under the present Bankruptcy Code. In many, many cases the relief will be the same full relief by discharge that was available before the "reforms" were put into effect. Very few people will be barred from relief by the new laws.

The single biggest change in eligibility for bankruptcy and determination of the kind of bankruptcy is the requirement of a mechanical statutory "means test," that calculates income compared to living expenses.

ANY FAMILY WHICH MAKES UNDER THE "MEDIAN INCOME" WILL PROBABLY BY ELIGIBLE FOR STRAIGHT CHAPTER 7 BANKRUPTCY. The median income for a family of one in Florida is $37,099.00 and for a family of four the figure is $61,825.00. SOCIAL SECURITY INCOME IS NOT COUNTED IN THIS CALCULATION. Since the dividing line is "median income," most moderate and lower income families will be eligible for Chapter 7. Families who make above the median income may still qualify for Chapter 7 depending on their living expenses, calculated by a politically determined cluster of real and artificial "allowable" expenses.

Generally, secured loans must be paid so potential debtors with high mortgages and high car payments are more likely to be eligible. Alimony, child support, and even an allowance for support of aging relatives are allowed expenses. Many families who make more than the median income will still be eligible for Chapter 7 relief; others will have to move on to relief under Chapter 13 which is a repayment plan generally referred to as the 'wage earners reorganization." Under the new laws it is now quite possible for even a Chapter 13 plan to provide that general unsecured creditors will receive absolutely nothing in the case. A Chapter 13 case might now pay less to unsecured creditors under the new laws than it would have under the old laws where our local judges required a minimum 20% to unsecured creditors.

For people who have gotten into financial trouble from bad investments or a failed business, the new "means test" may not even apply. Where a person's debt is primarily business debt, such as the bank or SBA loan from the defaulted business that is larger than the total of consumer debts, (such as personal credit cards, car loans and mortgages), the means test is inapplicable and need not be filed in the case. These people are eligible without regard to their income. Additionally, since the means test applies only to debtors with primarily consumer debt, it is completely inapplicable to corporations and other fictitious business entities.

Earlier, I alluded to some critical changes in the law of which Florida professionals should be aware. These pertain to what property is exempt from creditors. The changes are extensive and I cannot describe all, but four changes are so important and pervasive I am compelled to briefly address each.

  1. In any bankruptcy case, (and it appears this federal preemption applies only in bankruptcy cases), federal law now provides that Florida constitutional homestead is subject to a 10- year look-back/reach-back to set aside transfers or transactions whereby money or value was put into homestead fraudulently. This is very contrary to established Florida law prior to these changes. Some examples of circumstances where this might apply are buying, improving, or paying down the mortgage on, a homestead within the ten years. Moving homestead value from another state with a lower dollar limit to obtain the benefit of Florida's unlimited homestead could also trigger the provision.
  2. If Florida homestead has not been established for at least twelve hundred and fifteen (1,215) days, (approximately three years and four months), prior to the bankruptcy filing, then the claimable exemption amount is limited to One Hundred Twenty-Five Thousand Dollars ($125,000.00). Tracing proceeds from one Florida homestead to another would appear to be acceptable in this calculation, (the wording of this provision is inartful and creative interpretations on both sides of the issue are finding their ways to court).
  3. A very curious provision was aimed at debtors who changed states, (who moved to Florida), to take advantage of more favorable exemption laws such as unlimited homestead. Such a move might imperil homestead under number one above, but additionally Section 522 of the Bankruptcy Code provides that exemptions are determined by the state in which you reside, provided that you have lived in that state for at least two years. If you have not lived in that state, (Florida), for the two years immediately preceding the bankruptcy filing, then exemptions are determined by the state where the debtor was domiciled for the six months preceding two years before the bankruptcy, (from 2 years to 2 % years preceding the filing). There is more detail but that is the gist. Debtors who have lived in Florida less than two years get their previous state's exemption laws applied.
  4. There is a veritable minefield of seemingly minor requirements built in to the new procedures that have serious or fatal consequences. Dismissal is "automatic" upon the failure to file a certificate of pre-bankruptcy credit counseling by an approved agency, failure to file a means test form with submission of "advices" of income, or failure to provide tax returns to the trustee.

In summary, this is legislation successfully pushed by banking and creditor interests. It will take more time, effort, and expertise for the bankruptcy attorney to properly file the cases, but bankruptcy is alive and well. If you have clients who need to consider bankruptcy for their businesses, their credit cards, discharge or management of taxes, saving property from foreclosure, or any of the other myriad reasons why bankruptcy has been traditionally used, please make sure they investigate bankruptcy options immediately. It is very likely they will be eligible for the benefits of bankruptcy protection, often without significant change from pre-BAPCPA law.

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