The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

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The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005

• Carrie R. Hunt, Esq.
• Associate Director of Regulatory Affairs
• chunt_at_nafcu.org

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Bankruptcy Reform Act

• Reduces disparity of treatment in the bankruptcy
  system
• Establishes more uniform and predictable
  standards
• Strengthens the integrity of the bankruptcy
  process and restores personal responsibility
• Addresses the startling increase in bankruptcy
  filings
• Improves the public perception of fairness in the
  bankruptcy system
• Improves bankruptcy administration

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Review-Types of Bankruptcy

• Chapter 7- For individuals or businesses seeking
  to eliminate all debts. Non-exempt property is
  sold to pay creditors, and no debts are owed when
  the bankruptcy is complete.
• Chapter 13-This is a restructuring of debt. It is
  for individuals, not businesses. It is for people
  who dont want to lose their assets, and instead
  want more time to reorganize and pay their debts.
  

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Review-continued

• Chapter 11- Normally for businesses seeking to
  reorganize their debts. A Chapter 11 bankruptcy
  does not wipe out all debts. Rather it gives a
  debtor the time to restructure debts without
  losing business and property during that time.
• Chapter 12-Provides for family farmers to
  restructure their debts and continue to operate
  their farms. Family fishermen were permanently
  added to this chapter by Bankruptcy Reform Act.

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The Lucky Thirteen

• Needs-based Bankruptcy
• (means test)
• 2. Mandatory Credit/Financial Counseling
• New Reaffirmation Agreement Process
• New Mandatory Credit Disclosures

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• 5. Improved Notice to Creditors
• 6. Changes to the Automatic Stay
• 7. Limitation on Cram-Down of Auto Loans
• 8. Replacement Value Clarified
• 9. Elimination of Ride Through/ Debtors
  Statement of Intent

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• 10. Limitations on Homestead Exemptions Expanded
• 11. Two-year Residency Requirement for Local
  Exemption Law
• 12. Dischargeability of Credit Card Debt reduced
• 13. Ch. 13 Superdischarge Eliminated

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Needs-Based Reform

• Amends Federal bankruptcy law to revamp
  guidelines governing dismissal or conversion of a
  ch. 7 liquidation to one under either ch. 11 or
  ch. 13
• Permits a court on its own motion or on the
  motion of the U.S. trustee, private trustee,
  bankruptcy administrator, or other party of
  interest (including credit unions) to dismiss or
  convert a ch. 7 case for abuse if it was filed by
  a debtor whose debts are primarily consumer debts

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Needs-based-continued

• Replaces current presumption in favor of the
  debtor with a mandatory presumption of abuse if
• the amount of the debtors remaining income,
  after certain expenses are deducted, when
  multiplied by 60, exceeds the lower of
• 25 of the debtors nonpriority unsecured claims
  or 6000 (whichever is greater) or
• 10,000

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Needs-based-continued

• Expenses deducted from means test
• Heath and disability insurance
• Health savings accounts
• Expenses incurred to maintain safety under Family
  Violence Prevention and Services Act
• Other necessary expenses as defined by the IRS
  Financial Analysis Handbook

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Means Test - Rebuttal

• Mandatory Presumption of Abuse may be rebutted
  if
• Debtor demonstrates special circumstances
  justifying any additional expense or adjustment
  to the monthly income
• Such additional expense or income adjustment
  causes the debtors income when multiplied by 60
  to be less than the lesser of the means test
  formula
• Debtor is called to active duty in armed forces

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Rebuttal-continued

• If rebutted Court must consider
• Whether the debtor filed ch. 7 in bad faith or
• Whether the debtors total situation demonstrates
  abuse

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Safe Harbors to the Means Test

• Creditor cannot file a motion to dismiss a ch. 7
  on the general basis of bad faith if income is
  below the state median income
• No one can move to dismiss only on the basis of a
  debtors ability to repay if the debtors income
  is below the state median income

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Financial Counseling

• Requires debtors to participate in financial
  counseling prior to filing for bankruptcy relief
• Must be from an accredited non-profit agency as
  approved by U.S. Trustees
• Outline opportunities for credit counseling and
  assist in performing budget related analysis
• Counseling must occur within 180 days prior to
  filing
• Internet or telephone briefing is ok

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Financial Counseling-cont.

• Qualified credit counseling agency must
• Provide qualified counselors
• Maintain adequate provision for safekeeping of
  client funds
• Provide adequate counseling with respect to
  client problems
• Provide quality service

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Financial Counseling-cont.

• Qualified credit counseling agency must at a
  minimum
• Have a board of directors not employed by the
  agency who will not benefit from the financial
  outcome
• Charge a reasonable fee that may be waived
• Provide for safekeeping client funds
• Provide credit counseling program disclosures
• Provide adequate counseling that does not create
  negative amortization
• Have trained and experienced counselors
• Provide support services for the life of the plan
• Credit unions may be able to qualify as an
  approved credit counseling agency

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Financial Management

• Mandates personal financial management training
  after filing and before discharge
• Instructional course must be approved by U.S.
  Trustees
• The course must provide
• Trained personnel
• Adequate learning materials
• Adequate facilities
• Course evaluation
• Reasonable, waivable fee

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Financial Management-cont.

• It appears that credit unions may be eligible to
  offer financial management courses

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• Flowchart to a Fresh Start
• Start
• Credit Counseling Agency Briefing
• Individual or Phone or
• Group Internet
• Is Your Current Monthly Income More
• than the Median Income in the State?
• No Yes
• The Means Test
• Reduce your Current Monthly Income by your
  Expenses
• Multiply the difference times 60
• Is this amount?

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Reaffirmation Agreements

• Strengthens and clarifies the right of
  reaffirmation
• The legislation retains the right of a debtor to
  voluntarily reaffirm a debt to the credit union
• Requires court approval in cases where the debtor
  is not represented by counsel

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Reaffirmation-continued

• Certain disclosures are required to be provided
  to the debtor at or before the reaffirmation
  agreement is signed
• Summary of reaffirmation including amount
  reaffirmed, total debt, and fees
• Statements that that credit agreement may require
  payments beyond the reaffirmation agreement
• Disclosure of APR and various interest rates

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Reaffirmation-continued

• Disclosures may include a repayment schedule
• Statement must be clear and conspicuous
• Credit unions may file modified disclosures when
  debtor is represented by counsel

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Reaffirmation-cont.

• A presumption exists that the reaffirmation
  agreement is an undue hardship if the debtors
  income after certain expenses are deducted cannot
  cover the cost of the payments
• This presumption does not apply to credit unions!
• Reaffirmation agreement becomes effective upon
  filing with the court

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Credit Disclosures

• Amends the Truth in Lending Act to require
• New disclosures to an open end credit plan upon
  which finance charges are accruing and/or
• Credit union disclosure of a toll-free number to
  call for an estimate of the time required to
  repay the balance making only minimum payments

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Disclosures-continued

• Requires the Federal Trade Commission (FTC) to
  establish the toll-free number in the case of a
  creditor with respect to which the FTC is
  enforcing compliance
• Board is required to provide the toll-free
  telephone number to depository institutions with
  assets under 250 million for 24 months

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Disclosures-continued

• Requires the Board to create a detailed table
  illustrating the number of months it will take a
  consumer to repay debt if only the minimum
  payment is made

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Disclosures-continued

• Mandates additional disclosures for credit
  extensions secured by a dwelling that exceed the
  dwelling's fair market value, including a
  statement that the interest on the excess portion
  of the extension is not tax deductible for
  Federal income tax purposes
• Requires specified additional disclosures for
  (1) introductory rates and temporary annual
  percentage rates of interest (2) Internet-based
  credit card solicitations and (3) late payment
  deadlines and penalties

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Disclosures-continued

• Instructs the Board to promulgate regulations to
  provide guidance regarding the meaning of the
  term "clear and conspicuous" as used in the Truth
  in Lending Act.
• Implementing regulations will not become
  effective until the later of 12 months after
  enactment, or 12 months after the final regs are
  promulgated

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Mandated Studies

• GAO directed to study the reaffirmation process
  under ch. 11
• Federal Reserve Board (Board) to study and report
  to Congress on certain consumer protections
  limiting consumer liability for unauthorized use
  of a debit card
• Board to study and report to Congress on the
  impact that credit extensions to dependent
  students enrolled in college have upon the rate
  of Federal bankruptcy cases
• Board (in conjunction with NCUA and banking
  agencies) may study and report to Congress on the
  types of information available to potential
  borrowers from consumer credit lending
  institutions regarding factors qualifying such
  borrowers for credit, repayment requirements, and
  the consequences of default

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Notice to Creditors

• Eliminates provision that a failure by the debtor
  to supply notice to creditors in the prescribed
  form does not invalidate the notice
• Notice to creditor is not effective unless
• -served at address filed by creditor with court
  or
• -served at an address stated in two previous
  communications by creditor within 90-180 days
  from filing bankruptcy

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Notice to Creditors-cont.

• An otherwise ineffective notice may subject the
  creditor to liability if the notice was received
  by the person designated by the creditor to
  receive bankruptcy notices
• No monetary penalty will be imposed on the
  creditor for violating the automatic stay if the
  notice was defective

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Changes to the Automatic Stay

• Automatic stay terminates within 30 days if the
  debtor has a ch. 7, 11, or 13 dismissed in the
  previous year
• Adds new relief from automatic stay for a
  creditor whose claim is secured by real property
  if the bankruptcy was a scheme to defraud or
  delay creditors

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Limitation on Ch. 13 Cram-Downs

• Prohibits stripping down a car loan if the car is
  for the debtors personal use and debt was
  incurred within 910 days of filing bankruptcy
• Prohibits stripping down other secured debts
  incurred one year prior to filing for bankruptcy

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Valuation of Collateral Clarified

• Ch. 7 is amended to clarify that redemption
  requires full payment of an allowed secured claim
  at the time of redemption
• Collateral in ch. 7 is valued at its replacement
  cost, not the cost a creditor could get for the
  item if auctioned or sold
• If for personal, family or household purposes
  will the be retail price for property of a
  similar age and condition

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Elimination of the Ride Through

• Terminates automatic stay with respect to
  personal property if the debtor does not timely
  redeem or reaffirm
• Ch. 7 debtor must redeem any personal property
  with a purchase money security interest with in
  45 days of the meeting of creditors
• Any personal property that is collateral for a
  secured claim within 30 days of the meeting of
  creditors

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2 Year Residency for Local Exemption

• Extends the time that a debtor must be domiciled
  in a state from 180 to 730 days before he or she
  may claim the states exemptions
• Prevents debtors from moving to states with more
  favorable exemptions

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Limitations on Homestead Exemptions

• Imposes an aggregate limitation of value added of
  125,000 on homestead exemption
• Property must have been acquired within the 1,215
  day period preceding the filing
• Includes
• Real or personal property that is used as a
  residence
• Interest in a coop that is used as a residence
• Burial plot
• Homestead

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Homestead-cont.

• Reduces value of homestead by the amount of
  additional value added in the past 10 years, if
  addition was means to defraud creditors
• Imposes a 125,000 total cap if debtor convicted
  of a felony that is an abuse of the bankruptcy
  code

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Dischargeability of Credit Card Debt Reduced

• Presumption of nondischargeability for fraud in
  the use of a credit card is expanded
• Debtor now must charge 500 in luxury goods
  within 60 days from filing to invoke presumption
  previously was 1225 within 90 days
• Cash advances of 750 within 60 days invoke the
  presumption

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Ch. 13 Superdischarge Eliminated

• Debts to be excluded from a Ch. 13 discharge now
  include
• Unfiled, late filed or fraudulent tax returns
• Fraud, including credit card misuse
• Embezzlement
• Debts arising from willful or malicious injury to
  a person

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The New Bankruptcy

• Helps consumers avoid bankruptcy and pay their
  debts.
• Thwarts potential abusers of the system.
• Strengthens the rights and abilities of secured
  creditors to protect their interests.