About the author: John T. Turco is the principal of John T. Turco & Associates and is an attorney whose office is located in Omaha, Nebraska. The firm employs five full time attorneys that practice exclusively in the area of consumer and small business bankruptcies. John is a 1989 graduate of the Creighton School of Law and practices in Nebraska and Iowa. The firm has focused on the debtor bankruptcy practice for over 19 years.
2009 Bankruptcy Practice Update:
A view from the Debtor's bar
It has been a full three years since the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 ("BAPCPA") became effective on October 17, 2005. The last thirty-eight months have been a time of great change and learning for those who dared to explore the unknown and embrace the future. This article is an attempt to provide a nuts and bolts overview of what an attorney must know and be aware of before engaging in the bankruptcy practice.
Attorney responsibilities under BAPCPA
11 U.S.C. § 707(b)(4)(C) and (D) provide, in pertinent part:
(C) The signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has
(i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and
(ii) determined that the petition, pleading, or written motion
(I) is well grounded in fact; and
(II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1).
(D) The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect.
In a nutshell, the above requirements simply mean that the attorney must take "reasonable" steps to see that the Debtor provides accurate and meaningful information to the Court, Trustee and all other interested parties. Of course, there is not a legal definition of what would constitute a reasonable inquiry into the assets, liabilities and transactions of the Debtor. However, the statutory vagueness does not excuse the attorney of at least implementing some basic practices that are known to effectively confirm or contradict statements made by the Debtor. More importantly, an attorney's due diligence efforts to verify the information on the Petition and Schedules greatly serves the interests of his or her client. Contrary to popular belief, most inaccuracies discovered in bankruptcy proceedings are simply the result of substandard preparations or honest mistakes. As a result, most of these problems are preventable with some basic verification techniques performed before a bankruptcy petition is filed.
A good method of determining what documents should ordinarily be reviewed as part of the due diligence process is to examine the information that would be requested in a formal bankruptcy audit. A specific list of the "Document Request" may be found at the United States Trustee Program's website, http://www.usdoj.gov/ust/eo/bapcpa/debtor%20audit/docs/Document_Request.pdf. In short, the auditors request the following documents:
- Payment advices from an employer for the six full calendar months preceding the date of the bankruptcy petition.
- Federal income tax returns, including all schedules and all W-2, 1099 and K-1 forms, for the two most recent taxable periods prior to the date of bankruptcy petition.
- Bank account statements for all depository and investment accounts in which the Debtor had an interest within the last six months along with an explanation of each deposit and debit.
- If applicable, Divorce decrees or other domestic orders within the last three years.
Other suggested documents to be obtained and reviewed by Debtor attorneys include credit reports, Internet based asset reports, vehicle titles, insurance policies, day-of-filing bank account balances and judicial records via the JUSTICE system in Nebraska, (http://www.nebraska.gov/faqs/justice/) and CPAN (http://www.dotcomm.org/cpan/CPAN_FAQ.pdf).
The natural result of the due diligence process is that the attorney is able to extract relevant information from the Debtor and produce a complete and thorough bankruptcy petition. At times, sorting through the various documents and information acquired from outside sources is akin to detective work where one pursues several leads to piece together the whole puzzle. It is not an easy or perfect process by any means; however, the Debtor and attorney will both greatly benefit from the process.
Current Legal Trends
In a variety of ways, BAPCPA is a quagmire. Although it was several years in the making, BAPCPA is not a complete re-write of the old bankruptcy laws but is more accurately described as a heavily patched set of old statutes. To be sure, there are new sections and rules that have supplanted or amended previously existing code. However, the courts, trustees and bankruptcy bar have had their hands full over the last three years in one case after another wherein new and variant issues have come to light.
The area that has seen the most litigation, controversy and change over the last three years is that of the ominous "Means Test" (11 U.S.C. § 707(b)). In an effort to reduce judicial discretion, Congress attempted to formulize whether or not a debtor should be allowed to file a Chapter 7 liquidation bankruptcy. If the answer to that inquiry was "no," then the Means Test was to further serve the purpose of determining "how much" was to be paid back to unsecured creditors in a Chapter 11, 12 or 13 proceeding. Although the idea of having a formula in place to determine a debtor's ability to repay a percentage of his or her debt is an attractive one, it simply does not work in a lot of cases. In essence, the Means Test artificially imputes a historical income onto the Debtor. For example, if the Debtor earned, on average, $5,000 per month in gross wages within the six months prior to filing his bankruptcy petition, he would be required to state that his "Current Monthly Income" ("CMI") is, in fact, $5,000. So far....so good. But, what happens if the Debtor's job was terminated just before he files bankruptcy? Under the Means Test, his CMI is still $5,000! Under BAPCPA, losing your job apparently does not reduce your imputed income on the Means Test.
Are there not reasonable exceptions to the above situation? By statute, there are only a few, which are narrowly limited to matters concerning a serious health problem or a call to active duty in the Armed Forces. Unfortunately, many individuals who find it necessary to file a bankruptcy do not or have not had a regular and consistent source of income. In fact, the financial inconsistency is frequently the reason for the bankruptcy filing.
There are many other possible income situations that occur within the six months prior to filing bankruptcy that cause havoc with the Means Test results. Fortunately, there is a broad trend toward limiting the harsh results from the statutory formula and reinstituting the much needed judicial discretion back into the process. One of the most recent and significant cases for those in the Eighth Circuit to address the Means Test is In re Frederickson, 545 F.3d 652 (8th Cir. 2008). In discussing the problem of the Means Test income calculation, The Frederickson Court stated:
This problem arises because "disposable income" is based upon a debtor's historical income and IRS tables that provide regional averages for common expenses. This calculation may lead to an accurate projection of a debtor's "projected disposable income," but it is not necessarily an accurate projection for many Chapter 13 debtors. The historical calculation does not take into consideration a debtor's current financial situation, which may have changed substantially between the point in time six months before filing bankruptcy and the point in time when the debtor's Chapter 13 plan is being proposed. These changes could be the result of, inter alia, a promotion at work, the loss of a job, the acquiring of a second job, or increased medical expenses. Id. at 658-659.
The Frederickson Court goes on to conclude that the Means Test should only be used as a starting point in determining the Debtor's ability to repay his creditors and that the ultimate determination should be based on the realistic income that is available at the time the case is pending before the Court, among other practical considerations. The Frederickson decision causes one to ponder what meaningful purpose the Means Test has at this point. The post-Frederickson practice seems strangely familiar to those attorneys who practiced under the old law wherein a Debtor's ability to pay was determined by his net current income minus his reasonable and necessary monthly expenses!
Technology
Woe to the technologically impaired attorney in this arena. Since the enactment of the Bankruptcy Court's Case Management/Electronic Case Filing ("CM/ECF") system in early 2002, all documents filed with the Court must be in an electronic format. Specifically, documents must be filed in the ubiquitous portable document file ("PDF") format. In the vast majority of cases, attorneys file pleadings with the Court directly from their offices by connecting to the CM/ECF system through the Internet. A few attorneys still physically deliver a computer disk, CD or other electronic medium to the Clerk's office. In order to connect to the CM/ECF system, attorneys must first attend a training session conducted by the Clerk's office. Upon completion of a simple test, the attorney is then issued his or her own account name and password. The best source of all of the numerous requirements, local rules and other news is found at the Court's website, http://www.neb.uscourts.gov.
The next challenge for the bankruptcy practitioner is that of getting documents into the necessary PDF format. Fortunately, there are numerous bankruptcy software programs that take care of getting the Petition and Schedules into the proper format. However, since an electronically-created document does not contain actual signatures, it is a requirement and an absolute necessity that the original documents with signatures be retained.
A much larger task involves scanning and organizing documents that have not been internally produced. Examples include reaffirmation agreements, attachments to affidavits, pay advices, tax returns, bank statements, and other paperwork received from the Debtor. Many of these documents must be filed with the Court or, in other instances, provided to the assigned Trustee via email. It does not take much imagination to picture the slow and tedious process of scanning many irregularly-shaped, crumpled, double-sided and/or stapled paper documents. It is important to ensure that the image quality is readable and that the PDF file does not exceed the 2.5 megabyte limit per document. Darker and denser documents create larger PDF file sizes and thus, it is often necessary to break a document into several parts and file each part separately.
It bears noting, if it is not already apparent, that the technological aspects of the debtor bankruptcy practice are very time consuming and usually expensive. Good scanners are very costly and all the scanned images must be stored in a very safe and redundantly retrievable manner.
Conclusion
The debtor bankruptcy practice has dramatically intensified under BAPCPA. Many of the changes have caused a significant tightening of the standards of quality required by the Court, Trustees and creditors. Failure to implement these changes in terms of due diligence inquiries of the Debtor's financial matters can and will cause serious harm to both the Debtor and counsel.
Understanding and using technology is also a necessity in the practice. Although the technology has in many ways improved the practice, it has also simultaneously put a significant burden on the Debtor's attorney in terms of equipment costs and time expended.
Finally, the debtor bar must keep alert as to the constantly changing legal decisions. BAPCPA is still a relatively new law and there are numerous issues still unresolved. However, the general trend is inevitably moving toward interpreting the code on more practical terms and as a coherent whole rather than the strict and unrelenting adherence to the inconsistent letter of the law.
