On March 10, 2005, the Senate finally did what was thought to be the impossible: they passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.Swift passage in the House and a promised enactment is expected by April, with a six month delay in effectiveness. After an initial investment of $40 million by the credit card industry, and over eight years of additional spending and effort to insure its passage, the industry's baby was born.This is not a jaded political opinion. It is a fact. Another fact is that no established group of attorneys, including the American Bar Association,¹ law professors, bankruptcy practitioners, women, or consumer advocates supported the bill.

A large group of law professors, including renowned author G. Ray Warner and Vermont Law School's Joan Vogel, in an effort to dissuade senators from passing the bill, wrote a detailed letter to the senatorial committee on February 16, 2005.² While recognizing that some abuse does indeed occur within the bankruptcy system, the professors wrote that the new bill sought to kill a mosquito with a shotgun.³ They note that the economic crisis in this country caused by outsourcing, job loss, increased costs of health insurance and other costs of living has only been amplified since the bill's initial introduction.this the worst time to enact the bill, but the bill presents the wrong solution to the perceived problem.⁴

The history of the bill is truly fascinating. Of course ranting about its passage may be more entertaining than addressing the real concerns facing attorneys practicing under the umbrella of the soon-to-be- enacted legislation. Anyone interested in empathizing further can simply read the countless articles on the subject. For now, let us move past the shock, treat the bill as a reality, and commence a discussion regarding its significant elements.

The Means Test

The bankruptcy reform has been presented as an abuse prevention act, with the most critical amendment relating to the presumption of abuse for Chapter 7 debtors whom Congress has determined have the means to pay their debts, or at least some "reasonable" portion thereof. The 'means test' has been heralded as the cure-all and key element to the new bill to prevent bankruptcy abuse. The long awaited means test provided in the bill is the sweeping change most reported in the media. The means test can be summarized as follows: there is a presumption of abuse of Chapter 7 if current monthly income (excluding allowed deductions, secured debt payments, and priority) multiplied by sixty would permit a debtor to pay not less than the lesser of (a) 25 percent of nonpriority debt or $6,000 (or $100 per month), whichever is greater or (b) $10,000.

Sounds simple enough. The bankruptcy code sections codifying the means test are excerpted below. As if those outside the bankruptcy field did not already think that bankruptcy attorneys exist in their own strangely codified and foreign world, try this beast on for size (the quotation is long, but this section has to been seen to be believed):

(A)(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of —
      (I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $6,000, whichever is greater; or
(II) $10,000.
      (ii)(I) The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent. Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts. In addition, the debtor's monthly expenses shall include the debtor's reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence as identified under section 309 of the Family Violence Prevention and Services Act, or other applicable Federal law. The expenses included in the debtor's monthly expenses described in the preceding sentence shall be kept confidential by the court. In addition, if it is demonstrated that it is reasonable and necessary, the debtor's monthly expenses may also include an additional allowance for food and clothing of up to 5 percent of the food and clothing categories as specified by the National Standards issued by the Internal Revenue Service.
(II) In addition, the debtor's monthly expenses may include, if applicable, the continuation of actual expenses paid by the debtor that are reasonable and necessary for care and support of an elderly, chronically ill, or disabled household member or member of the debtor's immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case who is not a dependent)and who is unable to pay for such reasonable and necessary expenses.
(III) In addition, for a debtor eligible for chapter 13, the debtor's monthly expenses may include the actual administrative expenses of administering a chapter 13 plan for the district in which the debtor resides, up to an amount of 10 percent of the projected plan payments, as determined under schedules issued by the Executive Office for United States Trustees.
(IV) In addition, the debtor's monthly expenses may include the actual expenses for each dependent child less than 18 years of age, not to exceed $1,500 per year per child, to attend a private or public elementary or secondary school if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (I).
(V) In addition, the debtor's monthly expenses may include an allowance for housing and utilities, in excess of the allowance specified by the Local Standards for housing and utilities issued by the Internal Revenue Service, based on the actual expenses for home energy costs if the debtor provides documentation of such actual expenses and demonstrates that such actual expenses are reasonable and necessary.
      (iii) The debtor's average monthly payments on account of secured debts shall be calculated as the sum of —
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and
(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts; divided by 60.
      (iv) The debtor's expenses for payment of all priority claims (including priority child support and alimony claims) shall be calculated as the total amount of debts entitled to priority, divided by 60.
(B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
      (ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide (I) documentation for such expense or adjustment to income; and (II) a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable.
      (iii) The debtor shall attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required.
      (iv) The presumption of abuse may only be rebutted if the additional expenses or adjustments to income referred to in clause (i) cause the product of the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60 to be less than the lesser of —
(I) 25 percent of the debtor's nonpriority unsecured claims, or $6,000, whichever is greater; or
(II)$10,000.
(C) As part of the schedule of current income and expenditures required under section 521, the debtor shall include a statement of the debtor's current monthly income, and the calculations that determine whether a presumption arises under subparagraph (A)(i), that show how each such amount is calculated.⁸

One can just imagine all of the lobbying constituents requesting their respective senators to add or subtract certain types of income or expenses to the formula, until, alas, we arrive at the means test of the reform bill. Instead of utilizing the current '707(b)' test where the United States Trustee could find substantial abuse by examining the debtor's actual income and expenses, or instead of amending the code merely to provide a means test with income levels and corresponding expense totals that are presumptively abusive, Congress ended up with the hodgepodge of sausage links we now must call "Section 707".

Let us apply the means test to an average family of four, with two children, living in Burlington, Vermont. For argument's sake, we will suppose that both spouses work, bringing the total household income to approximately $5,400.00 per month.⁹ The National Standards formulated by the IRS applicable to this family allow a monthly food budget of $722, a housekeeping supplies budget of $109, an apparel and services budget of $217, a personal care products and services budget of $62, and a miscellaneous budget of $188 — bringing the allowable living expenses to a total of $1,298.¹⁰ The IRS's maximum monthly allowance for housing and utility costs for Chittenden County is $1,674 for a family of four.¹¹ The transportation allowance for ownership and operation of two cars is $393 for the Northeast,¹² Even after allowing a whopping $125 per month for private education costs as provided in subsection (IV) of the means test, this simplistic accounting shows that our family may have over five hundred dollars per month available for creditors, after accounting for withholding. Without resorting to the special exceptions which require detailed, expensive analyses and documentation to be provided by debtors and their counsel, at first glance this family appears to be a prime candidate for 'abusing' the Chapter 7 process.

Under the means test, with much effort, the debtor can demonstrate special circumstances to the court to rebut presumption of abuse. Unlike the current section 707(b) which may be utilized only by the U. S. Trustee to audit cases for perceived excess available income, the new section will allow any party to make a case for presumptive abuse. Any creditor with the means to do so can require a debtor to jump through additional hoops before the court to justify the debtor's monthly expenses. Debtors find it difficult enough to retain counsel for a bankruptcy filing, let alone find available exempt assets to retain an attorney to engage in anticipated bankruptcy litigation on their behalf.¹³

Fortunately for the Vermont family described above, the next section of the means test may provide relief for many Vermont debtors who sorely need it. Under the reform bill, if the debtor's income is below the median income of his or her state of residence as provided by the Bureau of Census, then only the trustee or judge can bring an action to convert or dismiss on the basis of abuse.¹⁴ While this section does not bring the debtor all the way out of the woods, it does curtail some frivolous creditor litigation when the debtor's income level could not possibly sustain the challenge.

According to the Bureau of Census, the median income for a four person family in Vermont is $65,876. Our presumptively abusive family of four earning $64,800 per year, then, would not be forced into conversion or dismissal by creditors, merely because their food budget for their family of four — which, did I mention, includes two teenage boys — is a more reasonable $900 per month, and the boys require well more than $651 each per year for shoes, apparel, and school supplies. More troubling for this family is that one parent currently smokes and has been unable to quit and the other has a significant medical condition requiring $400 per month for prescriptions. For some reason, the means test which incorporates the IRS's National Standards does not include a monthly budget allowance for prescriptions. These special expenditures would need to be reviewed on a case by case basis. Unfortunately, our family of four has not discovered the 'disposable' income in their budget that the IRS tells them is there.

Even if the debtor earns less than the median income, under subsection (C) above, the debtor is still required to provide a statement and a supporting calculation in the bankruptcy schedules showing whether the presumption of abuse arises under the means test. Under subsection (C), our sample family's petition and schedules would contain a bright red flag reading something like this: "yes, look here, we are presumed to have abused the system, hording hundreds of extra dollars monthly, but fortunately, we don't make quite enough money for creditors to take issue with our presumptive abuse, but by all means, judge/trustee, please feel free to do so. "Even more troubling for practitioners, as further discussed below, if a panel trustee brings a successful motion for dismissal or conversion, counsel for the debtor may be liable to reimburse the trustee for costs, attorney's fees, and a civil penalty. The attorney would be required to sign the petition containing this red flag of presumptive abuse. At the same time, the attorney has only the semi-substantiated hope that when all the sausage links are put together, the debtor's particular circumstances will cause the judge and trustee to pass the debtor by.

Attorney Liability

The changes near and dear to the practitioner's heart are the new attorney liability provisions. Strongly opposed by the American Bar Association and many state bars (including Vermont),¹⁵ the bill contains several new sections which add the potential for unprecedented liability for bankruptcy attorneys. Under certain circumstances, a debtor's attorney can be liable for fees, costs, and a civil penalty if the debtor's schedules are inaccurate — difficult to protect against without visiting every client's home and checking for buried treasures.

Under the bill, an attorney's signature certifies that the attorney has performed an investigation into the circumstances that gave rise to the petition; that the attorney has determined that the petition is well grounded in fact and is warranted by existing law or reasonable cause for extension of law;and that the attorney has no knowledge, after an inquiry, that information in the schedules is incorrect.¹⁶ If a trustee brings a successful action to dismiss or convert the case of a presumptively abusive debtor, the debtor's attorney could face costs, fees, and a civil penalty if the court finds that the attorney violated Bankruptcy Rule 9011 (which parallels Rule 11 in the Federal Rules of Civil Procedure).¹⁷

These provisions are the purest example, once again, of killing a mosquito with a shotgun. While the bankruptcy reform bill was passed to address a perceived increase in bankruptcy fraud, it is estimated that only a small percentage of cases involve fraud. In fact, a recent study reports that one half of all bankruptcy filings were prompted by medical bills, even among the insured.¹⁸ In seeking to eliminate the rare cases involving real fraud committed by dishonest debtors, the bill's only remedy is to shift the responsibility to the attorney. The flaw in this logic is that truly dishonest debtors are not likely to disclose the facts fully to their attorneys. What level of investigation must an attorney undertake in an effort to decipher whether or not the client is lying? Can an attorney ever be certain that any petition is actually 'grounded in fact'? No language in the legislation addresses this fundamental problem. Instead, these provisions of the bill only interfere with, and fundamentally misperceive, the attorney-client relationship.

As if this section were not scary enough, the reform bill gives attorneys two additional reasons to shudder. First, depending upon the debtor's budget, attorneys will be required to certify that certain debtors will be able to make payments upon reaffirmed debt.¹⁹ Under this provision, the attorney will be required to audit the debtor's finances further, and potentially wind up in conflict with the client if the client is adamant in his or her desire to reaffirm.²⁰ Secondly, any person (attorney or layperson alike) counseling a client in any way on the option of bankruptcy must disclose that they are a debt relief agency and follow a whole host of disclosure requirements.²¹ The debtor's attorney will be required, among other things, to give scripted legal advice, advertise as a 'debt relief agency', and inform each client and potential client that bankruptcy attorneys are not necessary to effectuate a filing.

Yes, the sky is falling, and it is slated to land directly on bankruptcy counsel. These attorney liability provisions are soon to be enacted and truly are to be feared. Once the fear subsides, practitioners will just have to decide whether to jump in with both feet or steer away from bankruptcy cases like the plague. Vermont practitioners are reminded of the effect that the Bianchi case and its progeny has had on fringe or part-time real estate practitioners. Certainly, our office will not touch new real estate cases with a ten foot pole. Avoiding new real estate transactions altogether is also the only way to avoid the increased malpractice premiums for handling real estate matters in the wake of Bianchi. No doubt malpractice insurance for bankruptcy attorneys will skyrocket after the enactment of the reform bill, or worse, contain exclusions for any bankruptcy code violation as a violation of a statute. As with dealing with the morass of the means test, attorneys will have no other choice than to pass yet another increased cost of providing quality bankruptcy advice on to the consumer. And the irony, of course, is the presumed lack of means of the bankruptcy client base to foot the bill.

As a member of the bar
I swear to creditors near and far
That every thing the debtor owes,
And every stitch of all his clothes,
All his assets, all his debts,
All his cattle, all his pets,
All his claims and all accounts,
And all descriptions, all amounts,
Are detailed, accurate, and complete,
Down to all the food that he could eat,
And if I'm wrong there is no barrier
To recovery from my malpractice carrier

Except, wait, did I mention
My policy contains an exception
For claims made under S. 256
So sue me, if you want your kicks
But the automatic stay of 362
Will slow down anything you can do
Because I'll file to protect my condition
If I can find an attorney to sign my petition.

As unworkable and bizarre as so many of the amendments seem to regular bankruptcy practitioners, the bill offers just another obstacle to overcome. That is what lawyers do. Like the years of effort it has taken to grapple with the poorly worded and soon to be obsolete Bankruptcy Code Section 523 (a)(15), which deals with divorce-related property settlements, we must again re-educate ourselves to accomplish what at this point appears to be impossible. Life goes on. With an increased initial investment, research, and energy, a bankruptcy practice can and must be reborn under the new bill.

Other Significant Changes

Just as this article has only scratched the surface of the means test and attorney liability provisions of the reform bill, each of the code amendments summarized below warrants an article unto itself. To pique the reader's interest (or to instill further fear), some significant changes are highlighted below.

• Honorable mention, as the third most notable aspect of the new bill, is the requirement that the debtor undergo credit counseling within 180 days of filing, and may not obtain a discharge until completion of a financial management class.²² The U. S. Trustee will take on the role of oversight in this department, but the debtor again will bear the additional burden and cost of this amendment.
• Domestic support obligations would be first priority and administrative expenses (such as attorneys and trustee fees, and other costs of administration) would be second.²³ Trustees and attorneys who are having considerably more responsibility imposed upon them under so many provisions of the new bill, under this section, will potentially be paid less for their efforts, if at all.
• Section 523 (a)(15) is eliminated. Divorce-related property settlement obligations will be treated the same as support related obligations and will be automatically non-dischargeable without the need to litigate.²⁴  This amendment will have a huge impact on the ability of one spouse to discharge hold harmless agreements for third-party debts such as credit cards.
• There is a new tenth priority claim for liability of the debtor caused by debtor's driving under the influence.²⁵
• Chapter 13 debtors would not be permitted to bifurcate or "cram down" security interests to the value of the vehicle in an automobile purchased within 910 days before the filing (2.5 years).²⁶ This arbitrary cut-off may have a disproportionate impact on the low income debtor who was coerced into financing a vehicle with outrageous interest rates or who rolled the balance of one vehicle that suffered an untimely collapse into the financing for a new vehicle, all without realizing the payment schedule could not be met.
• In an effort to tighten the Florida/Texas millionaire's loophole, debtors electing the state homestead exemption may not exempt an interest, acquired within 1215 days (3.3 years) of filing, which exceeds $125,000, unless the excess value arose from a transfer of residences within the same state.²⁷ While proposed amendments for a universal cap on all homestead exemptions failed, the bill at least curtails those that engage in immediate pre-bankruptcy asset maneuvering into states with unlimited homestead exemptions.
• Debtors may only receive a discharge once every eight years, rather than the present limitation of six years.²⁸

There are countless other changes involving the valuation of collateral, priority wage claims, defenses to actions seeking recovery of preferential transfers, the super discharges in Chapter 13 cases, family farmer reorganizations, Chapter 11 plans, redemptions and reaffirmations, requirement to file pay stubs and tax returns, and the length of Chapter 13 plans — too numerous to mention here and too important to mention merely in passing. Stay tuned for upcoming seminars and articles as bankruptcy attorneys continue to grapple with the problems and possibilities presented by the reform bill.

Prospect for the Future

The truth is that any good bankruptcy practitioner has already gone through much of the rigmarole codified into the new section. While it is insulting to any attorney to have to provide uniform disclosures and advertise as if their law degree were secondary, in many instances, the new code will merely require more work and more due diligence files. Under the new code, instead of merely insuring that all the proper questions are asked with respect to the debtor's income, expenses, assets, and liabilities, an attorney should take great care to document all of the questions and the answers to those questions. Attorneys may be required to have the client sign additional documentation to the attorney's own satisfaction that will reaffirm the validity of the client's disclosures and define with particularity attorney's "knowledge".

The day after the Senate's passage of the new bill, I met with a new client. I had spent most of the morning whining about the new bill with my colleagues as we considered alternative occupations. But then the client brought everything into perspective. About two years ago, her house had burned to the ground while she and her husband were uninsured. Then, her husband of thirty-two years left her for another woman. Struggling in an unfinished house, with one income, she resorted to credit cards out of necessity. She came to me after trying to eliminate her credit card debt over the last year to no avail. She had $24,000 in credit card debt and an annual salary of $18,000. One of her cards carried an interest rate of a whopping 29 percent and none was under 18 percent.²⁹ There was simply no conceivable way for her to pay off these cards in this lifetime. To illustrate, paying the monthly minimum on a credit card debt of $5,000 carrying an interest rate of 18 percent would take forty-six years to bring the balance to $0.³⁰

After the client told me that I had given her hope for the first time in years and made her feel a bit better, I considered that most of the bankruptcy reform changes would not take away the needed relief from people in her situation. I suspect that most experienced bankruptcy counsel will find themselves unable to turn a blind eye, and will find a way to continue to practice and minimize their risks while doing so.

1. See American Bankruptcy Association Fact Sheet, Bankruptcy Attorney Liability Legislation, Frisby, Mar. 11, 2005, available at www.abanet.org.
2. Letter from Professors Richard I. Aaron, et al., to Senators Arlen Spector and Patrick Leahy (Feb. 16, 2005) (available at www.abanet.org).
3. Id. at 2.
4. Id. See also, Rusch, Economic Policy Organization Weighs in on The Bankruptcy 'Reform' Debate, Demos: A Network for Ideas & Action, Feb. 24, 2005, at www.demos-usa.org/debt/.
5. The presence of children in a household increases the likelihood that the head of household will file for bankruptcy relief by 302 percent. See Letter, supra note 2, at 6.
6. Id. at 2.
7. Rodell, Bankruptcy Wears a Human Face, Charleston Gazette, Mar. 11, 2005.
8. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 102.
9. The Vermont Business Magazine recently reported that the state's average annual individual wage was $31,041 in 2002. Vermont At a Glance, 2005-2006, Vermont Business Magazine (Dec. 2004).
10. See National Standards for Allowable Living Expenses as of January 1, 2005, at www.irs.gov.
11. See Vermont — Housing and Utilities Allowable Living Expenses as of January 1, 2005, at www.irs.gov. It goes without saying that families with mortgage, taxes and utility costs under $1,700 per month in Burlington, Vermont, are few and far between.
12. See Allowable Living Expenses for Transportation, as of January 1, 2005, at www.irs.gov.
13. Under the current law, and even more so under the reform legislation, debtors aware that they may be facing discharge litigation will find it exceedingly difficult to retain an attorney, since the attorney's fees must with be paid with property that is not property of the estate, usually monthly income going forward. Unfortunately, the means test does not provide a reserve of monthly income to fund bankruptcy litigation.
14. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 102 (6).
15. Thanks are due to the Vermont Bar Association's Bankruptcy Committee and to Bob Paolini and the VBA Board of Managers for their amazingly quick action on this issue.
16. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 102 (4).
17. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 102 (4).
18. See www.demos-usa.org/pub438.cfm, citing Himmelstein, et al. , Illness and Injury as Contributors to Bankruptcy, Harvard Medical and Law Schools, Feb. 2, 2005.
19. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 203.
20. See American Bankruptcy Association Fact Sheet, Bankruptcy Attorney Liability Legislation, supra note 1, for more discussion.
21. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 227-229.
22. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 106.
23. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 212.
24. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 215.
25. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 223.
26. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 306.
27. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 322.
28. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 312.
29. Is that not usurious? The answer is no. State usury laws that capped interest rates and fees were eradicated by two Supreme Court cases in 1978 and 1996, where now the credit card companies only need to comply with the highest rates in their home state —South Dakota and Delaware have no ceiling. See Credit Card Industry Practices In Brief, Demos, A Network For Ideas And Action, at www.abiworld.org and www.demos-usa.org.
30. Id.

The information provided in this article is offered for informational purposes only; it is not offered as and does not constitute legal advice. Every situation is unique— you are encouraged to seek legal consultation to address your individual circumstances.