WASHINGTON-Bankruptcy abuse reform sounds like a laudable goal. Credit unions have shown near unanimous support for it. Financial publications have devoted gallons of ink to it. But who really understands precisely what is in the bill? U.S. Bankruptcy Court for the District of Illinois Chief Judge Eugene Wedoff has completed an analysis of the major effects of the conference report on the bankruptcy reform laws, which is outlined below. Chapter 7 (discharge of debts) Means testing Under H.R. 333, the means testing provision would be amended to allow dismissal of Chapter 7 cases, or permit a conversion to Chapter 13 with the debtor's consent, if abuse is apparent. Abuse can be found through unrebutted presumption of abuse through the means test or on general grounds, such as bad faith, as determined after consideration of all the circumstances. Standing If a debtor's income falls below the applicable median, abuse may only be found on general grounds, and the issue may only be raised by the judge, U.S. Trustee, or bankruptcy administrator. If the debtor's income is above the defined level, then any party of interest may invoke the means test presumption. Presumption of abuse The aim of the means test is to determine a debtor's ability to repay their debts. The three elements of the test are (1) "current monthly income" measurement; (2) a list of permissible deductions like child support and higher priority debt; and (3) triggers for income remaining after allowed deductions to determine a presumption of abuse. To appeal a presumption, the debtor must swear to and document "special circumstances" to decrease income below triggers. General grounds for abuse If the presumption does not apply or has been rebutted, a debtor who has filed for bankruptcy in bad faith or the "totality of the debtor's financial circumstances indicates abuse," can still be found abusive. A U.S. Trustee, bankruptcy administrator, or judge are authorized to assert this in any case, while creditors may only do so only when the debtor's income is above the defined state median. Sanctions imposed on debtor's counsel The bill would also amend current law by permitting the court to award costs and fees to a trustee who successfully proves abuse through means testing, payable by the debtor's counsel if it is found that the Chapter 7 filing violates current law and regulation. Additionally a civil money penalty may be imposed against the debtor's attorney. Another addition states that the signature of a debtor's attorney on a filing constitutes that "the attorney has no knowledge after an inquiry that the information in the schedules filed with [the] petition is incorrect." Section 319 of the conference report states that the debtor's counsel must make "reasonable inquiry" to verify the information included in all documents, and specifically schedules, as accurate and warranted by law. Support Priority Family support obligations are placed in "first priority" in distribution, after the expenses of the trustee administering the assets. However, a separate provision places back-owed property tax below support obligations as taken from the proceeds of the sale of the property. The current law places support obligations above the back property taxes. Reaffirmations Under H.R. 333 and in addition to current law, a reaffirmation agreement is not effective unless the debtor received extensive disclosures and the court may disapprove reaffirmations with creditors other than credit unions if the debtor files a statement reporting insufficient income to pay the agreed upon amount. A hearing is required prior to the discharge being entered but there is no deadline on entering a reaffirmation agreement. Creditors may collect payments prior to the reaffirmation filing if the creditor considers it "in good faith to be effective. Redemption Redemption requires full payment of the amount of permitted secured claims with claims based on retail replacement. Ride-through A debtor would no longer have the option to retain collateral without redemption or reaffirmation by making contract payments. "Failure to redeem or reaffirm results in termination of the automatic stay without motion," the analysis reads. Chapter 13 (debtor agrees to pay back some funds) Secured claims The new bill limits the stripdown of secured claims to the value of collateral. Automobiles purchased within 910 days of filing could not be stripped down, as well as all other secured debts incurred within one year of bankruptcy. Where stripdown is available, collateral has to be valued at retail. Chapter 13 plans must allow for payment in equal installments in an amount to provide for adequate protection and, prior to confirmation, paid directly to the creditor, deduct adequate payments from the preconfirmation plan and provide proof of adequate protection payments to the trustee. Disposable income Chapter 13 plans must meet a best efforts test, if they are contested by the trustee or unsecured creditor, to either pay the unsecured claims in full with interest or ensure that all disposable income will be contributed to the plan for a minimum of three years. If a Chapter 13 filer's income is above the defined median, disposable income is defined by the means test from Chapter 7. Superdischarge The debts exempted from Chapter 13 protection is expanded to include unfilled, late-filed, and fraudulent tax returns; fraud, including credit card misuse; failure to notify creditors of bankruptcy filing in time to assert claims; embezzlement, or breach of fiduciary duty; and other items. "Willful or malicious" injury are exempted from Chapter 13 protection, whereas "willful and malicious" injury is an exception to Chapter 7 and 11 cases. Chapter 11 (reorganization) Individual Chapter 11 cases Debtors will only receive discharge after completion of their plans under a personal Chapter 11 filing. General Successive discharges Chapter 7 filings will be denied if the debtor received a Chapter 7 or 11 discharge in the previous eight years to filing the new case. Chapter 13 filers will be denied protection if the debtor received a discharge under Chapter 7, 11, or 12 (farmers) filed within four years of the pending case or in a prior Chapter 13 case filed within two years of the pending case. Tax returns, other required filings Unless otherwise directed by the court, debtors must file "copies of all payment advices or other evidence of payment received within 60 days before the filing of the petition, by the debtor from any employer of the debtor," a monthly net income statement, and a statement of "reasonably anticipated" pay increases over the next year. Debtors will also provide, pursuant to a creditor's timely request, a copy of their federal income tax return. Chapter 13 filers must file a financial statement annually at the request of any interested party and demonstrate how income and expenditures are calculated. Debtors must also file past due tax return for up to the preceding four years. Audits Random audits are to be performed on the information provided by debtors in at least 0.4% of all individual Chapter 7 and 13 cases, and of income and expense schedules with "greater than average variances from the statistical norm of the district." The audits are to be performed by certified or licensed public accountants in accordance with generally accepted accounting principles (GAAP). Credit counseling and debtor education Completion of credit counseling must be completed up to 180 days before filing to be eligible for relief under any bankruptcy protection chapter. Exceptions are provided for in areas where adequate services are not available and for debtors with exigent circumstances requiring filing before counseling could be completed within five days after requesting it. Pilot educational programs are to be tested in six judicial districts over an 18-month period and evaluated for effectiveness and cost. Automatic stay If a Chapter 7, 11, or 13 filing falls within one year of the dismissal of an earlier case, other than a Chapter 11 or 13 case following a means test dismissal of a Chapter 7 case, the automatic stay terminates within 30 days of filing, unless the debtors demonstrates good faith in the second filing. If a second repeat filing takes place within one year, there is no automatic stay, unless the creditor agrees that the third filing is in good faith. Exemptions Under the homestead exemption, a debtor must own a home in the state of their filing for 730 days (between two and two-and-a-half years) before filing to claim protection. Value added to the home's equity in excess of $125,000 during the 1,215 days (approximately three years and four months) before filing is deducted from the exemption, unless it was transferred equity in another home within the same state. Employee Retirement Income Security Act (ERISA)-qualified plans are exempted. All tax-exempt retirement accounts are exempted, with a $1 million ceiling for Individual Retirement Accounts (IRAs). Bankruptcy appeals The circuit courts of appeals may decide to accept bankruptcy appeals without an intermediate appellate decision if all parties agree. Effective date The effective date for the bill is generally 180 after enactment, except for the homestead provisions, which are effective immediately upon enactment. [email protected]