November 30, 2005 Presented by: Norris McLaughlin & Marcus, P.A. BANKRUPTCY MATTERS! Get The Facts You Need To Know On The New Law Here!

Introduction On April 20, 2005 President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The changes were effective as of October 15, 2005, some earlier.

The most significant changes to the Bankruptcy Code affect bankruptcy filings by individuals. It is now more difficult for individuals to utilize chapter 7 of the Code to eliminate their debts.

Several changes to the Code affecting business bankruptcies have been made as well. The new rules also impose significant changes affecting lawyers and their bankruptcy practice.

The Means Test The most significant change to the Bankruptcy Code is the requirement that an individual pass a means test to be eligible for Chapter 7 relief.

Before the BAPCPA, an individual Chapter 7 debtor gave up their assets, if any, to repay creditors. Secured creditors were paid first followed by unsecured creditors in order of priority. Often times, secured and unsecured creditors alike would receive nothing, especially if the debtor did not have any non-exempt assets. The debtor would then receive a discharge and could start fresh with little to no remaining debt.

With the Means Test, fewer individuals will qualify to file under Chapter 7.

The Means Test incorporates regional median income information from the Census Bureau and various deductions based on national and local Internal Revenue Service standards.

First, the means test evaluates whether your current monthly income (from all sources) is greater or less than the applicable median income. Current Monthly Income is defined as the average monthly gross income received during the six full months just prior to filing bankruptcy. It includes gross income from all sources including income of a non-filing spouse, regular gifts or assistance from family members, and gross income from a wholly-owned business.

Current Monthly Income is annualized and if less than the Census Bureau's median income for the debtor’s family size in the debtor’s domicile state, the debtor has automatically passed the means test, and is eligible to file Chapter 7 bankruptcy.

If the annualized current monthly income exceeds the state median, a more definitive test is used to check for Chapter 7 eligibility.

A debtor can file Chapter 7 if his income less expenses times 60 is less than $6,000. A debtor cannot file Chapter 7 if his income less expenses times 60 is greater than $10,000. If the income less expenses times 60 is between $6,000 and $10,000, it must be less than 25% of the non- priority unsecured claims.

Examples of allowable expenses:  Mortgage payments  Utility payments  Payments on account of secured debt necessary for the support of the family  Education, food, clothing  Health insurance

If a debtor fails the Means Test, the case will either be dismissed or converted to a Chapter 13. Chapter 13 requires the repayment of some debt over a 3-5 year period.

Attorney Certifications Counsel for the debtor must make “reasonable inquiry to verify that the information contained” in the pleadings, petitions and motions is “well grounded in fact.” Attorneys signature on petition constitutes certification. Violation of requirement could result in sanctions.

Credit Counseling The amendments now require an individual debtor to receive credit counseling within 180 days prior to filing. The counseling can be one-on-one or a group briefing. Any debt management plan developed must be filed with the Court.

The counseling agency must be approved by the US Trustee. There are exceptions for cases of emergency.

Exemptions A debtor may now make the following exemptions: Most retirement funds irrespective of whether state or federal exemptions are elected Up to $1 million in an IRA or SEP

Homestead Exemptions To avoid debtors shielding assets by buying property in states with large homestead exemptions, debtors can now elect the state exemptions only in the state in which they have lived for 2 years days prior to filing. If the debtor moved during that 2 year period the state exemptions available to the debtor are those of the state where the debtor lived for the majority of the 180 days prior to the 2 year period. A $125,000 cap is imposed on the homestead exemption for property acquired within 1215 days if the filing.

Automatic Stay BAPCPA contains major limitations on the automatic stay. Some of the changes are: Stay does not prevent eviction Stay is terminated for serial filings Stay terminates if debtor fails to file statement of intention Stay does not apply to domestic support obligations

Real Property Leases Before the amendments, leases were deemed rejected unless assumed within 60 days of the petition date. The court could extend this time for cause with no limit on the length or number of extensions.

Now the debtor has 120 days to assume or reject and this time may only be extended for one additional 90 day period. Any extension after that requires landlord’s consent.

If a lease is assumed, the debtor must cure all monetary defaults but is not required to cure any non-monetary defaults incapable of being cured prior to assumption.

Declaration of Intent Debtors must surrender, reaffirm or redeem debt secured by property of the estate within 30 days following the first date set for the meeting of creditors. In a chapter 7, the debtor has 45 days or else the property is no longer estate property and the automatic stay does not apply.

Preferences BAPCPA clarifies the “ordinary course” defense. Transfers can be “made in the ordinary course of dealings with debtor” OR “made according to business terms customary in the industry.”

Preferences No liability for amounts under $5,000. If lien is perfected within 30 days of giving value, transfer is perfected and not subject to avoidance. Transfers to self-settled asset protection trusts are avoidable if made within 10 years of the petition date if debtor is beneficiary and transfer was made to defraud creditors.

Mandatory Debtor Education The court may not grant a Chapter 13 discharge unless the debtor has completed an education course in personal financial management as approved by the US Trustee.

Limitations on Discharge A Chapter 7 debtor cannot receive a discharge if a prior discharge was received within 8 years of the new filing. A discharge will not be granted in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 within 4 years of the filing date or a Chapter 13 within 2 years of the filing date.

Debtor’s failure to file tax returns or pay domestic support obligations is grounds for dismissal of the case. Furthermore, a plan will not be confirmed unless the debtor is current on these requirements.

Debt Relief Agencies Def: includes any person who provides bankruptcy assistance to an assisted person for compensation and includes, among others, a creditor who assisted the person in the restructuring of the debt owed

Debt Relief Agencies Must make certain disclosures and must comply with additional requirements or risk having fines and other sanctions imposed against them. Debt relief agencies must advertise themselves as such. They are not the same as nonprofit credit counseling agencies.

Responsibilities of Committee Must provide access to information for creditors who hold claims of the type committee represents who are not members of the committee. Must solicit and receive comments from creditors who are not members of the Committee.

Insider Employment There are limitations on the amounts that can be paid to insiders for the purpose of inducing them to stay with the debtor’s business. Insider must have competing offer from another business as a higher salary in order to justify payments.

Notice to Creditors When notice is required to be given to a creditor, the notice must now contain: the debtor’s name address last four digits of the debtor’s taxpayer identification number

Notice to Creditors If within 90 days of the petition date, the debtor receives two communications from a creditor and the communications contain the current account number and the current address to receive correspondence, then notice to the creditor should be at that address and include the account number.

Notice to Creditors Where a creditor designates a person or subdivision to be responsible for receiving notices and establishes reasonable procedures under which notices received by the creditor are forwarded to such person or subdivision, notice is ineffective until it is received by such person or subdivision.

Reclamation Historically, the seller’s right to reclaim goods the debtor received while insolvent extends to 10 days before the commencement of the case. Section 546(c) has been amended to extend that right to 45 days before commencement of the case.

Health Care Bankruptcies Code now defines “health care business.” Provides an exception to the automatic stay for the Secretary of Health and Human Services. Provides mechanism for disposal of patient records if funds to pay for storage are unavailable.

Health Care Bankruptcies Allows trustee an administrative expense claim for cost of closing a health care business. Trustee is charged with duty to transfer all patients to a nearby, similar facility Ombudsman is appointed as patient advocate.

Chapter 15 Added to the Bankruptcy Code as an entire new chapter to incorporate the Model Law on Cross Border Insolvency. Encourages cooperation between the US and foreign countries with respect to transnational insolvency cases.