Law Alert  updated 03/17/01 Includes Summary of New Bankruptcy Reform Legislation

    We will not attempt to report on every change or new development, just the one's which might affect our typical client. Here's what we have for you so far. (Press on a topic below to be taken directly to the subject in which you are interested.  Otherwise, just read the 'alerts' in order presented (newest on top)
 

Law Alert:
    Domestic Relations
     Statute change
     Child support
Summary:  The new Child Support Guidelines statute has been enacted and posted on this site. The changes are not extensive this year.  Minimum support amounts have changed somewhat.  The basic chart was not modified.  See Child Support Chart.
 

    Domestic Relations
        Important Case:
            Grandparent's rights

Summary: Florida Supreme Court rules that 'Visitation Statute for Grandparents' is unconstitutional
Florida Supreme Court. Saul v. Brunetti, No. SC94843. January 27, 2000.

    The Florida Supreme Court has ruled that a state statute which providest that a grandparent can obtain visitation "whenever this is in the child's best interests" is unconstitutional. The statute interferes with the parents'  rights to raise their children in the way they see best fit and therefore violates those parents' rights to privacy under the state constitution.

    "We recognize that it must hurt deeply for the grandparents to have lost a daughter and then be denied time alone with their [grandson]. We are not insensitive to their plight. However, familial privacy is grounded on the right of parents to rear their children without unwarranted governmental interference."

Added to Alerts: 02/15/00

Law Alert:

Congress has finally passed the hotly contested, and highly controversial, Bankruptcy Reform Bill.
President Bush is expected to sign it.

Dismissal for 'abuse.'
The bill provides that a consumer Chapter 7 case may be dismissed for "abuse" on a motion by the court or "by the U.S. Trustee, trustee, bankruptcy administrator, or any party in interest." There is a presumption in favor of dismissal if the consumer fails the "means test" and has income above the median income in his or her state.

Under current law, such a motion can be brought only by the court or the U.S. Trustee. There would have to be "substantial abuse." There is a presumption against dismissal.

This "means test" that can result in a 'presumption of abuse' works as follows:

The debtor's income over the next five years is calculated by taking the debtor's average monthly income for the six months prior to filing and multiplying that by 60.

Subtract, as projected over five years, the following amounts:

(1) Payments on secured debt;

(2) Payments on priority debt;

(3) Household expenses, but only in  according to IRS and other national and certain local standards and averages, with up to a 5% increase in food and clothing expenses;  the IRS standards can be found at this link: http://www.irs.gov/prod/ind_info/coll_stds/index.html

(4) Charitable contributions;

(5) Actual expenses of administering a Chapter 13 plan;

(6) Expenses for the care and support of an elderly, chronically ill, or disabled household member or member of the debtor's immediate family

(7) Expenses for private school (up to $1,500 per child annually); and

The diffence between the income and the expenses of (1)-(7) is what in current chapter 13 jargon is call "disposable income." Abuse is presumed if this "disposable income" over five years would be $10,000 or greater. If the extra income would be less than $10,000 but more than $6,000, abuse would still be presumed if there would be enough of this disposable income to pay at least 25% of general unsecured debt over the five years.

Note:  The presumption applies only if, over the six months prior to filing, the average monthly income of the debtor and the debtor's spouse combined, multiplied by 12, was greater than the state median income. (For individuals, use the median for one earner, and for families, use the highest median for families of the same size or smaller.)

The presumption can be rebutted by demonstrating "special circumstances."

Individual debtors must submit to the trustee their tax return, or a transcript of it, for the most recent year in which they filed or should have filed one.

They also must submit copies of tax returns that they file with the IRS while the bankruptcy case is pending.

In addition, to confirm a plan in Chapter 13, debtors must have filed tax returns with the IRS (if otherwise required to do so by nonbankruptcy law) during the four taxable years before filing for bankruptcy.  In other words, in order to take advantage of one federal law (bankruptcy) the debtor had to comply with other federal laws (IRS).

'Credit counseling' required.

Within 180 days before filing, a debtor must receive credit counseling consisting of "an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted that individual in performing a related budget analysis."

In addition, after filing for bankruptcy, in order to get a discharge, a debtor must "complete an instructional course concerning personal financial management" from an approved credit counselor.

If a trustee brings a motion to dismiss a Chapter 7 case for abuse, and the court finds that the debtor's attorney violated Rule 9011 of the Federal Rules of Bankruptcy Procedure, the attorney would be liable for the trustee's costs and attorney fees in bringing the motion, and there could be a civil penalty.

The signature of an attorney on any petition, pleading or written motion constitutes a certification that the attorney has "performed a reasonable investigation" and determined that, among other things, the petition, pleading or written motion does not constitute an "abuse."

The bill also provides, "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."

It includes a "Sense of Congress" provision recommending that Rule 9011 be changed to require debtors' attorneys to "make a reasonable inquiry to verify" that the information in all documents submitted to the court, including schedules, is "well grounded in fact" and "warranted."

At least 1 out of 250 cases in each judicial district will be randomly selected for audit annually. In addition, cases must be audited if the schedules show income and expenses reflecting greater than average variances from the district norm.

To claim a state's exemptions, the debtor must have lived there for two years immediately prior to filing for bankruptcy. If the debtor has not lived in any state for the entirety of the last two years, the debtor must use the exemptions of the state where he or she lived during the six months (or the majority of that time) just before the two-year period. (This is to prevent jurisdiction shopping.)

Under the bill, IRAs would be exempt. This would apply even if the debtor is otherwise using state law exemptions. The exemption would be capped at $1 million as to amounts that are not "attributable to rollover contributions" from various types of retirement plans listed in the bill.

The cap would override any state law exemptions.

A debt would be presumed nondischargeable if it was for luxury goods costing $250 or more and was incurred within 90 days before filing for bankruptcy, or if it was for cash advances of $750 or more obtained within 70 days of filing.

Under current law, the presumption of nondischargeability applies to debts for luxury items and cash advances of more than $1,075 incurred within 60 days of filing.

Under the bill, an eviction could not be stayed in bankruptcy.

Debtors in Chapter 13 would be prevented in most cases from doing a "stripdown" or "cramdown," in which they reduce the amount of a secured debt to the value of the collateral, leaving the difference unsecured. Debtors could no longer do this for automobiles unless the debt is more than five years old, or for other property unless the debt is more than one year old.

Currently, Chapter 13 debtors can do a stripdown if the collateral is an automobile or other personal property (although they generally cannot do one as to a mortgage).

Under the bill, many more types of debts are nondischargeable in Chapter 13 – for example, debts for willful or malicious injury, and debts for money or credit obtained by false pretenses.  I.e., the "super discharge" is no longer possible.

The change expands Chapter 13's list of nondischargeable debts to make it almost the same as Chapter 7's.

In calculating a debtor's disposable income in Chapter 13, if the debtor's income is higher than the state median, then his or her expenses must generally be determined using the standards that the IRS uses for collection of unpaid taxes.

For most people, this will result in more disposable income than if current standards were applied, lawyers say.

Debtors in Chapter 13 would be required to use a five-year plan if their income is greater than or equal to the state median.

After obtaining a discharge under any chapter, debtors would be barred from using Chapter 7 for eight years, and Chapter 13 for five years.

Under current law, debtors are barred from using Chapter 7 for six years. They are never barred from using Chapter 13.

The bill would also restrict the granting of an automatic stay if the debtor has already had a stay, and the case was dismissed, within the past year. A hearing would be required, and the debtor would have to overcome a presumption.

Under the bill, property settlements in divorce could no longer be discharged in Chapter 7.

Currently, they can be discharged if the debtor meets a "balancing of the hardships" test in the Code.

Alimony and support claims would have the highest priority – ahead even of administrative expenses.

Under current law, alimony and support debts are priority claims but are ranked seventh in the Code.

The bill provides that after a debtor files a Chapter 13 case, his or her wages can still be garnished to pay a pre-bankruptcy debt for alimony or support.

Under current law, it's not clear whether this can be done.

The bill would make full payment of alimony and support debts a mandatory condition of discharge in
Chapter 13.

Under current law, an ex-spouse can agree to a discharge even though a portion of an alimony or
support debt has not been paid.

    This statute does not "do away with" bankruptcy.  It modifies some filing criteria for some, but definitely not all, of our potential clients. Exactly how it will affect any particular individual is not clear at this time.  Most importantly, this proposed statute is not law yet. It does not affect any currently filed case, or on any case that is filed before the statute takes effect.

    If you have any questions concerning this legislation and how it might affect your particular situation, we encourage you to call our office and schedule an appointment to speak with one of our attorneys. Press here to be taken to our :Contact Us page.

    The substantive portions of the new legislation (subject to change when it is studied by the various conference committees) is as follows:
 

(i) In considering . . . 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 [reasonable living expenses] 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.

[DLC note: In other words, if you could generate $6,000 over 5 years after paying your necessary living expenses, you should be filing under the provisions of Chapter 13.  The previous "preferred length" of a Chapter 13 plan was 3 years. It now appears it will be 5 years.]

[DLC note: This clearly will limit what a client could claim as a reasonable amount of some living expenses. This could be rough. It's not your expenses that are allowed, its national and local average expenses, plus 5% for the food and clothing categories.  How this will pan out is anyone's guess. Click here to see the incredibly low National Standards: http://www.irs.gov/prod/ind_info/coll_stds/index.html. The National Standards are broken into three main categories: General (food, closthing and other items), Housing and Utilities, and Transportation.  They are not generous allowances.

    (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 under the age of 18 years up to $1,500 per year per child to attend a private elementary or secondary school, if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary.

(iii) The debtor's average monthly payments on account of secured debts shall be calculated as--

    (I) the sum of--

        (aa) 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

        (bb) 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

    (II) 60.
 

[DLC note: In plain English, when you finish paying for your car, you will be expected to pay the monthly installment amount toward your unsecured creditors.  A small change really, since the trustees were requiring that under the existing law anyway, just not for 60 months.]

    (I) the total amount of debts entitled to priority; divided by

    (II) 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--

        (I) itemize each additional expense or adjustment of income; and

        (II) provide--

            (aa) documentation for such expense or adjustment to income; and

            (bb) 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.

(3) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not apply or has been rebutted, the court shall consider--
    (A) whether the debtor filed the petition in bad faith; or

    (B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor's financial situation demonstrates abuse.

(4)
    (A) The court shall order the counsel for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion brought under section 707(b), including reasonable attorneys' fees, if--

        (i) a trustee appointed under section 586(a)(1) of title 28 or from a panel of private trustees maintained by the bankruptcy
administrator brings a motion for dismissal or conversion under this subsection; and
        (ii) the court--

        (I) grants that motion; and
        (II) finds that the action of the counsel for the debtor in filing under this chapter violated rule 9011 of the Federal Rules of Bankruptcy Procedure.
    (B) If the court finds that the attorney for the debtor violated rule 9011 of the Federal Rules of Bankruptcy Procedure, at a minimum, the court shall order--
        (i) the assessment of an appropriate civil penalty against the counsel for the debtor; and

        (ii) the payment of the civil penalty to the trustee, the United States trustee, or the bankruptcy administrator.

    (C) In the case of a petition, pleading, or written motion, the signature of an attorney 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.

 [DLC note: If a client files a Chapter 7 which is considered filed in bad faith, the attorney can be punished.  Ouch. This will no doubt cause many attorneys to push Chapter 13's very hard.  We at DLC have lots of experience in Chapter 13s.  ]

(5) The court may award a debtor all reasonable costs in contesting a motion filed by a party in interest (not including a trustee or the United States trustee) under this subsection (including reasonable attorneys’ fees) if—

    (A) the court does not grant the motion; and

    (B) the court finds that—
    (i) the position of the party that brought the motion was not substantially justified; or
    (ii)  the party brought the motion solely for the purpose of coercing a debtor into waiving a right guaranteed to the debtor under this title.

(6) However, only the court, the United States trustee, or the trustee may file a motion to dismiss or convert a case under this subsection if the current monthly income of the debtor and the debtor’s spouse combined, as of the date of the order for relief, when multiplied by 12, is less than the highest national median family income last reported by the Bureau of the Census for a family of equal or lesser size, or in the case of a household of one person, the national median household income for one earner. Notwithstanding the foregoing, the national median family income for a family of more than four individuals shall be the national median family income last reported by the Bureau of the Census for a family of four individuals plus $583 for each additional member of the family.

(7) In making a determination whether to dismiss a case under this section, the court may not take into consideration whether a debtor has made, or continues to make, charitable contributions (that meet the definition of ‘charitable contribution’ under section 548(d)(3)) to any qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)).

(8) Not later than 3 years after the date of the enactment of the Bankruptcy Reform Act of 1999, the Director of the Executive Office for United States Trustees shall submit a report, to the Committee on the Judiciary of the House of Representatives and the Committee on the Judiciary of the Senate, containing its findings regarding the utilization of the Internal Revenue Service standards for determining the current monthly expenses under section 707(b)(1)(A)(ii) of title 11, United States Code, of debtors and the impact that the application of such standards has had on debtors and on the bankruptcy courts.  Such report may include recommendations for amendments to such title, consistent with the Director’s findings.’.

(b) DEFINITIONS- Section 101 of title 11, United States Code, is amended—
     (10A) ‘current monthly income’ means the average monthly income from all sources derived which the debtor, or in a joint case, the debtor and the debtor’s spouse, receive without regard to whether it is taxable income, in the 180 days preceding the date of determination, and includes any amount paid by anyone other than the debtor or, in a joint case, the debtor and the debtor’s spouse, on a regular basis to the household expenses of the debtor or the debtor’s dependents and, in a joint case, the debtor’s spouse if not otherwise a dependent, but excludes payments to victims of war crimes or crimes against humanity and benefits received under the Social Security Act;
    [DLC Note: This defines income in a way that it has never been defined before.  Income is now what you used to earn, not what you are earning.  We've got to study this one.]
=================================
 Bankruptcy

    The Third Circuit of the United States Federal Court of Appeals has ruled that a "second mortgage" that has no underlying equity to support it is an unsecured debt that can be modified (and is potentially dischargeable) in Chapter 13 bankruptcy. The evidence presented showed that the loan represented by the first mortgage exceeded the value of the residence. That being the case, there was no value left upon which the second mortgage could attach.  If there were even $1 in equity, the loan would have been considered non-modifiable, but in the absence of an residual equity, it simply was an unsecured claim.

                            "If a mortgage holder's claim is wholly unsecured, then...the bank is not in any
                            respect a holder of a claim secured by the debtor's residence. The bank simply has
                            an unsecured claim and the antimodification clause does not apply. On the other
                            hand, if any part of the bank's claim is secured, then...the entire claim, both secured
                            and unsecured parts, cannot be modified."

U.S. Court of Appeals, 3d Circuit. In re McDonald, No. 99-1381. March 9, 2000.

Added to Alerts: 03/22/00