New Bankruptcy Law

As most of you know, there was a major revision to the bankruptcy laws in October 2005.  The law was designed to prevent most persons from filing a Chapter 7 bankruptcy, and was passed after extraordinary pressure (and political contributions), primarily from credit card companies.  It has NOT had the desired (from credit company perspective) effect.  In my experience, it has really only stopped about 1% - 2%  of persons who would have qualified under the previous law from filing under the revised law.  What it has done, is increase the complexity, create many new pitfalls and traps for the unwary, and for those who do not do a very thorough pre filing analysis.  It has also increased attorney fees (almost double), and has greatly increased the aggravation for everyone involved, including debtors, attorneys, trustees, judges, and even creditors.

The new law has created artifical (and just plain dumb) requirements to determine eligibility.   One of the tests is the "Means Test".  If your income is higher than the median income in the state in which you live for the size of your family unit, you must be able to pass the means test, or you are not eligible for a Chapter 7 discharge.  There is a common misperception that if you are over the median income you cannot file a Chapter 7.  This is wrong.  it simply means that you are subject to the means test to determine if you qualify for Chapter 7.  One very nonsensical part of the test, is that for purposes of the Means Test, your income is NOT what it is at the time you file, it is the average of what what it has been for the 6 calendar months prior to filing, which may have no real relationship to your current circumstances.  Your expenses, are NOT what your expenses are, and in most cases, are what the IRS says the average expenses in your county are, with certain allowed modifications.  There are a multitude of issues that must be considered and sometimes finessed in the means test analysis.  Under some circumstances, even if you fail the means test, we can assert that special circumstances apply in your case and still obtain a Chapter 7 discharge.

The law is so poorly drafted, that Courts all across the country are interpreting many of the provisions differently. There are contrary decisions in courts next to each other in the same court building.  Until these issues are resolved by appellate courts, there are some areas of the law that no one really knows what the law is.  The answer for now, is that your specific judge is entitled to intrepret the law according to what he or she thinks it means, regardless of what other trial court judges think the law is.  Once the appellate courts decide an issue, trial courts generally must follow the appellate decision.  The problem is, that many of these issues will not wind their way through to a conclusion in the appellate courts for another few years.  Luckily, with proper analysis and pre filing planning, most of these problem areas can be anticipated, avoided, or finessed.

Once you get past the Means Test, you generally must also satisfy the "Totality of the Circumstances" test, which is essentially based on what your true income and expenses are, and whether you have excess income after paying living expenses.

Another complication in filing, is the new active review and participation by the United States Trustee's office.  Their expressed mandate is to prevent fraud in the Bankruptcy system.  However, there seems to be strong political pressure from Washington for the local offices to find any reason to file a motion to dismiss cases to increase their case statistics, and they sometimes take extreme positions to do do so.  We are lucky in the Inland Empire because our local UST office is made up of individuals who are reasonable and measured in fulfilling their duties.  However, I think even this office is sometimes forced by higher ups to take what I believe to be unreasonable positions in some motions that are filed.  I also think that sometimes they feel forced to file motions under circumstances they may not agree with, in an attempt to get all four of our judges to take a position on issues they deem of particular importance.

Another troubling part of the new law is that under the old law, if a case was not properly analyzed regarding eligibility, or was dismissed for some other reason, you could generally obtain different and better counsel and just refile the case.   The new law imposes penalties if you have had a case pending in the past year, so it is important to get it right the first time.  Because of this, choosing the right attorney is more important than ever. 

Because so many areas of the law are unsettled, and subject to the particular views of the assigned judge, we have now restricted our representation to cases in the San Bernardino - Riverside bankruptcy courts so that we can attempt to keep track of the varying views of the various judges.