Bankruptcy Law Reform: A Primer For the General Practitioner
The Pennsylvania Bar Association Quarterly, July, 2006, Volume LXXVII, No.3.
By Scott F. Waterman, Esquire

When the founding fathers authorized Congress in the Constitution to create bankruptcy legislation, they never could have imagined how consumer oriented our economy would become. Thirty year mortgages, car loan and credit cards are all products of the 20th century. Credit card companies are more aggressive than ever in soliciting customers and Americans are taking them up on their offers. Over the last 10 years, the amount of consumer credit card debt has doubled. The average American now owes almost $10,000 each to the credit card companies. More troubling is the fact that the national savings rate is at its lowest point in over 50 years. Americans are less prepared than ever to deal with a financial emergency that is caused by a sudden job loss, illness, divorce or death of a spouse. It should be no surprise that as the amount of credit card debt has risen, so has the number of personal bankruptcies.

For the last 10 years the credit card industry has spent over 80 million dollars lobbying Congress to toughen the bankruptcy laws. After the 2004 elections with the political winds in Washington changing, they got their wish. In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, (the "Act") implementing the most sweeping changes to bankruptcy practice since the Bankruptcy Code was enacted in 1978. The Act generally became effective on October 17, 2005. See BAPCA § 1501.

A. The Means Test.

The most dramatic change under the new Act is the creation of the "means test", a complicated formula established to determine whether a debtor's Chapter 7 filing is presumed (subject to rebuttal) to be "abusive." The means test is also used to determine the minimum amount of money a debtor may be required to pay in a chapter 13 bankruptcy. The means test only impacts debtors whose gross earnings are greater than the median income in their state, as determined by the I.R.S. In Pennsylvania, that amount is $40,251.00 for a single debtor with no dependents, and $68,826.00 for a family of four.

The first step to determine whether the debtor is subjected to the means test is to calculate the debtor's "current monthly income" which is defined as the average gross monthly income from all sources that the debtor receives (or joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable, derived during the 6 month period ending on the last month immediately preceding the date of the filing of the case ¿excluding social security for elderly and disabled. For self-employed persons, the Official Form uses net income. See 11 U.S.C. §101(10A). If the debtor's "current monthly income" exceeds the median income in the state for a family the size of the debtor's, the debtor is subjected to the means test in both chapter 7 and a Chapter 13.

However, the calculation of "current monthly income" can lead to bizarre and absurd results. For example, assume that a debtor was earning $100,000.00 a year ($8,333.00 a month) and loses her job 3 months prior to filing a bankruptcy. According the means test, the debtor's "current monthly income" would be $50,000 a year or $4,166.66 a month - creating the false impression that the debtor has the ability to repay some or all of her debts while in reality the debtor has no actual income. The debtor would be subjected to the means test.

If a debtor is subjected to the means test, then the debtor is only entitled to deduct certain specific expenses, which include certain secured debts, certain actual expenses and other "allowable deductions" for food, transportation, housing and utilities as set forth by guidelines established by the Internal Review Service. See 11 U.S.C. § 707(b)(2)(A). If after deducting the "allowable expenses", the debtor has at least $150.00 to $166.00 a month (depending on the amount of debt), then the Chapter 7 bankruptcy filing is "presumed to be abusive", subject to rebuttal. 11 USC § 707(b)(2)(i)(I)&(II).

Problems may arise for a debtor whose actual expenses exceed the amounts authorized under the means test. For example, under the means test a debtor is only entitled to deduct $1,500.00 a year (or $125.00 a month) for education for each child under 18 years old. See 11 U.S.C. § 707(b)(2)(A)(ii)(IV). If a debtor elects to send a child to parochial school because the local public schools are poorly run or dangerous, the debtor may have a problem. The annual cost for parochial school education in the Archdioceses of Philadelphia for example is $4,140.00, or $345.00 a month. However, the debtor is only allowed to deduct $125.00 a month for the schooling. This may force a debtor parent to choose between dismissing her bankruptcy or educating her child. Of course, counsel could make a convincing argument that educating the child in the school of choice is a special circumstance which warrant allowing the tuition.

The means test is also used in a Chapter 13 bankruptcy. Chapter 13 debtors who have current monthly income above the state median must be subjected to the means test to determine the minimum amounts to be paid in a plan and they may be required to be in a chapter 13 bankruptcy for up to five years instead of three years for under median income debtors. 11 U.S.C. § 1325(b)(4).

One issue to be resolved by the Courts is what happens if a debtor passes the means test, but in reality his actual disposable income is much higher. It seems logical that if a debtor passes the complicated means test, then the filing is not abusive, unless there is some other evidence of bad faith, such as falsifying the pleadings. Otherwise the courts would be imposing two tests, the means test as dictated by Congress and a second reality income test. Since Congress only established one means test, to allow for two tests would be to supplant Congressional intent. Accordingly, one could argue that if a debtor passes the means test, it should be irrelevant whether in reality she has extra disposable income.

B. Credit Counseling

Another new requirement under the Act is for debtors to obtain a pre-bankruptcy Certificate from a credit counseling agency, which has been previously certified as such by the U.S. Trustee's Office. See 11 USC § 109(h)(1). A debtor is ineligible to file a bankruptcy unless he completes the counseling and attaches the Certificate to his Petition. See 11 U.S.C. § 109(h)(1). An individual who does not receive the counseling can only receive an exemption from the requirement if the debtor submits a certification signed by the debtor which (1) describes the exigent circumstances that merit a waiver (2) states that the debtor requested credit counseling from an approved agency but was unable to obtain the counseling within five days of the request (Debtors should specifically identify the name of the agency and the date and time of the request.) and (3) that the request is satisfactory to the court. 11 U.S.C. § 109(h)(3)(A). If the waiver is granted, the debtor must complete the counseling within thirty days after the bankruptcy is filed. See 11 U.S.C. § 109(h)(3)(B).

However, one Pennsylvania bankruptcy court has opined that merely having a sheriff's sale of the debtor's home scheduled the day after a bankruptcy is filed may not constitute "exigent circumstances" because, typically a debtor learns of the sale months, not hours prior to the bankruptcy filing. Therefore, the debtor bears some responsibility for not obtaining the certificate and the court may not approve of the waiver. See in re DiPinto, United States Bankruptcy Court for the Eastern District of Pennsylvania, 06-10112, January 30, 2006 (S. Raslavich).

In reality, obtaining a Certificate is not too complicated. Most of the approved credit counseling firms allow for sessions over the phone, or even over the internet. The problems arise when the agencies want to be paid. The cost of these sessions typically run approximately $50.00. If the debtor does not have a bank account, then it may take some time to mail a money order to the agency.

There is a serious question regarding the efficacy of these credit counseling sessions. Given that the counseling can be conducted by telephone or internet and only last about an hour, there is little expectation that the debtors are actually obtaining any valuable counseling. In fact one court, has already opined that the credit counseling requirement is simply "inane." In re Sosa, ___ B.R. ___ 2005 WL 3637817 (Bankr. W.D. Tex. 2005).

After a debtor files a bankruptcy she must also attend a financial management course from a certified credit counselor and obtain a certificate also to be filed with the Court. Unless a Chapter 7 or Chapter 13 debtor obtains the financial management certificate and files it with the court along with a duplicative certification of attendance he or she will not obtain a discharge. See 11 U.S.C. §§727(a)(11) and 1328(g).

C. New Attorney Issues

The New Act also imposes restrictions on how consumer attorneys advertise, how they practice and even what they can say to clients. Some of the provisions, however, may not be Constitutional.

The Act requires that consumer bankruptcy attorneys include the following statement in their advertisements: "We are a debt relief agency. We help people file for bankruptcy relief under the 'Bankruptcy Code' (or a substantially similar statement)." 11 U.S.C. §528(b)(2)(B). Failure to include this mini Miranda statement may make a fee agreement unenforceable and may subject an attorney to damages. See 11 U.S.C. §526(c)(2). There is a question whether requiring a private practicing attorney to advertise as a "debt relief agency" is actually deceptive. Calling oneself an "agency" falsely implies one of two things, either that the party is affiliated with the government, or that it is a non-profit. Many practitioners believe that the real purpose of this provision is to embarrass and demean consumer bankruptcy attorneys. However, some counsel have begun to advertise using the Miranda statement as a badge of accreditation, that they have been "certified" or "classified" as a "debt relief agency" by Congress, in an attempt to highlight their qualifications and distinguish themselves from other attorneys who have yet to use the mandated statutory language in their advertisements.

The Act also requires counsel to enter into written fee agreements and provide at least two new statutory notices to clients, one of which needs to be provided within three days of the initial consultation. See 11 U.S.C. §§527, 528 and 342(B)(1).

Practitioners have questioned whether these new restrictions interfere with the state's right to regulate the practice of law. In fact, in the State of Georgia, a local bankruptcy court ruled sua sponte that the new requirements did not apply attorneys. In Pennsylvania, it is expected that all counsel comply with the law. It should be noted that the Georgia Order is under appeal.

The Act also mandates that counsel conduct a reasonable investigation. Although there has been a lot of discussion regarding the impact of this provision, this standard is not substantively different from the requirements under Rule 9011. Counsel must make a reasonable investigation that the information in the petition, pleading or statement is well grounded in fact, warranted by existing law, and that counsel certifies that he has no knowledge of inaccuracies. 11 U.S.C. §707(b)(4)(C)(D). This does not appear to be a higher standard than under the old law, however, the new Act merely codifies the potential sanctions to be imposed should an attorney violate the law, which now include, not only a fine and disgorgement of fees, but also may include paying counsel fees to the trustee.

Another controversial provision in the Act involves a gag order on how attorneys may counsel their clients. New section 11 U.S.C. §526(a)(4) prohibits consumer bankruptcy counsel from advising a client to incur more debt in contemplation of filing a bankruptcy. The penalties for violating this gag order may include the following: Disgorgement of fees, actual damages, attorney's fees and costs. What constitutes "actual damages" (cost of the debt) and who its paid to remains a mystery.

This issue usually arises when a client advises the attorney prior to filing a bankruptcy that he has an older vehicle which is expensive to repair. Knowing how difficult it may be to obtain a car loan after a bankruptcy is filed, counsel could explain the benefits of obtaining a new car prior to filing a bankruptcy. Moreover, a car loan may be an allowable expense under the means test, which may make the debtor eligible to file a chapter 7 instead of being in a chapter 13 for five years.

It is certainly legal for an honest debtor to obtain a new car loan prior to filing a bankruptcy. If it is legal for a debtor to obtain more debt (such as a car loan) prior to filing a bankruptcy, how can it be unlawful for an attorney to give advice to do something which is perfectly legal? In essence the law is prohibiting speech. It is only a matter of time until this provision faces a Constitutional challenge.

D. Required Documentation.

Under the Act, consumer debtors are now required to produce various documents either to the court or to the bankruptcy trustees. The first requirement is the need to file pay stubs with the court. All individuals must file with the court all their pay stubs received within sixty days prior to the filing. 11 U.S.C. § 521(A)(1)(iv). This becomes a practical nightmare where a debtor has all the payments, except one or two. Consumer debtors are not known for their stellar ability to keep records. If debtors are unable to obtain the pay stubs, they can file a motion for a waiver. Otherwise, there is no exception to the rule, even in cases where the debtor's pay stubs provide a year to date balance. Other bankruptcy districts in the Third Circuit, such as the District for New Jersey and the District of Delaware have entered local General Orders modifying the requirement. In New Jersey, it is not necessary to file the pay stubs with the court. In Delaware, the debtor must send copies to the United States Trustee. See October 6, 2005 General Order entered by Hon. Judith H. Wizmur, Chief Bankruptcy Judge, and October 14, 2005 General Order entered by Mary F. Walrath, Chief Bankruptcy Judge.

The local bankruptcy courts in Pennsylvania have not yet modified this rule. Accordingly, unlike other jurisdictions in our Circuit, in Pennsylvania, if a debtor fails to file the required pay stubs, without seeking an extension, the debtor's bankruptcy could be dismissed. 11 U.S.C. § 521(i).

Chapter 7 and Chapter 13 debtors must also now provide the appointed trustee with a copy of the debtor's last filed tax year's tax return or tax transcript at least 7 days prior to the meeting of creditors. 11 U.S.C. §521(e)(2)(A). If a debtor has lost his last filed tax return, one can order a copy of a tax transcript from the I.R.S. Debtor's counsel should have the client complete the IRS form 8821 and request the "MFTRA-X transcript." Counsel can call the I.R.S. attorney hotline at 1-866-860-4259 to obtain the transcripts free of charge.

In a chapter 13 bankruptcy, the debtors also must file with the I.R.S. all required tax returns for 4 years prior to the filing by the date of the meeting of creditors. This new provision codifies the prior practice which required a debtor to file all tax returns within three years of a filing.

E. Timing of Filing More Important Than Ever

Under the Act, the timing of filing a bankruptcy may make all the difference. A debtor should consider filing a bankruptcy sooner if the debtor's income will be rising. As stated above, the definition of "current monthly income" means the average monthly income derived during the six month period ending on the last month immediately preceding the date of the filing of the case. See 11 U.S.C. §101(10A). Accordingly, if the debtor's income will be rising ¿ the debtor should consider file quickly before the new income is received.

If the debtor is a defendant in a pending residential eviction matter, the debtor should consider filing the bankruptcy before a judgment for possession is entered, because under the new Act the automatic stay may not be effective if judgment for possession is entered prior to filing. 11 U.S.C. § 362(b)(22).

If the debtor had two prior bankruptcies within the last year, the automatic stay is not effective upon the filing of a third bankruptcy. The debtor must file a motion within 30 days of the filing for the Court to impose the stay. 11 U.S.C. § 362(a)(4). The courts have not yet established a time table to hold the required "prompt" hearing. Accordingly, debtor's counsel should not wait until the 11th hour prior to a sheriff's sale to file a third bankruptcy within a year as time may run out.

Likewise there are a number of considerations for a debtor to wait until he or she files a bankruptcy. If the debtor's income is decreasing, then the debtor's "current monthly income" will be decreasing. A debtor could wait until his "current monthly income" falls below the median income and thus he would not be subjected to the means test, or have the income lowered to the point that he passes the test.

Another reason for delay would be to allow the debtor enough time to file tax returns. In a Chapter 13 Bankruptcy the debtor must file all tax returns (federal, state, local) for the four years proceeding bankruptcy filing and no later than § 341 meeting. 11 U.S.C. § 1308. In both Chapter 7 & 13 bankruptcies the debtor must serve with trustee his or her most recent year's federal income tax return or tax transcript. 11 U.S.C. § 521(e)(2)(A)(ii). Delaying a bankruptcy until the returns are filed relieves the debtor and his counsel of the worry that the case could be dismissed due to failure to file returns.

F. Amendments to Cramming Down Secured Loans

The Act limits the ability to cram down car loans in a chapter 13 bankruptcy. Under the old law, a debtor who filed a chapter 13 bankruptcy could have filed a plan of reorganization which modified (i.e. "cramed down") the rights of holders of secured claims, except for those claims which are secured only by the debtor's principal residence, (i.e. typical residential mortgages), subject to the requirements set forth in 11 U.S.C. § 1325(a)(5).

The most common cram down scenario in a chapter 13 case involves car loans. When a debtor crams down a car loan, the debtor is only required to pay the secured portion of the loan, (i.e. the fair market value of the vehicle) in the plan, and the remaining balance of the loan is considered a dischargeable unsecured claim which may or may not be paid in the plan. Because the value of cars depreciate faster than the loans are paid off, debtors could save thousands of dollars cramming down even recently bought car loans.

If a debtor crams down a car loan, she could also modify the interest rate of the loan. Pursuant to the Till v. SCS Credit Corp., 124 S.Ct. 1951, 1956, 158 L.Ed.2d. 787 (2004) decision, a debtor could modify the interest rate from the contract rate of interest, which many times exceed 21% to the lower interest rate of prime plus 1-3%. The debtor could save thousands of dollars in interest alone in cramming down a car loan, and the savings may make the difference whether a debtor would be able to afford to keep the car or not.

The recent amendments severely limit cram downs. A debtor may now be prohibited from cramming down a car loan for his or her own vehicle purchased within 910 days (2 ½ years) of the date of the petition or any other secured loan obtained within one year of the petition. 11 U.S.C. §1325(a). Thus, the debtor may be compelled to pay the principal balance of a car loan purchased within those time periods. This restriction, even if accepted by the courts, should only apply to cars acquired for the personal use of the debtor only. The reason for this is inclusion of the modifying phrase "acquired for the personal use of the debtor" which limits the restriction.

When interpreting a statute, there is an understanding that Congress says what it means and means what it says. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. 530 U.S. 1, 120 S.Ct. 1942, 1947 (2000). Words are given their ordinary, contemporary, common meaning unless there is an indication that Congress intended the words to bear some different import. Williams v. Taylor, 529 U.S. 420, 120 S.Ct. 1479, 1488 (2000); First Merchants Acceptance Corp. v. J.C. Bradford & Co., 198 F.3d 394, 397-399 (3d Cir.1999) (statute unambiguous based on definitions included within statutory scheme). We must give effect, if possible, to every word and clause of a statute. Alexander v. Riga, 208 F.3d 419, 430 (3d Cir.2000) (quoting Bennett v. Spear, 520 U.S. 154, 173, 117 S.Ct. 1154, 137 L.Ed.2d 281 (1997)).

Accordingly, applying the plain language of the statute, if the purchase was not for the personal use of the debtor, i.e. purchased for the debtor's business, or for someone other than the debtor, such as a debtor's family member, then the cram down restriction should not apply. One can argue that either a one year prohibition or no prohibition would apply in that case. Thus, a debtor may be able to cram down such a loan.

Interestingly, the Act does not overrule the Till decision. Therefore, in cases, where a debtor can cram down a car loan, the debtor is still free to use the prime plus formula as endorsed in Till.

G. Lowering the Bar to Presume Credit Card Fraud and Elimination Of Chapter 13 Super Discharge.

Filing a Chapter 7 bankruptcy for a client who had charged a lot on his credit cards shortly before the filing has always been risky. Under 11 U.S.C. § 523(a)(2), a credit card company could file an adversary action seeking to determine that the debt was not dischargeable arguing that the debtor committed fraud and never intended to pay back the debt. In fact, the statute contains a presumption of fraud for certain credit card debts incurred within the short window prior to a bankruptcy filing.

Under the New Act, § 523(a)(2)(c) is amended to lower the threshold to file a Complaint to Determine Dischargeability from $1,225.00 to only $500.00 and extends the 60-day measuring period to 90 days. The threshold regarding cash advances was also lowered; from $1,250.00 obtained within 60 days to only $750 within 70 days. The practical reality for counsel is to consider waiting to file the case beyond 90 days if this is an issue. Moreover, fraud, which was previously dischargeable in a chapter 13, is now not dischargeable. See 11 U.S.C. § 523(a)(2) & § 1328(a)(2). It is predicted that this will be become a greater issue because Chapter 13 debtors have more income than Chapter 7 debtors and are more likely to have incurred credit card debt and obtained cash advances prior to filing a bankruptcy. It is expected that the credit card companies will take advantage of the recent amendments and file more Complaints to Determine Dischargeability of recently incurred debt.

H. Issues Involving Repeat Bankruptcies

According to the Office of the Standing Chapter 13 Trustee, in 2004, close to one half of all Chapter 13 bankruptcies filed in the Eastern District of Pennsylvania were repeat cases. Although there was an initial hype that the New Act would bar serial filings, after a close review, it is apparent that while the new Act places a greater burden on the debtor, the protections of the bankruptcy court, including the automatic stay may still be available to the consumer debtor filing more than one case.

The Act does not bar serial filings. Certainly, if Congress intended to bar serial filing, it would have made a debtor ineligible for filing a second case under 11 U.S.C. §109. Instead, the new Act only limits the automatic stay in certain cases and places a greater burden on the debtor to show good faith.

The first limitation is listed in new § 362(c)(3). If a debtor in a chapter 7, 11 or 13 was a debtor in one case within one year before the latest petition was filed (except in a case dismissed under §707(b), the automatic stay under § 362(a) expires thirty days after the petition was filed unless it is extended by the court.

If the debtor desires for the automatic stay to continue in effect without interruption, the debtor must file a motion and the court must hold a hearing within thirty days to extend the stay. Without a new local rule in effect, it is recommended that debtor's counsel file expedited motions to ensure (and properly notice all creditors) that the Court is able to timely rule to continue the automatic stay within thirty days.

In order to continue the automatic stay, the debtor has the burden to show that the case was filed in good faith. The provision codifies the case law already in effect in our district that it was the debtor's ultimate burden to prove good faith. See In re Krebs, No. 01-12942F, Slip op. at 8 (Bankr. E.D. Pa. April 27, 2001).

The case is presumptively not filed in good faith if the following occurs:

More than one prior case involving the debtor was pending in a year before the petition was filed (i.e. debtor received a discharge, then filed second case within a year);

A debtor's prior case was dismissed within the preceding year after failure to file required documents, provide adequate protection payments or perform terms of a plan. The new Act states that while inadvertence or negligence of the debtor is not an excuse, negligence of the debtor's attorney can be a proper excuse. See § 362(c)(3).
The debtor can overcome the presumption by clear and convincing evidence showing substantial change of circumstances. 11 USC §363(c)(3)(i)(III). It does not appear that the required evidence would be any different to show good faith than under the prior law. A debtor should be expected to explain why the last case was dismissed, i.e., the debtor lost a job, was downsized or was ill, but now the debtor has sufficient income to propose a feasible plan. The debtor should also expect to produce documents, such as pay stubs, medical bills to substantiate his or her assertions. The debtor should be able to explain why the automatic stay should be extended to all creditors, not just a mortgage company. See In re Charles, 322 B.R. 538 (S.D. TX , 2005). Authorizing a wage attachment, may also be helpful in persuading the court to continue the automatic stay. If a debtor is able to explain how his or her circumstances have changed to make the second case feasible, it is likely that the courts will authorize the extension of the automatic stay.

If an individual debtor has had two or more cases dismissed within the year before the petition is filed, new §362(c)(4) provides that the automatic stay under §362(a) does not go into effect upon the filing of the case (other than a case refiled under § 707(b)).

A debtor must file a motion within 30 days after filing to have the court impose the automatic stay. The debtor must demonstrate that the case was filed in good faith as to the creditor stayed. As is the case under § 362(c)(3), again there is a presumption that the case was filed in bad faith, subject to the debtor's rebuttal by clear and convincing evidence to the contrary.

I. In-rem Stay Orders

Creditors with claims secured by real property may seek in-rem stay relief under §362(d)(4). However, the in-rem relief may only be granted if the creditor proves that the filing of the petition was part of a scheme to hinder, delay or defraud creditors and the scheme involved the transfer of full or partial interests in the property without creditor or court approval or multiple bankruptcies involving the same property. Thus, it seems that this provision cannot be imposed during the first bankruptcy involving the property. Also prior filings in the more distant past may not be considered a part of a scheme to hinder, delay or defraud.

This provision codifies the case law authorizing in-rem orders in certain cases.

One can argue that since the code now sets a bright line rule for in-rem stay relief, courts should not grant it in other circumstances, especially where it is the first filing involving a property. It also should not be granted in a later case unless the case meets the requirements of being part of a scheme to hinder, delay or defraud creditors.

J. Filing Cases After Receiving a Bankruptcy Discharge

Section 727(a)(8) extends the time period a debtor may obtain a subsequent chapter 7 discharge from six to eight years after which a debtor received a prior chapter 7 discharge.

A new chapter 13 discharge cannot be entered if a debtor received a discharge in a prior chapter 7, 11 or 12 case that was filed four years prior to the filing of the chapter 13 case.

There appears to be a drafting error involving the limitations on obtaining a chapter 13 discharge after a prior chapter 13 case. A debtor is unable to receive a chapter13 discharge only if he received a chapter 13 discharge in a prior case filed two years before the present case, which will almost never be a bar for a second chapter 13 as most chapter 13 cases are at least 36 months. However, it is the plain meaning of the statute, and there are cases where a debtor can obtain a chapter 13 discharge within two years of filing.

It is important to recognize that it is still possible to file a second chapter 13 case even if a discharge is not granted. A chapter 13 may be used to cure a mortgage default or other default. The automatic stay can stop collection activity, foreclosures and repossessions.

K. Limitations on Discharging Marital Family Law Obligations

The New Act makes property settlement obligations in divorce non dischargeable in a Chapter 7. 11 U.S.C. §523(a)(15). The old act allowed for a weighing of the equities to the parties. Accordingly, a debtor's only option to discharge equitable distribution obligations is to file a chapter 13 bankruptcy.

L. Extension of Time for Proving Domicile

If the debtor elects to use state court exemptions, the debtor may only use the state exemptions for the state he has been domiciled in for at least 730 days prior to Petition, not the 180 days under the prior law. See 11 U.S.C. §522(b)(3)(A). Accordingly, a debtor may need to wait before filing a case if he wishes to elect to use the state exemptions.

M. Retirement Benefits and 401K Loans Repayments Protected

One of the few provisions in the new Act which help consumer debtors involve the treatment of retirement funds, retirement loan repayments and retirement contributions. Under the New Act, it is clear that ERISA qualified 401K(s), pensions and now IRAs (up to $1,000,000.00) are 100% exempt, regardless of whether a debtor chooses state or the federal exemptions. See 11 U.S.C. §522(b)(3), §522(d)(12).

Moreover, the new Act overrules the Third Circuit decision in In re Ames, 195 F.3d 177 (3rd Cir. 1999), and now authorizes the deduction of 401(k) loans repayments as a reasonable expense in a Chapter 13. See 11 U.S.C. §362(b)(19), §541(b)(7)(A). Under the old law debtors were forced to stop paying 401(k) loans, triggering hefty tax consequences. The new Act makes it clear that those contributions are not considered disposable income, so the deductions may continue.

Finally, in a Chapter 13, a debtor's contribution to an ERISA qualified pension, 401(k), or 403(b) plan are now considered a reasonable expense. 11 U.S.C. § 541(b)(7)(B). Thus, debtors should be advised to continue or maximize such contributions if they were considering a Chapter 13 bankruptcy.

This article only highlights some of the hundreds of amendments contained in the new Act. Counsel are urged to take the time to read and then re-read the Act to ensure that they and their clients are in compliance with all of the new provisions.