Congressional approval and the President's signature are expected soon to enact the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as Senate Bill 256.

Advocates and opponents of the legislation as well as bankruptcy attorneys agree the legislation will result in major changes in the legal landscape of consumer bankruptcy. And with most of the bill's provisions set to take effect six months after enactment, bankruptcy attorneys are already hearing from clients who may hasten to file in advance of the new legislation taking effect.

To provide an update on the anticipated new law, the NHBA CLE Committee has scheduled a three-hour breakfast forum, "An Overview of the Bankruptcy Reform Act - 2005," for June 1, 2005. (See page 18.) Jennifer Rood, of the Manchester office of Bernstein, Shur, Sawyer & Nelson, is chairing the program. She expects major changes in how she handles consumer and pro bono bankruptcy cases under the new law, and major social consequences for debtors, many of whom will find the new process daunting and too expensive. Rood said the program also would cover significant changes in the law that will affect Chapter 11 bankruptcy filings.

Among the major provisions of the bill affecting consumers:

• Means-testing for Chapter 7 filings. Liquidation under Chapter 7 would be denied to debtors considered "able" to repay their debts. The mechanism is based on income and expense standards set by IRS guidelines for "reasonable and necessary expenses." Means testing would not apply to debtors with incomes at or below the median family income in that state.
• Attorney liability for the accuracy of the petition and financial information. The bill requires debtor's attorneys to be held "personally liable" for the accuracy of their clients' schedules. Furthermore, attorneys would have to certify the debtor's ability to make payments under a reaffirmation agreement.
• Identification of law firm/attorney as a "debt relief agency." Attorneys handling debtor's bankruptcies would be required to identify themselves as "debt relief agencies;" and that would entail lengthy written disclosure statements and prohibitions on providing certain kinds of advice on pre-bankruptcy planning. Lawyers Weekly USA said the "broad language" of the bill could be interpreted to apply to "any lawyer who might advise someone about bankruptcy, such as a divorce lawyer."
• All filers under Chapter 7 must provide tax returns and other detailed income information. With electronic filing, this requirement may result in Congress "mandating that individual tax returns will be posted on the Internet," speculated Lawyers Weekly USA.
• No more "cram downs." Under current law, a debtor can force a reduction in the amount that must be paid on a secured loan in a Chapter 13 plan to the current value of the asset. Under the new bill, the entire amount of the loan balance would have to be paid; this provision applies to cars purchased within two-and-a-half years of the filing, or for other consumer goods, within one year of the filing.
• Fewer dischargeable debts. Fraudulently obtained credit card debts, tax debts, luxury goods (costing at least $500 and purchased within 90 days of filing); cash advances of at least $750 obtain within 70 days of filing, and other debts are nolonger dischargable.
• Priority for alimony and child support. Alimony, child support debts would obtain first priority, including support debts owed to a government agency. (Unless a trustee is appointed, in which case, the trustee's expenses must be paid first.) Approval of a debtor's repayment plan would be conditioned on proof that the debtor was current on child-support obligations.

SB 256 passed the US Senate on March 10 by a 74-25 vote (Senator John Sununu, R-NH, is one of 12 co-sponsors). The legislation, backed by the financial services industry, has been advocated for more than eight years, but had foundered on unrelated roadblocks that have been cleared away this year. The bill passed the House Judiciary Committee in mid-March and a vote by the full House is expected shortly after lawmakers' April 4 return to Washington, DC from a recess, according to the ABA.

"The bill will dramatically affect bankruptcy attorneys," Rood said. "Given the more limited eligibility and the attorney accountability provisions, I will have to charge more and screen even more carefully. Also, there will be more Chapter 13 filings and potentially more individual Chapter 11 filings, both of which are more expensive. It is not at all clear what will happen to debtors who are forced into Chapter 13 or 11 and whose efforts to reorganize inevitably fail."

Ginny Martin, NHBA Associate Executive Director for Legal Services, who oversees the Bar's Pro Bono Referral Program (which last year referred some xx bankruptcy cases) said she believes it will be much harder for attorneys to accept pro bono consumer bankruptcy cases, even for low-income clients who qualify for liquidation bankruptcies because of the strict attorney liability provisions that require that attorneys personally vouch for the accuracy of their clients' financial statements.

Rood said a likely result of the law is that many more cases will be handled on a pro se basis, which may hamper the efficiency of the courts in handling cases due to the extra time court personnel will likely spend explaining procedures to self-represented litigants.

The ABA, while not taking a position on the merits of the entire bill, has said the attorney liability provisions "would be a disaster for the nation's bankruptcy system. These provisions would discourage many attorneys from agreeing to represent debtors at all, while dramatically increasing the fees and expenses of clients who are able to obtain legal representation. In addition, these provisions would strongly discourage lawyers from providing essential pro bono bankruptcy services."

Rood said the legislation's reliance on the IRS guidelines for living expenses is problematic because it replaces judicial discretion with inflexible standards. "The IRS standards for living expenses often do not correspond with reality," Rood said, "especially in a household with several children or medical expenses. There is no provision for unusual (but legitimate) expenses nor any discretion for Courts to allow some deviation."

According to Sam Gerdano, executive director of the American Bankruptcy Institute (check www.abiworld.org for excellent coverage of the legislation), two-thirds of Chapter 13 plans fail under current law; making more debts non-dischargeable and forcing more debtors into reorganization plans will increase the number of failures, he said.

"I suspect there could be serious social consequences," Rood said. "There is no clear answer to what happens to failed Ch 13 cases under the new legislation. Now, debtor can convert to Ch 7; they may face asset issues or dischargeability challenges, but they can usually achieve debt relief. Eventually, there is likely to be a backlash and potentially legal challenges to parts of the legislation."

A group of bankruptcy law professors, in a letter to senators two months ago, called the bill "deeply flawed," and warned that it will harm small businesses, the elderly, and families with children."

The professors, quoting studies on bankruptcy filers, found that individuals who filed for bankruptcy due to medical reasons, put off doctor visits, had experienced utility shut-offs and went without food at times. "If the costs of bankruptcy are higher," the professors warned, "the privations will increase."

In support of the bill, the Independent Community Bankers of America issued a statement praising certain "pro-family" portions of the bill, saying the proposed bankruptcy law protects "women and children by strengthening their ability to collect alimony and child support; it shields low-income filers by providing them access to chapter 7 without qualification; it helps consumers through a 'debtors bill of rights' requiring the disclosure of bankruptcy fees; and it safeguards all families against the high costs of having to pay for the bankruptcy abuses of others."

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