Debtors and lawyers struggle with credit counseling mandate

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1 Featured Article from Lawyers USA: Debtors and lawyers struggle with credit counseling mandate By Correy E. Stephenson Staff writer Even before the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect in October 2005, attorneys decried its new requirements. Recently, one of the Act's mandates - that all individual debtors receive pre-petition credit counseling from an approved agency - has faced renewed attention as the agencies grapple with some bad publicity. Just months after the IRS revoked the tax-exempt status of 41 of the nation's largest counseling agencies, a Texas bankruptcy judge attended a Q-and-A where he heard the chief executive officer of an approved agency declare that his company didn't employ former bankruptcy filers - a violation of the Bankruptcy Code. [See accompanying story for more information.] While the agencies struggle with their public image, lawyers are struggling with the Act's requirements. "Whenever the law changes, uncertainty exists, but with [the Act], the incredibly poor drafting and level of complexity that Congress tried to regulate makes the confusion even more extreme," said University of Illinois College of Law professor Robert Lawless. The Act imposes mandatory pre-petition credit counseling upon all potential debtors "to try to get people to think about alternatives to filing for bankruptcy, to understand the implications and consequences of filing," explained bankruptcy attorney Steve Jakubowski, a partner at the Coleman Law Firm in Chicago who runs a blog at http: // But the reality has been quite different. Pre-petition credit counseling is "just another hurdle - a way to impose more costs and more paperwork and more time and more hassle before a consumer can get to bankruptcy court," Lawless complained. Jakubowski agreed. "The counseling requirement has created a lot of questions and litigation, and harmed a lot of debtors," he said. The requirements Under the Act, debtors must pay for and undergo credit counseling within 180 days before filing for bankruptcy. The credit counseling requirement may be waived for 30 to

2 45 days if the debtor can prove that there were "exigent circumstances" or that an approved counseling agency refused to assist him within five days of his request for counseling. The counseling requirement has been interpreted broadly, covering everyone from family farmers who file under Chapter 12 to incarcerated prisoners to professionals who file as individuals. The counseling session costs approximately $50 and can be performed in-person, on the phone or over the Internet. In October 2006, approximately one year after the new requirements went into effect, the National Federation for Credit Counseling reported that face-to-face counseling accounted for just 15 percent of the 563,494 pre-petition filing sessions conducted. The average time for sessions was about two and half hours, the NFCC reported, and fewer than 4 percent of those who received counseling chose not to file for bankruptcy. O. Max Gardner III, a bankruptcy attorney in Shelby, N.C., said the new requirement "hasn't produced any tangible benefit for debtors. It's just another thing they have to do - and pay for - in order to qualify for bankruptcy." If the counseling "did some substantive good, I could see the justification for it," Gardner added. "But when people are at the point where they are going to lose their home in a few days at a foreclosure sale, what is the benefit of credit counseling to that person?" The legal issues Given the general antipathy towards the requirement, Jakubowski said the fact that it has spawned so much litigation is "incredibly frustrating." Here are the main issues courts have been struggling with: Language problems. Most credit counseling agencies offer services in both English and Spanish, and the Executive Office of the U.S. Trustee has a search mechanism on its website ( that enables debtors to search for services by language. But one bankruptcy judge has waived the credit counseling requirement where no local agency could speak Creole, the debtor's language, and the debtor couldn't afford a translator. (In re Petit-Louis, 338 B.R. 132 (S.D.Fla. 2006).) 'Exigent circumstances.' Absent a client "engaged in warfare with Al Qaeda or in Fallujuah," attorneys know better than to file a motion seeking an exception to the credit counseling requirement because of exigent circumstances, Gardner said.

3 In the immediate wake of the law's enactment, debtors tried several avenues to seek an exemption for "exigent circumstances," the only stated exception, which isn't defined in the statute. But courts have held fairly uniformly that exigent circumstances did not include financial problems - i.e., imminent home foreclosure proceedings or car repossession. Decisions have come from bankruptcy courts in Iowa, Minnesota, Missouri and Texas, as well as from the 8th Circuit Bankruptcy Appellate Panel. The U.S. Trustee's Office did make one notable exception: debtors filing in the Southern District of Mississippi and all Louisiana districts in the wake of Hurricane Katrina received a waiver of the pre-petition counseling requirement (although the waiver did not apply to hurricane victims filing in other judicial districts). Filed without counseling. Courts are grappling with what to do with a debtor who has already filed a petition but failed to get the requisite counseling, and the ramifications for debtors are serious. "If the petition is dismissed, meaning it existed as a first case and the debtor must refile, that person now has to pay another filing fee, and once he re-files, the serial filer section is triggered," explained Lawless. As a serial filer, the automatic stay isn't quite as automatic - it's lifted after 30 days. Jakubowski noted a recent decision where a bankruptcy judge ruled that because neither of the debtors, a married couple, had received counseling prior to filing, the automatic stay never attached and subsequent foreclosure proceedings on their home were valid. (In re Jackson, No (S.D. Texas 2007). Other bankruptcy courts in Florida and Indiana have similarly held that because the debtor is ineligible to file, no petition and no case existed, meaning the automatic stay never applied. Some bankruptcy courts in Colorado, Georgia, New York, Pennsylvania and elsewhere in Texas have chosen to strike the ineligible debtor's petition, rather than dismissing it. This line of cases results in the application of the stay based on a distinction between the filing of a petition and the filing of a case. A minority of bankruptcy courts - in Indiana, Maryland and the District of Columbia - have held that an ineligible debtor should still receive the protections of the automatic stay, although no case is commenced. When to get counseling. The Act requires that pre-petition counseling occur "during the 180-day period preceding the date of filing of the petition." (11 U.S.C. Sect. 109(h)(1).) But some debtors have pushed the envelope, filing their petition just a few days after receiving their certificate, or, in some cases, the same day they receive counseling.

4 Bankruptcy courts are split on how to handle the situation. Some cases, such as In re Moore, No (E.D.Tenn. 2006), have allowed same-day counseling, as have courts in Arkansas, Connecticut, Maryland and Wisconsin. But another Tennessee bankruptcy court and one in the District of Columbia have required at least a day between counseling and filing, and a South Carolina court has held that counseling must occur at least five days prior to the filing of a petition. (In re Dansby, 340 B.R. 564 (D.S.C. 2006).) The agencies themselves. Jakubowski noted that while credit counseling agencies are operated as non-profit ventures, the new requirements of the Act have resulted in a serious infusion of cash. At $50 per session for more than 500,000 debtors, the industry received about $40 million last year just for pre-petition counseling, he estimated. It's no wonder the IRS recently revoked the tax-exempt status of 41 agencies after an audit revealed that they "offered little or no counseling or education and appeared to be primarily motivated by profit," according to an IRS statement. And sometimes the agencies haven't even earned their fee - in one Connecticut case, a debtor contacted an approved counseling agency only to receive the wrong services. Luckily for the debtor, despite the error, the bankruptcy judge determined that she was still eligible to file her bankruptcy petition. (In re Kernan, No (D.Conn. 2007).) Questions or comments can be directed to the writer at: correy.stephenson@lawyersusaonline.com Texas bankruptcy judge takes on counseling agency In January, Marvin Isgur, a U.S. Bankruptcy Court judge in the Southern District of Texas, attended a meeting of the Houston Association of Debtors' Attorneys. Ivan Hand spoke at the meeting. Hand is the CEO of Houston-based Money Management International, one of the nation's largest credit counseling agencies, with over 140 locations in 22 states. According to an order requesting a status conference filed by Judge Isgur, during a question-and-answer period with the audience Hand stated that MMI had a policy of not hiring any credit counselor who had previously been in bankruptcy. Since such a policy would be a clear violation of Sect. 525 of the Bankruptcy Code - "no private employer may discriminate with respect to employment against an individual who is or has been a debtor under this title solely because such debtor or bankrupt" has been a debtor - Judge Isgur requested that the U.S. trustee investigate.

5 Under Sect. 111(b) of the Code, credit counseling agencies can only be approved to provide their services if the U.S. trustee reviews the agency and finds it meets the statute's qualifications, including providing counselors "who have adequate experience." (Sect. 111(c)(2)(F).) Judge Isgur noted in his request that the U.S. trustee might not have inquired about the company's employment policies during the initial review. MMI quickly filed an affidavit stating that Hand had misunderstood the question and that the company had no such employment policy. At a March 1 status conference, Judge Isgur did not take any action with regard to MMI's continued status as an approved credit counseling agency, but did ask for further investigation by the U.S. trustee as to whether the company had previously and would continue to hire former bankruptcy filers. A further status conference is scheduled for March 30. In a statement to Lawyers USA, MMI spokesperson Clint Woods said there was a "misunderstanding" about the company's hiring practices. "We believe this is a non-issue and are certain this will be cleared up shortly," he said. - By Correy E. Stephenson