CUs Must Work To Ensure Bankruptcy Law Interpreted Right
Despite enactment of a new law, bankruptcy "reform" is far from complete, and CUs should now be pooling resources to appeal cases and ensure the new rules are interpreted in ways that favor credit unions, according to one analyst.
The reason in part, said Eric North, an attorney whose San Jose, Calif.-based law firm represents CUs in litigation and compliance matters and a well-known expert on bankruptcy, is that the new law is, in his opinion, poorly written and is going to require interpretation by bankruptcy courts.
North told the California and Nevada Credit Union Leagues' Big Valley Educational Conference here the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did not come close to resolving all issues relating to consumer bankruptcy.
"People ask: 'Was the reform worth it?' It was worth it, but it will take years to know what we got," he said. "Not that the process of passing the bill was easy, but there is even more work to be done. Now that Congress is done, the courts will interpret what they think that's what Congress meant."
The 2005 law represents the most "significant" change to bankruptcy law in nearly three decades, but North said he is not a fan of the legislation.
"The last major revision to the bankruptcy code was in 1978," he explained. "This is probably the worst-written law I've ever seen come out of Congress. It is sloppy. It uses terminology in one way in some areas, and other ways in other areas. Some things make no sense."
Positive Changes For CUs
Not everything about the bill is bad, North said. He highlighted several changes he termed positive for CUs. Among these:
* Means Testing: a debtor may not file Chapter 7 if the debtor's income exceeds the median income and the debtor would be able to pay a significant portion of his or her unsecured debt through a 60-month Chapter 13 plan.
"The means test is designed to have debtors pay unsecured creditors if they can afford it," North said. "It is not a bad rule, but it won't help put lots of money in credit unions' pockets. Studies show the rule only will affect 5%, maybe 10% of bankruptcy filers."
* Mandatory Credit Counseling: "This was the key item in this bill, because the hope was people either might not file, or they wouldn't be right back in the same mess in three years," he said. "However, debtors are not required to get counseling...just information on what counseling is available and a budget."
* Availability of Information: Credit unions will receive case-related information more quickly and easily thanks to this provision. CUs may file with any bankruptcy court a notice showing an address to be used for notices. CUs can register at: www.ncrsuscourts.com.
* Under a second provision, if a CU supplies a debtor with the debtor's current account number and with an address the credit union wants future correspondence sent in at least two communications sent within 90 days before the bankruptcy is filed, the debtor must provide notices of any subsequent bankruptcy case to that address and reference the account number.
In addition, debtors are required to provide information concerning their income and expenses that was not required previously. This includes documents of payments received by the debtor from the debtor's employer within 60 days before filing, a statement disclosing any reasonably anticipated increase in income or expenditures over the 12-month period following filing, tax returns and amendments filed with the IRS, and annual statements of income and expenses.
A 'Sleeper' Issue
North referred to this as a "sleeper" issue. He said there was very little discussion about the information requirements, but "it allows financial institutions to get information they couldn't get before. This is a big advantage and very significant. Financial institutions will get notices more quickly and they will be more accurate."
* Reaffirmations: In a Chapter 7 bankruptcy filing, the debtor must file a statement of intention regarding any collateral held in a loan, such as a car. North said the new act closes a loophole by taking away a debtor's ability to avoid making a reaffirmation. If the debtor fails to choose between surrender, redemption (paying off the value of the collateral) or reaffirmation (a binding agreement to pay some or all of the debt) within 30 days of filing, the automatic stay ends.
"This is important, if credit unions use it," he said.
* Loans used for Tax Payments: Another Chapter 7 loophole North said the new law closes concerns money borrowed to pay taxes. If the taxes are not dischargeable, the loan to pay the taxes no longer is dischargeable. Similarly, any amount borrowed by fraud is not dischargeable.
Watching Collateral Depreciate
Under the old bankruptcy law, a secured creditor would receive no payments during a Chapter 13 filing until a plan was confirmed. Even then, the debtor's attorney's fees were paid first before CUs saw any money. This meant the collateral continued to depreciate. North said credit unions could have objected to this, but few did.
The new law was supposed to protect secured creditors, but according to North, there still are delays, and credit unions still watch the value of vehicles or other collateral depreciate.
"Most courts have adopted local rules, under which the debtor pays the trustee, and the trustee pays the credit union. Credit unions must be willing to fight this," he declared.
North said he hopes credit unions will take Chapter 13 cases and challenge these adequate protection payments, as well as provisions relating to value interpretations for secured collateral.
"It will take guts to spend $5,000 to fight over $900, but it is important. Credit unions don't want the courts to rule as with the old law," he said. "Credit unions don't tend to appeal cases-even if they think the judge is wrong about the law-because of money. But, several credit unions could pool money, and groom one case for appeal. Look for a case to make law."