Appellate Panel Upholds Credit Counseling Ruling

In the first appellate decision addressing the issue, a Bankruptcy Appellate Panel of the Eighth Circuit has upheld a bankruptcy judge's dismissal of a case due to the debtor's failure to give an adequate excuse for noncompliance with the new BAPCPA pre-filing counseling requirements. In re Dixon, __ B.R. __, 2006 WL 355332 (8th Cir. B.A.P. 2/17/06).

In Dixon, the debtor filed a certification seeking a waiver of the prefiling counseling requirement which attested that his residence was scheduled for a foreclosure, that he did not contact an attorney until the day prior to the foreclosure, that he then contacted a credit counseling agency but was advised that it would be two weeks before they could provide counseling over the phone or 24 hours over the internet, that he did not have a computer to access the internet, and therefore it was impossible for him to obtain counseling before the foreclosure and he had to file a Chapter 13 without completing the counseling.

Bankruptcy Judge Schermer accepted the debtor's representation that he was unable to timely obtain counseling, but found that he had not described "exigent circumstances that merit a waiver" of the pre-filing counseling requirement. In particular, he noted that Missouri law required twenty days notice of a foreclosure, and with that much notice, the debtor's exigent circumstances did not merit a waiver. On appeal, the appellate panel upheld the ruling.

The panel noted that the waiver provision in 11 U.S.C. 109(h)(3) has three requirements: (i) that the debtor's certification describe "exigent circumstances that merit a waiver"; (ii) that the debtor certify that he sought but was unable to obtain counseling within 5 days; and (iii) that the certification is "satisfactory to the court." Taking these in reverse order, the court initially noted that it would be difficult to imagine a circumstance where the first two elements were satisfied but the certification was still not satisfactory to the court, but in order to give meaning to this third element, concluded that it was intended to permit the bankruptcy to exercise its discretion in making the determinations under (i) and (ii). As a result, it applied a generous standard of review, looking at findings of fact only for clear error and at the bankruptcy court's determination of exigent circumstances or satisfaction of the "unfulfilled request" requirement for an abuse of discretion.

Since the bankruptcy court's ruling was based on the failure to satisfy the exigent circumstances requirement, the appellate panel focused on this issue. In doing so, it held that it actually has two components: first, that there are exigent circumstances, and second, that those circumstances merit a waiver of the counseling requirements. Although the imminent foreclosure clearly demonstrated "exigent" circumstances, the bankruptcy court found that those circumstances did not "merit a waiver" -- apparently because the debtor had 20 days' notice of the foreclosure but waited until the last day to seek an attorney's advice. The panel, applying an abuse of discretion standard, declined to reverse the bankruptcy court's decision.

Implicitly, then, the panel found that the determination of whether there are exigent circumstances which merit a waiver may include an evaluation of the debtor's diligence or delay, and whether the debtor bears some responsibility for the exigency. As noted in a previous post, see Got Credit Counseling?, this is an issue on which courts have split, with some holding to the contrary that "exigent circumstances," unlike "excusable neglect," does not require any inquiry into the debtor's responsibility for the exigency. See In re Childs, 335 B.R. 623 (Bankr. D. Md. 12/19/05). A growing number of courts, though, are looking to the debtor's responsibility for the exigency in deciding whether circumstances "merit a waiver." Aside from Dixon, a similar approach was taken in In re Talib, 335 B.R. 424 (Bankr. W.D. Mo. 12/12/05) (where Judge Dow declined to vacate a prior order dismissing a case for failure to comply with the pre-filing counseling requirement), In re Rodriguez, __ B.R. __, 2005 WL 3676824 (Bankr. D. Idaho 12/9/05), and In re DiPinto, __ B.R. __, 2006 WL 213721 (Bankr. E.D. Pa. 1/30/06).

In Talib, the debtor first sought counseling the day before a foreclosure sale, and was told it would not be available for two days. As a result, it was impossible for her to make the necessary certification for a waiver that counseling could not be obtained within five days. Although it may be a "difficult and burdensome requirement" which in some circumstances "may produce harsh results," the court did not find that it was so absurd that it could disregard the plain language of the statute. Judge Dow noted that Congress clearly chose to link the availability of counseling not to the timing of the exigency but to the time of the request; although the requirement "may not be realistic or even fair in many circumstances," the court could not second-guess Congress' policy determination.

In Rodriguez the debtors contacted one agency by internet and were told to call to get a username and password, but couldn't get an answer; they contacted a second agency and were told that a counselor would call back at an unspecified time (and were apparently asked to pay the agency's fee before finding out when the counseling would be available). To prevent an impending wage garnishment, they filed before the second agency responded. The court found that these efforts were also inadequate, since there was nothing to indicate that the second agency could not provide counseling within 5 days. The court refused to find that exigencies could override the 5 day requirement, noting that waiting until the eve of creditor action before addressing the counseling requirement makes the exigency "rather self-inflicted" and that an overly liberal approach to exemptions would vitiate Congressional intent to require almost all debtors to undergo counseling before filing.

Similarly in DiPinto, the court found that the debtor's efforts to obtain counseling, by calling only one agency (which could not make an appointment for 22 days) less than 24 hours before a sheriff's sale of his property, were "deficient." Although the sale was to occur within a matter of hours, the court found that the debtor could have tried to contact other agencies (note that other courts, such as In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 11/16/05) have held that a prospective debtor is not required to "scour the field"). The court would not "reward token effort" with a waiver. In dicta, Judge Raslavich explored, but ultimately did not answer, the question of whether the 109(h) requirements effectively impose a five day "cooling off" period for prospective debtors or whether the five day period may straddle the petition date.

The statute as drafted does produce some incongruous results:
If one debtor contacts a counselor 4 days before a foreclosure and is told he can be counseled 5 days later, he would not be eligible to file before the foreclosure (he would not have completed the counseling, but also would not be able to make the certification required by 109(h)(3)(A)(ii).
If another debtor contacts a counselor 2 days before a foreclosure and is told he can be counseled 6 days later, he is eligible to file - he does qualify for the waiver certification under 109(h)(3)(A)(ii).
If yet another debtor contacts a counselor 1 day before a foreclosure and is told he can be counseled immediately, he also will be eligible to file, assuming he completes the counseling.

Of course, these results could mostly be avoided if the prospective debtor starts to seek counseling at least a week before the impending creditor action. But where that does not happen, the statute does not particularly reward diligence or punish dilatoriness, but depends mostly on the vagaries of what response the debtor gets from the particular counseling agency he or she has contacted.