Wednesday, July 26, 2006

Excuses, Excuses – Temporary Waivers of Credit Counseling

Some of the first decisions interpreting the BAPCPA amendments made clear that in order to obtain a "waiver" (actually, only an extension of time) of the pre-filing credit counseling requirement imposed by 11 U.S.C. 109(h), a debtor must submit a certification that:

(i) describes exigent circumstances that merit a waiver;
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.

These requirements are mandatory, and the court has no discretion to grant a "waiver" unless the debtor satisfies all three requirements. Several recent cases demonstrate, though, that the courts have at least some discretion in determining what constitutes exigent circumstances that merit a waiver, and what constitutes an inability to obtain counseling.

For instance, two cases in which debtors asserted an inability to obtain counseling due to unavailability of funds to pay for counseling reached contrary results. In In re Piontek, __ B.R. __, 2006 WL 1837905 (Bankr. W.D. Pa. 7/5/06), husband and wife had filed a joint petition under Chapter 13 along with a Certificate of Credit Counseling evidencing the husband's completion of pre-petition counseling, but not the wife's. The wife claimed that one month prior to filing, the couple contacted a credit counseling agency, but they only had enough funds to pay for one credit counseling session, which cost $50 per person.

The Piontek court held that the proper inquiry is "whether the debtor was actually precluded by his or her circumstances from obtaining the briefing," citing In re Tomco, 339 B.R. 145 (Bankr. W.D. Pa. 2006). As a general proposition, insufficient funds may, under the right circumstances, provide a de facto "inability" to obtain counseling, and be a "satisfactory" reason to grant a temporary waiver. However, the court found that the evidence in this case demonstrated that the wife was able to pay for counseling. First, $50 from the $400 retainer to the couple's bankruptcy counsel could have gone to credit counseling, especially since $274 of it was used to pay the filing fee (I wonder how the attorney would have felt about that!). The debtors had a total monthly income of at least $2,361.64, car payments in excess of $1,000, $55 for cable T.V., and $141.88 to the wife's 401(k) plan. They also had $75 cash on hand, $165 in a checking account, and $18,000 in equity in their home. Finally, § 111(c)(2)(B) requires credit counseling agencies to provide services "without regard to [the debtors'] ability to pay the fee," and the wife never requested counseling on a pro bono or reduced fee basis. Had such request been made and inappropriately denied, it would have been possible for the court to conclude that an inability to pay counseling was due to circumstances beyond their control. The Court dismissed the wife, and as a final note rejected the notion that credit counseling obtained by the husband could be imputed to the wife.

On the other hand, Judge Ray, in In re Westenberger, Slip Copy, 2006 WL 1105008 (Bankr. S.D. Fla. 4/25/06), granted a debtor's request for pre-petition waiver based on an inability to pay for credit counseling. The debtor alleged that a creditor had frozen his bank account, which was his only source of income. "The Court [found] the Debtor's situation of being without any money and having no access to funds unless released by the bank to be exigent. As to whether it merits a waiver, the Court [found] that it does because the Debtor's only bank account and sole source of funds was frozen." Unlike Piontek, the court made no mention about the debtor asking for counseling on a pro bono basis.

Meanwhile, in In re Star, 341 B.R. 830 (Bankr. E.D. Va. 4/24/06), the court temporarily waived pre-petition counseling for an incarcerated debtor. Debtor alleged that he was disabled within the meaning of § 109(h)(4) because he did not have credit counseling courses available or access to internet or conventional phone usage. As discussed in our prior post, "Incapacity and Disability Waivers for Credit Counseling Explored"), the court denied his request for a permanent waiver based on the lack of courses available, access to internet, and phone usage.

Debtors should be careful about waiting until the last minute in trying to get credit counseling because if they do, and are unable to obtain counseling, the court may deny an "exigency" argument. In re Afolabi, __ B.R. __, 2006 WL 1524628 (Bankr. S.D. Ind. 6/2/06). In Afolabi, Debtor filed his petition along with a Certification of Exigent Circumstances. Two days later, he filed an Amended Certification alleging that he "had very little time . . . to schedule credit counseling as the final decision to file bankruptcy was made less than 24 hours before the sheriff sale of [his] house . . . ." For Judge Coachys, "the proper focus under § 109(h) is not on the circumstances that hastened or precipitated the bankruptcy filing [(sheriff's sale)] but on whether those circumstance or any other prevented the debtor from being able to obtain credit counseling prior to filing for bankruptcy." The debtor here "waited until the last minute to seek legal advice and bankruptcy protection. This self-created emergency does not constitute 'exigent circumstances.'"

This focus raises the question of whether 109(h) effectively imposes a de facto 5-day waiting period for potential debtors before they may file. Judge Coachys, while finding the language awkward, concluded that it did: "the most logical reading of the statute dictates that debtors must attempt to obtain credit counseling at least five days in advance of filing." Congress intended individuals to consider an alternative to bankruptcy prior to the petition date and to discourage hasty filings; this goal is not accomplished if the individual waits until just before the petition date to seek credit counseling. By comparison, in Judge Ray's Westenberger opinion discussed above, the debtor offered the credit counseling agency an out-of-state check from a relative, but the agency would not provide counseling until the check cleared its bank account, which would have been more than five days. In those circumstances, Judge Ray found that the "unfulfilled request" requirement had been satisfied.

A second appellate-level decision confirms that bankruptcy courts will have discretion in determining that a debtor's circumstances are not an exigency that merits a waiver, where they are self-inflicted. See In re Hedquist, 342 B.R. 295 (8th Cir. BAP 2006) (holding that bankruptcy court did not abuse its discretion in finding that a debtor's circumstances were not exigent where debtor waited to file a petition until the eve of a foreclosure, despite having ample notice of the foreclosure).

After the debtor files the certificate, and the court satisfies itself that the debtor merits a waiver of the pre-petition counseling, when must the debtor actually complete the counseling and file the Certificate of Credit Counseling? In In re Bass, Slip Copy, 2006 WL 1593978 (Bankr. W.D. Tenn. 6/9/06), a pro se debtor, 15 days after filing the petition, submitted a "Notice of Continuance" indicating that the counseling agency only offered sessions once a month, and that counseling was not available until nine days later. She then was unable to attend that session but attended the following month (50 days after the petition date) and filed a certificate two days later indicating she had completed the counseling. The U.S. Trustee moved to dismiss the case under 11 U.S.C. § 707(a), for failure to comply with the provisions of 109(h)(1) and 109(h)(b)(3) (the extension provision), because the debtor did not complete counseling and file the certificate within 45 days.

Under § 109(h)(B), ". . . in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days." But 109(h) does not specify the time for filing a certificate of counseling.

dismissn 707(a) says that the court may dimiss a case on the U.S. Trustee's motion for a debtor's failure to file, within fifteen days of the petition date or such additional time as the court allows, "the information required by paragraph (1) of section 521." But curiously (or "strictly speaking," as the court put it in Bass)Section 521 fact is no paragraph (1) of Section521! Although 521(a)(1) (which used to be numbered as 521(1)) requires the filing of certain documents, they do not include the counseling certificate. 521(b)(1), though, does require the filing of a certificate from the counseling agency that counseling has been completed. However, it also does not specify a time for filing (nor does any other portion of the BAPCPA-amended Code).

Under Interim Bankruptcy Rule 1007(c), though, either the certificate from the approved nonprofit budget and credit counseling agency or the certificate of exigent circumstances should be filed with the petition. Interim Bankruptcy Rule 1007(a)(5) provides that the court may extend the time for filing these and other documents specified in Interim Bankruptcy Rule 1007(a) "on motion for cause shown and on notice to the [UST and certain others]."

The U.S. Trustee argued that these provisions collectively required a debtor to obtain counseling and file a certificate confirming same no later than 45 days after the petition date. The court disagreed, stating that it was enough for the debtor to file the certificate of exigent circumstances within the 30 days. The Debtor's filing of a document within 30 days after the filing of her petition, which indicated the next available date that she could obtain the credit counseling, was treated as substantial compliance with Section 109(h)(3). Since she could not obtain the credit briefing within 45 days after her filing but did so as soon as she was able, and this was not the result of her lack of diligence, the court determined based on the totality of the circumstances that the debtor has substantially complied with 109(h) and thus the UST's motion to dismiss was denied.

The foregoing cases demonstrate that the prospects for obtaining waiver of the 109(h) requirements are generally slim. This lack of flexibility has frustrated some courts, particularly where the purpose of such counseling appears lacking (for instance, where debtors qualify for waiver of filing fees due to the severity of their financial problems). As one court put it, "[i]t is a mystery to the Court why Congress granted the Court the authority to waive all filing fees for persons such as the Filer, but not waive the credit counseling requirement. . . . Exactly what form of credit counseling could be useful, or necessary, to a person who qualifies for a waiver of fees under 28 U.S.C. § 1930(f) is even more of a mystery. The rationale for many of the provisions in BAPCPA, the language used in those provisions, and the coordination among them are likely to remain an enigma for a long time." In re Raymond, Slip Copy, 2006 WL 1047033 (Bankr. D. N.H. 4/12/06).

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