While bankruptcy judges are obliged to apply and uphold the rule of law as specifically set out by Congress, some have chosen to publicly air their misgivings about the lack of discretion left to  judges to administer bankruptcy cases by the 2005 amendments to the Code. A recent order by Judge Monroe of the Western District of Texas has gained widespread attention for its scathing attack on the credit counseling requirement. [1] It remains to be seen whether bankruptcy judges and practitioners will be able to prompt review of this provision, but the frustration evident in Judge Monroe's decision has sent Congress a clear message.

The credit counseling prerequisite to filing a bankruptcy petition is just one example of how the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has made bankruptcy relief more expensive, time consuming, and restrictive than before. One initial study suggests that the credit counseling industry is ill equipped to provide any meaningful assistance to the vast majority of debtors who are pushed into bankruptcy by financial catastrophes. [2]

When Alfonso Sosa received a Notice of Foreclosure for missing four mortgage payments on his mobile home last summer, he didn't understand what the word meant. "I thought is was another letter complaining, like the other ones they sent me, " Sosa, a house painter and father of three, told the Austin American-Statesman. [3] Sosa began negotiating with the mortgagee of his home, but were ultimately unable to come to an agreement.

At the last possible moment before losing their home, Sosa and his wife filed a petition for Chapter 13 relief under the Bankruptcy Code that would have stayed the foreclosure and allowed them to set up a repayment plan. However, the Sosas were unaware than credit counseling was a prerequisite to filing bankruptcy and their case was dismissed after they failed to show cause why the requirement should be waived. [4]

Prepetition credit counseling is a new debtor eligibility requirement under § 109(h) of the Bankruptcy Code; without it, individuals cannot seek relief from their debts. [5] Judge Monroe recognized that after filing the petition and speaking with a bankruptcy attorney, Sosa and his wife were properly advised to seek counseling and did so, but as of the show cause hearing, only Alfonso Sosa's certificate of completion had been filed with the court. Nonetheless, Judge Monroe upheld the "clear and unambiguous" requirements of the statute and dismissed the case:

"Once debtor has now substantially complied with the intent of the Act by undergoing the required credit counseling. One has not but still could within the time limit if a waiver could be granted. However, because the Debtors did not request such counseling before they filed their case, Congress says they are ineligible for relief under the Act. Can any rational human being make a cogent argument that this makes any sense at all?" [6]

In a similar decision also issued last December, Judge Cristol of the Southern District of Florida wondered if "[i]t was the intent of Congress that poor, ignorant persons who do not know the law and cannot afford to obtain the advice of counsel are to be denied the protection and assistance of the Bankruptcy Code which is available to more affluent and better educated persons?" [7]

While Judge Cristol seemed willing to give Congress the benefit of the doubt, Judge Monroe was not so forgiving about BAPCPA generally and the credit counseling requirement specifically, calling it "one of the more absurd provisions in the new Act." [8]

"Simply stated, if a debtor does not request the required credit counseling services from an approved nonprofit budget and credit counseling service before the petition is filed, that person is ineligible to be a debtor no matter how dire the circumstances the person finds themselves in at that moment. This Court views this requirement as inane." [9]

Common sense suggests that the proper time for credit counseling is not on the eve of foreclosure. The counseling requirement serves a gate-keeping function that is designed to weed out abusive filings, i.e. by those debtors who could afford to reorganize their finances and pay creditors as part of a repayment plan. The National Association of Consumer Bankruptcy Attorneys recently conducted a study of 61,335 debtors who sought prepetition counseling. The study found that a mere 3.3 percent of those debtors qualified for debt management plans as an alternative to a bankruptcy filing based on income, [10] however some of those required bankruptcy to invoke the automatic stay and protect their homes from foreclosure proceedings, as was the case for the Sosas.

In connection with the NACBA study, Leslie Linfield, executive director of the Institute for Financial Literacy, spoke about the proper role of credit counselors:

"The clients receiving credit counseling under the new bankruptcy law are at their most vulnerable. Bankruptcy for most is their only option and a bankruptcy alternative, such as a debt-management plan, is inappropriate. Where the credit counseling industry has the ability to truly serve these clients is assisting them in the creation of family budgets, providing information on available social services, and educating these clients in sound financial management." [11]

In the five months since BAPCPA has been in effect, preliminary reports indicate that it is neither preventing abuse or protecting consumers. Rather, it seems that the warnings of bankruptcy judges, professors, and practitioners are being borne out: the new law is making bankruptcy less accessible to those who need it most. [12]

Time will tell whether the credit counseling requirement truly is an unmitigated failure of drafting. If the effects of this provision are indeed prejudicial to those most in need and if it does not substantially weed out abusive filings, it can only be hoped that bankruptcy judges and lawyers will continue to vigilantly document its effects and press for thorough review by Congress.

Sources

[1] In re Sosa, 336 B.R. 113 (Bankr. W.D. Tex. 2005). It should be noted that Judge Monroe is not alone in exercising brutal honesty from the bench at the Bankruptcy Court for the Western District of Texas. Judge Clark's "Order Denying Motion for Incomprehensibility" is undeniably amusing. In re King, No. 05-56485-C (Bankr. W.D. Tex. Feb. 21, 2006), available at http://www.txwb.uscourts.gov/opinions/opdf/05-56485-lmc_King.pdf.

[2] National Association of Consumer Bankruptcy Attorneys, Bankruptcy Reform's Impact: Where are all the "Deadbeats"? Feb. 22, 2006, available at http://nacba.com/news/022206NACBAbankruptcyreformstudy.pdf [hereinafter NACBA].

[3] Robert Elder, Judge Takes Congress to Task in Bankruptcy Case, Austin American-Statesman, Feb. 6, 2006, available at http://www.statesman.com/news/content/news/stories/local/02/5bankrupt.html.

[4] In re Sosa, 336 B.R. at 115.

[5] 11 U.S.C. § 109(h)(1) (West 2005).

[6] In re Sosa, 336 B.R. at 115.

[7] In re Valdez, 335 B.R. 801, 803 (Bankr. S.D. Fla. 2005).

[8] In re Sosa, 336 B.R. at 114.

[9] Id.

[10] NACBA, supra note 2, at 2.

[11] Leslie Linfield, Executive Dir., Inst. for Fin. Literacy, Statement at NACBA News Conference (Feb. 22, 2006) available at http://www.nacba.com/news/022206Linfieldstatement.pdf.

[12] NACBA, supra note 2, at 3.