April 14, 2005

One of the more provocative features of the new bankruptcy law passed by the House this afternoon is Section 106, which requires prospective debtors to seek "credit counseling" as a condition for being allowed to file a Chapter 7 petition. Credit counseling agencies are currently regulated by the states, and the new law will require the United States Trustee, a political appointee in the Justice Department, to approve any non-profit groups permitted to give credit counseling. Federal budgeting being what it is, the likelihood that the U.S. Trustee is going to be given the funds to properly regulate credit counseling agencies is almost nil, so it is more likely that the Trustee will rely on the regulatory powers (if any) currently invested by the states in determining which agencies will be approved.

So far, the states aren't doing a particularly effective job. It is unclear from the language of the bill whether bankruptcy attorneys would be permitted to affiliate with an approved agency; the petition mills that have proven such a bane to the Bankruptcy courts in California may switch business strategies when the bill goes into effect, luring prospective clients by advertising as "credit counseling agencies", then handing the case off to a bankruptcy lawyer who works next door. Moreover, the law contains a glaring exception: when a debtor can show that he was not able to receive counseling within five days of so requesting, he may go ahead and file, and seek "counseling" later. With the disproportionate number of non-English speaking filers in some states, the probability of this loophole being exploited is high.

Section 106 represents probably the biggest change from the current law, in terms of who will be permitted to file in the future (and btw, the "future" won't begin for six months: 180 days of the most spectacular, hedonistic goings-on in the history of my profession, a BK Bacchanalia, if you will). As I noted last month, the much-discussed change in financial eligibility has a loophole so broad that any changes to the current practice of bankruptcy law will be limited to the greater amount of money lawyers like myself will be able to charge. By not providing clear standards for judicial review, Congress is inviting the Bankruptcy Court to set its own; the "special circumstances" that will justify a greater than normal budget will be set judge by judge, circuit by circuit, and based on what I've heard from other local professionals, more than a few of the local judges have no intention of imposing any sort of rigid formula preferred by the credit card industry. Expect to see this issue revisited many times in the future.

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