Written by Craig D. Robins, tadalafil Esq.
You Don’t Always Get What You Wish For. This past April, store President Bush signed the most sweeping bankruptcy amendment act in decades, prostate granting the credit card and banking industry’s wish for a tougher Bankruptcy Code. For the six months following, the press spouted stories of gloom and doom for consumers seeking to file after October 17, 2005, when the new laws would go into effect. Newspapers painted a grim picture that debt-laden consumers would no longer be able to utilize bankruptcy as a way to alleviate their financial woes. As a result, many consumers developed the impression that bankruptcy was going away for good or that they would no longer qualify.
It initially appeared that the new laws were so harsh and slanted in favor of banks and lenders that bankruptcy for the masses would be a thing of the past. However, now that several months have passed, and some of the dust has settled, it looks like the credit card companies may not necessarily have gotten what they wished for.
Digesting and analyzing the complex, 500-page-long Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was something that most attorneys had put off until after October 17, 2005. After all, there was a mad rush towards the end, of consumers seeking to take advantage of the existing liberal bankruptcy laws, which kept bankruptcy practitioners quite busy. There was also a dearth of legal education seminars to assist attorneys with learning the intricacies of the new laws. Now that I have taken a number of workshops and courses about the new laws, prepared petitions under the new laws (I was the very first attorney to file a Chapter 7 case in this district under the new act), spoken with trustees and colleagues, reviewed commentary by the academics, and conducted my own analysis of the law, I can make some comments on actual practice under the new laws. Although the 2005 Act is still very early in its infancy, and we have barely seen any case law interpreting it, I am now in a position to glean some winners and losers.
Secured Lenders: Big winners. Automobile loan lenders are perhaps the biggest winners of the 2005 Act as debtors are now obligated to re-affirm debt secured by personal property in order to keep their cars. In addition, secured lenders now have greater rights in receiving payment through Chapter 13 plans than they did previously.
Credit Card Companies: Not the winners they thought they would be. The banking industry that poured tens of millions of dollars into lobbying efforts to get a tougher set of bankruptcy laws probably will not fare as well as they had hoped. For one, the vast majority of consumers will still remain eligible for Chapter 7. Secondly, proponents of the new laws inserted the requirement that debtors fulfill credit counseling requirements ostensibly in the hope of steering a significant number of consumers away from bankruptcy, and into credit counseling payment plans instead. However, it appears that consumers desiring to file for bankruptcy are going straight to bankruptcy attorneys just as they had done before, and the bankruptcy attorneys are then setting up the credit counseling for them. Thus, credit counseling does not seem to be really acting as a deterrent, and instead, it is just a nuisance.
Consumers: Not the losers that everyone thought they would be. It appears that about 85% of those consumers who could have filed for Chapter 7 relief under the old laws will still be eligible to file for Chapter 7 under the 2005 Act. Perhaps the most dreaded component of the 2005 Act was the means test, a six-page, fifty-five-line item, computational form designed to weed out from Chapter 7 eligibility those consumers who theoretically could afford to pay back a portion of their debts. However, now that the means test has been actually put to use and thoroughly analyzed, it appears that it was poorly constructed and does not totally do the job its proponents expected it to. For many Long Islanders, the means test will not be a problem because it generously favors homeowners with mortgages and consumers who have car loans or leases. However, consumers who have respectable incomes, but who rent, could end up being ineligible for Chapter 7 compared to similar individuals who pay mortgages and car loans.
It also appears that there may be many loopholes within the means test that will enable a savvy consumer to utilize pre-bankruptcy planning to become eligible for Chapter 7 if they are not already eligible. Although most consumers will still be able to file for Chapter 7, they may be considered losers to the extent that they will have to pay higher legal fees, increased court filing fees, and credit and budget counseling fees. In addition, they will have to deal with more paperwork and headaches to demonstrate eligibility, as attorneys must verify this information and trustees may want to review it as well. It also appears that the new laws may enable some Chapter 13 debtors to pay less than what they would have paid under the old laws.
Bankruptcy Attorneys: Losers to an extent. Although the 2005 Act will require the attorney to do much more work, and to increase legal fees for all bankruptcy matters as a result, the additional legal fees will not compensate them for this. However, bankruptcy attorneys who concentrate in the field may get more cases because bankruptcy has become too difficult and specialized for the general practitioner. Attorneys will have more headaches in having to comply with new due diligence requirements to verify the accuracy of information that clients provide. Attorneys will also have more anxiety as the penalties for violating any of the new liability provisions can be strict and can include fee disgorgement plus actual damages including attorney’s fees and costs and possible civil penalties.
General Practitioners. Big losers. The complexity of the 2005 Act, together with the new responsibilities that it imposes on counsel, combined with potential attorney liability, has certainly caused most general practitioners to leave the consumer bankruptcy practice. The new bankruptcy laws have just become too difficult for those attorneys who do not regularly handle bankruptcy matters.
Trustees: Losers. Trustees now have more paperwork, yet receive the same fees, and may end up with fewer cases. They are also saddled with additional obligations such as having to notify domestic support creditors and agencies whenever a debtor owes a domestic support obligation. In addition, there are greater confidentiality requirements for any cases involving medical or patient records. However, before feeling bad for the Chapter 7 trustees, they will certainly be kept rather for busy for months to come because of the business that will be generated by the record number of consumers who flooded the bankruptcy court with filings just before October 17, 2005, seeking to take advantage of filing under the old laws. Perhaps the trustees will find these cases more lucrative because there appear to be more asset cases in that bunch as the result of many cases filed by debtors without attorneys, who did not understand the concept of exemptions.
United States Trustee: Loser. As the ultimate enforcer of policing abusive bankruptcy filings and also having the responsibility to review just about every case in general and appear in all Chapter 11 cases, this office was chronically overworked and understaffed to begin with. Now they have even more work in reviewing the means test filed with each and every case, as well as reviewing cases for substantial abuse under Code section 707(b). In addition, the 2005 Act imposes many new debtor filing requirements such as filing the credit counseling certificates, income tax returns, proof of pre-petition wages, the means test form, etc. The United States Trustee will probably be the entity that ultimately brings applications to dismiss those cases in which debtors have neglected to timely file the appropriate documents, or they may direct the clerk’s office to automatically dismiss a case.
Legal Publishers: Winners. Between Electronic Case Filing and the new laws, you simply cannot do a bankruptcy case any more unless you have the most up-to-date (and expensive) computer software. Gone are the days of grabbing a Blumberg form for a few bucks. The legal publishers have been doing a brisk business selling their updated software.
Innocent Spouses: Partial Winners. The 2005 Act contains a host of provisions designed to protect innocent spouses that the code refers to as “support creditors,” basically divorcees and single mothers who are owed child support, alimony or maintenance (the Code now refers to these debts as “domestic support obligations”). However, in some instances, increased protection is illusory as secured creditors such as automobile lenders have greater priority over unsecured priority creditors such as innocent spouses.
Judges: Losers. What judge wants the headache of new laws that are not popular to begin with, are poorly written, have numerous ambiguities and inconsistencies, and do not necessarily help those consumers who the judges have been trying to help for the past several decades. Judges and professors have complained that many provisions of the new law have been drafted atrociously. Whereas prior legislation was drafted with the assistance of some of the finest minds in the bankruptcy world, the new legislation was mostly drafted by lobbyists with relatively little knowledge of real life bankruptcy practice. I have not heard of a single judge in this country who has had any praise for the new laws.
Dedication to Judge Duberstein. I dedicate this column to the memory of Chief Bankruptcy Judge Conrad B. Duberstein, who died in November at the age of 90. He was extremely well liked for his personable nature and ability to entertain, especially in the courtroom. We have all heard his numerous jokes and anecdotes throughout every proceeding. He made practicing before him an enjoyable experience. He had the rare ability to touch each of us in a special way. We will all miss him.
About the author: Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in the March 2005 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.
Gambling has long been a culprit that drives people into bankruptcy. With Atlantic City and Indian casinos a mere bus ride away, Long Islanders are finding it ever so easy to gamble away their hard-earned incomes and get into a bad debt situation. Combine that with horse racing and OTB, lotteries, bookies and now, internet gambling, and we have plenty of opportunities for individuals to lose their shirts. Day trading with stocks is also considered by many to be an addictive form of gambling. It is no secret that compulsive gamblers incur devastating debts on their credit cards to fuel their obsessions.
Gamblers often get trapped in a vicious cycle of taking cash advances for gambling in the hope that future winnings will then satisfy ever-increasing debt. Left unchecked, this cycle will usually drive the gambler into a downward vortex, destroying the gambler and his family financially.
Gamblers may actually have some luck on their side if they can take advantage of the current bankruptcy laws, as the filing of a Chapter 7 bankruptcy will enable the gambler to discharge most gambling debts. It appears that with the surge in legalized gambling across the country, bankruptcy courts have become more liberal in permitting gamblers to discharge their gambling debts.
However, proposed legislation, if enacted, will certainly make it increasingly more difficult for gamblers to discharge their debts. Such legislation is currently pending and would adversely affect all consumer filings, not just those of gamblers. One commentator suggested that the legislature is suffering from apparent schizophrenia—they are constantly legalizing more gambling, yet condemning the ever-increasing amount of consumer debt and the “ease” of its discharge.
The following are points that the consumer bankruptcy practitioner should be aware of with regard to discharging gambling debts of their clients.
1. Gambling debts are generally dischargeable. There is no statutory authority that expressly states that gambling debts are non-dischargeable. Therefore, gambling debts are not per se non-dischargeable.
2. A creditor must prevail in an adversary proceeding for a gambling debt to be non-dischargeable. All gambling debts are dischargeable unless a creditor objects to them in an adversary proceeding. Adversary proceedings are federal law suits brought within a bankruptcy. They are involved and costly for all parties. Going back several years, casinos and credit card companies often sought to object to discharging extensions of credit given to debtors at the casino. However, such suits are much less common today.
3. Creditors rely on certain statutory provisions when they allege that gambling debts are non-dischargeable. There is one major Bankruptcy Code provision that creditors generally use in adversary proceedings to challenge dischargeability of gambling debts. This is Code section 523(a)(2)(A) which provides an exception to discharge for debts obtained by “false pretenses, a false representation, or actual fraud.”
4. Creditors have the burden of proof. Although there appear to be fewer creditors today bringing adversary proceedings objecting to gambling debts, some creditors continue to bring such suits. A creditor seeking to object to a debt bears the burden of proof by a preponderance of the evidence as stated by the U.S. Supreme Court in the 1991 Grogan case.
5. Creditors must establish four elements. In order for a creditor to prove false pretenses, false representations or fraud, the creditor must generally establish each of four separate elements: a) false representation (the creditor must prove that the gambler made a false representation through which the gambler obtained money, such as by lying on a credit application); b) knowledge (the creditor must prove that the gambler either knew the representation was false or made with such reckless disregard for the truth as to constitute willful misrepresentations — this is often the major element that is litigated); c) scienter (the creditor must prove that the debtor intended to deceive); and d) justifiable reliance (the creditor must show that it actually relied on the gambler’s false representation and that creditor’s reliance was justifiable).
6. The reasonableness standard: subjective ability to pay has become the general rule. Earlier cases concerning whether debtors believed that they would be able to repay gambling debts focused on whether the debtor’s belief was reasonable from an objective viewpoint. The creditor would argue that the debtor “knew or should have known” that the debtor could not possibly pay back his debt. A debtor will often assert that his only hope of repaying a gambling debt is to win it big in the future. Prior cases held that gambling debts in such situations should be non-dischargeable because the debtor’s belief was not reasonable.
However, the current trend has shifted to a more subjective determination. One case held that the debtor’s “honest but somewhat questionable belief that he would soon get lucky at gambling and pay off his debts” demonstrated intent to repay. Thus, a debtor may be able to defeat the creditor’s position if the debtor can persuade the court that based on his history, the debtor genuinely believed that he would be able to pay his debts and that he had the intent to pay his credit card debts at the time he incurred them.
7. The courts are mindful of public policy arguments. In recent years, this country’s policies toward gambling have also shifted for social policy reasons. One Court’s position is this: At one point in time, not so far in the past, gambling was against public policy and gambling debts were not enforceable in a court of law. But public policy changed. Certain forms of gambling are now legal … . They are hyped as a source of jobs (i.e., casinos), as a source of revenue for government (i.e. Lottery proceeds used for education), and as a form of entertainment (i.e., casinos and off-track betting).
8. The luxury goods and cash advance exceptions can make the debt non-dischargeable. Code section 523(a)(2)(C) makes a debt non-dischargeable if it is for a “luxury good or service” over $1,225 that is purchased within 60 days pre-petition, or if it is a cash advance over $1,225 obtained within 60 days pre-petition. Problems with these exceptions can be easily avoided by properly questioning your client about their pre-petition credit use and then waiting the requisite period of time.
9. Beware of pending bankruptcy reform legislation. In some versions of the pending legislation bill, there is language that provides that a debt incurred when the debtor had no reasonable expectation or ability to repay it is non-dischargeable. This would adversely slam the liberal trend in the case law mentioned above. If the bankruptcy laws change, it may become much harder to discharge gambling debts.
10. Gamblers need non-legal help also. Compulsive gamblers suffer from an addiction disorder and need professional help. Although the bankruptcy practitioner can certainly help by providing the opportunity for a fresh new financial start, you should urge the client to seek professional help. In addition to counseling, there are support groups such as Gamblers Anonymous.
Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the March 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.