Thresholds to Filing in Chapter 7 - Means Testing and The Liability of Lawyers

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1 Thresholds to Filing in Chapter 7 - Means Testing and The Liability of Lawyers Janet A. Flaccus 1 Professor As you now have heard, Congress finally passed the Bankruptcy Abuse Prevention and Consumer Protection Act of They had been threatening to pass similar bills since the end of the 1990s. I last spoke about these proposed bills in 1999 at a continuing legal education site. This article will discuss two basic changes the Act makes when Chapter 7 is filed for a client. Most of the provisions of the statutory change come into effect on October 17, Let me discuss the accuracy of the petition and the debtor's discussion of debts and assets in his schedules. The Act has penalties that can be imposed on the attorney representing the debtor, the debtor and the creditors. Secondly I will discuss the threshold requirements for the filing in Chapter 7. Here too, the Act has sanctions that can be imposed on the debtor's attorney for improper calculation that resulted in the chapter 7 petition being dismissed or converted. One good thing is that the liability of attorneys in the Act is less than the liability in previous versions of this legislation. Certificates That the Petition and Schedules are Accurate First I will go into the penalties in the Act for the attorney that did not check the accuracy of the debtor's petition and the debtor's schedules. There are potential penalties in section 707(b)(4)(C) since the Act has language stating that the attorney's signature shall constitute a certificate complying with the following: The signature of an attorney on the petition, pleading, or written motion shall constitute a certificate that the attorney has-- (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and (ii) determined that the petition, pleading, or written motion -- (I) is well grounded in fact; 1. I originally prepared these materials for a CLE in 1999! 2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No , 119 Stat. 23 (2005).

2 JANET A. FLACCUS and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1). 3 Subsection (D) says : "[t]he signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect." 4 (emphasis supplied) Will reliance upon what the client says be enough? The Act seems to be requiring more than believing what the client has told you. Tax returns, paycheck stubs and/or financial disclosures could be used to substantiate the debtor's information in the schedule about income. Did they ever fill out a financial statement? You should see it. Remember that before filing for bankruptcy any debtor will need to go through credit counseling. Under section 521(b)(2) copies of the workout need to be filed with the bankruptcy court. The workout process should have the debtor collecting information that they can give to you to substantiate the information in the debtor's schedules. Under section 521(e)(2) after a request by a creditor, the debtor needs to file with the court a copy of his or her tax return. It makes sense to require the debtor to give to you a copy of their tax return before the petition so the debtor's information about income can be checked with the tax return. I do not see how an attorney can do this without seeing the client before any filing. Under 521(a)(1)(B)(vi), the debtor, as part of his/her duties under 521, must file all copies of advices or other evidence of payment from any employer received within the 60 days before the bankruptcy petition. The debtor must provide an itemized statement of projected net monthly income under 521(a)(1)(B)(v) with a discussion of how it was calculated. In this material the debtor would need to substantiate any extraordinary financial circumstances expected in the future. Tax returns from the last three years would need to be filed. Last but not least is a statement of expected income in the future year. Constructing this information should help the attorney make an investigation into the finances of the debtor. This will be at least a starting point. Although I do not think that Congress was intending to make the attorney commit a crime, the turning of a signature into a certificate may turn that signature into a crime. I do not think this is Congress' intention. Under this certificate language, the attorney could be committing a bankruptcy crime if the certification is inaccurate. The crime is not a certainty by a long shot, but it is a possibility. Let's say the client is hiding assets but the attorney certifies that the schedule listing the debtor's assets is accurate. All of the bankruptcy crimes require that the attorney act intentionally and with fraudulent intent. The trouble 3. 11U.S.C. 707(b)(4)(C). I am taking the language not from the Act but from a publisher of a redlined version of the codified code. So far there has not been an official codification of the Act. This redlined version places in red type the language added by the Act and strikes through in black the language the Act deletes. It is published by AWHFY, L.P. and their phone number is (877) Its title is "Mini - Code Special Redlined Edition" and was selling for $ I think it is the best thing since sliced bread. Of course if this publisher made any error in codification, so did I. I have read the language in the Act but have not compared them word for word U.S.C. 707(b)(4)(D).

3 BANKRUPTCY MEANS TESTING is that the jury gets to decide whether the attorney acted without fraudulent intent or with it. All of the attorneys in the cases I have read have argued that they did not have the requisite intent. None of the attorneys were believed by the jury and the attorneys were all convicted. The false certificate that could result from the Act may fall under the crime of making a false certificate in 18 U.S.C. 152 (3). This section makes it a crime knowingly and fraudulently to make "a false declaration, certificate, verification, or statement under penalty of perjury... in relation to any case under title 11." There is only one case, that I have found, in which an attorney was found to have committed the crime of making a false oath. This is the bankruptcy crime in 18 U.S.C. 152 (2). In this case, a partner in a large New York law firm filed a chapter 11 case for the bankruptcy of a Wisconsin mining company. The attorney was approved by the court as the debtor's attorney. As you know, attorneys must file a statement in the bankruptcy court discussing conflicts of interest. The affidavit signed by that attorney listed many conflicts but neglected to include the fact that the attorney's law firm also represented a major partner of a financing partnership that was a major creditor of the debtor. The lawyer in question knew about the work and in fact had done some of the work for the non disclosed partnership. None of the work done by the firm or the attorney had anything to do with the Wisconsin bankruptcy. The Seventh Circuit affirmed the conviction of this attorney for filing a false oath. United States v. Gellene. 5 Mr. Gellene served a 15 month sentence. The bankruptcy crimes allow for incarceration from one to five years and also include a fine or penalty. Mr. Gellene's fine was a modest one of $15,000. Because of his conduct, his Law Firm had to pay back into the bankruptcy estate $1.86 million of their chapter 11 fees as the penalty for the false filing. The troubling thing about this case is that several partners of the law firm knew about the other representation but agreed that it did not need to be disclosed to the Wisconsin bankruptcy court. Only Mr. Gellene went to jail for this behavior. If the attorney knows or should have known that his or her client is hiding assets, this sets up the attorney for potentially committing two different crimes. One of these exists in current law. This is the crime of aiding and abetting the knowing and fraudulent hiding of assets by the client in violation or 18 U.S.C. 152 (1). The Eighth Circuit has affirmed two cases of attorneys who were convicted of aiding and abetting a client who was also convicted for hiding assets. Both of these attorneys went to jail for twenty-four months and twenty-one months respectively. U.S. v. Dolan 6, Edgar v. U.S. 7 If the false certificate of the attorney is considered a false certificate under 152 (3) of Title 18, then this would be the basis for a second crime. Recall that crimes require a mental element such as knowledge of the falsity. The actual language of the statute is "knowingly and fraudulently." Mr. Gellene knew about the conflict but he said that he did not think it was enough of a conflict to be disclosed. This should have at least weighed on the jury's mind but, nonetheless, the jury found that he had acted fraudulently. New language added to title 18 which deals with bankruptcy crimes tells the Attorney F.3d 578 (7th Cir. 1999) F.3d 856 (8th Cir. 1997) F.2d 89 (8th Cir. 1992).

4 JANET A. FLACCUS General to designate people in the United States Attorneys office and the FBI to have responsibility for dealing with false schedules and the Act has additional penalties for an attorney who is not careful to verify the facts of the petition. It says: It is the sense of Congress that Rule 9011 of the Federal Rules of Bankruptcy Procedure... should be modified to include a requirement that all documents (including schedules), signed and unsigned, submitted to the court or to a trustee by debtors who represent themselves and debtors who are represented by an attorney be submitted only after the debtor or the debtor's attorney has made reasonable inquiry to verify that the information contained in such documents is-- (1) well grounded in fact; and (2) warranted by existing law or a goodfaith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1). 8 Section 319 of the Act provides that it is the sense of the Congress that all such documents be submitted only after the debtor or the debtor's attorney has made reasonable inquiry to verify the information they contain. This requirement applies to signed as well as unsigned documents." This Act language may lead to an amendment of Bankruptcy Rule 9011 which will result in sanctions if the schedules and other filings are not accurate. Presumably this would result in some kind of financial penalty. But a financial penalty is better than a criminal conviction. It is likely perhaps that the certificate requirements in the statute will never result in criminal prosecution. But it is a terrible hidden danger lurking in every bankruptcy case. Remember that the conviction may also result in loss of the license to practice law since it is the conviction of a felony. There are several cases that hold that disbarment is the appropriate remedy when a bankruptcy crime has been committed by an attorney. Colorado v. Schwartz; 9 In re Murray Appel; 10 Suffolk Co. Bar Assoc. v. Pfingst. 11 Threshhold Filing Requiements and Penalties for Attorneys The threshold requirements in the Act are very different from anything that has gone on before. Moreover, there are difficulties in obtaining the numbers with which to make the calculation, and if the attorney doesn't investigate properly, it can be costly. This part of the discussion will set out what the requirements are, tell you how to get the numbers in order to make the calculation, and go through a model calculation to see whether the debtor can file in Chapter 7. These rules only apply to filing a petition in Chapter 7. The last discussion will cover what penalties can be exacted against the attorneys who do not calculate these numbers correctly. The penalties give a monetary incentive to calculate the numbers correctly. The Act looks to see how much the debtor could pay to non-prioritized unsecured debt 8. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No , 119 Stat (2005). All other cites are to the unofficial codified Code P.2d (Colo. 1991) A.D.2d (N.Y. Supreme Ct. 1978) A.D. 2d 268 (N.Y. Supreme Ct. 1976).

5 BANKRUPTCY MEANS TESTING over a 60 month period. This is done by a series of calculations which will be discussed in detail shortly. Before that detailed discussion, the outlines of the tests will be discussed. Under 707(b), the debtor's Chapter 7 filing is presumed abusive if the debtor can pay back to non-prioritized unsecured creditors certain amounts. The first calculation is to compare, either 25 percent of the debtor's non-prioritized unsecured debt or $6,000 over a 60 month period. The higher figure is used. Next, this figure is compared with $10,000 and the lesser of the two amounts is used. So, for example, if the debtor's payment of 25 percent of the debtor's non-prioritized unsecured debt is $8,000 then this figure is compared with $10,000 and the $8,000 figure is used. If the debtor can over 60 months pay this amount back, then this is considered an abusive filing. If 25 percent of nonprioritized unsecured debt is less than $6,000, then the ability to pay $6,000 will be an abusive filing. If the debtor can pay over the 60 months more than $10,000, then $10,000 will establish an abusive filing. 12 The key calculation in determining how much the debtor can pay during the 60 months are the definition of income and the determination of any expenses that can be taken out. A new definition in 101 (10A) defines current monthly income. It includes any source of income, whether taxable or not, and includes amounts paid by anyone who is regularly making contributions to the household expenses of the debtor or the debtor's dependents. Parents might fall here for example or a spouse. The amount for the past six months before the filing is averaged. After current monthly amount is calculated, the monthly amount is multiplied by 60. The Act does not include amounts paid by Social Security. 13 There are some specialized forms of income from war crimes and terrorism that are excluded as well. This calculation of monthly income does not include a spouse's income, except amounts paid for household expenses as noted above, unless both spouses have filed bankruptcy. Subtracted from this amount are expenses. For the most part, these are not the debtor's actual expenses but amounts delineated by the Internal Revenue Service. The expenses set out by the IRS can be found at the IRS web site or the American Bankruptcy Institute's web site. Go under "allowable expenses" once you get to the IRS web site. To get the individual expense amounts for food/clothing, shelter and transportation click on the link sites that are provided. The current IRS expense numbers are included in Appendix A. I am told that they get updated every year or so. Don't expect to get information from the IRS telephone line. I spoke with someone who specializes in bankruptcy tax issues and she had no idea where the expenses would come from. You can also get links to this information on the American Bankruptcy Institute's web site. 14 The current allowed expenses by the IRS will be discussed with the examples detailed below. The debtor's actual expenses will be used for 12. Non-prioritized unsecured debt of $24,000 is where 25 percent is $6, U.S.C.A. 101(10A)(B). It also excludes from current monthly income "payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism." Id. 14. The American Bankruptcy Institute's web site has a way to get these expense numbers under a heading of "means testing." Click first on "Full Coverage of Bankruptcy Reform". Scroll down to "means testing" and find the links to the IRS material. The one link it does not provide is the one for other necessary expenses. This is why I have provided it in Appendix B. It took several hours and library help to find it.

6 JANET A. FLACCUS the category of Other Necessary Expenses. The statute just lists things like health and disability insurance but it references the IRS's definition of Other Necessary Expenses. Since this took a lot of time to find, I have included a portion of the IRS Manual dealing with Financial Analysis Handbook which is part 5 of the Manual in Appendix B. As you can see, this is the discussion of Other Expenses. Also subtracted from the monthly income are the total amounts that would be paid to secured creditors during the 60 month period. This is then divided by 60 to get a monthly amount to subtract from monthly income. Total amounts owed to prioritized unsecured debt divided by 60 is also allowed to be subtracted from the monthly income. The Act also allows to be subtracted an additional 5 percent for actual food or clothing expenses. 15 Actual amounts may be subtracted for utility costs instead of the IRS figure also. The debtor must substantiate this difference. 16 Once these three types of expenses are subtracted from the monthly income, then the monthly income is multiplied by 60. Also to be subtracted from monthly income is up to $1,500 for each child for private schooling per year. This is less than the House wanted to provide. This gives preferential treatment to private school parents over those who send their children to public school. Keep in mind that 707(b)(1) already has language not allowing abuse to consider prior or continued charitable contributions. I question the wisdom of this policy. Why should charitable entities and private schools benefit out the pockets of other creditors? Amounts paid for care of elderly relatives or for chronically ill or disabled household members may also be subtracted as an expense. This makes sense. If the debtor is paying to care for one of these people, then this should be an expense recognized by the statute. The United States trustee is to investigate whether the debtor meets the threshold test for filing in Chapter 7. They are to file with the court no later than 10 days after the first meeting of creditors a statement of whether the debtor's filing is a presumed abuse one. 17 No later than 5 days after receiving this report, the court is to send the report to creditors. 18 Another 30 days after receiving the above statement, the United States trustee is to file a motion to dismiss or convert under 707(b). 19 The United States trustee can file a statement of why it is not appropriate to dismiss the case. The Act would preclude a motion to dismiss or convert if the debtor and the debtor's spouse combined, as of the date of the order of relief, have current monthly income equal to or less than the state median family monthly income calculated on a yearly basis for a household of equal size. 20 For households larger than four, the Act allows the addition of $525 for each additional dependent to the median income. 21 Since the figures for median income for a state U.S.C.A. 707(b)(2)(ii)(2005) U.S.C.A. 707(b)(2)(ii)(V)(2005) U.S.C.A. 704(b)(1)(A) (2005) U.S.C.A. 704(b)(1)(B) (2005) U.S.C.A. 704(b)(2) (2005) U.S.C.A. 707(b)(7) (2005) U.S.C.A. 707(b)(7)(A)(iii) (2005).

7 BANKRUPTCY MEANS TESTING are not calculated monthly, the debtor and spouse's monthly income is to be multiplied by twelve. 22 Note that it does not matter whether the debtor and spouse have both filed bankruptcy. For the median income comparison, both spouses' income is combined. The state median income per family size is provided by the U.S. Census see appendix A. The Census gives upper and lower ranges. Which one is to be used for debtor protection? For example, for a family of four in Arkansas the lower state median income is $46,206. The upper range figure is $52,020. Should the court take the average? For families of 2 or more people the Act says the "highest median income." Thus, a family of four in Arkansas would be able to file in Chapter 7 as long as their combined monthly income multiplied by twelve is $52,020 or less. Assuming that our families do not get absolute protections because their joint income is not below the state's highest median income, further calculations need to be made. The Act limits who can raise an abuse argument when the debtor's median income (not the debtor and his spouse's income) is at or lower than the highest median income for his size family. If the debtor's median yearly income falls here, the only people who can raise abuse are the United States trustee and the judge not creditors. When the debtor's or the debtor's and spouses's income is to high for the above protection this is when the means test for abusive filing needs to be calculated. After calculating income for the 6 months preceding the bankruptcy petition filing in order to get the average monthly amount, 23 expenses need to be calculated. The three hypotheticals below are for a family of four living in Washington County in Arkansas, Adair County in Oklahoma and McDonald County in Missouri. The families have two cars. The three hypotheticals use expenses taken from the IRS National and Local Guidelines. These are included herein in Appendix B. 24 Taxes are suggested to be taken out from the IRS's "Other Necessary Expenses." The Act lists the following as the types of expenses that might fit under "Other Necessary Expenses." These are: 1) health and disability insurance costs; and 2) health savings accounts for the debtor, the debtor's spouse or any dependant. The debtor is able to use his own actual expenses for the above mentioned "other necessary expenses." As can be seen from Appendix C, the Other Necessary Expenses according to the IRS include expenses that are necessary to support the debtor or dependants or for the generation of income. Taxes, child care, work expenses such as a uniform or the internet, child care, court-ordered payments, term life insurance and taxes are some of the items listed. This comes out of part 5 of the Internal Revenue Manual. Do not make the mistake I made when U.S.C.A. 707(b)(7)(A) (2005). 23. Note in our hypothetical, the debtor's monthly income does not vary from month to month. If it did, the 6 month period for calculating the monthly income would have to be used. Here I just took yearly income and divided by 12. This could not be done if income varied at all from month to month which it often would. 24. Except for taxes all the expenses in Table 1 are taken from the IRS' National and Local Standards. These are readily available on the internet. If you want all of the information on the expenses from one visit to the web site then go to the basic web site for the IRS listed above and click on the blue link sites to the various standards. You can see these link sites. They are the underlined text in the first and second page of Appendix A. Recall that the ABI web site also can get you to the correct place. Click under the "Full Coverage of Bankruptcy Reform" and then find the box for "Means Testing."

8 JANET A. FLACCUS searching for this information on the IRS web site. I first type in Internal Revenue Service Manual. Take the Service out. In the tables below only taxes and a general figure for other necessary expenses are included. This is for simplicity. For each case, however, the other necessary expenses need to be itemized and substantiated. TABLE 1 EXPENSES ARKANSAS OKLAHOMA MISSOURI Food*: $1,298 $1298 $1,564 Housing:** $1158 $774 $861 Trans:*** $336 $336 $345 Taxes**** $800 $750 $1,100 Other + $100 $500 $400 School $600 TOTAL $3,692 $3,658 $4,670 *Food includes expenses for food, apparel and services, housekeeping supplies, personal care products and services, plus a miscellaneous amount of $175 for a family of four and is a national standard. The base amount is $100 and $25 dollars are added for each additional person.the amount allowed for food depends on the debtor's income. Since these families have to have a yearly joint income above the state median, they are given an income rounded to the next thousand as their income. The median income for Arkansas and especially for Missouri is higher than in Oklahoma. The highest median income for our Oklahoma family of 4 is $51,715, an amount slightly lower than in Arkansas which is $52,020. In Missouri the highest median income for our Missouri family is $62,692. So for the food expenses, I put the Missouri family in a different category. ** Housing includes utilities and is broken down per county in each state. The debtor can not double dip by subtracting the IRS expenses and actual mortgage costs as a secured debt. The Internal Revenue Manual indicates that the expense provided is to cover mortgage payments or rent. The national standards for transportation expenses also indicate that they are covering purchase or lease amounts plus gas and car repair in the amount specified. Thus, amounts actually spent to pay off loans on the car could not be deducted as a secured loan expense. *** Transportation is broken down into regions. Arkansas and Oklahoma are in the South Region. Missouri is included into the Midwest region. For each region, the standards give a region amount and then an amount for the major cities in that region. For each of the debtors, the regional amount was taken. **** The IRS allows as other necessary expenses such things as expenses for income, FDIC and state income taxes. A list of other necessary expenses is available on the Internal Revenue web site. The portion of the manual with the IRS list of types of other necessary expenses is included in Appendix B. Since the median income of the Missouri family was much higher, I gave it more income and they therefore would pay more in taxes. + The "Other" expenses in Table 1 is a number for all other necessary expenses. For an actual case the debtor will have to substantiate the actual expenses that go here. Do not accept the debtor's word for this. Next, the debtor is to subtract from monthly income the total amounts our families owe on secured debt during the next 60 months.

9 BANKRUPTCY MEANS TESTING Assume our three families owe a total of $22,000 $15,000, and $20,000 in non house or car secured debt respectively. Note that in these calculations, none of these families have been allowed to double dip by taking a secured expense for their house and cars since amounts have already been accounted for in the IRS standards. These total amounts on secured debt need to be divided by 60. This leaves $367, $250, and $334 for each of our families to deduct for payment for secured debt per month. The next calculation is for the total to be paid to prioritized debt. Assume the Arkansas family owes $18,000 in back due child support entitled to a first place priority under 507(a). Thus, for them their total prioritized debt is $18,000. Divided by 60 this equals $300 per month. The Oklahoma family owes $10,000 to the IRS. This is entitled to an eighth place priority under 507 of the bankruptcy code. Divided by 60 this equals $167 per month. The Missouri family owes $13,000 in back taxes to the IRS. This amount divided by 60 equals $217 per month. These figures are allowed to be subtracted from monthly income. First add the secured debt monthly payment to the prioritized unsecured debt monthly payment which is done below. TABLE 2 SECURED AND PRIORITIZED DEBTS Debts ARKANSAS OKLAHOMA MISSOURI Secured $367 $250 $334 Priority $300 $167 $217 TOTAL $667 $417 $551 Next add the total debts calculated above with the total IRS expenses in Table 1 TABLE 3 EXPENSES AND DEBTS ARKANSAS OKLAHOMA MISSOURI Expenses $3,692 $3,658 $4,670 Debts $667 $417 $551 TOTAL $4,359 $4,075 $5,221 This completes the calculation of the amounts that can be deducted from monthly income. The next calculation that needs to be made is to take the monthly income and subtract the total of the IRS expenses and the Debts. This is done below for the three families. TABLE 4 MONTHLY INCOME MINUS EXPENSES AND DEBTS ARKANSAS OKLAHOMA MISSOURI Monthly* $4,500 $4,333 $5,250 Income Monthly Expenses $4,359 $4,075 $5,221 & Debts EQUALS $141 $258 $29 *Each of the families' income was based on the nearest $1,000 to the highest median income for each state. The above figures represent the amount of money per month left over after paying expenses and secured and prioritized debt. This supposedly could be used to pay non-prioritized unsecured debt if the case were in Chapter 13.

10 JANET A. FLACCUS The next calculation is that these monthly amounts need to be multiplied by 60. This is because the text in the Act is designed to see how much a debtor could pay in a 5 year Chapter 13 plan on non-prioritized unsecured debt. For the Arkansas family, $141 times 60 equals $8,460. For the Oklahoma family, $258 times 60 equals $15,480. Last for the Missouri family, $29 times 60 equals $1,740. Of course this calculation is artificial because all of these families may have spent more on each expense category than the amount allowed under the IRS expenses. The only exception was the amount the Oklahoma family spent on food. Thus, were these families in Chapter 13 this amount of non-prioritized unsecured debt would not be paid off to this extent. Be sure to use IRS expense tables for the calculation instead of actual anticipated expenses. The Oklahoma family's filing in Chapter 7 would be presumptively abusive because they could pay back more than $10,000. For the Arkansas and Missouri families who cannot pay back more than $10,000 an additional calculation needs to be made. Because the abuse standard is based in part on the ability to pay twenty-five percent of nonprioritized unsecured debt, an amount of non prioritized unsecured debt will have to be given to each family. The Arkansas family has credit card debt of $10,000. The Missouri family has $100,000 in medical debts that are uninsured. Twenty-five percent of $10,000 is $2,500. Twenty-five percent of $100,000 is $25,000. The Arkansas family's 25% is under $6,000 so the lower threshold under the abuse standard is the ability to pay $6,000. Here the Arkansas family can pay $8,460 so their filing would be presumptively abusive. If they had enough non-prioritized unsecured debt, then the $10,000 would have been the standard and their filing would not be seen as abusive. The Missouri family can pay only $1,740. Twenty-five percent of their unsecured debt is $25,000. This is higher than the $10,000 standard so the Missouri family would be judged under the $10,000 standard, not the $6,000 standard. Since they cannot pay back $10,000 their filing would not be considered to be abusive. Note, they can pay so little back that their filing would not be considered to be abusive even if their unsecured debt were a lot lower, so the $6,000 standard would be used. The ability to pay back a little less than $167 per month will place the debtor under either standard in the abuse category because that pays back a little more than $10,000. The Oklahoma family was well above this amount and therefore their filing would be considered abusive. The presumption of abuse can be rebutted by showing of special needs. The Act lists two types of special circumstances. They list serious medical conditions and active duty in the Armed Forces. It is unclear whether these are the only special circumstances allowed. The statute does not have language such as "including not limited to." Once the debtor qualifies as having a special need the debtor must: 1) itemize each additional expense; 2) document each expense; 3) provide a detailed explanation of the special circumstances that make such expenses necessary and reasonable. 25 The debtor must "attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required." 26 The presumption of abuse is rebutted if these spe U.S.C.A. 707(b)(2)(B)(ii)(2005) U.S.C.A. 707(b)(2)(B)(iii)(2005).

11 BANKRUPTCY MEANS TESTING cial expenses lower the ability to pay under the 25 percent/$6,000 or $10,000 threshold whichever is applicable. Damages can be awarded to either side if Rule 9011is violated in the process and the party loses on the argument of abuse. So if a creditor makes the argument and loses and violates Rule 11 in the process, it must pay the debtor his/her costs of defending the action. Similarly, an attorney for the debtor is liable if the trustee makes the argument and wins and the attorney violated Rule 11. Recall, Section 319 of the Act says that it is the wish of Congress for Rule 11 to be amended so that the debtor's attorney is verifying the accuracy of the debtor's documents and schedules. The statute uses the language "well grounded in fact." It remains to be seen whether Rule 11 is amended. The key here is a reasonable checking of the debtor's information. It's noted in the first part of this article how this might be done. There are many other changes in this Act that will substantially change the practice of bankruptcy at least for Chapter 7. The focus here has been on those two portions of the Act that have direct monetary consequences on the attorneys representing the debtor and creditors U.S.C.A. 707(b)(2)(B)(2005).

12 JANET A. FLACCUS Appendix A: MEDIAN FAMILY INCOME IN THE PAST 12 MONTHS (IN 2003 INFLATION-AD JUSTED DOLLARS) BY FAMILY SIZE Geography ID State Table ID Line Number Line Description Median Income (dollars) Estimate 90-percent confidence interval Lower Bound Upper Bound 04000US01 Alabama B Total: US01 Alabama B person families US01 Alabama B person families US01 Alabama B person families US01 Alabama B person families US01 Alabama B person families US01 Alabama B or-more-person families US02 Alaska B Total: US02 Alaska B person families US02 Alaska B person families US02 Alaska B person families US02 Alaska B person families US02 Alaska B person families US02 Alaska B or-more-person families US04 Arizona B Total: US04 Arizona B person families US04 Arizona B person families US04 Arizona B person families US04 Arizona B person families US04 Arizona B person families US04 Arizona B or-more-person families US05 Arkansas B Total: US05 Arkansas B person families US05 Arkansas B person families US05 Arkansas B person families US05 Arkansas B person families US05 Arkansas B person families US05 Arkansas B or-more-person families US06 California B Total: US06 California B person families US06 California B person families US06 California B person families US06 California B person families US06 California B person families US06 California B or-more-person families

13 BANKRUPTCY MEANS TESTING 04000US08 Colorado B Total: US08 Colorado B person families US08 Colorado B person families US08 Colorado B person families US08 Colorado B person families US08 Colorado B person families US08 Colorado B or-more-person families US09 Connecticut B Total: US09 Connecticut B person families US09 Connecticut B person families US09 Connecticut B person families US09 Connecticut B person families US09 Connecticut B person families US09 Connecticut B or-more-person families US10 Delaware B Total: US10 Delaware B person families US10 Delaware B person families US10 Delaware B person families US10 Delaware B person families US10 Delaware B person families US10 Delaware B or-more-person families US11 District of Columbia B Total: US11 District of Columbia B person families US11 District of Columbia B person families US11 District of Columbia B person families US11 District of Columbia B person families US11 District of Columbia B person families US11 District of Columbia B or-more-person families US12 Florida B Total: US12 Florida B person families US12 Florida B person families US12 Florida B person families US12 Florida B person families US12 Florida B person families US12 Florida B or-more-person families US13 Georgia B Total: US13 Georgia B person families US13 Georgia B person families US13 Georgia B person families US13 Georgia B person families US13 Georgia B person families US13 Georgia B or-more-person families US15 Hawaii B Total:

14 JANET A. FLACCUS 04000US15 Hawaii B person families US15 Hawaii B person families US15 Hawaii B person families US15 Hawaii B person families US15 Hawaii B person families US15 Hawaii B or-more-person families US16 Idaho B Total: US16 Idaho B person families US16 Idaho B person families US16 Idaho B person families US16 Idaho B person families US16 Idaho B person families US16 Idaho B or-more-person families US17 Illinois B Total: US17 Illinois B person families US17 Illinois B person families US17 Illinois B person families US17 Illinois B person families US17 Illinois B person families US17 Illinois B or-more-person families US18 Indiana B Total: US18 Indiana B person families US18 Indiana B person families US18 Indiana B person families US18 Indiana B person families US18 Indiana B person families US18 Indiana B or-more-person families US19 Iowa B Total: US19 Iowa B person families US19 Iowa B person families US19 Iowa B person families US19 Iowa B person families US19 Iowa B person families US19 Iowa B or-more-person families US20 Kansas B Total: US20 Kansas B person families US20 Kansas B person families US20 Kansas B person families US20 Kansas B person families US20 Kansas B person families US20 Kansas B or-more-person families US21 Kentucky B Total: US21 Kentucky B person families

15 BANKRUPTCY MEANS TESTING 04000US21 Kentucky B person families US21 Kentucky B person families US21 Kentucky B person families US21 Kentucky B person families US21 Kentucky B or-more-person families US22 Louisiana B Total: US22 Louisiana B person families US22 Louisiana B person families US22 Louisiana B person families US22 Louisiana B person families US22 Louisiana B person families US22 Louisiana B or-more-person families US23 Maine B Total: US23 Maine B person families US23 Maine B person families US23 Maine B person families US23 Maine B person families US23 Maine B person families US23 Maine B or-more-person families US24 Maryland B Total: US24 Maryland B person families US24 Maryland B person families US24 Maryland B person families US24 Maryland B person families US24 Maryland B person families US24 Maryland B or-more-person families US25 Massachusetts B Total: US25 Massachusetts B person families US25 Massachusetts B person families US25 Massachusetts B person families US25 Massachusetts B person families US25 Massachusetts B person families US25 Massachusetts B or-more-person families US26 Michigan B Total: US26 Michigan B person families US26 Michigan B person families US26 Michigan B person families US26 Michigan B person families US26 Michigan B person families US26 Michigan B or-more-person families US27 Minnesota B Total: US27 Minnesota B person families US27 Minnesota B person families

16 JANET A. FLACCUS 04000US27 Minnesota B person families US27 Minnesota B person families US27 Minnesota B person families US27 Minnesota B or-more-person families US28 Mississippi B Total: US28 Mississippi B person families US28 Mississippi B person families US28 Mississippi B person families US28 Mississippi B person families US28 Mississippi B person families US28 Mississippi B or-more-person families US29 Missouri B Total: US29 Missouri B person families US29 Missouri B person families US29 Missouri B person families US29 Missouri B person families US29 Missouri B person families US29 Missouri B or-more-person families US30 Montana B Total: US30 Montana B person families US30 Montana B person families US30 Montana B person families US30 Montana B person families US30 Montana B person families US30 Montana B or-more-person families US31 Nebraska B Total: US31 Nebraska B person families US31 Nebraska B person families US31 Nebraska B person families US31 Nebraska B person families US31 Nebraska B person families US31 Nebraska B or-more-person families US32 Nevada B Total: US32 Nevada B person families US32 Nevada B person families US32 Nevada B person families US32 Nevada B person families US32 Nevada B person families US32 Nevada B or-more-person families US33 New Hampshire B Total: US33 New Hampshire B person families US33 New Hampshire B person families US33 New Hampshire B person families

17 BANKRUPTCY MEANS TESTING 04000US33 New Hampshire B person families US33 New Hampshire B person families US33 New Hampshire B or-more-person families US34 New Jersey B Total: US34 New Jersey B person families US34 New Jersey B person families US34 New Jersey B person families US34 New Jersey B person families US34 New Jersey B person families US34 New Jersey B or-more-person families US35 New Mexico B Total: US35 New Mexico B person families US35 New Mexico B person families US35 New Mexico B person families US35 New Mexico B person families US35 New Mexico B person families US35 New Mexico B or-more-person families US36 New York B Total: US36 New York B person families US36 New York B person families US36 New York B person families US36 New York B person families US36 New York B person families US36 New York B or-more-person families US37 North Carolina B Total: US37 North Carolina B person families US37 North Carolina B person families US37 North Carolina B person families US37 North Carolina B person families US37 North Carolina B person families US37 North Carolina B or-more-person families US38 North Dakota B Total: US38 North Dakota B person families US38 North Dakota B person families US38 North Dakota B person families US38 North Dakota B person families US38 North Dakota B person families US38 North Dakota B or-more-person families US39 Ohio B Total: US39 Ohio B person families US39 Ohio B person families US39 Ohio B person families US39 Ohio B person families