The Bankruptcy Lawyers Blog

We've all heard clients complain about the pre-filing credit counseling requirement and ask why they have to jump through this hoop when they know they're going to end up filing for bankruptcy anyway.  In many cases, we may be inclined to agree:  a client facing foreclosure or repossession is in a hurry, and we know that there aren't any other realistic options on the table.

However, a new study released by the University of Illinois Department of Agriculture and Consumer Economics and MMI suggests that the credit counseling requirement does benefit those bankruptcy debtors after the fact.  The study sought to measure two general areas:  change in knowledge and change in behavior.

The educational value, based on pre-test and post-test scores, seems clear:  the average score jumped from 77.1% to 85.9%.  And an overwhelming percentage of participants surveyed reported that they felt more knowledgeable about their options and more confident in their ability to make financial decisions after the credit counseling briefing.

The other conclusion drawn by researchers--that credit counseling impacts future behavior--is less clear.  That conclusion rests on participant reactions to a list of financial behaviors pre- and post-counseling.  However, the pre-briefing questions related to actual current behavior, whereas the post-briefing survey asked which behaviors participants planned to implement.  Good intentions being what they are, we'll need to see some data on actual post-briefing behavior before drawing any firm conclusions on that point.

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In theory, when the U.S. Supreme Court rules on an issue, conflict and confusion among lower courts is laid to rest.  Back in March, when the Supreme Court ruled in United Student Aid Funds, Inc. v. Espinosa, the case caused much confusion in the popular press, with major newspapers suggesting that the ruling would make it easier for debtors to discharge student loan debt in bankruptcy. Bankruptcy attorneys, however, were generally clear on what the case actually addressed: the appropriate use of Federal Rule of Civil Procedure 60(b)(4).

The Lanning decision is a different matter altogether. The Court held that "when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation." 

That seemingly simple ruling has opened up a host of questions among bankruptcy attorneys.  Some argue that the decision effectively takes us back to pre-BAPCPA days, while others are concerned that the "known or virtually certain" standard actually further restricts the bankruptcy court's ability to deviate from the mechanical calculation of disposable income in determine projected disposable income.  While the issue in the case and the language in the holding are limited to the determination of projected income, some bankruptcy attorneys hope the bankruptcy courts will interpret the ruling to stand for the broader proposition that real-life numbers trump the artificial calculations dictated by the forms.  Still others are reporting that the Lanning decision reflects what is already common practice in their local bankruptcy courts and is unlikely to have any significant impact.

If bankruptcy court interpretations are as varied as those offered by bankruptcy attorneys in the first few days following the ruling, the Lanning decision will do little to reconcile the conflicting interpretations of the Code itself that the Supreme Court hoped to eliminate by ruling on this issue.

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A new opportunity to assist consumer bankruptcy clients facing foreclosure opened up yesterday, when Treasury Department Supplemental Directive 10-02 took effect.  Among other things, the directive requires servicers to consider borrowers in bankruptcy for modification upon request of the borrower, the debtors bankruptcy attorney or the bankruptcy trustee.

Complete information is available here:  Supplemental Directive 10-02 - Home Affordable Modification Program - Borrower Outreach and Communication

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