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2005 Bankruptcy Reform FAQ

Drafted by Richard Ekimoto, Esq.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("the Act"), community associations can expect to collect more delinquent common assessments than they did under the old law. In large part, this is because the Act makes it more difficult for anyone to eliminate their personal obligation to pay debts through bankruptcy ("discharge").

The Act also includes a specific provision for the protection of community associations. Bankruptcy courts across the country have had different rules for delinquent assessments after an owner files bankruptcy. Some courts have said that the right to assessments arises at the creation of the community and when the bankruptcy filing occurs, assessments after the bankruptcy filing can be discharged. A few courts said that assessments after the bankruptcy cannot be discharged. A 1994 law made assessments after the bankruptcy filing non-dischargeable in a residential condominium or cooperative if the owner resided in or rented out the unit. However, the different rules continued to exist for many planned community associations and commercial condominiums or cooperatives. The 1994 law also meant that if the owner moved out or stopped renting the unit, the post-petition delinquencies could be discharged. The Act makes all post-petition common assessments non-dischargeable.

What is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

The Act includes some of these key provisions:

    • Mandates financial counseling before filing 
    • Mandates financial management course as a condition to obtaining a discharge
    • Increases the time periods that debtors must wait between bankruptcies if they obtain a discharge   
    • Increases the amounts paid in Chapter 13 cases 
    • Automatically terminates the automatic stay in some refiled cases 
    • Increases the amounts to be repaid to creditors 
    • Grants additional rights to secured creditors 
    • Grants post-petition relief to community associations 
    • Grants higher priority to child and spousal support obligations
    • Requires the debtor to provide tax returns or tax transcripts to any requesting party 

Permits relief from the automatic stay in favor of a real property secured creditor when the bankruptcy petition is part of a scheme to delay, hinder and defraud creditors involving either (i) a transfer of the real property without the secured creditor's or court's consent, or (ii) multiple bankruptcy filings affecting the real property.

How were pre-petition common assessments handled before the Act?

The unsecured debts were handled differently under Chapter 7 and Chapter 13.    In a Chapter 7 case, the mortgages, taxes, pre-petition delinquent common assessments and other secured debts would be paid from the sale of the real property in order of the priorities established by state law. Any secured pre-petition debts not paid through the liquidation of the property would become unsecured debts.  Under Chapter 7, if there are assets remaining in the bankruptcy estate, they are liquidated and used to pay the unsecured debts. If not all the unsecured debts can be paid, the remaining unsecured debts would be discharged unless the debt is exempt from the bankruptcy laws. Under a Chapter 13 filing, all or part of the unsecured debts would be paid over 3 to 5 years. The amount of the unsecured debt to be paid is determined by the bankruptcy court.

How will pre-petition common assessments be handled under the Act?

The new means test will mean that more debtors will file Chapter 13 bankruptcies rather than Chapter 7 bankruptcies. That means that fewer debts will be discharged. In addition, the Act increases the amounts debtors pay in Chapter 13 filings, so associations will receive more of their pre-petition common assessments than they do under current law. However, there is no provision in the Act which specifically addresses pre-petition common assessment debts. The changes, while significant, are due to the provisions of the Act favoring creditors generally.

How were post-petition delinquent common assessments handled before the Act?

Delinquent common assessments incurred after the bankruptcy filing were treated differently depending on the type of community association and the location of the bankruptcy. This is because courts in various locations have treated delinquent common assessments differently. For many associations, the post-petition delinquent common assessments are discharged unless the debtor is residing in the unit or renting the unit.

How will post-petition delinquent common assessments be handled under the Act?

Regardless of the type or location of the community association, post-petition delinquent common assessments will not be discharged as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in the unit.

Is financial counseling required before an individual can file for bankruptcy?

Yes, once sufficient non-profit credit counseling agencies have been approved, the Act will require that before anyone files for bankruptcy, they must be certified by an approved non-profit credit counseling agency to have been briefed on opportunities for available credit counseling and to have received assistance in preparing an individual budget analysis. The U.S. Bankruptcy Trustee's Office is charged with approving non-profit credit counseling agencies. This requirement can be waived if the debtor submits a certification describing exigent circumstances and stating that he or she requested credit counseling services but was unable to receive it within 5-days from the request. However, even if waived, the debtor must undergo counseling within 30 days of filing the petition unless the court grants a 15 day extension.

Is a financial management course required after filing for bankruptcy?

Yes, once sufficient financial management course providers have been approved, debtors must complete the course prior to any discharge under either Chapter 7 or 13. The U.S. Bankruptcy Trustee's Office is charged with approving financial management course providers based on criteria contained in the Act.

When does a debtor's income and expenses have to qualify under the means test?

If a debtor's average gross family income 6 months before the bankruptcy filing exceeds the median for families in the debtor's state, the debtor's income and expenses must meet the means test. If the income and expenses do not meet the means test, the debtor must file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy. The Bureau of the Census publishes charts with the median family income by state and the American Bankruptcy Institute has more specific information on how median income is determined.

What is a Chapter 7 bankruptcy filing?

Chapter 7 is a liquidation proceeding. Under Chapter 7, the debtor turns over all non-exempt assets to the Bankruptcy Trustee. The Trustee liquidates the assets and pays the creditors. All unpaid debts are discharged other than those few that are exempt from the bankruptcy laws.

What is a Chapter 13 bankruptcy filing?

Chapter 13 is a reorganization proceeding. Under Chapter 13, the debtor pays some or all of the debts over a period of 3 to 5 years to the Chapter 13 Trustee who distributes the funds according to a plan approved by the Bankruptcy Court. The amount of the debts paid under the plan will vary but only needs to be more than what unsecured creditors would have received under a Chapter 7 filing. During the repayment period, creditors are prevented from requiring payment directly from the debtor for debts incurred before the bankruptcy filing ("pre-petition debt").

What is the Means Test for filing a Chapter 7 bankruptcy?

The difference between the debtor's monthly qualified expenses (less secured payments) and income is multiplied by 60. If that amount is less than $6,000.00, the debtor may file a Chapter 7 bankruptcy. If that amount is greater than $10,000.00, the debtor is prohibited from filing a Chapter 7 bankruptcy. If that amount falls between $6,000.00 and $10,000.00, the debtor may file a Chapter 7 only if that amount is less than 25% of the non-priority unsecured claims. There are provisions to allow additional expenses or adjustments to the income in special circumstances. In most instances, however, if the debtor's gross family income exceeds the median for families in the debtor's state, the debtor will probably need to file under Chapter 13 rather than under Chapter 7. The U.S. trustee, bankruptcy administrator or judge can challenge a debtor's bankruptcy filing in any case where the totality of the debtor's financial circumstances indicates abuse of the bankruptcy system.


For more information, you may wish to review articles by Eugene R. Wedoff, United States Bankruptcy Court, Northern District of IllinoisThomas J. Yerbich, Esq. or Doney & Associates.