THE new bankruptcy code requires debtors to take credit counseling before filing their bankruptcy case. Specifically, Section 109(h) states “… an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing …that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.” Despite the fact that this is a straightforward and clear pre-filing requirement, some debtors still file their bankruptcy cases without taking credit counseling. Some argue that their house is going to be foreclosed next week so they have no time to take credit counseling. They argue that the imminent foreclosure of their house is an “exigent circumstance” that exempts them from credit counseling. Well, these arguments are not valid in Southern California where the foreclosure process takes at least 4 months. Nothing “exigent” for a process that takes 4 months.
Three bankruptcy debtors filed their cases without credit counseling. US Trustee asked the bankruptcy court to dismiss the cases. The bankruptcy court decided instead to strike all 3 cases. Striking a case means that the petition is kicked out of bankruptcy court as if it was never filed. The court observed that 109(h) “was intended to provide debtors with education as to all of their options when experiencing financial difficulty, before a resort to bankruptcy protection was necessary.” The court concluded that compliance with the credit counseling requirement was “an absolute pre-requisite to individual bankruptcy eligibility.” Relying on its reasoning in In Re Rios 336 B.R. 177, the bankruptcy court found that Section 109(h) barred the debtors from commencing a case under Section 301. Despite the fact that there was no case, the bankruptcy court found that it had jurisdiction over the matter and the Section 105 allowed it to strike the case. In doing so, the court noted that the automatic stay never went into effect because there was no case! The US Trustee appealed on the issue of whether the bankruptcy court correctly ruled that bankruptcy petitions filed by ineligible debtors do not commence cases. The District Court affirmed the bankruptcy court’s ruling. But the 2nd Circuit court of appeals reversed and remanded.
Section 301 says “A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.” Section 109 defines who may be a debtor and it says that no individual may be a debtor unless that individual has received credit counseling 180 days preceding the filing of the bankruptcy petition. The 2nd Circuit followed the reasoning that individuals who do not obtain pre-petition counseling may commence a bankruptcy case, but they are not eligible for relief under any particular chapter of the bankruptcy Code. They have a bankruptcy case, but it’s not a Chapter 7 or a Chapter 13 case. The appellate court also found that Sections 109(h) and 301 were not jurisdictional, “but rather elements that must be established to sustain a voluntary bankruptcy proceeding. Restricting whether an individual may be a debtor either under the Bankruptcy Code in general or under a given chapter does not speak in jurisdictional terms or invoke the jurisdiction of the district court.” Because the bankruptcy filings commenced a case, they also triggered the automatic stay. The appellate court noted that Sections 362(b) lists circumstances under which the filing of a bankruptcy petition does not trigger the automatic stay. A filing by an ineligible debtor is not one of them. “Finally, we note that having the automatic stay commence even when a debtor fails to satisfy the credit counseling requirements both fits into the overall purpose and framework of the stay…” the court said.
Take credit counseling before filing your bankruptcy case, or your case may be dismissed.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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