Opinions Regarding Failure to Obtain Credit Counseling Underscore Dissatisfaction With Law

Mandatory pre-bankruptcy credit counseling was one of the reforms enacted by BAPCPA. Its drafters intended for credit counseling to be a prophylactic step which would prevent avoidable bankruptcies. In practice, it has become a formality for some and a stumbling block for others. Several recent opinions from the Western District of Texas highlight differing approaches to this issue.

Approach One: This Is Stupid, I’m Going to Say It’s Stupid, But I Am Going to Enforce This Stupid Law

On December 22, 2005, Judge Frank Monroe from the Austin Division of the Western District of Texas released his opinion in In re Sosa, 336 B.R. 115 (Bankr. W.D. Tex. 2005). Judge Monroe did not mince words about the wisdom of the credit counseling requirement.

"One of the more absurd provisions of the new Act makes an individual ineligible for relief 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 §111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.' See 11 U.S.C. § 109(h)(1). No doubt this is a truly exhaustive budget analysis."

Judge Monroe goes on to describe the circumstances in which a certificate of exigent circumstances can be filed and approving, concluding:

"Simply stated, if a debtor does not request the required credit counseling services from an approved nonprofit budget and credit counseling service before the petition is filed, that person is ineligible to be a debtor no matter how dire the circumstances the person finds themselves in at that moment.

"This Court views this requirement as inane. However, it is a clear and unambiguous provision obviously designed by Congress to protect consumers."

Approach Two: This Is Foolish But Congress Gave Me Room to Avoid a Foolish Result

Judge Monroe seemed pretty definitive, but things were not so clear in San Antonio. On June 27, 2006, Judge Leif Clark released his Order on Motion for Exigent Circumstances in In re Navarro, No. 06-51007 (available at www.txwb.uscourts.gov/opinions). Judge Clark was faced with a pro se debtor who “was unable to obtain counseling within the five day window because she did not know that she needed to obtain counseling as a prerequisite to filing for bankruptcy.”

Judge Clark, like Judge Monroe, did not view the credit counseling requirement as particularly helpful Judge Clark stated:

"The credit counseling briefing is superficially designed to discourage people from filing for bankruptcy on the theory that, if they but knew of the alternatives, they might pursue those instead. In practice, however, the briefing has little or no effect on the actual decision to file because, by that time, the person’s financial condition has deteriorated too far for any alternative other than bankruptcy to be effective. The 'briefing' called for by section 109(h)(1) does little more than make the debtor aware of credit counseling as an alternative. But credit counselors attempt to negotiate a payment plan with the consent of the debtor’s creditors, for a fee, and their success will depend on whether they can get all creditors to cooperate…The actual negotiation of an alternative thus requires a voluntary “standstill” by the creditors while an arrangement is worked out. In practice, that will not happen. (citation omitted). What is more, the debtor may well be actually discouraged from filing when filing might be the right thing to do—by a credit counselor who is not lawyer effectively giving the debtor legal advice. (citation omitted). The result is that the credit counseling briefing ends up being a useless formality.

"It also operates as a trap for the unwary, potentially causing the dismissal of so-called 'ineligible' debtors from bankruptcy. (citation omitted). While certain private financial interests may be rewarded as a result, (citation omitted), no genuine public interest appears to be served."

Judge Clark then turns his thoughtful mind to the court’s role in policing eligibility. Judge Clark notes that eligibility is not jurisdictional. Thus, an ineligible debtor may proceed in bankruptcy unless someone timely objects. In this case, the court is appointed as gatekeeper. The clerk may not refuse to accept a petition which is not accompanied by a certificate of credit counseling. The clerk may bring any deficiency to the attention of the court, which, under Rule 1007(e) “may” dismiss the case, but is not required to. If the debtor files a certificate of exigent circumstances, the court “may” conduct a hearing, but is not required to. Further, “If the court finds the certificate of exigent circumstances to be satisfactory, then the issue of eligibility under section 109(h) is deemed resolved for all purposes, and the debtor is henceforth eligible for relief as a debtor under title 11, no further questions asked.”

Judge Clark seems to be saying that he has the discretion to ignore a failure to obtain credit counseling as well as the discretion to accept any explanation of exigent circumstances. In a footnote, he states:

"Section 707(a) permits (but does not require) the court to dismiss a case for failure to file the information required by section 521(a)(1), but the certificate of credit counseling briefing is not one of the documents required to be filed by section 521(a)(1). …Thus, while some courts have elected to dismiss cases that do not comply with Interim Rule 1007(b)(3)(including my colleague in this division), they apparently do so as a matter of judicial housekeeping, but not as a matter of statutory or rule construction."

Judge Clark concludes that not knowing about credit counseling was an exigent circumstance in the case before him.

"The court finds that this debtor, a non-lawyer, was justified in not knowing about the credit counseling briefing requirement as a pre-condition to eligibility for bankruptcy. That justifiable lack of knowledge, in turn, satisfies the court as an exigent circumstance."

While Judge Clark’s logic is elegant and his heart is clearly in the right place, the result seems to be a bit off. The exigent circumstances provision is part of a clause which has three parts connected by an “and.” Judge Clark’s ruling appears to state that a person may be a debtor if they submit a certificate describing exigent circumstances which is satisfactory to the court. While this satisfies the first and third requirements, it appears to read out the second one. The middle provision requires that the “debtor requested credit counseling services from an approved non-profit budget and credit counseling agency, but was unable to obtain the services … during the five-day period beginning on the date on which the debtor made that request.” If the debtor did not request credit counseling at all, the debtor would not be able to establish that credit counseling was not available within five days. Therefore, the debtor would not be able to establish exigent circumstances. However, in the Navarro case, that is exactly what happened.

Approach Three: The Law Seems Clear to Me

The final salvo in this round of cases comes from Judge Ronald King from San Antonio, who weighed in with an opinion on July 7, 2006. Like Judge Clark, Judge King was faced with a pro se debtor. In In re Gallardo, No. 06-50724 (available at www.txwb.uscourts.gov/opinions), the debtor sought to reconsider dismissal of his case. The debtor contended that he had looked on the internet for requirements to file bankruptcy but did not discover the credit counseling provision. Judge King was not impressed. He said:

"This Court cannot control publication of the United States Code on internet websites. The fact that the Debtor could not locate section 109(h) of the Bankruptcy Code on a particular website does not make the amendments made by BAPCPA inapplicable to this Debtor. Section 109(h) of the United States Bankruptcy Code, as amended by BAPCPA effective October 17, 2005, requires that credit counseling must be taken prior to the filing of a new bankruptcy case by an individual debtor and certification of such credit counseling must be filed with the petition. There are certain exceptions for exigent circumstances, incapacity, disability or active military duty which are not applicable in this case. This Court must follow the law as enacted by Congress and signed by the President."

It seems obvious that Judge King considers dismissal of a non-complying case to be mandatory rather than a matter of judicial housekeeping. The fact that Judge King would publish this scant 1 ½ page opinion just ten days after Judge Clark’s opinion in Navarro could be read as an attempt to stake out his own position on this issue.

Defying Congress

Both Judge Monroe and Judge Clark seem intent on lecturing Congress. By referring to the credit counseling requirements as absurd, inane and a useless formality, the judges have made it clear what they think. They have also expressed what a sizeable contingent of the practicing bar (including this author) thinks. By lending the prestige of their office to the critiques voiced by many, the judges may spur corrective action by Congress (although this is probably wishful thinking). However, Judge Clark’s ruling is a bit more troubling. By claiming that he is the gatekeeper who may admit whom he finds worthy and by stating that he can make a debtor eligible “no further questions asked,” Judge Clark appears to take a very aggressive position. No party filed a timely appeal from Navarro, so that the debtor in that case will likely be able to complete her case without pre-petition credit counseling. It remains to be seen whether a creditor or the U.S. Trustee will take up the gauntlet in a future case.