The Lost Day Exigent Circumstances and the Timing of Credit Counseling

Journal Issue

Apr 2006

Column Name

Feature

Citation

ABI Journal, Vol. XXV, No. 3, p. 40, April 2006

Bankruptcy Code

109

Topic Tags

Consumer Bankruptcy

Practice and Procedure

Journal HTML Content

Attend any bankruptcy-related legal conference,
CLE or bar meeting (sometimes even happy hour at the local pub after a
heavy day of §341 hearings) and the topic of the new mandatory
credit counseling requirement isn't too far from someone's lips. Most
of those conversations revolve around precisely when a debtor needs to
obtain their counseling and whether exigent circumstances for a waiver
truly exist. Even now a new question is emerging: whether counseling
received the day of the filing of a petition creates eligibility issues.

How Exigent Is Exigent? Around the country, multiple
bankruptcy courts have ruled on the requirements of 11 U.S.C.
§109(h). We have even seen the first appellate decision addressing
the issue. The Eighth Circuit Bankruptcy Appellate Panel (BAP) affirmed
the bankruptcy court's determination that the debtor was not eligible
to be a debtor in a bankruptcy case and that Chief Judge Barry S.
Schermer (E.D. Mo.) had applied the statute correctly. The facts
of In re Dixon1 address the debtor's failure to
establish exigent circumstances meriting a waiver of the pre-petition
credit counseling as required under §109(h). The debtor alleged
that the fact that his home was scheduled for a foreclosure sale the
same day he filed his bankruptcy case constituted an exigent
circumstance under §109(h). The debtor had sought out credit
counseling after contacting an attorney the previous day. He stated in
his "Certification Requesting Waiver of the Debt Counseling by
Individual Debtor" that "I called [the USTP-approved
credit-counseling agency] and was advised that it would be two weeks
before they could provide me with debt counseling on the phone and
that it would be 24 hours before they could provide me with the
counseling by Internet" and that "I have no computer and had
no access to the Internet." He goes on to state, "it was
impossible for me to complete credit counseling prior to the time set
for foreclosure on my home."2 The BAP's analysis
looked at the requirements to establish a waiver under §109(h)(3).
This section, which provides that the counseling requirement does not
apply with respect to a debtor who submits to the court a
"certification," consists of three statutory requirements:
<blockquote> <blockquote> Subject to subparagraph (B), the
requirements of paragraph (1) shall not apply with respect to a
debtor who submits to the court a certification that: (i)
describes exigent circumstances that merit a waiver of the requirements
of paragraph (1); (ii) states that the debtor requested credit
counseling services from an approved nonprofit budget and credit
counseling agency, but was unable to obtain the services referred
to in paragraph (1) during the five-day period beginning on the
date on which the debtor made that request; and (iii) is
satisfactory to the court.3

</blockquote></blockquote>With regard to the second requirement, the
BAP found that the debtor was unable to obtain the required credit
counseling within the five days of his requests, as is required by
109(h)(1). With regard to the statutory requirement that the
certification be "satisfactory to the court," the BAP notes
that "it is unclear what substantive content this requirement
has. It is difficult for us to posit a situation where a court would
determine that the requirements of subdivision (i) and (ii) are met,
but still not satisfactory to the court."4 Finally,
the BAP looked at what it called "the most problematic of the
requirements,"5 the actual description of the exigent
circumstances that would lay the foundation for the waiver of the
credit-counseling requirement. The opinion noted that there must be
both an actual exigent circumstance and circumstances that would merit
waiving the requirements.6 The BAP's analysis included a
discussion of "exigent," stating that it "indicates
that the debtor finds himself in a situation in which adverse events
are imminent and will occur before the debtor is able to avail himself
of the statutory briefing."7 The opinion goes on to note
that "virtually all of the cases in which the exigent
circumstances certificate is filed will, in fact, involve exigent
circumstances."8 However, when the BAP looked at the
merits of waiving the requirements, it found a problem. The BAP noted
that the bankruptcy court had found that a Missouri law 9

requires a 20-day notice of a foreclosure sale: <blockquote>
<blockquote> In the face of that much notice of the impending
foreclosure sale, the bankruptcy court determined that his exigent
circumstances did not merit the waiver of the prebankruptcy
briefing requirement. We cannot say that the bankruptcy court
abused its discretion in making that determination. A review of
the reported decisions on facts similar to these, discloses that
most courts have come to the same conclusion.10 
</blockquote></blockquote>This fact was the fatal blow to the
debtor's request. The BAP affirmed the bankruptcy court's finding that
the debtor was not eligible to be a debtor in bankruptcy. The BAP
decision clearly indicates that exigent circumstances do exist, but
that it is extremely difficult to rise to the level of meriting the
waiver. Falling back on the maxim "ignorance of the law is no
excuse," courts will hold a client responsible for dallying after
receiving statutory notice of a pending action such as a foreclosure.
So how will the debtors' bar deal with cases like this? One attorney
who was not surprised by the court's finding has a policy of not
taking emergency cases. O. Max Gardner III of North Carolina
says, "we don't file emergency cases. There is insufficient time
to do a reasonable investigation and to prepare the case. It may even
be malpractice." However, there are attorneys who feel that you
take the debtors as you find them. "You have an ethical
obligation to represent your clients," says Marc Stern of
Seattle. "The fact you don't have a lot of time because the
client walks in the day before the foreclosure is a factor in what goes
into a reasonable inquiry." Stern, who recently contributed to an
ABA report entitled Attorney Liability under §707(b)(4) of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
also believes that "reasonable inquiry relates to chapter 7
cases. If you're doing a 'house-saver,' you're filing an emergency
chapter 13." For those that disagree with the BAP's holding,
there may be a glimmer of hope. The bankruptcy court in In re
Carter11 held that out of the five debtors seeking a
waiver in the case, the one debtor who had actually attempted to
obtain counseling but was unable to had met their burden. If this
decision or a similar one is affirmed by a BAP, practitioners may be
able to shoehorn their clients into court. In the meantime,
practitioners should proceed cautiously when pursuing an
exigent-circumstance waiver. The Lost Day When must a
client complete the credit counseling in order to be eligible as a
debtor under §109(h)? The BAP in Dixon also underlined the
fact that the counseling must be obtained prior to the date of filing.
A panel trustee in Arkansas, Jo-Ann Goldman, believes that not
only does the credit counseling need to be completed prior to the
filing of the petition, but that counseling completed on the day of
the actual filing of a petition will disqualify a debtor from
eligibility under §109. Goldman's argument lies in the actual
language of §109(h)(1), which says that "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...a...briefing." "You have no
idea what time [debtors] actually got their credit counseling,"
Goldman says. "That's why the word 'day' versus 'date' is
important." She goes on to state that as a panel trustee she has
limited discretion around issues of eligibility. "I don't have
discretion of who may be a debtor under §109(e) and debt
limitations, so therefore it stands to reason I do not have discretion
around eligibility under §109(h)." She also says that
"if Congress wanted trustees to have discretion they could have
put this requirement in §1325, but they didn't; they put in
§109." So what raised this concern for Goldman? "I had
a debtor who didn't file the credit counseling certificate with the
petition as required under §521(b). When it was later filed, it
showed that the counseling was completed the day the petition was
filed. I called the agency and learned that the debtor had actually
completed their counseling after the petition had been filed. The
certificates do not show what time the debtor completed their actual
counseling." So is this just a case of a tough trustee? Perhaps
not. "Confirmation of a case does not bind a debtor. Judges don't
have jurisdiction if debtors were not eligible to begin with,"
Goldman explains. "If we are jeopardizing a debtor's ability to
get a discharge, this has to be addressed. I'm really concerned for
the chapter 7 debtors. What if their discharges aren't valid? In a
chapter 13 plan, we have three to five years to figure this out; not
[so] with the chapter 7 cases. You're talking about malpractice and
the possibility of creditors attempting to collect years later. This
could be a quagmire of litigation." Whether counseling may be
completed on the day of filing will remain an open question until it
reaches the appellate courts. In the meantime, practitioners may wish
to stress to their clients the importance of obtaining credit counseling
prior to the date of filing. Additional Thoughts The
developing case law regarding exigent-circumstance waivers is clearly
demonstrating an almost insurmountable barrier for debtors to climb. It
is distressing that the underlying facts in these cases involve
debtors who are facing an impending mortgage foreclosure. Does
Congress need to consider passing stronger consumer-protection
provisions for those at risk of mortgage foreclosures? One possible
provision could require mortgage lenders to provide notice of the
credit-counseling requirement of §109(h) and a list of all
approved nonprofit budget and credit-counseling providers in their
district. This may reduce the need for debtors to file
exigent-circumstance waivers by better informing them of the need for
counseling. <blockquote> <blockquote>

</blockquote></blockquote><hr><h3>Footnotes</h3>1 Dixon v.
LaBarge (In re Dixon), #05-6059EM, 2006 WL 355332 (8th Cir.
BAP (E.D. Mo.) 1/31/06). 2 Id. at 3. 3 11
U.S.C. §109(h)(3)(A). 4 See supra note 1 p. 7.

5 Id. at 8. 6 It is worth noting that in a footnote
of this opinion the court recognizes that this request for a waiver is
an actual misnomer. Debtors are in fact requesting a 30-day deferral
of the credit counseling requirement. 7 See supra note 1
p. 9. 8 Id. 9 Mo. Rev. Stat. §443.310.
10 See supra note 1 p. 9. 11 In re Carter,
(#05-90089DK, 2005 WL 3529729 (D. Md.) 12/16/05).

Journal Authors

Leslie Linfield

Journal Date

Saturday, April 1, 2006 - 12:00

Bankruptcy Rule

2006

none