Constitutional Questions Regarding New Bankruptcy Statute

When the Bankruptcy Abuse and Consumer Protection Act was passed by Congress and went into effect in October of 2005, it was touted as a measure to stem perceived abuses in consumer bankruptcy law. In reality, the Act heralded a new age of government regulation and oversight to a previously simple and streamlined process.

Increasingly the Act, known as BACPA, is coming under criticism and scrutiny from constitutional scholars around the nation.

In July, a U.S. District Court in Dallas, Texas, ruled that a provision of the Act, Section 526(a)(4), which sought to limit the ability of attorneys to advise their clients, was unconstitutional. That ruling may not be the last challenge the BACPA faces.

The next area of the Act to be challenged may come in regards to the rights of debtors when issues of domestic support are involved, as the new provisions of the Bankruptcy Code strip a debtor down to nothing if domestic support is owed.

One of the most drastic changes to the Bankruptcy Code was the revision to Section 522(c)(1), which made otherwise exempt property subject to execution to satisfy a domestic support obligation. Exempt property is property that the debtor can keep so that he or she may receive a fresh start. Usually this includes household items, personal effects, vehicles, and in Texas, the homestead.

In Texas, a debtor may exempt a homestead in a non-rural area up to ten acres, and in a rural area 100 to 200 acres may be exempted.

A literal interpretation of the new bankruptcy provision would appear to “take the clothes off the debtor’s back,” since it would seem that the debtor has no exempt property in bankruptcy that is not subject to execution if a domestic support obligation is owed.

Issues of child support, alimony, and divorce have always been left to the sovereign states to decide what is exempt and what is subject to execution. The 10th Amendment to the U.S. Constitution, which reserves to the states the right of self governance, was narrowed during the 1950’s because of the civil rights movement. However, with the current conservative makeup of the U.S. Supreme Court, the issue of states’ rights is back at the forefront with the 10th Amendment again being a strong argument to counter an overreaching statute.

Most attorneys practicing in states with strong exemptions are aware of the change in the bankruptcy laws and are advising debtors who are divorced and are in arrears for child support that bankruptcy may not be an option if they have substantial exemptions like a house that does not have a mortgage.

More troubling for many may be a provision of the Bankruptcy Code which allows one to file an involuntary bankruptcy on behalf of one owing money to the filer. This may result in the liquidation of otherwise exempt property that would not be liquidated under state law if the debtor had not filed bankruptcy. Still, perhaps the most frustrating part of the new statute is that the debtor has no exemptions if a domestic relations obligation is owed. What is left to a debtor so that he or she can start over? In the prior Code, the debt simply survived the bankruptcy and was not discharged.

Many bankruptcy attorneys across the nation are anxious to hear a court rule on this issue.