Wednesday, May 25, 2005

Technical Amendments to Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

On May 9, 2005, I provided a FAQ on the Act as it relates to community associations. Since then, the answer to the last question has been updated (although the date of the article has not been changed) to reflect that one technical amendment has already been made to the Act. The Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005 includes in on page 67, technical amendments for bankruptcy fees. Effective on October 17, 2005, the following bankruptcy fees will change:

  • The Chapter 7 filing fee will be increased to $220. With the trustee fee of $15 and the $39 administrative fee, the total Chapter 7 filing fee will be $274.

  • The Chapter 13 filing fee will be reduced from $155 to $150. Thus, the total filing fee for Chapter 13 will go from the current $194 to $189.


Congress apparently decided not to increase the fees retroactively. Other bills to amend the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 have been introduced.

Tuesday, May 24, 2005

Watch Out for Evergreen Clauses

Ed Foster of InfoWorld has a blog on gripes about computers and computer vendors. Today, he wrote about an issue that commonly arises for community associations -- Evergreen clauses. You're probably familiar with them. They're automatic renewal clauses that extends the contract for a year or more unless one party cancels. With the change over of board members, site managers and managing agents, it is often difficult for community associations to remember to cancel the agreement. As Ed Foster points out, even normal businesses can fall prey to these types of clauses. The best thing to do is to write them out of all your contracts. The last thing you need is suddenly finding out that your landscaping contract has been automatically extended for another 3 years. If you vendor refuses, consider getting another vender. Do you really want a vendor that has to rely on tricks to make sure you remain their customer?

If you have existing contracts with Evergreen clauses or you can't get the vendor to eliminate them and you feel the vendor is still the best choice, see if you can immediately exercise your right to cancel. If the contract does not require that the notice of cancellation for the additional term be made within so many days before the end of the existing term, you can give notice of cancellation of the additional term immediately upon signing the contract. For example, an Evergreen clause might read, "This contract is automatically extended for an additional three year term unless either party gives notification of cancellation at least 60 days before the end of the initial or renewal term." Since the clause permits you to cancel 60 days or more before the end of the term, you can cancel the day you sign the contract. On the other hand, if you have to give notice, say within 60 days of the end of the existing term, you're going to need to implement a calendaring or tickling system for your contracts so that you don't miss the cancellation period by accident.

Finally, community associations should also consider reviewing their contracts to determine if they have Evergreen clauses.

Tuesday, May 10, 2005

Sex Offender Registry Updated

Yesterday, the Governor signed into law Act 45 which allows the criminal justice center to expand the sex offenders that are listed on its website as sex offenders.

The Hawaii Supreme Court in State v. Bani, 97 Haw. 285, 36 P.3d 1255 (2001), overturned a prior statute that required that all sex offenders registration information be made available to the public. A constitutional amendment was passed last year permitting the legislature to make the information public. Act 45 implements the constitutional amendment and allows most of the sex offender registery information to be available online. According to the Attorney General, the online registry does not list the following sex offenders:

  • About 300 whose offenses are less serious and whose information is available at the attorney general's Criminal Justice Data Center and police stations.

  • About 300 others whose cases are being worked on to determine if they meet the new standards for having their information posted. These cases include mostly people who moved to Hawaii.

  • About 100 who have committed only single misdemeanor offenses and are not required to have their information made public.

Many community associations are faced with issue of whether it has a duty to inform residents whether a sex offender is living in the community. While an association will normally have the power to inform its members of a sex offender in the community, it probably does not have a duty. For most associations, however, it makes sense if they are aware of a sex offender in their community to inform their residents of the fact. We normally recommend, however, that instead of identifying the individual, the community simply inform residents where the information may be located.

Monday, May 09, 2005

FAQ on Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("the Act"), community associations can expect to be able to obtain judgments for 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 arise 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?

This law has been considered by Congress for 8 years. The Act includes some of these key provisions:
  • Adopts a means test for bankruptcy

  • Mandates financial counseling before filing

  • Mandates financial management course after filing 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

  • Toughens homestead exemptions

  • 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

When will the Act be effective?

Most of the Act will be effective on October 17, 2005. The effective date for most provisions of the Act is 180 days after April 20, 2005, the day the President signed the bill. Except for a few provisions, the new Act will not apply to any bankruptcy cases that were filed before October 17, 2005. Many people expect there to be a spike of bankruptcy filings before October 17, 2005 to take advantage of the more lenient old law.

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 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.

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

The unsecured debts are 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. The unsecured debts are handled differently under Chapter 7 and Chapter 13. 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 provisions 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 are 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.

Will there be any other changes to the Act?

Congress has already adopted and the President signed an amendment that will change the bankruptcy filing fees effective October 17, 2005. A number of bills amending the Act have been introduced. Other technical corrections remain possible. It is even possible that Congress will make substantive changes to the Act.

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

Tuesday, May 03, 2005

Status of Sexual Orientation and Gender Identity Bill

On April 6, 2005, I reported on a Conference Committee being assigned on the Sexual Orientation and Gender Identity Bill. However, the House reconsidered its decision to disagree with the Senate Amendments. The Senate amendments were adopted by the House and the bill has been transmitted to the Governor.

HB 1715 SD1 This bill adds sexual orientation and gender identity to the category of protected classifications in the residential real property transactions. Sexual orientation is currently a protected classification under the State fair employment laws. The bill would mean that Hawaii condo associations would be subject to claims for discrimination on the basis of sexual orientation or gender identity. The bill continues to vaguely define gender identity.


Status of Resolution to Establish Task Force on Naturally Occurring Retirement Communities

On April 16, 2005, I reported on Hearings on the resolution to establish a Task Force on Naturally Occurring Retirement Communities. The committees passed out amended version of the resolution and was also approved by the House Finance Committee in the same form. The Senate later agreed to the House amendments. Therefore, the resolution is adopted.

SCR 79 HD1 This Resolution would establish a task force that would identify issues and problems that inhibit the establishment of naturally occurring retirement communities and provide potential solutions on how condominium and housing associations and other real property organizations may be able to most expediently and cost-effectively resolve these issues and problems. The task force would include members from he Elderly Affairs Division of the City and County of Honolulu, The Assisted Living Options Hawaii, Catholic Charities Elderly Services, The Hawaii Council of Associations of Resident Managers; The Community Association Institute; The Hawaii Council of Association of Apartment Owners;The Hawaii Long Term Care Association;The Healthcare Association of Hawaii;Hawaii Independent Condominium and Cooperative Owners; and Association of American Retired Persons.

Status of Condominium Association Manager Certification Sunrise Review

On April 22, 2005, I reported on a Hearing on the resolution for sunrise review of mandatory condominium association manager certification. The resolution passed out of committee, was approved by the Senate. Since the resolution was previously approved by the House, the resolution is adopted.

HCR 204 Under Hawaii law, before the state can implement a new scheme regulating a profession, it must first have the Auditor conduct a sunrise review. A sunrise review is a study evaluating the need for the regulation of the profession.

This resolution would direct the Auditor to conduct a sunrise review of condominium association managers based on a bill introduced in 2003. SB 1454 contemplated a scheme for certification of condominium association managers. Under the bill, the Real Estate Commission would be authorized to designate an entity to certify condominium association managers. Under the bill, certain condominium association managers would be grandfathered. I believe that the only certification program for community association managers is the Certified Manager of Community Associations® (CMCA®) which is offered by the National Board of Certification for Community Association Managers (NBC-CAM).

At this point, however, all that the resolution would do is direct the Legislative Auditor to conduct a sunrise review. After the review, the legislature would need to consider whether it would approve a bill mandating certification of condominium association managers.