In re Crawford

• Decision Date: 14 December 2009
• Docket Number: No. 09-14645-J7.,09-14645-J7.
• Citation: 420 B.R. 833
• Parties: In re Tanner Steven CRAWFORD and Tillie Marie Crawford, Debtors.
• Court: U.S. Bankruptcy Court — District of New Mexico

420 B.R. 833

In re Tanner Steven CRAWFORD and Tillie Marie Crawford, Debtors.

No. 09-14645-J7.

United States Bankruptcy Court, D. New Mexico.

December 14, 2009.

R. Trey Arvizu, III, Las Cruces, NM, for Debtors.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, Bankruptcy Judge.

This matter is before the Court on an Order to Show Cause Why Case Should Not Be Dismissed for Failure to Comply With Credit Counseling Requirements, entered October 14, 2009 (Docket No. 8). On October 30, 2009, a final hearing was held on the Order to Show Cause.¹ On November 9, 2009, Tanner Steven Crawford and Tillie Marie Crawford (together, the "Debtors"), by counsel, filed a Response to Order to Show Cause (Docket No. 14) setting forth the facts and making legal argument. For purposes of this opinion, the Court will regard all facts recited in the Response as true.

For the reasons set forth below, the Court will dismiss this bankruptcy case.

BACKGROUND

The Debtors filed a case under chapter 7 of the Bankruptcy Code on October 13, 2009 (the "Petition Date"). Since Debtors first visited the office of their bankruptcy counsel ("Counsel") on August 14, 2007, they have had numerous discussions with Counsel and/or his office staff, both in person and over the telephone, regarding their financial situation. Prior to commencing their chapter 7 case, Debtors were advised by Counsel and were aware of the consequences of filing a bankruptcy case and their alternatives to filing a chapter 7 case, including whether bankruptcy was the best option for them to resolve their situation, the potentially devastating effect a bankruptcy filing could have on their credit rating, and how long the bankruptcy would be reported on their credit record. It was not an easy choice or overnight decision for the Debtors to file a chapter 7 bankruptcy case, as evidenced in part by the delay between the time Debtors first visited Counsel and the time they commenced their Chapter 7 case.

On April 15, 2009, 181 days prior to the Petition Date, Debtors completed a credit counseling course on the internet from an approved credit counseling agency. The mistake in not filing the chapter 7 case within 180 days after Debtors completed the credit counseling course, or in not retaking the course pre-petition with the 180-day period, was due to Counsel's mistake and not the mistake of the Debtors. Counsel computed the time period as a six month period instead of a 180-day period. The Chapter 7 case was filed within six months after Debtors completed the credit counseling course.

After the Order to Show Cause was entered on October 14, 2009, Counsel and the Debtors immediately attempted to correct the error. Debtors again took the credit counseling course from an approved credit counseling agency on October 17, 2009, four days after the Petition Date; obtained new credit counseling certificates indicating they had retaken the credit counseling course on October 17, 2009; and filed the new credit counseling certificates with the Court on October 19, 2009 (Docket No. 12). A debt repayment plan was not prepared in either credit counseling session. Counsel has offered to be fined if fining Counsel would avoid dismissal of the Chapter 7 case.

Debtors reside in New Mexico. Their schedules reflect total liabilities in the amount of $118,323.88, and total assets in the amount of $13,385.00. The largest single scheduled liability is in the amount of $62,000, representing a deficiency owed to a lender following foreclosure of the Debtors' former residence. In Schedule C, Debtors claim exemptions under 11 U.S.C. § 522(d). The Debtors have two minor children. The Debtors' schedules reflect combined gross monthly income in the amount of $2,405.00, which is just above the 2008 median family income for families of four in New Mexico. The first meeting of creditors in Debtors' case was held November 18, 2009. The chapter 7 trustee concluded the meeting and issued a report of no distribution. (See docket entry dated November 18, 2009).

Debtors ask the Court to exercise judicial discretion to allow their bankruptcy case to proceed. Creditors would not be prejudiced if the case were permitted to proceed notwithstanding Debtors' failure to take the credit counseling course timely.

ISSUE

The issue presented to the Court is whether the Court has discretion to waive the 180-day pre-petition credit counseling requirement where (i) none of the statutory exceptions apply to the requirement under 11 U.S.C. § 109(h)(1) that Debtors take the credit counseling course within 180 days prior to their commencement of their voluntary chapter 7 case; and (ii) where Debtors took the credit counseling course 181 days before the Petition Date, took the course again four days after the Petition Date and promptly after the deficiency was brought to their attention, were counseled extensively by their counsel pre-petition about the consequences of filing a bankruptcy case and the alternatives, and acted innocently in reliance on counsel. Under these circumstances, the Court would be inclined to waive the credit counseling requirement for the Debtors, extend the deadline either backwards or forwards so that the credit counseling would be considered timely, or otherwise permit the Debtors to obtain chapter 7 relief including a discharge and allowance of their claims of federal exemptions, provided the relevant Code sections leave the Court with sufficient discretion to effectuate that result.

DISCUSSION

Congress amended 11 U.S.C. § 109(h)(1) for individual debtor bankruptcy cases filed on or after October 17, 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") to provide:

Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, 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 ... 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.

Paragraph (2), (3) and (4) of Section 109(h) set forth exceptions to the credit counseling requirement of paragraph (1) by either waiving the requirement or permitting the requirement to be satisfied post-petition.² None of those exceptions apply to the Debtors. If a debtor does not satisfy the credit counseling requirement, and none of the exceptions to the requirement apply, the Bankruptcy Code does not expressly state whether dismissal of the case, or some other remedy, is required or appropriate as a consequence of the failure to satisfy the requirement. The Code's silence regarding the consequence for failing to comply with the pre-petition credit counseling requirement contrasts with other sections in the Bankruptcy Code that expressly provide for permissive, automatic, or mandated dismissal of an individual debtor bankruptcy case.³

Harsh consequences can result from dismissal of a bankruptcy case as a result of a debtor's noncompliance with the credit counseling requirement of 11 U.S.C. § 109(h). For example, should the debtor choose to file another case within a year after dismissal of the case, the debtor would face the hurdle of overcoming loss of protection of the automatic stay.⁴ A re-filing debtor also would be subjected to an adverse credit rating due to successive case filings, be forced to pay another filing fee,⁵ and likely incur additional attorneys' fees to prepare a new case for filing and to seek protection of the automatic stay.

Judicial Approaches to Whether Dismissal is Mandated if the Credit Counseling Requirement is Not Met.

In light of the harsh consequences to a debtor from dismissal of a bankruptcy case for failure to comply with the credit counseling requirement of 11 U.S.C. § 109(h), the lack of any provision in the Bankruptcy Code expressly specifying the consequence of failing to comply with the credit counseling requirement in contrast to the specific dismissal requirements contained elsewhere in the Bankruptcy Code, and the language of 11 U.S.C. § 109(h) itself, courts have taken at least three different approaches in considering whether dismissal is mandated if the pre-petition credit counseling requirement is not met.

Some courts, particularly those issuing opinions within the first few years after enactment of BAPCPA, considered the bankruptcy case a nullity, or at least not a pending case for purposes of 11 U.S.C. §§ 362(c) and (4), if the debtor failed to comply with the credit counseling requirement of 11 U.S.C. § 109(h), and struck the petition so a new case filed by the debtor would not be treated as a subsequently filed case.⁶ Courts fashioned this result by reasoning that failure to comply with the requirements of Section 109(h) precludes the commencement of a bankruptcy case. They reasoned further that because no case was commenced there was no case to dismiss; thus, striking the petition and annulling the stay was the proper remedy.

The majority of courts considering the issue have found that dismissal of the case is mandatory if the debtor failed to comply with the credit counseling requirement of 11 U.S.C. § 109(h).⁷ These courts typically find that the plain meaning of 11 U.S.C. § 109(h) leaves no room for the exercise of judicial discretion to allow the bankruptcy case to proceed.

A third approach finds judicial discretion to waive the credit counseling require of 11 U.S. § 109(h) in appropriate circumstances. These courts begin by determining that § 109(h) is not a jurisdictional requirement.⁸ They conclude that the court may exercise discretion not to dismiss a debtor's case in light of the harsh result of dismissal, the underlying purpose of the statutory provision, the Code's lack of a...