Bankruptcy and prepetition credit counseling: flexible requirement

Before an individual can seek bankruptcy relief, 11 U.S.C. § 109(h) requires the would-be debtor to participate in credit counseling:

[A]n 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 described in section 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.

So, what happens if you don’t and file the petition anyway?

The Bankruptcy Code doesn’t expressly state what you’d think would be the obvious answer: the case should be dismissed.

Federal courts addressing the issue have broken into two camps. Some view the requirement as jurisdictional, so non-compliance requires dismissal. Others view the requirement as one of eligibility, which vests a bankruptcy court with discretion to waive the requirement under the proper circumstances.

Most courts faced with debtors who use their noncompliance strategically — for example, not moving for dismissal until after the trustee has uncovered assets that can be sold for the estate’s benefit — don’t hesitate to waive the debtor’s compliance. Gaming the system is frowned upon. The Bankruptcy Appellate Panel for the Sixth Circuit, in In re Amir, illustrates this point nicely.

But what about debtors who simply, and without any ulterior motive, don’t finish up the required counseling until after the petition is filed. What should become of their bankruptcy cases?

Up until late last week, the Sixth Circuit BAP had not addressed the issue. Now, under In re Ingram, the prepetition credit counseling requirement is a matter of eligibility, not jurisdiction, and decisions to enforce the requirement are reviewed for an abuse of discretion.

In William Ingram’s case, his prepetition counseling had two components: an online portion which he completed the day he filed his petition, and a telephone component, which he completed a day later. The bankruptcy court dismissed the petition without prejudice because both components hadn’t been completed prepetition.

The court turned aside Ingram’s argument that the counseling provider led him to believe that the Internet component was sufficient. The court ruled that if that was the case, Ingram could ask the counseling provider for his money back, but it didn’t provide a reason to excuse compliance with the counseling requirement.

The BAP affirmed:

The requirements of § 109(h) are clear and unambiguous. As such, the bankruptcy court, except in the limited circumstances set forth in § 109(h)(2), (3), and (4) which were not present here, did not have discretion to ignore, modify, or defer the requirements of § 109(h)(1).

Compliance with § 109(h) is a prerequisite to obtaining relief under the Bankruptcy Code. By definition, an individual may not be a debtor who is eligible for bankruptcy relief unless he has complied with § 109(h). …

Because the Debtor did not comply with the requirements of § 109(h), or qualify for a deferral of the credit counseling requirement, he is not eligible to be a debtor. Therefore, the bankruptcy court properly dismissed the Debtor’s case.