Summary of a Recent
Judicial Development in
Bankruptcy

Failure to Attend Credit Counseling Sessions Does Not
Mandate Dismissal of Debtor's Case

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Manalad, 360 B.R. 288 (Bankr. C.D. Cal. 2007), the United States Bankruptcy Court for the Central District of California held that failure to comply with credit counseling requirements does not warrant mandatory dismissal of a debtor's plan, and enumerated three criteria to consider in determining whether to cure a debtor's ineligibility.

Background

Debtor filed for bankruptcy in November 2005, but did not attend credit counseling sessions or take the appropriate steps to avoid it. Id. at 290. A case commencement deficiency notice was sent to the Debtor. Id. at 291. In March 2006, an order to show cause why case should not be dismissed was sent to the debtor. Id. After a hearing, the court ordered the Debtor to attend a budget and credit counseling briefing and file the certificate of completion and debt repayment plan, and the Debtor complied. Id. at 292.

Arguments

Debtor argued that he was forced to file his petition when he did to avoid garnishments on overdue child support, and so he was excused from complying with the credit counseling requirements because his debts were not consumer debts. Id. at 292.

Trustee argued that the Debtor's case should be dismissed because he did not comply with the credit counseling requirements, and his ineligibility could not be cured. Id.

Analysis and Holdings

The issue before the court was whether failure to comply with credit counseling requirements mandated automatic dismissal of the Debtor's case, or whether the court had discretion to cure the ineligibility. Id. Under § 109(h)(1) or (3) of the Bankruptcy Code, an individual must participate in a budget and credit counseling session within 180 days prior or 45 days after filing his petition. Id. Under § 521(b), an individual must provide proof of participation in budget and credit counseling by filing a certification of participation and a copy of the debt repayment plan if one was prepared at the session. Id. Concerning whether eligibility is a jurisdictional issue, the court adopted the test used by the United States Supreme Court that "when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as non-jurisdictional." Id. at 295. Using this test, the court concluded that the debtor's eligibility was not a jurisdictional issue. Id. The court further reasoned that "nowhere in Title 11 is there a provision setting forth the remedy for failure to comply with the Credit Counseling Requirements, while the remedy of dismissal is specifically provided for in other situations," and moreover, even when dismissal is specifically called for, the court has discretion to extend the time period for submitting documents. Id. The court then, after holding that failure to comply with credit counseling requirements do not call for mandatory dismissal, held that these factors are pertinent in deciding whether to dismiss a case for ineligibility under § 109(h): (1) the debtor has a reasonable explanation; (2) he attends the credit counseling sessions once he finds out it is necessary; and (3) at the session, it is determined his debts could not be paid outside of bankruptcy. Id. at 308. The Debtor met all those criteria, so the court cured his ineligibility. Id.

The case was decided on January 25, 2007.