ABI - National Bankruptcy Review Commission

National Bankruptcy Review Commission


Thursday, May 16, 1996
Friday, May 17, 1996
San Antonio, Texas

Prepared by: Susan Jensen-Conklin
Deputy Counsel
Approved: June 20, 1996

Hilton Palacio del Rio
San Antonio, Texas


Commission Members Present:

Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Babette A. Ceccotti
John A. Gose
Jeffery J. Hartley
Honorable Edith Hollan Jones
James I. Shepard

Commission Reporter and Staff Present:

Professor Elizabeth Warren, Reporter/Consultant
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer

Panel Participants:

Leonora K. Baughman, Chrysler Financial Corporation
Karen Cosgrove, Kemp Management
Professor Richard E. Flint, St. Mary’s University School of Law
Jerry Hermesch, CitiBank
Henry E. Hildebrand, III, Standing Chapter 13 & 12 Trustee
Richardo I. Kilpatrick, Shermeta, Chimko & Kilpatrick
D. Jean Ryan, Law Office of D. Jean Ryan, P.A.
Emma G. Scott, Sears, Roebuck and Company
Henry J. Sommer, Consumer Bankruptcy Assistance Project
Stanley P. Spence, Pentagon Federal Credit Union
Professor William C. Whitford, University of Wisconsin Law School


Elizabeth S. Petersen
William E. Brewer
Jill A. Michaux
Mark Segal
Matthew Mason
Scott H. McNutt
Paul W. Rosenbaum
Edgar M. Rothschild, III
John Brady
James T. McMillin
William Hall
Tosianyia Williams
Louis P. Terrazas
Solomon Zeltzer
Leon Jon Bonney
Ike Shulman
Pamela Stewart
J. Thomas Black
Robert H. Waldschmidt

Public Attending:

Approximately seventy-five people were in attendance including representatives from the Administrative Office of the United States Courts, Office of the United States Trustee, United States Navy, Chapter 13 and 7 trustee offices, state government, professional and trade associations, private industry, law firms, and the media.


Chair Williamson called the meeting to order at 9:06 a.m. and made preliminary comments. He thanked the National Association of Consumer Bankruptcy Attorneys for suggesting that the Commission meet at the same time that the Association conducted its annual convention. He stated the presence of the Commission at San Antonio reflected its continuing commitment to soliciting and hearing a wide range of viewpoints. The minutes of the April 19 meeting were thereafter approved by oral vote of the Commissioners. Chair Williamson concluded his introductory remarks by reviewing his efforts to open lines of communication with members of Congress. He also reviewed the status of pending legislation affecting bankruptcy law.


After introducing the panel members, Professor Warren explained that the format of the discussion would be open-ended and free-form. The three general topic areas that she identified for discussion were the distinction between Chapter 7/Chapter 13; fraud and abuse in the bankruptcy system; and access, relief and uniformity in the bankruptcy system.

Beginning with the first topic area identified, Professor Warren noted that the process of choosing between Chapter 7 and Chapter 13 lies at the heart of the consumer bankruptcy system. Mr. Hildebrand said that circumstances such as a negative cash flow seem to make the selection for the debtor. Where, however, the debtor has a positive cash flow, he stated that the local legal culture steered the debtor. He explained that the local legal culture includes attorneys, judges, trustees and the creditor community. It also relates to the success or failure of consumer credit counseling services in the area.

While agreeing with Mr. Hildebrand, Professor Whitford expressed concern that the choice is made more often by debtor’s counsel than by the debtor and that counsel’s role in steering a debtor into a particular chapter of relief was a product of the attorney’s own self-interest, rather than of the debtor’s interests. He characterized this concern as a crisis in professional responsibility. Among the factors which influenced the behavior of counsel in this regard that he cited were reputation in the local bankruptcy community and economic concerns.

Mr. Hermesch concurred with the statements of Mr. Hildebrand and Professor Whitford with regard to the influence of local legal culture in the decision making process. He added that counsel make the decision for their clients and advise against filing for relief under Chapter 13.

Mr. Hildebrand noted that many debtors file for relief under Chapter 13 with the misimpression that it will have a better credit rating impact than Chapter 7. Mr. Hermesch observed that the fact that the credit rating for a Chapter 7 filing was the same as that for a Chapter 13 filing should definitely be fixed.

Ms. Ryan stated that there was a misconception as to what debtor’s counsel does and should be doing. Describing her intake procedure, Ms. Ryan noted that she advises her clients that bankruptcy is a last resort and that they should attempt to work out a solution with their creditors. After attempting to negotiate with her clients’ creditors, she then explains to her clients what their options are under each chapter and that it is their choice as to which chapter under which they will proceed. With regard to fees, Ms. Ryan observed that the fee structure will vary by district. She said that no attorney had the right to decide for his or her client under which chapter to proceed.

Commissioner Shepard stated that Chapter 13 is underutilized as a result of the lack of knowledge and experience by the debtor bar. Ms. Ryan responded that the decision depended on what the debtor was trying to accomplish and the client’s financial condition. Ms. Scott noted that the process was really one of financial analysis, involving an assessment of the debtor’s income level, assets and needs with regard to those assets that had to be protected.

Mr. Sommer explained that this analysis involved reviewing myriad factors such as the debtor’s assets, income, type of creditors, whether there were nondischargeable debts, tax obligations, and the client’s desire and ability to repay creditors. Other factors that he cited include the flexibility of Chapter 13 and the fact that sometimes a debtor has no choice. While he admitted that some debtor’s attorneys were not very good, he noted that some creditors’ lawyers were likewise not very good. In this regard, he acknowledged, there will always be some dishonest debtors as there will always be some dishonest creditors.

Professor Warren asked the panelists to clarify whether the problem was small or major. She asked them to articulate what was the nature of the complaint, that is, whether or not a lot of debtors were filing under Chapter 7 when they should be filing under Chapter 13, whether many debtors were steered into Chapter 13 who did not belong there because counsel made the choice based on his or her economic self-interest. She observed that while there was a lot of collective experience, there were no hard data.

Mr. Kilpatrick maintained that even if the problem was not statistically great, the perception was that it was a problem. He stated that the economic self-interest of debtor’s counsel should not be a factor in the decision-making process. Commissioner Hartley conjectured whether the problem would be eliminated if debtor’s counsel fees were made uniform nationwide. Mr. Kilpatrick answered that there were alternatives to uniform fees. He suggested that the priority treatment accorded attorney’s fees could be eliminated or that there could be a requirement that attorney’s fees be stretched out over the life of the plan. This would provide an incentive to the debtor to complete the plan and for the attorney to work with the debtor to accomplish that objective, he noted.

Commissioner Shepard asked whether there were a lot of cases where debtor’s counsel bailed out as soon as the fees are paid. Mr. Kilpatrick said that there were and that cases were converted or dismissed immediately after the fees are paid. Commissioner Shepard inquired as to how this affected the administration of the case. Mr. Hildebrand noted that the problem is addressed through judicial enforcement of professional responsibility obligations. Mr. Sommer agreed that this was really an issue concerning judicial enforcement of professional responsibility.

Commissioner Jones supported Mr. Kilpatrick’s suggestion that attorney’s fees be paid over the life of the plan. Mr. Sommer stated that while he was not totally against this concept, he noted that many plans do not consummate. In response to the increased risk of nonpayment, he explained, the fees would increase. Commissioner Shepard stated that it was his perception that attorneys do not screen their cases well and if there was some risk of nonpayment, then they may be more hesitant to recommend that their clients file under Chapter 13. Mr. Sommer remarked that an attorney cannot predict that a debtor will become unemployed two years into the case or have a marital problem. Mr. Kilpatrick responded that the risk is minimized for those practitioners with sufficient volume to generate an income stream to account for the risk of nonpayment.

Professor Flint described a more fundamental concern, namely, whether there should be two separate chapters for consumer bankruptcy as there was no philosophical justification or moral basis supporting this current system. He said that many of the debtor’s needs that are presently addressed by Chapter 13 such as tax problems, stripping down personal property liens and mortgage defaults can easily be handled in Chapter 7. Commissioner Shepard observed that the purpose of Chapter 13 involved repayment and retention of assets while Chapter 7 offered liquidation and freedom from liability.

Mr. Kilpatrick expressed concerns with a single chapter proposal and wondered whether it would involve the conditional discharge system that is used in England. Professor Whitford stated that Chapter 7 was not a pure liquidation alternative and that subsequent to obtaining their discharge, debtors still owed a lot of money and that they could reaffirm more obligations. As an implicit premise, however, he noted that the Commission should reinforce the idea that there are supposed to be uniform bankruptcy laws. He stated that data showed that the consumer bankruptcy system was not uniform and cited, for example, the variation between districts regarding filing rates of Chapter 7 and 13 as well as the payout percentages in Chapter 13 cases.

Agreeing with Professor Whitford, Ms. Baughman noted that the variation in the implementation of the bankruptcy law caused different results which, in turn, created increased economic costs to creditors. The expense associated with this lack of consistency constituted a cost that was passed on to the entire group of people who borrow money or purchase motor vehicles.

While there may be a need to promote greater uniformity, Ms. Ryan stated that the basic concept of Chapter 7 and 13 did not need to be changed to any great extent. The current system, she suggested, provided the debtor and creditor with some options that do not exist elsewhere.

Agreeing with this statement, Mr. Spence explained, however, that creditors do not differentiate between Chapter 7 or 13 as to credit rating impact because of the inconsistency with regard to payment percentages to unsecured creditors under Chapter 13 plans. Where the payment to unsecured creditors under a Chapter 13 plan was nominal or zero, then there was no difference between it and a Chapter 7 discharge. In response to Commissioner Jones’ query as to what benefit did Chapter 13 offer an unsecured creditor, Mr. Spence stated that there were no benefits if the Chapter 13 case involved a zero percent plan. Commissioner Jones then asked Ms. Ryan to address the practice of some bankruptcy courts to confirm plans that provide for a minimum payout of 50 percent or more. While Ms. Ryan noted that in her district there was a threshold required payout minimum of 20 to 25 percent for unsecured creditors which Commissioner Jones described as pennies. Ms. Scott rejoined that the creditors nevertheless would like to receive these pennies. Although she was not sure if uniformity with regard to a specific payment percentage was the solution, she did believe that debtors with zero percent plans belonged in Chapter 7.

Ms. Ryan stated that debtor’s counsel can use Chapter 13 to save the debtor’s house from foreclosure even though only a zero percent plan is proposed and that this was no better than what the unsecured creditors would have received if the debtor filed under Chapter 7. The Bankruptcy Code provides a mechanism, she noted, to make sure that these creditors receive under a Chapter 13 plan at least as much as they would receive if the case was filed under Chapter 7. To prohibit zero percent plans, she observed, would create other problems.

Mr. Kilpatrick explained that there were other problems concerning the issue of inconsistency. He cited disposable income as an example of a term whose interpretation has varied from judge to judge. Nevertheless, Ms. Ryan cautioned that standardization in this area could be problematic and cited the recent efforts by the Internal Revenue Service to set national living expense guidelines. Commissioner Ginsberg asked whether this would be like the bankruptcy version of sentencing guidelines. Mr. Kilpatrick, however, responded that some of the bankruptcy judges’ discretion should be limited.

Mr. Sommer stated that attempts to make bankruptcy judges decide all matters the same way or to have national standards of living would not succeed. Before radical surgery is attempted to achieve uniformity, he suggested that it was important to keep in mind that the bankruptcy system has helped and continues to help millions of people by saving their jobs, homes, jobs and mental health. He said that it is part of the safety net and keeps these people from needing the rest of the safety net, all at very little expense to the government.

Commissioner Jones asked whether Chapter 7 should be amended to permit negotiation of tax, mortgage and motor vehicle obligations. In response, Mr. Sommer said that he tended to agree that Chapter 7 should be more flexible, but that Chapter 13 deals a wide variety of other problems not addressed by Chapter 7. Mr. Hildebrand noted that 43 to 46 percent of the debtors who received a Chapter 13 discharge in his district had repaid 100 percent of allowed unsecured claims.

Another concern that should be addressed according to Mr. Kilpatrick pertained to the cost of the bankruptcy system to society as a whole. He estimated that the cost of credit increased two to four percent as a result of bankruptcy filings. Mr. Sommer disputed this estimate as being entirely bogus. He said that it was based on figures derived from total debt, most of which would not have been paid whether or not the debtor filed for bankruptcy relief. In addition, he noted that creditors adjust their interest rates to account for the different types of risk.

Ms. Scott stated that Mr. Sommer was missing the point as there was definitely some increase in the cost of credit due to bankruptcy and that the losses were beyond what retail creditors have anticipated which, in turn, were passed along to others. She agreed with Mr. Kilpatrick that there should be greater uniformity with regard to the application of such terms as disposable income as the lack of uniformity has led to increased administration and litigation costs.

While Mr. Sommer stated that in most places people know what the judge is going to do and that this cuts down on litigation, Mr. Kilpatrick said that this was not true as there can be different rulings from the same judge on different days with regard to a debtor’s budget. Citing the constitutional issue presented by tithing as an example, Ms. Ryan warned that there would be still be litigation. Mr. Kilpatrick clarified that the system should not be changed to define these areas, but to provide parameters which limit judges’ discretion. He suggested, for instance, that the analysis under Section 1325(b) be tied to a Consumer Price Index or similar index. With regard to Mr. Sommer’s concern that there would be exceptional cases, Mr. Kilpatrick said the judge would have to exercise discretion.

Professor Whitford observed that there should be some clarification as to what is meant by uniformity and that he thought the problem was the lack of uniformity among the districts. With regard to the losses being incurred by the credit industry, Professor Whitford noted that the percent of debt extended by revolving charge companies increased by 15 percent which was greater than any other entity in the credit market. Thus, he observed, while losses may be increasing, this has not led to credit curtailment and that profits must be very strong. He also explained that historically the idea behind discharge was to give people a chance to get on their feet and become more productive.

Professor Warren asked the participants to consider the essential features of the bankruptcy system. She restated Professor Whitford’s comments regarding the purpose of discharge, namely, to free future income, to get economic units, i.e., debtors, back in productive use again. She asked what were the elements that constituted the core of the consumer bankruptcy system.

Responding, Mr. Sommer cited the cure of long-term secured debt, shorter term secured debt, executory contracts such as rent to own leases as well as vehicle and residential leases. Commissioner Ginsberg observed that the current system offers a debtor the opportunity to undo financial damage that is attributable to a discreet event such as job loss or extended illness. A further object of consumer bankruptcy, Mr. Sommer added, was to pay creditors to liquidate the debtor’s non-exempt property.

From a creditor’s perspective, Mr. Kilpatrick said that certainty and finality were desired. Commissioner Gose noted that there was no quick, inexpensive way to obtain uniformity by appeal. Agreeing, Mr. Kilpatrick noted that one had to proceed to the circuit court level to have binding authority in certain districts. In addition, he stated that there was an extensive cost and time incurred in litigating the issue to the appellate level.

Mr. Sommer noted, however, that in half of the appeals the circuit court defers to the bankruptcy court’s discretion because it finds that the matter depends on the facts of the case. Mr. Hildebrand responded that even a direct appeal to the circuit court would still be a time-consuming and very expensive process. Mr. Kilpatrick agreed with Commissioner Hartley that the appellate system would be improved if district judges were taken out of the process and the bankruptcy appellate panels were eliminated. Commissioner Hartley suggested that this may address the need for uniformity. Although Commissioner Shepard noted that this would satisfy the need for predictability within the circuit, Mr. Spence said that it would satisfy the need for predictability. Mr. Spence observed that the issue not only concerns judge uniformity as well as procedural and practical uniformity. He cited the timing of payments in Chapter 13 cases as an example.

Summarizing, Ms. Ryan said that it seems like the bankruptcy system is generally working and that it just needed some adjustment to provide definite guidelines and specific provisions. Professor Flint, however, disagreed with this summary. He said that he had heard nothing from the panelists which contradicted his position that Chapter 7 cannot accommodate all consumer bankruptcy needs. In particular, he noted that less than 40 percent of Chapter 13 cases result in discharges.

Mr. Sommer noted that while there is some talk about abusive repetitive filings, most filings were sincere efforts. When asked by Commissioner Shepard what percentage of these filings were sincere, Mr. Sommer responded that most were, but he did not have data. Commissioner Shepard then asked Mr. Sommer to define success in the context of Chapter 13. Mr. Sommer answered that it was to obtain a discharge or, at a minimum, to cure a mortgage default. Commissioner Shepard wondered whether this was a proper use of Chapter 13 where there was no payout to unsecured creditors. Mr. Sommer stated that it was a proper use and was absolutely contemplated by the Code’s drafters. Commissioner Shepard asked whether it would be better to modify the reaffirmation provisions under Chapter 7 cases to allow deferred payments.

Ms. Ryan noted that unsuccessful Chapter 13 cases typically involved debtors who are desperate to save their homes and have unrealistically low budgets which cannot not accommodate the unforeseen such as job loss or extended illness. With regard to these debtors, she insists that they have a revised ability to pay before their cases are refiled.

Commissioner Jones noted that several creditors had written the Commission about abusive repetitive filings. Ms. Ryan said these were mostly the result of paralegal services. Mr. Hildebrand said that in the Western District of Tennessee there was a high employment turnover rate which would be a factor in the District’s high rate of re-filing. In the Middle District of Tennessee, he noted, one did not see abusive filings because they are addressed when they occur and bankruptcy petition preparers are criminally prosecuted. Mr. Spence commented that of the 450 bankruptcy cases that he reviewed for his credit union last year, ten re-filed Chapter 13 cases. Mr. Hildebrand, referring to certain statistics regarding recidivism in Chapter 13 that he acquired, said that the trustees from California reported a much higher number of refilings than other districts in the nation.

Commissioner Shepard stated that the District of Oregon from February 15, 1996 to March 15, 1996 had 223 debtors file 520 cases of which 209 were dismissed. He said that this would appear to show that there was a very high number of repeat filings, where debtors commonly filed two to four cases each and sometimes up to six or seven cases. Mr. Sommer noted that those conclusions could not be drawn from these statistics because, for example, the total filings for the district was not stated. He also observed that he did not think anyone would disagree that there were legitimate and illegitimate repeat filings and that it was the job of the judge to distinguish between the two. Mr. Spence said that was the problem and that judges cannot do this.

Professor Warren sought to refocus the discussion on the creditors’ perspective that there should be predictability and uniformity. Specifically, she asked the panelists to discuss the differences and difficulties that exist among the various creditor subgroups such as unsecured creditors, secured creditors who would ordinarily be repaid within three years, mortgage creditors and landlords.

With regard to landlord interests, Ms. Cosgrove said that the biggest problem is that a bankruptcy filing stays the eviction process. In California, she noted, advertisements promise seven months free rent. She said that landlords were more interested in regaining possession than in receiving payment on their past due rent. In response to Commissioner Shepard’s question as to whether the problem was regional or nationwide, she noted that the problem had surfaced in other states.

Although acknowledging that there were always going to be situations where there were bad tenants, Mr. Sommer did not view this a problem caused by bankruptcy. The staying of the eviction process is important to the debtor as it allows time for the default to be cured, he observed. The problem was with the petition preparers. Commissioner Shepard asked Mr. Sommer whether attorneys advised clients to use bankruptcy to avoid paying rent. While there were exceptions, Mr. Sommer said that attorneys were held to a code of professional responsibility that they generally take seriously and that they were also concerned about their reputation.

Commissioner Shepard shared Ms. Cosgrove’s concerns about the time and cost of obtaining relief from the automatic stay. Likewise, Commissioner Jones asked why should bankruptcy give recalcitrant tenants an additional incentive. Mr. Sommer responded that this was a benefit that was part of the fresh start, that is, to provide a breathing spell within which the debtor can catch up on paying the past due rent.

Ms. Ryan wanted to know the extent of the problem as it was not occurring in her district. She observed that the problem was not with the bankruptcy system but with the people who are putting these debtors into the system. Commissioner Jones postulated that if the automatic stay did not apply to residential leases, then these debtors would not be put into the system. Ms. Ryan asked about those debtors that do need the benefit of the automatic stay to protect their residential lease interests. Although Commissioner Shepard and Ms. Cosgrove did not see any benefit to the estate that could be derived, Commissioner Ginsberg noted that it would provide housing to the debtor while pursuing job opportunities. He also noted that the discussion was very anecdotal and that there were protections for the landlord under current law. The delay between the filing of the bankruptcy case and the scheduling of the eviction hearing in the Central District of California, according to Mr. Sommer, was related to state law. Commissioner Shepard asked why should bankruptcy provide a remedy that differs from that available under state law. Mr. Sommer answered that bankruptcy provides certain rights for debtor rehabilitation, but that a debtor who is to be evicted is not going to have a successful Chapter 13 case. If a debtor is abusing the Code, he noted that there were remedies available. Ms. Cosgrove observed that there is an erroneous perception that landlords are large corporations which are very profitable. She noted, for instance, that approximately 50 percent of the landlords in Texas owned buildings consisting of four or less units.

Professor Whitford said that there was a need to remain focused on the uniformity issue as there were some states that were protective of tenant concerns while there were other states that were not. As one of the purposes of bankruptcy law is to provide a form of safety net, he suggested that there may be some way to craft legislation that tries to distinguish. He noted that there was a tenuous balance between federal and state law. He explained that one of the historic purposes has been to provide a kind of minimal national protection similar to other federal protections such as welfare and public education.

Professor Flint recalled that during the time when he was a trustee in the Southern District of Texas there were no problems with residential tenants, although there were serious problems with commercial lease tenants. To the extent that the problem did exist, he viewed it as being associated with the problem of multiple re-filers. He proposed that a simple amendment to Section 109 would eliminate most of this problem, that is, by simply providing for the automatic dismissal of a subsequent bankruptcy case filed within 180 days from the filing of a prior case. When asked by Commissioner Shepard for the definition of a bad faith filing, Professor Flint responded that the problem was that it was unclear what constituted a bad faith filing. Ms. Cosgrove said the problem is a major issue in some parts of the country causing landlords to lose millions of dollars in lost rents.
Professor Warren queried whether there could be a system which provides for the termination of the automatic stay for evictions based on current non-payment of rent. Mr. Hildebrand said that the system was already in effect in his district. He explained that if the debtor wants to retain the leasehold interest, she or he must sign off on an order which provides for the immediate relief from the automatic stay upon the filing of a notice of non-payment of rent.

The panelists discussed possible remedies to serial filings which included eliminating the automatic stay in the second filing unless the debtor petitions for its imposition. Another was to prohibit a second filing within 180 days from the filing of the prior case. Commissioner Shepard stated that he always envisioned bankruptcy as an extraordinary remedy limited to those extraordinary cases where relief is truly justified and that it was not just something that can be used against creditors any time the debtor wanted to stop proceedings.

Mr. Sommer said that most of his clients were current with their rent obligations and that bankruptcy involved an array of one-time costs for a debtor such as attorney fees, filing fee, utility deposits and other disruptions to the debtor’s income. While Commissioner Hartley noted that these costs can be folded into a Chapter 13 plan, Mr. Sommer stated that most courts would not permit this. In addition, he said that cost is a significant barrier to debtors contemplating bankruptcy and that this was why there are many low income debtors who, unable to afford legal representation, resort to petition preparers. He cautioned that every time you put a burden on the debtor, it increases the cost. Commissioner Hartley asked whether that additional cost should be weighed against the real estate industry’s cost. Commissioner Shepard inquired about the cost to society if you facilitate bankruptcy. He said that this furthers and fosters the view that bankruptcy permits everyone to file and get away with murder. Mr. Sommer said that perception exists both for corporate as well as consumer bankruptcy. Commissioner Shepard queried whether the charge of the Commission was that it owed a responsibility to the public. Commissioner Jones suggested that other creditors should be heard on this issue.

Ms. Baughman said that vehicle leasing was increasingly a big business and that one-third of financed vehicle purchases were done through leasing. Chapter 7 and 13, however, did not appropriately deal with motor vehicle leases, she observed. In Chapter 7, Ms. Baughman explained that although the trustees have the duty to reaffirm the lease, they have no interest in doing so, even though the debtors have a very serious interest in retaining their vehicles. Chapter 13 does not contemplate how to deal with leases that extend beyond the length of the lease or that terminate prior to the term of the plan.

Disagreeing with Ms. Baughman, Ms. Ryan said that the Bankruptcy Code handles motor vehicle leases very well. If the Chapter 7 trustee does not assume the lease, then the debtor can either assume it or give the vehicle back, she noted. In a Chapter 13 case, the plan will provide for the curing of any arrearages or else provide that it be paid outside of the plan if there is a default and the creditor can pursue the same remedies they had prepetition.

Professor Whitford said that it should be kept in mind that from a creditor’s perspective a lease is frequently an alternative to a secured loan. In response to his query as to whether it was true that car lenders are pushing prospective purchasers into car leases because the lenders fare better should the purchasers subsequently file bankruptcy, Ms. Baughman said she was not sure. She explained that while leasing was more common, it was not clear that the creditors were doing the pushing or that it was because of the payment structure. Responding to Ms. Ryan’s statements, Ms. Baughman said that she was not sure if all Chapter 7 trustees act similarly and that she had heard different scenarios from different districts. She also noted that there was a greater concern with regard to insurance because the if there is an accident, the owner/lessor is liable. Professor Warren observed that the treatment for lessors is much better given the fact that, unlike a lien, a lease cannot be stripped and that the lessor was less likely to lose money than a seller who sold the vehicle on credit. Mr. Kilpatrick noted that the status of claims based on leases is problematic and noted that in was unclear as to how to complete the proof of claim form. He also cited the long hiatus between the time when the Chapter 13 case is filed and when payments from the trustee under the plan commence and the unclear status of postpetition, preconfirmation arrearages.

Mr. Spence concurred with Mr. Kilpatrick’s statements regarding the delay in receiving payments in Chapter 13 cases. Another concern he expressed was the fact that there were debtors filing Chapter 7 who could pay their debts. He said that of the 450 files that he reviewed last year, at least a quarter had disposable income, although this was not always disclosed in the debtors’ schedules of income and expenses.

Focusing on disposable income, Professor Warren noted that unsecured creditors rely on it in two ways. In Chapter 13 cases, the unsecured creditor was entitled to disposable income, she noted. In Chapter 7 cases, the protection was in the form of Section 707(b) which provides for dismissal for substantial abuse. Professor Warren asked the panelists to discuss the problems concerning disposable income and possible solutions.

Mr. Hildebrand cited a technical problem with Section 1325(b). He explained that this provision requires the debtor to repay 100 percent of the unsecured debt in three years or all projected disposable income for three years. He asked that if the debtor’s plan was for more than three years, why should not the debtor be required to pay all disposable income for the duration of the plan. Mr. Sommer questioned why a debtor should be hostage to paying unsecured creditors for that additional time. He said it was basically a matter where the debtor has less ability to pay.

Professor Warren asked why creditors should receive better treatment in cases where the debtor has mortgage arrearages and credit card debt as opposed to those cases where the debtor is a tenant or whose mortgage is not in arrears. Specifically, she queried why should the only motivation for filing a Chapter 13 case and locking one’s disposable income into a plan be to retain a home or motor vehicle. Mr. Kilpatrick said it was a matter of assuming the burdens along with the benefits of the system. He said that Chapter 13 was intended to allow debtors to keep their property and obtain a discharge at the end of payment stream to which the debtor was committed for a period of time.

Professor Whitford proposed amending Section 722 to allow installment redemptions in Chapter 7 with very stringent conditions, such as payment must commence within thirty days of filing. He suggested that many debtors who presently are filing Chapter 13 may consider Chapter 7 if this alternative was available. Mr. Spence noted that certain districts were currently authorizing this repayment option. He said the problem was implementing the stringent conditions and making sure that the debtor follows through. In response to Commissioner Jones’ query as to whether the proposal contemplated installment payments according to the contract or cram down amount, Professor Whitford explained that it would be a cram down amount. Professor Warren suggested that this proposal attempts to de-link the payment of unsecured debt to the payment of secured debt. The issue presented, she noted, was why the two are linked and whether they should remain linked.
The panelists then discussed the practices of Sears with regard to its different repayment arrangements with debtors which they generally considered to be successful.

Mr. Hermesch suggested that unsecured creditors would like some form of a guarantee or ability to forecast what type of distribution and when will they receive it in a Chapter 13 case. With regard to disposable income, he wondered at what point should the repayment schedule no longer be based on projected, but on actual income where the latter is greater than the former. Mr. Sommer said that requirement was already codified as part of the ability to pay test. Mr. Hildebrand disagreed and cited the Ninth Circuit’s Anderson decision. Although Mr. Sommer stated that creditors can currently move to modify the plan, Mr. Hildebrand noted that the evidence supporting the modification was not in the possession of the trustee or creditor. Mr. Kilpatrick noted he had not become involved in this part of the discussion because he was aware that the issue regarding the amount of scrutiny and oversight was slated for discussion later that day.


After a short recess, the meeting resumed with the open forum for public participation.


Ms. Petersen identified herself as a bankruptcy attorney and Chapter 7 trustee from Durham, North Carolina. As an attorney, she stated that she represented debtors as well creditors. She said that her firm does from 200 to 250 bankruptcy cases a year and that most of these were Chapter 13 filings.

She cautioned against making any significant amendments to Chapter 13. She said the system as presently constituted worked extremely well from both the perspective of the debtor and creditor. The return to creditors in Chapter 13, she noted, was much greater than what was discussed this morning. She observed that the average individual debtor usually wants to pay his or bills and does not abuse the system. As a Chapter 7 trustee, she stated that she had seen few instances of abuse. Usually, these debtors seek relief because something has happened in their lives that prevents them from paying their bills such as an illness, divorce, death, employment disruption or retirement. She acknowledged that these people were living close to the edge prior to the occurrence of the triggering event, but that they have no reserves to deal with it.

Ms. Petersen noted that the schedules do not explain why a debtor has filed bankruptcy. For example, she noted that they do not disclose that the debtor has cancer and an 18-month life expectancy, or that he is about to lose his home through foreclosure and the creditor is refusing to work with him. She then described an instance that occurred earlier this week where her client had offered to assign the rents to the mortgagee to try to avoid filing for relief under Chapter 13. The mortgagee refused the rent assignment. Ms. Petersen then described another situation where her client has recently been divorced, has limited income and lacks medical insurance. Even though Ms. Petersen advised the client to consider filing a Chapter 7 case, the client, stating that she wanted to pay her bills, chose instead to file a Chapter 13 case.

With regard to Mr. Sommer’s statement that a case was not necessarily a failure if a Chapter 13 debtor does not finish making all of the requisite payments, Ms. Petersen said that in most cases the creditors would not have received any payment as many of these debtors are judgment proof. The other factor that should be considered, she maintained, was the phenomenal amount of money being paid to the Internal Revenue Service under Chapter 13.

Concluding, she asked that Chapter 13 not be changed significantly as it works very well for individuals.


Mr. Brewer, a practitioner from Raleigh, North Carolina, said that he had two points. First, he stated that the consumer bankruptcy system was not broken and thus need not be fixed other than some fine tuning. Second, he declared that his bankruptcy clients, though often depressed, were among the most honest and best people of his other clients.

He observed that when clients seek assistance from him they are often depressed. He said that they come to him for one reason: debt relief. The choices that he discusses with them include options other than filing for bankruptcy relief. As to whether they should file for relief under Chapter 7 or 13 he said was a decision they made. He said every good bankruptcy attorney simply educates his clients and then lets them make the decision.

Mr. Brewer indicated that he was amazed at those comments made at the meeting which suggested eliminating Chapter 13 and tinkering with Chapter 7 to include some of Chapter 13's attributes. He said there were goals which can only be accomplished in Chapter 13, namely, curing arrearages and the debtor’s retention of property. A reaffirmation agreement, Mr. Brewer observed, required both sides to agree and, absent agreement, Chapter 13 provides the debtor leverage which can enable him or her to cure the arrearage.

With regard to the residential lease abuses discussed at the meeting, Mr. Brewer said that this may be a regional problem, but not one that exists in his district. He noted that he has two types of clients, those that own double-wides and those that rent single-wides. Concerning the latter type of client, Mr. Brewer said that the automatic stay prevents the landlord from evicting the debtor for nonpayment of a $75 obligation. Absent such protection, the other creditors suffer, he noted.

As to the question of fraud, Mr. Brewer said that he files 250 to 300 consumer cases per year and that he has probably seen four cases of abuse over the past four years.

In response to the credit industry’s claims with regard to its losses resulting from bankruptcy, he said that these claims were fallacious. These creditors should analyze how much of the debt would have been paid had the debtor not filed bankruptcy and how much money did they save as a result of hiring collection agencies. He said all that bankruptcy does is help the credit industry identify those debtors who are unable to pay and to stop them from being squeezed by the credit industry.


Ms. Michaux of Topeka, Kansas stated that she represents debtors along with her husband and that they file about 40 cases per month. She said that about 45 percent of these filings are under Chapter 13 and the remainder are under Chapter 7.

She said that most of their clients agonize over the prospect of having to file for bankruptcy relief, but generally have no other option. Some of these individuals try to work out their financial difficulties under the aegis of consumer credit counselors, but are told that they cannot be helped because they owe too much money. She noted that creditors are increasingly refusing to work with consumer credit counselors. Ms. Michaux observed that most of her clients are just ordinary people who make $6 to $7 per hour. Some of these clients are single-parents, some work two or three jobs to make ends meet, she explained.

With regard to the possibility of eliminating Chapter 13, Ms. Michaux expressed concern. She said that there were many benefits associated with this form of bankruptcy relief and was incredulous that some believe that attorneys file Chapter 13 cases just to get rich. She said that they do not get rich filing Chapter 13 cases and that they must function as social workers, counselors and psychologists during the three to five year term of the plans. She said that many of her clients lack medical insurance and that there was an increasing number of bankruptcies being filed in response to the uninsured portion of the medical debts. She also said that there starting to be bankruptcy filings because of foreclosures of second mortgages, to the detriment of the first mortgagee. She suggested that the debtor should be able to cram down and strip off these second mortgages

She remarked that the system works very well and that Chapter 13 should be left alone. With regard to fraud, Ms. Michaux noted that virtually everyone wants to repay their creditors.


Mr. Segal, a debtor’s attorney from Las Vegas, Nevada, said that eighty percent of his clients were driven into bankruptcy by the Internal Revenue Service. To this end, he noted that Chapter 13 provides the most effective way for debtors to deal with their tax obligations over time without the accrual of interest and penalties.

He noted that hundreds of millions of dollars are paid to the Internal Revenue Service through the Chapter 13 process. In addition, this process permits other creditors to be paid which, outside of bankruptcy, would not have been paid.

Mr. Segal then discussed other matters. He commended Sears for working with his clients. He noted that debtors want to pay their bills and do not willingly file for bankruptcy relief. The triggering event, at least for his clients, is the Internal Revenue Service. He expressed amazement at some of the practices of credit card companies with regard to their willingness to extend credit. He observed that debtors who are forty years old or more are more concerned about the need to pay their debts than the younger generation. He attributed this to the greater ease of obtaining credit. He concluded his remarks by noting that NACBA provides valuable educational experiences on how to deal with real-life problems.

In response to Commissioner Shepard’s question as to whether credit education would be beneficial, Mr. Segal thought that it would as most people who filed for bankruptcy relief were not financially sophisticated.


Mr. Mason, Assistant Director of the UAW-GM Legal Services Plan, said that his firm represents approximately one million clients. Agreeing with the prior speakers with regard to the low level of financial sophistication of debtors, he said that any consumer education would be valuable.
He stated that he had surveyed the 400 attorneys who work for his firm in 70 offices located throughout the nation as to specific suggestions for changes to the bankruptcy system. The responses suggested relatively few changes, none of which could be described as major, he noted. As an example, he cited those suggestions which favored uniform exemptions.

Commissioner Hartley recalled that he and Mr. Sommer had worked for years to derive language for uniform exemptions. Mr. Mason noted that the suggestion would be to allow a debtor to opt for either federal or state exemptions. Commissioner Shepard asked Mr. Mason to comment on whether there should be a cap because of the perceived inequity among the state exemption laws. Mr. Mason responded that as his firm primarily operated in the Midwest and East, the need for a cap was not a major issue.

Mr. Mason then discussed certain specific suggestions. He said that the Commission must consider the consequences that may occur in the context of an economy that may not presently exist. With regard to serial filings, he mentioned one instance where his firm filed three Chapter 13 cases for a client and, by the third filing, the client was able to make the requisite payments. He explained that blanket rules which terminate the automatic stay or prevent subsequent filings would be problematic in those cases where it takes three attempts to have a successful case.

As a final comment, Mr. Mason observed that bankruptcy is a part of the social fabric as it is designed to give people a fresh start, a breathing spell within which to get back on their feet, which is the underpinning of the system.


Mr. McNutt stated that he practiced in San Francisco and Los Angeles and was vice-chair of the Debtor-Creditor Committee of the State Bar Section, although he was speaking in his individual capacity.
He said that serial and abusive filings are a major problem especially in Los Angeles and that this causes disrespect for the system. Most of these filings, he observed, are pro se with lawyers assisting in the background. He noted that the state legislature enacted an amendment to the Civil Code saying that the filing of bankruptcy does not stop an eviction by a sheriff, but no judge in California will enforce that provision. The solution is to enforce existing laws concerning criminal conduct, he explained.

In response to Commissioner Hartley’s question as to whether bankruptcy judges would exercise criminal contempt powers if they were so empowered, Mr. McNutt responded absolutely. He said the bankruptcy judges in southern California are very concerned about their inability to address the problem.


Mr. Rosenbaum described himself as a volume practitioner from San Antonio, Texas. He said that notwithstanding some of the proposed changes regarding Chapter 13 that have been discussed at the meeting, he said that the system works wonderfully well in his venue. He said this view is shared by debtors, creditors and governmental users of the system.

He noted that 85 percent of the cases he files for his clients are filed under Chapter 13 not because there is more profit for him, but because the clients want to repay their debts. He stated that debtors are looking for credit rehabilitation and that Chapter 13 provides this opportunity. In this district, he said that the Chapter 13 trustee facilitates the credit rehabilitation process.

With regard to abusive serial filings, Mr. Rosenbaum observed that the bankruptcy judges in this district enter orders granting relief from the automatic stay in subsequently filed cases. Concerning the debtor’s obligation to report changes regarding his or her budget, he explained that the Chapter 13 trustee closely examines the debtor about this matter at the Section 341 meeting and requires the debtor to supply annual or monthly budget reports during the term of the plan, where appropriate.


Mr. Rothschild stated that he was an attorney from Nashville, Tennessee and that he had been in private practice for 18 years. He said that his office files approximately 1,000 consumer cases annually and that 70 percent of these were Chapter 13 cases.

He observed that the system was client-driven rather than attorney-driven. He described the practice of his firm as consisting of advising the client that he or she can do nothing, referring the client to a consumer credit counseling service, or recommending against bankruptcy, which occurs often. Then the client’s options under the Bankruptcy Code are examined and what the costs are. With regard to profitability, he said that although Chapter 7 was probably more profitable for his firm, the bulk of his firm’s fees were generated from Chapter 13. He noted that Chapter 13 was attractive to debtors for a number of reasons: it allows people to save their home or motor vehicle; it permits them to deal with tax obligations without having penalty and interest continuing to accrue; and it provides some flexibility with regard to dealing with child support issues. In addition, he noted that debtors favor Chapter 13 because of their strong moral desire to repay their debts.


Mr. Brady described himself as a consumer attorney from San Diego and that he files between 500 to 600 cases annually. Of this amount, two-thirds are Chapter 13 cases.

He agreed with those statements by other speakers that most debtors want to repay their debts. He noted that the main factor which motivates his clients to seek his services is a drop in income due to some form of employment disruption. One issue that has not been addressed today, however, concerned the requirement that retroactive interest be paid on student loan obligations, he observed. He asked that this matter be addressed by the Commission as it was very problematic for his clients.


After the lunch recess, Chair Williamson called the meeting to order and advised the panelists that they would each be asked by Professor Warren at some point during this portion of the meeting for their specific recommendations for changes or modifications in the Bankruptcy Code or statements that no changes are warranted.

Professor Warren explained that this portion of the discussion would focus on fraud and abuse. She identified four issues that should be addressed: what constitutes abuse, what different forms does it take, what can be done about it and what is the magnitude of the problem.

Ms. Baughman articulated one example of abuse where the debtor, realizing that he needs to purchase a new motor vehicle, either purchases or leases a new vehicle and files for bankruptcy relief shortly thereafter. If the debtor files a Chapter 7 case and obtains an installment payment redemption, the car lender loses $3,000 to $5,000. Mr. Kilpatrick noted that Ms. Baughman was describing, in essence, a situation where there was a certain amount of pre-bankruptcy planning. Mr. Sommer, however, noted that this does not happen very often. Commissioner Shepard suggested that the problem was not the planning, but the strip down. Mr. Kilpatrick added that the problem also included the lack of uniformity in the decisions. In response to Professor Warren’s query, Ms. Baughman indicated that Chrysler maintained some statistics on how old loans are at the time the debtor declares bankruptcy.

Mr. Sommer reminded the panel that debtors were not the only parties that abuse the bankruptcy system. He said, for example, that he regularly sees proofs of claim filed by mortgagees which double count the escrow. He also stated that he has seen even more instances where creditors claim attorney’s fees often for just filing a proof of claim. He noted debtors are coerced into reaffirmations by threats of repossession or other actions where the debtors lack the resources to litigate against those actions.

In response to Commissioner Gose’s question as to whether the calculation of the amount due under a mortgage involved merely a mathematical computation, Mr. Hildebrand noted that this figure was not easily determined as it often included attorney’s fees, foreclosure costs, and a back due escrow amount.

Mr. Spence explained that the law in some jurisdictions was unclear as to the inclusion of certain amounts of interest which, in turn, caused creditor uncertainty and the need to utilize the services of an attorney to complete the proof of claim form. Mr. Hildebrand clarified that Mr. Sommer’s concern was not based on the fact, but on the amount of the fees charged for such work, an item which is not reviewed or monitored unless the debtor has the sophistication to challenge the claimed fee.

Mr. Kilpatrick observed that there were sufficient tools that already exist with regard to this concern such as Federal Rule of Bankruptcy Procedure 9011 and the requirement that the proof of claim be prepared under penalties of perjury. He disagreed with those statements that suggest creditors extort money out of debtors by obtaining reaffirmation agreements through the threat of filing dischargeability actions. He said that creditors holding viable claims of nondischargeability are simply trying to resolve these claims short of filing adversary proceedings.

Ms. Ryan said that the bankruptcy judges in the Southern District of Florida discerned a practice of creditors who threatened pro se debtors with discharge objections or dischargeability exception actions to extract reaffirmations. Mr. Kilpatrick noted, however, that there may be colorable claims of nondischargeabilty. Ms. Ryan acknowledged that there may and may not be.

Mr. Hermesch stated that one of the problems unsecured creditors face is that they do not have a lot of avenues of recourse. He also mentioned the problem of attorneys advising their clients to get cash advances outside of the presumption period that can then be used to pay the attorneys’ fees. There was also the advice given by some attorneys to their clients to pay off one account by taking a cash advance from another credit account so that the debtor can at least maintain credit by virtue of the paid account. He suggested that this type of abuse and potential remedy should be more clearly identified under the Bankruptcy Code. Ms. Scott agreed that some cases are not filed until the presumption period expires so that the cash advances or purchases for luxury goods fall outside the 60-day time period. Mr. Sommer said that the presumption period could be lengthened, but that the creditor would still have to prove fraud as it was only a presumption.

A debtor who has an account for five years and then six months before filing bankruptcy changes from a pattern of never obtaining cash advances to obtaining cash advances was cited by Mr. Hermesch as an example where the Code could better define fraud. Commissioner Hartley questioned whether this activity would constitute a nondischargeable debt if the debtor’s pattern of obtaining cash advances changed due to the fact that the debtor just lost a job. Commissioner Shepard agreed that one would never find intent in this scenario. Mr. Hermesch maintained that the debtor should exercise some type of responsibility when it becomes clear that he or she is insolvent. Mr. Hildebrand asked whether the creditor has the responsibility to protect itself by restricting cash advances. Commissioners Hartley and Ceccotti suggested that a creditor could exercise some form of control over a debtor’s access to cash advances.
Professor Whitford observed that the problem substantively concerns pre-bankruptcy exemption planning. While there will be some manipulation, he said the question was how much is acceptable and how much control on abuse of that right can be imposed at an acceptable cost. He noted that Section 523(a)(2)(C) was one attempt which was hardly perfect.

Commissioner Jones recalled that as a bankruptcy lawyer she found Section 341 meetings to be a questionable vehicle to obtain information and that they may be even less helpful now because of their brevity in some jurisdictions. Ms. Scott concurred that Section 341 meetings were not very helpful as in many instances debtors did not appear at either the initial or subsequently scheduled meetings and the cases were not timely dismissed. She also noted that some trustees did not permit creditors to ask questions of the debtors if the creditors were not represented by counsel. She noted that her firm attempts to attend every Section 341 meeting.

Ms. Baughman noted that her firm routinely conducts a Rule 2004 examination prior to filing a nondischargeabilty proceeding as the Section 341 meeting offered an opportunity that was too brief. Mr. Hermesch agreed that his company generally does not attend Section 341 meetings as they often do not provide sufficient information in the time permitted. Mr. Spence also noted that his firm does not routinely attend all Section 341 meetings due to limited resources. Rather, his firm relies on himself to review the files and determine which cases should have a representative at the Section 341 meeting. In addition, he observed that the schedules do not provide enough information in making this determination. He explained that the debtors do not provide all of the information required by the schedules in a manner that can be readily discerned by the creditor and that no one insists that the schedules be completed in their entirety. The panelists then discussed examples of incomplete or less than meaningful responses on schedules.

Mr. Hermesch also noted that there was no system in place to validate the information set forth on the schedules. Professor Warren asked whether it should be someone’s obligation to routinely audit these schedules. Mr. Sommer said that the issue to some extent concerns non-enforcement of rules that presently exist. He noted that this responsibility falls squarely in the domain of the United States Trustee.

Mr. Hildebrand explained that a trustee sometimes can identify an error in the schedules only through the assistance of a creditor. Moreover, after the error is brought to the attention of the debtor, he or she simply admits that it was a mistake or simply converts his or her case to one under Chapter 13. Further, he noted that trustees who pursue these concerns are not compensated by the system. Professor Flint, a former Chapter 7 trustee, concurred with Mr. Hildebrand. He said that in the eight years that he was a trustee the schedules were incomplete, but that there was nothing that alerted him that the error was anything more than insignificant. He stated that while there were presently existing laws and rules which address these concerns, the problem was that a violation is not given much credence.

As trustee’s counsel, Ms. Ryan said that where the debtor has not disclosed a material asset, her practice is to immediately file a complaint objecting to discharge. Commissioner Shepard asked whether it was more effective to object to discharge or to move for dismissal of the case. Ms. Ryan explained that the former was more effective as it prevents the debtor from obtaining a discharge. Commissioner Shepard posited that the case could be dismissed and the court retain jurisdiction of the debtor’s assets. Mr. Hildebrand remarked that this could be a solution, but Ms. Ryan noted that upon dismissal of the case, there was no estate. Mr. Hildebrand responded that the court for cause could prevent the property from vesting in the debtor upon dismissal of the case. He suggested that a party who discovers unscheduled assets should be compensated for the cost incurred in discovering those assets. Mr. Sommer noted that this suggestion somewhat addressed his prior point that there should be an economic incentive so that if a debtor or creditor is committing fraud, the winning side should be entitled to attorney’s fees. Absent the provision of incentives, issues of fraud will not be addressed. Ms. Ryan noted that the bankruptcy judges in her jurisdiction authorize the payment of administrative expense claims under Section 503(b) to persons who locate assets and bring them into the estate. Mr. Hildebrand noted that a Chapter 7 trustee who discovers unscheduled assets and the case converts to Chapter 13 is not compensated for his or her efforts.

Commissioner Shepard asked how one funds a system to encourage the pursuit of known fraud where there was little likelihood of recovery. While there should be some provision for criminal sanctions or dismissal of the case, he questioned how these efforts would be funded. Commissioner Jones noted that if the debtor has not been honest in making all of his or her non-exempt assets available to creditors, the debtor will still receive a discharge because it is not worth while for anyone to pursue it. Mr. Sommer suggested that one should ask how often this occurs as the vast majority of debtors do not have assets to hide. Ms. Ryan agreed that one of the issues involved an assessment of the impact of the problem.

Commissioner Jones reminded the panelists that her questions with regard to the schedules and Section 341 meeting were related to the idea that the system was supposed to be somewhat self-regulating and discerning of fraud. Ms. Ryan added that these should be considered in light of the United States Trustee’s philosophy at least in her district that Chapter 7 trustees should not bother to recover these assets unless they exceed a certain dollar amount. Commissioner Jones summarized that there were problems with United States Trustee oversight, trustee compensation, and inadequate schedules. Ms. Ryan observed that part of the problem pertaining to the schedules concerned the inadequacy of the forms themselves in that certain questions were vague.

Returning to the issue of fraud, Mr. Sommer noted that the amount of fraud committed by debtors has not been quantified and that he believed the amount of significant fraud that occurs is very small. He recommended that each Commissioner spend a day attending Section 341 meetings. He encouraged the Commission to be as concerned about the fraud committed by creditors as it is about the fraud committed by debtors.

Commissioner Gose asked what tools could be utilized to raise the level of sophistication of the users of the bankruptcy system. Ms. Ryan noted that it is one case out of 5,000 that causes the system to be subject to scrutiny and that whether the schedules are accurate will have an absolutely minimal impact on identifying fraud as it will occur regardless.

Professor Warren asked the panelists to comment on whether or not Section 707(b) was effective in dealing with fraud and abuse in the bankruptcy system. Mr. Hermesch said that it is extremely difficult to prove a case under this provision. Mr. Kilpatrick noted that Section 707(b) has not been very effective as it has been utilized disparately through the nation. In addition, he observed that if the schedules are not accurate or if the Section 341 meeting is ineffective, there is no way to make an analysis under this provision. The standard should be a totality rather than a means test, he advised. He also suggested Section 707(b) should be amended to remove the creditor taint provision, that is, creditors should be permitted to intervene and bring information to the appropriate parties so that they may undertake the Section 707(b) analysis. Mr. Spence noted that creditor intervention presently is not allowed under Section 707(b).

Commissioner Ginsberg queried whether the panelists meant intervene or initiate, because if the United States Trustee does not initiate anything, there is no need for creditors to intervene. Mr. Spence said creditors would like to initiate the Section 707(b) action, but at least be able to inform the United States Trustee. Commissioner Shepard asked whether it was likely that the United States Trustee would follow up on such complaints. Ms. Ryan and Commissioner Shepard agreed that the United States Trustee would follow-up on high profile and unusual cases and ones having the most impact. Ms. Ryan observed that the bankruptcy system is premised on limited resources.

Mr. Kilpatrick warned that if there is no effective statute like Section 707(b), then the result is aberrations like Section 707(a) litigation which is currently being utilized to dismiss cases for bad faith and cause. He described a Sixth Circuit decision which permitted a Chapter 7 case to be dismissed for cause under Section 707(a) because the case could not be dismissed under Section 707(b) as the debtor had business debt and the creditors could not communicate the information they had to the parties that had the ability to bring the Section 707(b) action.

Professor Whitford advocated that Section 707(b) should be made applicable to all debtors, not just consumer debtors. He also suggested that the Commission should recommend an amendment that overrules those decisions that have interpreted this provision as creating a mandatory requirement that certain debtors belong in Chapter 13. He said that this provision should be limited to the type of abuse discussed at this meeting. Ms. Baughman agreed that there should be some standards with regard to the application of Section 707(b) in general and that ability to pay should not be the test for its applicability. Ms. Scott proposed that examples of substantial abuse be included in the provision such as hiding assets or actual fraud that has been found by a state court.

Commissioner Hartley expressed concern that if Section 707(b) was amended to allow creditors to bring these actions, then the courts would become clogged with them. He said that one of the main goals of the Commission is to make the system more effective and streamlined. Mr. Kilpatrick responded that creditors should not be permitted to bring the actions directly themselves, but they should be allowed to communicate with the appropriate parties such as the United States Trustee or the court. Ms. Ryan asked Mr. Kilpatrick what the creditors would do if the United States Trustee or court fails to act after being supplied with such information. Mr. Sommer said that providing this information to the decision maker was problematic. Commissioner Shepard noted that the real problem was that no one was charged with the responsibility to pursue and follow-up on these matters. Commissioner Ginsberg observed that the inclusion of the bankruptcy judge in this process was an aberration of the worst kind as the judge was not in a position to conduct his or her own discovery. He strongly recommended that the court be removed entirely from the process except as decision maker.
Mr. Kilpatrick proposed that a method whereby a notice containing all of the information from a creditor regarding a substantial abuse case be served on the United States Trustee, debtor and the court. Eventually, he noted, the United States Trustee would have to fulfill some of its responsibilities in this regard. Commissioner Hartley suggested that there should perhaps be a bankruptcy administrator system where one could go directly to the Chief Judge responsible for overseeing the bankruptcy administrator.

Turning to a different topic, Professor Warren asked the panelists to discuss the impact of making student loans nondischargeable. Mr. Sommer observed that there was a popular perception that doctors, lawyers and others that went to college sought to discharge their educational loans by filing bankruptcy. In contrast, he noted that the vast majority of debtors seek to discharge obligations owed to trade schools, correspondence course providers, truck driving schools and other entities that engage in a variety of fraud. He said that many debtors were lured from welfare offices by commissioned recruiters to sign up for these courses based on phony tests that said they would benefit from these schools. He stated that these obligations were no different than other obligations owed to the government and thus should not be treated differently.

Professor Flint stated that the undue hardship standard for dischargeability has failed because it is not defined in the Bankruptcy Code and therefore subject to differing interpretation by bankruptcy judges. With regard to Mr. Sommer’s statements, Professor Flint said that there really two groups of debtors involved, those who have attended professional schools and obtain employment and the other group which consists of those who have attended trade schools. He said that the Commission should consider making the loans obtained by the debtors in the second category to be dischargeable. Although she had not seen many doctors in her practice, Ms. Ryan did acknowledge that there were young attorneys with substantial educational loans with no ability to repay them due to unemployment or underemployment.

Professor Warren asked the panelists to discuss their experiences with the luxury goods dischargeability exception. Mr. Hermesch said that it is relatively well-defined and basically works well. Professor Whitford commented on the effort to expand this provision to make any use of a credit card nondischargeable and its impact on the debtor’s fresh start. He noted that debtors may not fight these dischargeability exceptions because it costs money to litigate them and the simple solution is for debtors’ counsel to simply advise their clients to pay or reaffirm them and discharge the others.

With regard to support arrears, Professor Whitford noted that they are permanently nondischargeable unlike educational loans which can be discharged after seven years. He likened support obligations to a life sentence. Mr. Sommer suggested that there should be a distinction between support arrears owed to a spouse or child from those owed to a governmental agency. Commissioner Shepard asked why should there be any distinction between the person who has to pay a spouse and a person who has to pay the government who paid the spouse. Mr. Sommer answered that the government is in a different position form the spouse. Professor Whitford noted that whereas the original objective of the consumer bankruptcy discharge is to supply an incentive to the debtor to re-enter the work force and reestablish his or her financial standing, nondischargeable support arrears impacted on that objective.
Mr. Kilpatrick stated that Section 523(a)(2)(A) is a vague statute that applied to prior practice where the loan officer and borrower sat across from each other when they executed the loan application. Soon, he noted, loan applications will be executed on the Internet and Section 523(a)(2)(B) will no longer apply as there will be no statement in writing. Professor Whitford explained that this was why Section 523(a)(2)(C) should be reviewed so that it provides clearly established guidelines.

Turning to the issue of exemptions, Professor Warren asked the panelists to discuss whether there should be uniform exemption provisions or whether a floor or ceiling should be established. Commissioner Hartley responded that it was very difficult to prepare a list of uniform exemptions. Ms. Ryan explained that this was due to the economic diversity that exists among various regions in the nation. She also explained that Florida’s 100 percent homestead exemption was based on a policy decision made in response to the fact that many retirees settle in that state. Commissioner Shepard observed that Florida had a reputation where out of state debtors can move to in order to purchase expensive homesteads and escape their creditors. Ms. Ryan asserted that these creditors had options which they did not pursue.

Mr. Hildebrand suggested that giving the debtor the option to chose between federal and state exemptions should be considered. In addition, Commissioner Jones observed that many state legislatures have been driven by their constituents’ frustration to enact state laws to get around the bankruptcy law. Mr. Sommer explained that the opt out provision was enacted in response to creditors who wanted the states to be able to eliminate the federal exemptions and now these creditors want to eliminate some of the state exemptions. He noted, however, that there should be at least a minimum floor that is reasonable in every state. Commissioner Shepard said that this did not address the problem with unlimited homesteads. Professor Whitford proposed that Paterson v. Shumate be legislatively overruled as the question of whether or not a pension fund should be excluded from the estate is a matter of exemptions policy.

Professor Warren mentioned the possibility of establishing an exemption cap. Mr. Kilpatrick advised that there should be an attempt to quantify the economic impact of a uniform exemption provision. In addition, he said some thought given to the constitutionality of such an attempt.

Recalling that there was discussion concerning the limited financial sophistication of debtors, Professor Warren asked the panelists to consider what role should the bankruptcy system play in educating debtors. Mr. Hermesch cited the work of certain Chapter 13 trustees in credit education and rehabilitation as being a remarkable success. He also noted that consumer credit counseling has had a very positive impact. Commissioner Shepard questioned the need or desirability of required counseling. Ms. Ryan said that the real focus should be on the prevention of bankruptcy, not after the debtor gets into trouble. Mr. Sommer stated that he would not underestimate the role played by debtor’s counsel in this regard and also noted there was an issue of who was to pay for debtor schools.

Mr. Hildebrand explained that he originally believed that the court and trustee had no responsibility to act in loco parentis. After determining that 45 percent of debtors admit that they do not know how to manage their money, he now sees that Chapter 13 trustees could offer debtors assistance in learning how to live on a budget and how to make credit decisions. He suggested that the Commission consider amending Section 1302(b) to authorize Chapter 13 trustees to provide credit education and rehabilitation services to debtors. Ms. Ryan added that there should be the equivalent of Chapter 13 for small businesses and that these debtors be provided education as well.
Professor Warren noted that consumer credit counseling services have some influence on where and when debtors file for bankruptcy relief. She then asked whether creditors should have some responsibility to cooperate with these services in order to provide alternatives to bankruptcy for debtors. Mr. Spence explained that his firm works very closely with consumer credit counseling services. He said that it was in everyone’s best interest to educate the consumer debtor and that the responsibility in this regard was shared by the creditors, debtors’ counsel, and Chapter 13 trustees. Ms. Scott noted that most retail creditors were already participating in consumer credit counseling programs and have brochures which explain the use of credit, terminology and how payments are made and applied. Mr. Spence stated that as these efforts are done inconsistently around the nation, they perhaps should be made more consistently available.

Commissioner Gose agreed with Mr. Kilpatrick that there no longer was a personal relationship between lenders and borrowers. Mr. Sommer noted that consumer credit counseling cannot deal with recalcitrant creditors or creditors with mortgage claims guaranteed by the government who have a perverse incentive to foreclose.

Commissioner Jones asked whether the trend toward disclosure in mortgage lending and truth in lending laws over the past 25 years has been a waste of time given the panelists’ comments regarding the need for consumer credit education. Mr. Sommer said the trend is being reversed as a lot of those laws were being repealed which, in turn, is causing these problems. Commissioner Gose agreed that loan closing statements are difficult for a consumer to decipher.

Professor Whitford asked whether the discussion was going beyond the Commission’s scope. He said that there was a tremendous growth in consumer credit notwithstanding the fact that 70 percent of the population is living with stagnant or declining wages. The whole idea, he noted, was to keep people from getting to the point where they have to turn to bankruptcy.

Professor Warren then asked the panelists each to identify the two most important changes to the bankruptcy system that they would to have accomplished. Mr. Spence proposed that there should be consistency in the timing of when payments begin in Chapter 13 plans. The other change he discussed was to not allow Chapter 13 to be used to discharge fraud claims under Section 523.

Mr. Kilpatrick said that the Commission should eliminate those consistent areas of conflict that need not exist such as valuation. Specifically, he suggested that there should be some definition of valuation incorporated into Section 1325(a)(5). His second suggestion concerned the creation of some central agency to oversee the bankruptcy process and to improve the integrity of the system. He noted that small or insignificant abuses should not be ignored and somebody should be there to ensure that those who benefit from the system, also assume its burdens.

Mr. Sommer recommended that access to the bankruptcy system should be broadened through such avenues as in forma pauperis and that the playing field should be more level so that if debtors have to object to a claim or defend against a dischargeability proceeding, they should be entitled to attorney’s fees. He also recommended that greater use of Chapter 13 should be encouraged by restoring the flexibility and incentives that were there originally, such as the discharge of student loans, and the flexibility in dealing with taxes and secured creditors. It should be clear, he noted, that the plan is voluntary and that if creditors receive at least as much as they would receive in a Chapter 7 case, then they should not complain.

Mr. Hildebrand reaffirmed his previously discussed suggestions. He stated that there should be a prompt confirmation and that there was no reason for a court to defer confirmation until after the claims bar date. The integrity of Section 1327(a) should be restored and it should specifically include the valuation of collateral to avoid the claims allowance process which is expensive, cumbersome and litigious. His other suggestion was that a method of valuation should be established that everyone can understand.

Ms. Ryan advocated that efforts to modify or change the Bankruptcy Code should stop or be done only after careful consideration. A specific change that she recommended was the elimination of Section 523(a)(15) as it has created more litigation and duplicates what can be done under Section 523(a)(5). Ms. Ryan also noted that the notice of intent provisions of Section 521 and their enforcement were problematic.

Professor Flint suggested that the Commission should consider whether there is any need for two forms of consumer bankruptcy relief. The matters currently addressed by Chapter 13 such as home mortgages, tax claims and installment redemption of personal property can easily be dealt with in Chapter 7, he noted. And for those debtors who feel an obligation to repay their creditors, Chapter 7 did not prevent this from happening. Professor Flint also recommended that the Commission advise Congress to quit continually adding dischargeability exceptions.

Ms. Scott asked that Section 524 be clarified with regard to the enforceability of reaffirmation agreements. In addition, she recommended that there be at least a minimum time period in Chapter 13 cases between the Section 341 meeting and confirmation hearing. She noted that in numerous districts, both are held on the same day.

Professor Whitford suggested that installment redemptions in Chapter 7 be permitted under Section 722. Further, he proposed that there be mandatory minimum federal exemptions perhaps coupled with maximums on state exemptions. He also asked that Patterson v. Shumate be repealed.

Ms. Baughman requested that Chapter 13 be consistently implemented and that the bankruptcy system as a whole be consistently implemented.

Mr. Hermesch recommended that there be some form of debt counseling prior to the filing of bankruptcy.

Professor Warren concluded this portion of the meeting by thanking the participants for their contribution to the discussion. Chair Williamson also expressed his thanks to the panelists. He then announced the resumption of the open forum portion of the meeting.



Mr. McMillin of Corpus Christi, Texas noted that he had been practicing law for 21 years. He said that the biggest problem that he has seen is creditor fraud. He cited the practice of filing claims for the full amount of the principal and interest as an example. Although there were several comments made during the meeting regarding bad debtors, he said that he has not seen them, except in rare instances. The treatment accorded debtors after bankruptcy was another concern that he discussed. He observed that Chapter 7 debtors fare better than their Chapter 13 counterparts as they are able to obtain credit sooner. With regard to criticism of the consumer debtor bar concerning certain of its practices, Mr. McMillin said that the courts have the responsibility to monitor these practices.


Mr. Rosenbaum introduced his client, Mr. Hall. Mr. Hall said he was a fire inspector for the City of Castle Hills. He said that he filed a Chapter 13 bankruptcy case in 1986 and repaid his creditors 100 percent. The bankruptcy was filed, he explained, for numerous reasons including the Internal Revenue Service. He stated that he had started a business with a business partner who withdrew all the money from the business and left.

After he filed his bankruptcy case, he said that the education classes conducted by Mr. Olson, the Chapter 13 trustee, showed him the mistakes he had made in business. He said that he repaid 100 percent of his debts and that he paid them 13 months early by working a second job. Mr. Hall noted that his case shows that the system works. When asked by Chair Williamson if there was anything he would change about the system, Mr. Hall responded that there was nothing. He concluded his remarks by noting that he has learned from this experience and that Chapter 13 does benefit some people.


Another of Mr. Rosenbaum’s clients, Ms. Williams of San Antonio, Texas, explained that she and her husband had to file for bankruptcy relief under Chapter 13 as the result of several factors including back child support and student loan obligations and their inability to obtain employment. She said that they were 2 1/2 years into their case and that their plan will repay their unsecured creditors 65 percent.

Before they filed for bankruptcy, she noted, their creditors refused their payments and that they were getting harassing calls every day. Since they filed their Chapter 13 case, she said that they have had piece of mind and they look forward to re-establishing their credit after attending Mr. Olson’s credit rehabilitation classes. She noted that they had already attended budget classes and that they established a bank account for emergencies. She concluded her statement by noting that bankruptcy was the best thing to happen to her family and herself. In response to Chair Williamson’s question as to whether there was anything she would change about the bankruptcy system, Ms. Williams said that the continual accrual of interest on student loans.


Mr. Terrazas, another of Mr. Rosenbaum’s clients, said that he filed a Chapter 13 case five years ago and that he would complete payments under the plan later this year which will yield a 100 percent payout to his creditors. Noting that he was 65 years old, he stated that to make the payments under the plan, his wife had to go to work at age 58. As a result of the bankruptcy filing, he was able to save his business of thirty years which employs 21 workers. He said that he resorted to bankruptcy as a result of obligations owed to the Internal Revenue Service and the 100 percent penalty. Although there may be occasional abuse, he asked the Commission to not change Chapter 13 as the majority of debtors are honest, hard-working people. When asked by Chair Williamson if there was anything he would change about the process, Mr. Terrazas said the unwillingness of the Internal Revenue Service to negotiate.


Mr. Rosenbaum noted that the three clients who spoke were not hand-picked, but merely happened to be available. He said that he echoed their sentiments. In particular, he stated that the nondischargeability of student loans in Chapter 13 and the unabated accrual of interest were real problems.


Mr. Zeltzer said that he practiced in San Jose, California and that he filed his first consumer bankruptcy case more than 30 years ago. He noted that his practice is 80 percent bankruptcy at this time.

He observed that his clients are increasingly employed on a part-time or temporary basis and therefore lack health benefits or pensions. He also noted that support obligations are problematic to obligors who have been unemployed for very long periods of time and lack the legal assistance to modify their support orders. These obligations, he stated, interfere with the debtor’s ability to complete his or her Chapter 13 plan.

He suggested that if a debtor makes a good faith effort to repay more than 75 percent of his or her obligations, then that debtor’s positive credit history should be restored.


Mr. Bonney identified himself as the chief counsel for Duncan Kester, a standing Chapter 13 trustee, located in the Northern District of California, San Jose Division. He said that they currently administer approximately 7,000 cases and that they disburse annually between $20 to $26 million to creditors. He observed that Mr. Kester has been a Chapter 13 trustee for nearly 30 years and disbursed hundreds of millions of dollars over the course of administering hundreds of thousands of cases.

Mr. Bonney said that the consumer bankruptcy system works very well. Although minor tweaking may be necessary, anything of a major nature was not necessary, he asserted. With regard to the issue of fraud, he said that this almost always emanates from those cases filed by non-attorney petition preparers. And, concerning the issue of uniformity, Mr. Bonney said that any legal system can only be as uniform as the diversity of the United States. Uniformity is a function that should be performed by the courts.


On behalf of the National Association of Consumer Bankruptcy Attorneys ( NACBA ), Mr. Shulman thanked the Commission for coming to San Antonio and providing the opportunity for a broad range of people to comment about their experiences with bankruptcy. He encouraged the Commissioners to talk with the attorneys attending the NACBA convention.


Ms. Stewart identified herself as a debtors’ attorney from Houston, Texas. She said that consumer education should be mandatory, based on her experience as a practitioner. Ms. Stewart mentioned that the College for Financial Planning in Denver provides financial management training materials designed for high school students at no charge. Her second concern pertained to the nondischargeability of student loans in Chapter 13 and the accrual of interest.


Mr. Black described himself as a consumer bankruptcy attorney from Houston, Texas. He said that Chapter 13 works quite well and that its 40 percent completion rate was comparable to the marriage completion rate of 50 percent.

He stated that consumer education is a good idea. His clients often have never prepared a budget before they see him and are surprised at how much it costs to live. Chapter 13 provides them with the opportunity to make some payments to their creditors, even though it may not be 100 percent, he noted. With regard to student loans, he suggested that payments should be made directly under Section 1322(b)(5) so at least the amount of the debt does not balloon and leave the debtors with a large amount at the end.


Mr. Waldschmidt said he was a Chapter 7 trustee from the Middle District of Tennessee and an officer with the National Association of Bankruptcy Trustees. He stated that the Section 341 meeting provides the trustee with the opportunity to assess the debtor’s credibility and it gives secured creditors the opportunity to have the debtors enter into reaffirmation agreements or sign agreed orders for relief from the automatic stay. While the Section 341 meeting is not conducive for building a case for a discharge objection, the Rule 2004 examination is a convenient mechanism to achieve this end. In response to Commissioner Hartley’s question as to the average length of a Section 341 meeting, Mr. Waldschmidt stated that they last between three to four minutes. If the case is very complicated, he schedules a Rule 2004 examination. He stated that he allows a creditor to ask questions, but when the time exceeds ten or fifteen minutes and other cases are waiting, he suggests that they schedule a Rule 2004 examination of the debtor.

Commissioner Jones asked how a creditor, having a small claim, who cannot even afford to hire counsel, would invoke a Rule 2004 examination. Mr. Waldschmidt says that he arranges to have the creditor come to his office to conduct the examination. Ms. Ryan asked how many cases out of the forty that he hears does he set down for Rule 2004 examinations. Mr. Waldschmidt answered probably one or two. Usually, he asks the debtor to supply books and records by a certain date and, if the debtor fails to do that, the debtor must appear for the Rule 2004 examination. Occasionally, he advises creditors to consult with counsel to determine if they have grounds for a discharge objection or dischargeability exception.

When he suspects fraud, he chases the debtor into Chapter 13, he stated. This is done by a discharge objection, objection to exemptions or preference action. Commissioner Jones asked whether these types of problems can be solved by abolishing the debtor’s right to convert. Mr. Waldschmidt answered no and explained that it was in the public interest to get people into Chapter 13. In his jurisdiction, the court grants him an administrative expense claim in the Chapter 7 case if he has commenced litigation. On the other hand, he is not allowed