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News Room




MARCH 17, 1999

Web posted and Copyright © March 17, 1999, American Bankruptcy Institute.

Mr. Chairman and members of the Subcommittee, my name is William Houston Brown, a U.S. Bankruptcy Judge in the Western District of Tennessee, in Memphis. I am appearing today as a representative of the American Bankruptcy Institute (ABI), a non-profit, non-partisan organization of bankruptcy professionals engaged in research and education on issues related to insolvency.

The ABI is the nation's largest organization in the field of bankruptcy, with over 6,500 members. ABI is not an advocacy group and does not take official positions on pending legislation. Rather, ABI provides a forum for the analysis and discussion of insolvency issues, which we hope will assist your understanding of the U.S. bankruptcy system. Our members come from many different disciplines: law, accounting, finance, judicial, administrative, academia, and more. ABI members represent both debtors and creditors, in both commercial and consumer cases. ABI's multi-disciplinary approach and outlook makes us unique among those who appear before Congress.

Together with Judge Eugene R. Wedoff of Chicago, I Co-chair the ABI's Consumer Bankruptcy Committee. Judge Wedoff has prepared an analysis of the consumer bankruptcy provisions of H.R. 833, which we incorporate into this statement.

I have served as a bankruptcy judge in the Western District of Tennessee since 1987. Prior to that appointment, I practiced law, representing both debtors and creditors, and I have been a professor at three law schools.

My judicial district is one that has historically seen one of the highest numbers of consumer bankruptcy filings, with 16,749 Chapter 13 cases and 5,991 Chapter 7 cases having been filed in calendar year 1998, a small decline from calendar year 1997. My district's bankruptcy filings each year are approximately 75% Chapter 13's.

This experience influences my views of the law and system. As a bankruptcy judge, my principal task is to apply the law as Congress has written it, as well as applicable nonbankruptcy law, to the cases or proceedings before me. Whether I personally agree with those laws is not a consideration in my work as a judge. Likewise, in my participation in ABI's effort to analyze the pending bankruptcy reform legislation, I have attempted to leave aside my personal views in an effort to reach a compromise on certain recommendations that I will discuss today.

Bankruptcy law is complex and changes in the law often have unanticipated impacts upon not only the practice and administration of that law but also upon broader economic and policy issues. The ABI, through its members and its grants, has attempted to provide some analysis of the bankruptcy legislation that was pending before the 105th Congress as well as this Congress. For example, the ABI through a grant to Professors Marianne B. Culhane and Michaela M. White of Creighton University School of Law, provided an opportunity for another examination of means testing for Chapter 7 debtors and their repayment capacity. This subcommittee will be hearing from one of those professors in a later panel, and I will defer to her for testimony concerning their study.

It is not surprising, of course, that all members of the ABI will not agree with the results of the Professors' study. Nor would all ABI members agree with my opinions or those of any other professional in the bankruptcy arena. That does not diminish the importance of Professors Culhane and White's study or of any other reports that result from ABI-sponsored work.

It would be impossible to expect that unanimity would occur in anything so complicated or controversial as bankruptcy reform. This subcommittee and the full Congress expect and deserve, however, the contribution of differing concepts and viewpoints as you work to craft an agreement on such reform.

Judge Wedoff and I have led an effort for over a year to bring together a small but diverse group of experienced professionals for a series of discussions on consumer bankruptcy reform. This ad hoc group consists of representatives of consumer debtors, banking (both credit card and secured lending), credit unions, automobile finance lenders, trustees (in both Chapter 7 and 13), accountants and bankruptcy judges.

This group, known as the ABI Consumer Bankruptcy Legislative Group, does not attempt to speak as an official voice of the ABI or its full membership. But that Group was able in its prior and continuing work to reach a consensus of those participants on many of the more difficult subjects being addressed in the current bankruptcy reform legislation.

I believe that this consensus is very significant because it illustrates that, despite personal differences of what each individual would prefer to see occur, professionals and those with experience in the bankruptcy system can come to agreement on compromises in many areas being considered in this legislation. I do not suggest that given enough time we could agree on everything, but I do urge the Representatives on this subcommittee, as well as the full Committee on the Judiciary, to consider the compromises that have been reached. During the 105th Congress, the ABI Consumer Bankruptcy Legislative Group sent a letter to Chairman Henry Hyde, along with a list of sixteen specific recommendations concerning reconciliation of the differences between H.R. 3150 and S. 1301 that were pending before the 105th Congress. A copy of those recommendations is available at ABI's Internet website, Some of those recommendations have now become stale, as a result of changes made in the House Conference Report on H.R. 3150 and in H.R. 833. But, the group's recommendations in some areas have been validated by provisions of H.R. 833, such as a delay in the effective date for bankruptcy reform legislation in order to permit the system to adjust to dramatic change.

That group continues to meet, as recently as March 10, in its ongoing effort to contribute a consensus of recommendations for your consideration.

I want to emphasis the working process of this ABI Consumer Bankruptcy Legislative Group. A pledge of confidentiality has been honored by the participants, to assure that everyone would know that the brain-storming of ideas would not be revealed until everyone was comfortable in signing off on the consensus reached on particular recommendations. The work product of our Group from its March 10 meeting, as well as earlier meetings that concern H.R. 833, is being prepared for circulation to the Group's members now, and we would anticipate sending your subcommittee another set of recommendations specifically addressing some of the major provisions of H.R. 833 within the next few days. A copy will, of course, be posted on ABI's website,, when it is sent to you.

Before addressing some comments to major changes proposed in bankruptcy law by H.R 833, it would be helpful to first explore how consumer bankruptcy operates under the current law. It is helpful to look at current bankruptcy law as a two-part system that (1) determines the assets that are available to consumer debtors and (2) divides the assets, allowing the debtor to retain some of those assets, and using other assets to pay various of the debtor's creditors.

The assets available: All consumer debtors have the same two basic types of assets available to them: present assets and future assets. The present assets are what a debtor owns at the time a bankruptcy is filed. These include tangible assets like a home, a car, clothing, furniture, and cash, as well as intangible assets, like savings and retirement accounts and lawsuits for personal injury. Future assets are those to which a debtor first becomes entitled after a bankruptcy is filed. The principal future assets of most debtors are the personal earnings to which they become entitled after the bankruptcy filing; other future assets include gifts received or lawsuits accruing after the filing.

The classes of claims: In a bankruptcy case, the assets available to the debtor are divided between the debtor and the debtor's creditors. The share of each creditor depends on the type of claim the creditor holds. The Bankruptcy Code sets out several different classes of claims:

(a) Secured claims. Debts that are supported by liens on property owned by the debtor (like a home mortgage, or a lien on an automobile) are known as "secured claims." The Bankruptcy Code generally provides that secured claims must be paid at least the value of the collateral that supports them before that collateral can be used by the debtor or paid to other creditors. In other words, the debtor and other creditors are only entitled to the "equity" that exists in the property above the amount of the claim for which the property is collateral. In this way, secured claims are generally first in the distribution of a debtor's assets. Claims that are not supported by a lien on property of the debtor are known as "unsecured" claims.

(b) Priority claims. Certain claims are viewed by the Bankruptcy Code as being especially entitled to payment. Examples include certain tax obligations, expenses of administering a case in bankruptcy, and family support obligations of the debtor. Although these claims against the debtor may not be secured, the Bankruptcy Code provides that when a debtor's assets are distributed, these claims should be paid ahead of other unsecured claims, and so they are known as "priority unsecured" or simply "priority" claims, in contrast to ordinary ("general") unsecured claims against the debtor.

(c) General unsecured claims. Unsecured claims that do not have priority status and "general unsecured" claims are involved in nearly every consumer bankruptcy case. Examples include most credit card debt and medical bills. However, even a creditor secured by a home mortgage or automobile lien may hold a general unsecured claim. An important concept in the Bankruptcy Code is that, whenever the value of collateral is insufficient to cover the entire amount owed on the creditor's claim, the creditor holding the lien has both a secured claim (to the extent of the collateral value) and an unsecured claim (in the amount of the deficiency in the value of the collateral). Thus, a creditor with a $10,000 claim, secured by an automobile worth only $7,000, is treated as having a secured claim of $7,000 and a general unsecured claim of $3,000.

(d) Nondischargeable claims. Ordinarily, when the distribution of a debtor's assets under the Bankruptcy Code has been concluded, the debtor is given a discharge, wiping out the debts that the debtor owed at the time the bankruptcy was filed. Thus, all of the debtor's future assets, after the distribution, are allowed to be retained by the debtor. However, there is an exception to the discharge for certain types of debt. Some of this debt is of the same nature as priority debt (taxes and family support obligations), but the Bankruptcy Code also excepts from discharge certain debts that were incurred through misconduct of the debtor, such as debts arising from fraud and intentional injuries. These "nondischargeable" claims, to the extent they have not been paid from the assets that are distributed during a bankruptcy case, remain payable from the future assets of the debtor.

Chapter 7 bankruptcy: Distributing present assets to creditors. Since the enactment of the Bankruptcy Act of 1898, the standard process of a bankruptcy case has been for a trustee to collect the debtors' present assets, liquidate them, and divide the proceeds among the debtors' creditors, with the debtors, in exchange, being discharged from their debts, so that they retain the right to their future assets, free of claims of creditors. This process, set out in Chapter 7 of the current Bankruptcy Code, is known as "liquidation" or "straight bankruptcy." Allowing the debtors to use future assets free of creditor claims is known as the "fresh start."

There are, however, two features of Chapter 7 that vary the general plan of liquidating present assets for distribution to creditors and leaving future assets for the debtor. First, debtors are allowed to retain some of their present assets. The Bankruptcy Code sets forth a list of "exempt" property, deemed necessary for debtors' maintenance. States may provide an alternative to this list, and then either allow the debtors to choose between the two lists of exempt property (state and federal) or else provide that the state exemptions are the only ones available. In any event, debtors are allowed to keep some of their current assets as exempt, excluding them from distribution in Chapter 7. Where debtors have no substantial assets beyond those that are exempt, there will be no distribution to creditors. Cases such as these are known as "no asset" Chapter 7 cases.

Second, debtors in Chapter 7 are not always discharged from all of their debts. As noted above, some debts are nondischargeable, and these remain, after bankruptcy, so that the creditors holding these claims may seek payment from future assets of the debtor. Moreover, under certain circumstances (generally involving misconduct by the debtor in the course of the bankruptcy itself), a Chapter 7 debtor may be denied a discharge altogether.

Taking all of this into consideration, Chapter 7 generally divides a debtor's assets as follows:

Secured creditors are given the value of their liens in the debtor's present assets.

The debtor's exemptions are deducted from the present assets.

Any remaining present assets are liquidated and distributed, first to priority claims, and then to general unsecured claims.

The debtor is given a discharge, allowing the debtor to have future assets free of creditor claims, subject to nondischargeable claims.

Nondischargeable claims remain payable in full from the future assets.

Chapter 13 bankruptcy: Distributing future assets to creditors. Chapter 13 is presented in the Bankruptcy Code as an alternative to the standard Chapter 7 liquidation. The basic idea of Chapter 13 is to allow debtors to retain all of their present assets, in exchange for paying to creditors, out of future assets, at least as much as the creditors would have received if there had been a Chapter 7 liquidation. To accomplish this, the debtor must propose a plan, administered by a trustee, to pay creditors through periodic contributions from the debtor's regular income. Chapter 13 recognizes that debtors cannot pay all of their income into the plan, since some income will be necessary for the support of the debtors and their dependents. However, all income not necessary for that support is defined as "disposable" income, and a Chapter 13 plan must either pay creditors in full, or devote all disposable income to the plan. A plan that does not provide for full payment of debts must have a duration of at least three years, and five years is the maximum length of the plan. Because of the disposable income requirement, it is possible for Chapter 13 plans to pay much more to creditors than they would have received in a Chapter 7 bankruptcy.

Under current law, Chapter 13 is entirely voluntary. Only a debtor can propose a Chapter 13 plan; a debtor has an absolute right to dismiss a case that was originally filed under Chapter 13; and a debtor can convert a Chapter 13 case to Chapter 7 at any time. To encourage debtors to choose Chapter 13 over Chapter 7 (and thus provide greater payment to creditors), the Bankruptcy Code has two distinct types of incentives. First, at the conclusion of a Chapter 13 plan, the debtor is given a broader discharge than is available in Chapter 7. This "superdischarge" results in the discharge of several types of debt (including those for fraud and intentional injuries) that are not discharged in Chapter 7. Second, debtors are allowed to keep property that is encumbered by liens, even though they are in default on the underlying obligations. A debtor with a home in foreclosure or a car subject to repossession may be able to retain the home or car by making payments to the secured creditors through a Chapter 13 plan. Moreover, except for certain home mortgages, the debtor in Chapter 13 may pay to a secured creditor the value of the collateral, even though it is less than the full amount owing, and obtain a release of the lien. Chapter 13 contains detailed provisions as to the type of payments required on secured claims.

Plans in Chapter 13 are required to pay priority claims in full, over the course of the plan, and not to discriminate unfairly among general unsecured creditors. Considering all of its provisions, Chapter 13 generally divides a debtor's assets as follows:

The debtor retains all present assets.

The debtor contributes disposable future assets to a plan for a period of three to five years, or for a shorter period sufficient to pay the debts in full. The payments to be received by creditors must be at least as much as they would have received in a Chapter 7 case. Secured creditors must receive at least the value of their liens. Priority claims must be paid in full.

The debtor retains all nondisposable future assets during the time of the plan.

After the completion of the plan, the debtor is given a discharge, allowing the debtor to retain all future assets, free of dischargeable creditor claims.

Nondischargeable claims remain payable in full from the future assets. However, many debts that are nondischargeable in Chapter 7 are able to be discharged in Chapter 13.

Choice of Chapter 7 or Chapter 13: Under current law, consumers have a largely free choice between Chapter 7 and Chapter 13 as a form of relief. However, there are some limitations, the most significant of which are the following: First, a debtor cannot file any bankruptcy case within 180 days after a prior case was dismissed under specified circumstances. Second, Chapter 13 is unavailable to individuals with large amounts of debt (over $269,250 in unsecured debt or $807,750 in secured debt). Third, a Chapter 7 case may be dismissed on motion of the court or the United States trustee if granting Chapter 7 relief would be a "substantial abuse." Fourth, a debtor cannot receive a discharge in a Chapter 7 case if that case was filed within six years of an earlier filing in which the debtor received a Chapter 7 discharge.

The automatic stay: In either Chapter 7 or Chapter 13, an automatic stay goes into effect at the time the case is filed, which generally operates to prohibit any collection activity, including foreclosure and repossession, on debts that were in existence at the time of the filing. In order to obtain the right to proceed with collection activity, a creditor must obtain relief from the automatic stay. In either Chapter 7 or Chapter 13, a creditor is entitled to relief if the value of its lien is declining or at risk of declining, and no action (known as "adequate protection") is taken to make up for the decline. In Chapter 7, the creditor is also entitled to relief if there is no equity in the property that might be obtained for the benefit of creditors. In Chapter 13, relief is granted if there is no equity and the property is not needed for the debtor's plan to be effective.

Judge Eugene Wedoff has been posting on ABI's website a section-by-section analysis of the various bankruptcy reform bills pending before the Congress. He is at work on that analysis of H.R. 833. His preliminary analysis, containing some commentary on the major consumer proposals found in H.R. 833, follows:

1. Means testing—§§101-102.

Content: Chapter 7 cases would be subject to dismissal or conversion to Chapter 13 (on the debtor's request), pursuant to §707(b), if the case would involve "abuse" of Chapter 7, instead of the "substantial abuse" now required. Motions would be required to be presented by the Chapter 7 trustee in many cases, and judicial discretion to deny the motions would be strictly limited.

  • Abuse under §707(b) would be presumed if, during a 5-year period, the debtor would have sufficient income to pay at least $5000 ($83.33 per month) toward general unsecured claims or to repay at least 25% of those claims. The debtor's ability to pay general unsecured claims would be calculated by deducting three categories of expenses from the debtor's current monthly income—defined on the basis of the debtor's average monthly income for 180 days prior to filing—(1) expenses allowed under IRS collection standards; (2) payments on secured claims that would become due during the 5-year period, divided by 60; and (3) all of the debtor's priority debt, again divided by 60.

  • The only way for a debtor to rebut the presumption of abuse would be to show "extraordinary circumstances that require additional expenses or adjustment of current monthly total income." Such a showing, in turn, would require detailed itemizations and explanations sworn to by both the debtor and the debtor's attorney. The extraordinary circumstances—together with the standard three deductions—would have to reduce the debtor's current monthly income to a level that would not allow payment of the minimum amounts of general unsecured claims (at least $5000 over 5 years, amounting to at least 25% of general unsecured claims).

  • The Chapter 7 trustee would be required to analyze each case to determine whether the debtor's schedules reflected the presumptive ability to repay debt. If this analysis reflected grounds for a presumption of abuse under §707(b), the trustee would be required to file a §707(b) motion, unless the debtor's family income was less than a specified minimum (based on average household incomes).

  • Parties in interest would be allowed to bring §707(b) motions, but only in those circumstances where the trustee would be required to bring such motions. In cases where the debtor's income was below the specified minimum, only the judge, United States Trustee, bankruptcy administrator or case trustee could bring the motion.
Commentary: The major impact of this legislation is potentially to deny Chapter 7 relief to any debtor with $83.33 in disposable income per month, regardless of the amount of outstanding debt. For example, a debtor with bills totaling $200,000, and disposable income (under the formula) of $90 per month, would be found to have made an abusive Chapter 7 filing, even though less than 3% of the unsecured debt could be paid in a 5-year Chapter 13 plan. Conversely, debtors with very small amounts of disposable income could be denied Chapter 7 relief if their debts were also small. For example, a debtor with disposable income of only $20 per month could be denied Chapter 7 relief unless the unsecured debts scheduled exceeded $7200. There is a substantial advantage to basing means-testing on a fixed amount of disposable income rather than on an ability to repay a particular percentage of outstanding indebtedness—the debtor is not able to avoid §707(b) by accumulating greater indebtedness.

There are several problems with the use of the IRS standards in calculating disposable income. First, the IRS standards themselves include a category ("other necessary expenses") covering the sort of individualized expenses that also can be seen as arising from "extraordinary circumstances." The IRS standards do not specify any particular allowance for "other necessary expenses," and thus trustees would have to assess reasonableness on a case by case basis. If an expense arose from "extraordinary circumstances," rather than being in the category of "other necessary expenses," detailed scheduling (under oath from the debtor and the debtor's attorney) would be required. Trustees would therefore have to determine how any given expense not covered by the other IRS categories (such as costs of medical care) should be categorized.

Second, secured debt presents a problem for calculating disposable income under the formula set out in the bill. The IRS expense allowances are intended to cover all housing and transportation expenses, including the cost of acquiring a dwelling or automobile. But because the bill's formula allows full repayment of secured debt in addition to the IRS allowances, debtors are given double expense allowances in all such situations. The bill therefore discriminates against those who rent either their housing or their automobiles. Such renters will receive only the expense allowance provided by the IRS standards (supplemented by any showing of extraordinary circumstances). Owners of cars or houses, in contrast, would receive not only the IRS allowance, but the full amount of their mortgage and auto loan payments as well, unlimited in amount.

Third, the fact that allowed expenses can be increased by incurring secured debt provides a strategy for avoiding the means test. For example, a debtor who would otherwise have disposable income of $400 per month could trade in an old car for a new one, with monthly payments of $350, and the resulting increase in secured indebtedness would reduce the disposable income to an amount that would not result in dismissal of the Chapter 7 case. Another method of avoiding the means test would be for a debtor to declare an intent to make charitable contributions. Section 4 of the Religious Liberty and Charitable Donation Protection Act of 1998 allows debtors to contribute up to 15% of their gross income to charity without those contributions being considered in making a determination under §707(b). Thus, a debtor with an income of $60,000 could remove $500 per month in disposable income by declaring an intent to make the maximum charitable contributions.

Alternatives: Instead of using IRS collection standards for assessing disposable income, means- testing might be based on data maintained by the Bureau of Labor Statistics. The BLS publishes annually a table of average consumer expenditures, grouped by income level. These tables would eliminate the confusion between "other necessary expenses" and expenses arising from "extraordinary circumstances." BLS figures might also be used to calculate presumptive maximums for acquiring housing and transportation, regardless of whether the housing or transportation is purchased with secured credit or rented. BLS categories could be incorporated into the schedules required to be completed by debtors, allowing for a simple determination by trustees as to the potential for abuse under §707(b).

2. Funding prosecution of §707(b) motions—§101.

Content: Debtor's attorneys would be required to reimburse panel trustees for all costs of prosecuting a successful motion to dismiss or convert under §707(b) of the Code, wherever the court found the filing of the case "not substantially justified." If the court found a violation of Fed.R.Bankr.P. 9011, it would be required to impose a civil penalty against the debtor's attorney in favor of the United States Trustee or the case trustee. Costs could be imposed against the proponent of a §707(b) motion only if (1) the motion was not substantially justified, or (2) the motion was brought "solely for the purpose of coercing the debtor into waiving a right guaranteed . . . under the Bankruptcy Code," and (3) the moving party was not a panel trustee, the United States Trustee, or a party in interest with an aggregate claim against the estate of less than $1,000.

Commentary:It is desirable to provide some financial incentive for trustees to prosecute meritorious §707(b) motions. Under current law, if such a motion succeeds in having a Chapter 7 case dismissed, the trustee is likely to recover none of the costs of prosecuting the motion. However, offering the trustee a potential recovery from the debtor's attorney is problematic. The potential for an award of sanctions against debtors' counsel may have a chilling effect on representation of debtors—attorneys fearful of an award of fees may be unwilling to file even appropriate Chapter 7 cases. On the other hand, judges wary of this potential chilling effect may be unwilling to find that Chapter 7 cases were filed without substantial justification.

There is also a problem with the limitation of liability in cases of unsuccessful creditor motions under §707(b). The need for potential fee-shifting is due to the leverage that creditors would otherwise have to extract reaffirmation agreements from Chapter 7 debtors: a creditor could threaten a §707(b) motion unless its debt was reaffirmed, and the debtor, faced with the cost of responding to such a motion, might well accept reaffirmation as a less costly option, even if the debtor would be likely to prevail on the merits of the motion. The bill, however, eliminates potential creditor liability for creditors with claims of less than $1,000. Such creditors could therefore bring entirely groundless §707(b) motions without being liable to pay the costs of the debtor in responding. This immunization would allow major creditors to file §707(b) motions, without potential liability, in any case where their claims were small.

Alternatives: The trustee's recovery in the event of unjustified Chapter 7 filings could be limited to an automatic claim for fees and expenses against the debtor, rather than the debtor's attorney. (However, the court, in its discretion, would still be able to find that misconduct by the debtor's attorney merited an award under Rule 9011. ) The award against the debtor could be in the form of a judgment, nondischargeable and entitled to priority in any later bankruptcy proceeding. Since the trustee would only prevail against debtor's with substantial disposable income, the likelihood of collection of such a judgment would be substantial enough to encourage trustees to prosecute appropriate §707(b) motions.

With trustees given an appropriate incentive to prosecute §707(b) motions, there would be no reason to insulate any creditor from potential fee shifting in the event that the creditor's motion was unsuccessful.

3. Chapter 13 plan length—§606.

Content: For debtors whose income equals or exceeds a specified amount, generally based on national median household income: (a) five years is the maximum term of the plan, (b) a plan cannot be amended to provide for payments extended beyond "the applicable commitment period under section 1325(b)(1)(B)(ii)," and (c) the "duration period" would be five years. For debtors whose income is below the specified amount, three years would be the maximum plan term unless the court found cause to extend the term to no more than five years (the current law as to all Chapter 13 debtors), and the "duration period" would be three years.

Commentary: The provisions of the bill are confused. There is no §1325(b)(1)(B)(ii) under current law, and the bill does not appear to add such a section. There is also no provision of the bill defining "duration period" or specifying its relevance. The provision regarding "duration period" is placed at the end of §1329 of the Code, which deals with plans modified after confirmation, and so would not appear to require a minimum five-year plan for any debtor. If the bill does require minimum five-year plans for certain debtors, it would make the completion of Chapter 13 plans more difficult for these debtors, increasing incidents of default, and giving the debtors an incentive to choose Chapter 7 over Chapter 13.

Alternative: Current law, which has a three to five year duration for all Chapter 13 plans, may not require any change.

4. Limitation of the Chapter 13 discharge—§§129, 807, 1113.

Content: All debts covered by §523(a)(1) (certain tax obligations), (a)(2) (fraud), (a)(3)(B) (unlisted debts requiring dischargeability determinations in bankruptcy court), and (a)(4) (breach of fiduciary duty) would be nondischargeable in Chapter 13 as well as in Chapter 7. All debts covered by §523(a)(6) would be remain nondischargeable only in Chapter 7. Property settlements in divorce and separation cases, treated by §523(a)(15) of the Code, would continue to be nondischargeable only in Chapter 7 cases, but whether such claims would be included in §523(a)(3)(B) in the event of untimely scheduling is an issue subject to conflicting provisions, discussed below at item 10.

Commentary: The "superdischarge" of Chapter 13 has the effect of encouraging debtors with debts that might be nondischargeable in Chapter 7 to choose Chapter 13 as a means of discharging those debts and obtaining a fresh start. This has the corollary result of reducing litigation over dischargeability. H.R. 833 would exclude from the Chapter 13 discharge debts arising from fraud—the most common ground for claims of nondischargeability, and the one involved in most claims of credit card nondischargeability—as well as certain tax claims, claims involving breach of fiduciary duty, and claims that were not scheduled in time to permit bankruptcy court adjudication of dischargeability. Under this change in the law, debtors subject to nondischargeability claims on any of these grounds would be encouraged to file under Chapter 7 rather than under Chapter 13. This would undercut one of the major purposes of the reform legislation—the encouragement of Chapter 13 repayment—and litigation over dischargeability in Chapter 13 would increase substantially.

Alternative: To maintain the current incentive for debtors to file Chapter 13 cases, the current scope of the Chapter 13 discharge could be maintained. Situations of significant misconduct by debtors may be dealt with by requiring the bankruptcy court to give explicit consideration, in passing on the good faith of a Chapter 13 filing, to the existence of any debts that would be excepted from discharge in Chapter 7.

5. Presumption of fraud—§135.

Content: All credit card debt aggregating more than $250 in cash advances or $250 in "luxury goods or services" during the 90 days preceding a voluntary bankruptcy filing would be presumed nondischargeable under §523(a)(2). "Luxury goods or services" is not defined, but the section specifies that the phrase "does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor."

Commentary: Under current law, there is a similar though less extensive presumption of fraud in the use of credit cards shortly before the filing of a bankruptcy case. A difficulty with applying this presumption—which is continued under H.R. 833—is that there is no specification of the elements of fraud as to which the presumption operates, and so there is no way to determine how the presumption can be overcome. Beyond this difficulty, the presumption of H.R. 833 is ambiguous in its use of the phrase "luxury goods or services." Although the bill clearly excludes "necessities" from the scope of "luxury goods," it leaves open the possibility that some purchases (like flowers for a spouse), although not "necessary" for support, would still be common enough, and inexpensive enough, not to be considered "luxuries." The absence of a definition here could lead to substantial litigation. Finally, the presumption in H.R. 833 aggregates all purchases and all cash advances. Thus, if several small "luxury" purchases were made from different creditors over a 90-day period, the bill would result in a presumption of fraud.

Alternative: A distinct ground for nondischargeability could be defined for a debtor's use of a credit card without intending to pay the resulting debt. The law could specify that the debtor's financial situation would be relevant in determining this question of intent. Under this definition, a lack of intent to repay could be presumed for purchases of defined "luxuries" shortly before bankruptcy.

6. Valuation of secured claims—§§124-125.

Content: Secured claims for the purchase of personal property acquired by an individual debtor within 5 years of the bankruptcy filing would not be bifurcated in any chapter of the Code. Where bifurcation did occur in Chapter 7 and 13 cases, the secured claim would be valued on the basis of the debtor's replacement cost, without deduction for costs of sale. For household and personal goods, this would be retail price.

Commentary: The overall impact of these provisions of H.R. 833 would be (1) to encourage debtors to surrender collateral in both Chapter 7 and 13 cases, and (2) to allow secured creditors to obtain higher payments in Chapter 13 than under current law, at the expense of unsecured creditors.

Surrender of collateral would be encouraged, because, unless the debtor purchased the collateral more than five years prior to the bankruptcy, the debtor would have to pay the full amount outstanding on the purchase in order to retain the collateral, even if the collateral was worth much less that the outstanding balance. For example, the debtor may have purchased a used car, or a new refrigerator, on credit, with a high rate of interest. If the debtor missed several payments before filing the bankruptcy case, the amount owed on the car or refrigerator could greatly exceed its actual value. Nevertheless, in order to redeem the property in Chapter 7 or to retain it in Chapter 13, §124 of the bill would require the debtor to pay the full outstanding balance. In such circumstances, it would often be in the debtor's best interest to return the collateral, and attempt to purchase a replacement. It can be anticipated that "bankruptcy financiers" would make credit available to enable the purchase of such replacements.

Where the debtor did choose to retain property in Chapter 13, unsecured creditors would be disadvantaged (compared to their treatment under current law) in any case that did not have a 100% payout. This is because, under current law, secured creditors are paid only the value of their collateral (with interest). The plan payments of the debtor in excess of this collateral value are paid on account of unsecured claims—including the claims of secured creditors in excess of the value of their collateral.

Valuing collateral at its retail price involves payment to secured creditors of more than they could obtain upon surrender or repossession of the collateral (since selling the property at retail would ordinarily involve substantial costs of sale). This provision, then, would also have the effect of diverting funds from unsecured to secured creditors in many Chapter 13 cases.

Alternative: Certain types of secured credit may be of sufficient economic impact that full repayment of the indebtedness should be protected in bankruptcy. Certain home mortgages are given such protection under current bankruptcy law (pursuant to §1322(b)(2) of the Code). This sort of protection could be extended to other defined types of secured lending, certain auto loans for example, without making major changes in the general treatment of secured claims in bankruptcy.

7. Adequate protection of secured claims pending Chapter 13 plan confirmation—§137.

Content: Payments of adequate protection would be required, pending confirmation of a Chapter 13 plan, at times and in amounts specified by the applicable contract, but the debtor would be allowed to seek a court order reducing the amounts and frequency.

Commentary: By requiring adequate protection payments to be made in addition to preconfirmation plan payments, this provision would make Chapter 13 very difficult for many debtors. Plan payments are often intended to deal with secured claims, and are often required to exhaust the debtor's disposable income (pursuant to §1325(b) of the Code). Thus, pending confirmation, it would often be impossible for debtors to make both plan payments (as required by §1326 of the Code) and adequate protection payments. Furthermore, contract payments are often in an amount greater than the depreciation of collateral withheld by the debtor, and so a presumption that adequate protection should be paid in the contract amount may be unreasonable. Requiring the debtor to seek a lower payment would increase the debtor's costs of proceeding in Chapter 13.

Alternative: Chapter 13 trustees could be required, pending confirmation, to make payments to secured creditors of the payments that these creditors would receive under the debtor's proposed plan. If these payments are insufficient to provide adequate protection, the court could be authorized to increase the payments on the creditor's motion or—if this were not possible—to dismiss the case.

8. Timing of events in Chapter 13 cases—§605.

Content: Debtors would be given 90 days after case filing to file a Chapter 13 plan; no change is made in the time for meetings of creditors, which (under Fed.R.Bankr.P. 2003(a)) requires that the meeting take place between 20 and 50 days after case filing; confirmation hearings would be held between 20 and 45 days after the meeting of creditors.

Commentary: The timing specified by H.R. 833 would cause substantial difficulty. Current bankruptcy law, Fed.R.Bankr.P. 3015, requires the debtor to file a Chapter 13 plan within 15 days of the case filing. By delaying plan filing for up to 90 days after case filing, the bill would allow plans to be filed after the time set for the meeting of creditors under §341, which would then have to be continued. The notice of the meeting of creditors would be issued prior to filing of the plan, and so would not be able to include any information about the plan, thus requiring a separate notice or resulting in inadequate information for creditors prior to the meeting. If the meeting of creditors is continued, a question will arise about whether the confirmation hearing must be held within 45 days of the first date set for the meeting, or whether that time limit should run from the continued date. Any delay in confirmation, which would be often necessitated by the proposed procedure, would result in a delay in payment of unsecured creditors, and greater need for litigation regarding adequate protection payments to secured creditors pending plan confirmation.

Alternative: The current 15 day deadline for plan confirmation could be set out in the statute.

9. Special treatment for support obligations—§§141-144, 146-147.

Content: Several provisions of H.R. 833 extend special treatment to a category of claims know as "domestic support obligations." These claims would be defined to include obligations arising both before and after the filing of the bankruptcy case, whether owed to a spouse, former spouse, child, or guardian of the child of the debtor, or to any governmental entity, as long as the obligation both was in the nature of support and arose from a specified agreement, decree, or process. The special treatment would include the following:

€ "Domestic support obligations" would be accorded the first priority of distribution.

€ "Domestic support obligations" would be required to be current as a condition for confirmation of any plan under Chapter 11 or 13.

€ The automatic stay would not apply to actions in connection with "domestic support obligations," and all such obligations would be excepted from discharge pursuant to §523(a)(5).

€ Exempted property would continue to be liable for domestic support obligations, under §522(c)(1), even if state law provided to the contrary.

€ Payment of domestic support obligations would be excepted from preference recoveries, pursuant to §547(c)(7).

Commentary: The only one of the new protections that makes a major change in current law is the first priority for support obligations. This provision would give support obligations priority over administrative expenses. As a result, trustees may have to decline to administer many cases involving support obligations. In order to recover funds in such cases, the trustee would often have to retain professionals, and these professionals could only be paid after the support obligations were paid in full. To avoid situations in which assets were recovered by the efforts of professionals and the professionals were left unpaid, trustees would choose not to pursue the recoveries. This would have the effect of reducing payments of support obligations in bankruptcy.

Alternative: Support obligations should have a priority subordinate to administrative expenses.

10. Nondischargeability of property divisions—§145, 1113.

Content: H.R. 833 contains conflicting provisions on this topic. Section 145 makes all property settlements in family cases nondischargeable pursuant to §523(a)(15), regardless of ability and need, and removes exclusive bankruptcy jurisdiction, so that claims covered by §523(a)(15) would not require timely adjudication in bankruptcy court. In contrast, §1113 generally reaffirms the current language of §523(a)(15), and implicitly continues exclusive bankruptcy jurisdiction over §523(a)(15) by providing that, if a creditor does not receive notice of the bankruptcy in time to obtain bankruptcy court adjudication under §523(a)(15), the claim would be nondischargeable under §523(a)(3)(B).

Commentary: If H.R. 833 were enacted in its present form, the conflicting provisions as to § 523(a)(15) would lead to substantial uncertainty and unnecessary litigation.

Alternative: Retention of the present law (as set out in §1113 of H.R. 833) may be the better alternative. There is no apparent reason why property settlements not needed for support should be made nondischargeable. For example, a wealthy nondebtor spouse may have been awarded a right to payments offsetting the debtor's retention of a retirement account. If, after the divorce, the debtor's financial condition has deteriorated, and the debtor has difficulty meeting ordinary living expenses, it is difficult to see why the nondebtor spouse should be able to enforce a nondischargeable claim for the property settlement payments.

11. Disclosure of tax return information—§603-604.

Content: Several items—including copies of all federal tax returns, with schedules and attachments, filed by the debtor during three years prior to the bankruptcy case— would be added to the information that individual Chapter 7 and 13 debtors are required to provide, unless otherwise ordered by the court. These documents would be available for inspection and copying by any party in interest, but the Director of the Administrative Office of the United States Courts would be required to "establish procedures for safeguarding the confidentiality of any tax information." If the required information were not filed within 45 days of case commencement, the case would automatically be dismissed. However, the court could authorize an extension of the period for filing for up to 45 days.

Commentary: There are several problems with these provisions: (1) the requirement to furnish tax returns (and the other required information) would impose an additional cost on debtors who do not have tax return copies and financial records available; (2) the requirement to file tax returns will impose additional costs in personnel and storage on the clerks of the bankruptcy courts; (3) automatic dismissal would take place even in cases where the trustee finds assets to administer, such as preferences and fraudulent conveyances, that creditors might have difficulty pursuing outside of bankruptcy; (4) it would be difficult for regulations to safeguard the confidentiality of tax returns in a manner consistent with the general requirement that they be made available to any party in interest for inspection and copying.

Alternative: If tax return information is to be kept confidential, it should not be part of the public bankruptcy files, and should not be made available to creditors for inspection and copying. However, tax return information could be required to be presented to the bankruptcy trustee (in either Chapter 7 or Chapter 13) prior to the meeting of creditors. The information could be ordered to be submitted in electronic form, as maintained by the Internal Revenue Service, and actual copies of returns could be required to be produced upon the trustee's request. Other parties, including creditors, would continue to be able to obtain tax return information on motion, pursuant to Fed.R.Bankr.P. 2004.

12. Audits—§602.

Content: Audits would be required in at least 0.4% of individual Chapter 7 and 13 cases, as well as schedules reflecting "greater than average variances from the statistical norm of the district in which the schedules were filed." The audits would be required to be performed "in accordance with generally accepted auditing standards [GAAS] . . . by independent certified public accountants or independent licensed public accountants." The U.S. trustee for each district would be authorized to contract for the auditing services, but no funds are provided for this purpose.

Commentary: The principal problem with this provision is its cost. Audits by licensed professionals according to GAAS are likely to be very expensive, and such formal audits are likely unnecessary to determine significant misstatements in debtors' petitions and schedules. Moreover, the provision is ambiguous in requiring audits of all schedules with "greater than average variances from the statistical norm of the district in which the schedules were filed." The provision does not indicate the items as to which variance from the norm should be measured. However, likely items would include income and expenses, but assets and claims may be intended as well. If "statistical norm" means the median, and the average variation is the midpoint between the high and low points and the median, then the proposal could require audits of half of all schedules on each of the relevant items: for example, those schedules reflecting the lowest 25% and the highest 25% of income.

Alternative: In order to reduce costs, audits could be conducted by trained employees of the United States trustees, rather than by licensed accountants, according to regulations established by the Executive Office of the United States Trustee, rather than generally accepted auditing standards. A lower minimum number of cases could be subject to audit, with provision that the United States trustees would be authorized, in their discretion, to conduct audits of cases referred to them by Chapter 7 and 13 trustees.

13. Credit counseling—§302.

Content: Individuals would generally be ineligible for bankruptcy relief under any chapter of the Bankruptcy Code, pursuant to §109, until they had first attempted to negotiate a voluntary repayment plan through a consumer credit counseling service approved by the United States trustee, with no limitations as to the type of counseling service that could be approved, as long as the service provided (1) an individual or group briefing outlining opportunities for available credit counseling and (2) assistance in performing an initial budget analysis. Exceptions would be made for situations (1) in which the U.S. trustee or bankruptcy administrator found that credit counseling services were unavailable and (2) in which the debtor was unable to obtain credit counseling services within five days of making a request from an approved counselor. Any party would be allowed to bring a motion to dismiss based on the debtor's ineligibility under this section.

Commentary: The eligibility requirement would add to the cost of bankruptcy relief. If an individual is in genuine need of bankruptcy relief, and consults an attorney for that purpose, the attorney would have to direct the individual to a credit counseling service for briefing and budget analysis before the bankruptcy case could be filed. The attorney would then have to conduct another budget analysis in order to prepare the bankruptcy schedules. Existing counseling services would be burdened by the need to brief and counsel individuals who have no likelihood of being able to pay their debts through a voluntary repayment plan. Debtors in need of immediate bankruptcy relief to avoid foreclosure, repossession, eviction, or wage garnishment would be unable to obtain timely relief if immediate consumer counseling were unavailable. Accordingly, it can be anticipated that counseling services would be created that would work in conjunction with debtors' attorneys in providing immediate counseling. Regulating and approving credit counselors would impose a substantial burden on the U.S. trustees.

Alternative: Two changes to the provision on credit counseling would likely have a significant beneficial impact. First, the requirement for credit counseling could be applicable only in Chapter 7 cases. Chapter 13 cases already incorporate the essential features of voluntary repayment plans—careful budgeting, living within the budget, and payment of all disposable income to creditors. Eliminating the cost, expenditure of time, and delay involved in separate credit counseling would encourage use of Chapter 13. Second, the debtor could be allowed to complete the required counseling after the filing of a bankruptcy case upon a showing that the filing was necessary to avoid foreclosure, repossession or wage garnishment. In such situations, the filing fee could be deferred until after the debtor completed the credit counseling, so that, if the debtor elected to pursue a voluntary repayment plan outside of bankruptcy, the bankruptcy case could be dismissed without payment of a fee.

14. Debtor education—§§104, 302.

Content: First, the Executive Office of the U.S. Trustee would be required (1) to develop a program to educate debtors on the management of their finances, (2) to test the program for one year in three judicial districts, (3) to evaluate the effectiveness of the program during that period, and (4) to submit a report of the evaluation to Congress within three months of the conclusion of the evaluation. The test program would be made available, on request, to both Chapter 7 and 13 debtors, and, in the test districts, bankruptcy courts could require financial management training as a condition to discharge.

Second, a new exception to discharge would be applicable in Chapter 7 cases, for situations in which the debtor failed to complete a course in personal financial management administered or approved by the U.S. trustee. Similarly, the court would be directed not to grant a Chapter 13 discharge to any debtor who failed to complete such a course. An exception would be made for districts in which the U.S. trustee or bankruptcy administrator found that suitable courses were unavailable.

Commentary: These provisions raise several difficulties: (1) the education requirement would apply to individuals who could not benefit from such a course, such as financially responsible individuals who had encountered financial problems unconnected to failures in personal budgeting; (2) there is no provision for payment for such courses, and Chapter 13 debtors would ordinarily lack disposable income to pay for them; (3) substantial resources would have to be expended by the U.S. trustee in order to administer a program for approving and regulating educational facilities; (4) it would be premature for the United States trustee to administer or approve programs for debtor education prior to completion of the pilot educational programs; (5) if discharge is denied to individuals who do not complete educational programs in the pilot districts, but no such requirement is imposed in other districts, there will be a substantial constitutional question raised under the uniformity provision of the Bankruptcy Clause (see Railway Labor Executives Ass'n v. Gibbons, 455 U.S. 457, 466, 102 S.Ct. 1169, 1175, 71 L.Ed.2d 335 (1982), for a discussion of the uniformity clause).

Alternative: Debtor education is likely to be far more effective in Chapter 13 than in Chapter 7 cases. Debtors in Chapter 7 cases generally come in contact with the bankruptcy system only at a brief meeting of creditors and are thereafter promptly discharged. Chapter 13 debtors, in contrast, usually maintain a long-term relationship with the Chapter 13 trustee. Several Chapter 13 trustees have been conducting programs of debtor education for several years. Based on these programs, programs of voluntary debtor education could be implemented in a large number of judicial districts, as part of the Chapter 13 trustees' operating budget. Based on the results of this study, an educational program could be made mandatory, perhaps limited to particular situations in which the education is likely to be helpful. In Chapter 7 cases, any educational effort might be limited to a group presentation at the creditors' meeting. Such presentations could also be conducted on a voluntary basis in pilot districts to measure their effectiveness before being made mandatory.

15. Homestead exemptions—§126.

Content: Debtors would be required to reside in a state for 730 days before being allowed to claim the exemption law of that state.

Commentary: The proposal would not address abuse of the bankruptcy system by existing residents of states with unlimited homestead exemptions. Such individuals may amass substantial estates in homestead property, and obtain a bankruptcy discharge without surrendering any of that property. The proposal would discourage some debtors from changing their state of domicile for the purpose of obtaining higher exemptions. However, it would encourage many others to make such changes. Since no state's exemption law would apply until a debtor had resided in the state for two years, the applicable exemption law would be the federal exemptions. These exemptions are more generous than the laws of many states, and debtors from states with exemptions lower than the federal exemptions would be encouraged to move to any new state prior to filing bankruptcy.

Alternatives: Two different alternatives might address problems in connection with homestead exemptions. First, a cap might be placed on the homestead exemptions available in bankruptcy, together with a provision that the cap would not apply in the case of involuntary bankruptcy cases. This would reduce (to the level of the cap), the most flagrant abuses of the homestead exemption. Second, in situations of changes of domicile, the law could provide that, for a specified period after a change of domicile, debtors would only be allowed to apply to their homestead the exemption law of the state of domicile with the lower homestead exemption.

16. Bankruptcy appeals—not treated in H.R. 833.

Commentary: Although both H.R. 3150 and S. 1301, passed by their respective houses in 1998, contained provisions for expedited appeals from bankruptcy courts to the circuit courts of appeal, the Conference Report on the bills, and hence H.R. 833, fail to address the issue. Direct appeal would have the benefit of


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