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Mr. Chairman and members of the Subcommittee, my name is Eugene R. Wedoff. Since 1987, I have been a U.S. Bankruptcy Judge for the Northern District of Illinois, in Chicago. I am a graduate of the University of Chicago and its law school. I am also currently the co-chair, along with the Hon. William H. Brown, of the American Bankruptcy Institute's Consumer Bankruptcy Committee, and I am pleased to present the ABI's views today.

As you know, the ABI is the nation's largest education and research organization of bankruptcy professionals, with over 6,000 members. Our members are attorneys, judges, accountants, lenders, academics, trustees and others involved in the bankruptcy system. We maintain a comprehensive Internet site (ABI World) at www.abiworld.org. ABI is non-profit and non-partisan and thus we take no advocacy position on the current proposals.

To the extent I give you an opinion today, it is in my personal capacity based on my analysis of the legislation and my experience as a judge, and not an official ABI position. We commend the Subcommittee for the attention devoted to improving the bankruptcy system and stand ready to assist in your understanding of the impact of the various proposals.

Introduction: The general operation of consumer bankruptcy.

H.R. 3150, currently pending before the 105th Congress, proposes major changes to the consumer provisions of the Bankruptcy Code (Title 11, U.S.C.). Similar changes have been proposed by two other bills, H.R. 2500 and S. 1301, that are the subject of an earlier analysis published by the American Bankruptcy Institute. Like the earlier analysis, this paper reviews the proposed legislation with three aims: first, identifying each of the changes that the bill would make in current consumer bankruptcy law; second, assessing the impact that these changes would have in the operation of the law; and third, suggesting alternative approaches, as appropriate, to achieving the goals of the bill. Where the provisions of H.R. 3150 are substantially the same as those of H.R. 2500 or S. 1301, the comments from the earlier analysis are reproduced here, to avoid the need for cross-reference.

In order to discuss the proposed changes and their impact, it is necessary first to have an understanding of how consumer bankruptcy operates under the present law. It is helpful to look at the 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 the 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&emdash;"general unsecured" claims&emdash;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&emdash;to the extent they have not been paid from the assets that are distributed during a bankruptcy case&emdash;remain payable from the future assets of the debtor.

Chapter 7: 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:

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

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

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

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

(5) Nondischargeable claims remain payable in full from the future assets.

Chapter 13: 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 pro-pose a Chapter 13 plan; a debtor has an absolute right to dismiss a case that was origi-nally 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 inten-tional 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:

(1) The debtor retains all present assets.

(2) 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.

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

(4) 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.

(5) 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 dis-missed under specified circumstances. Second, Chapter 13 is unavailable to individ-uals with large amounts of debt (over $250,000 in unsecured debt or $750,000 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&emdash;including foreclosure and repossession&emdash;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.

Summary: major effects of the consumer bankruptcy provisions of H.R. 3150.

As discussed in the section-by-section analysis that follows, H.R. 3150 appears designed to reduce bankruptcy filings and increase payments to creditors in bankruptcy. A number of features that would increase the cost of bankruptcy filing and administration The major changes proposed in H.R. 3150 include the following:

1. After a debtor received a bankruptcy discharge, the debtor would be ineligible for any bankruptcy relief for a period five years, and ineligible for Chapter 7 relief for a period of 10 years, without consideration of good faith or economic situation. §171.

2. Chapter 7 relief would be denied to a class of debtors, based on ability to pay a specified portion of their debt. Debtors with relatively large debt would remain eligible for Chapter 7 relief, those with smaller debt would be ineligible. Testing for eligibility would be required for most debtors. §§101, 103.

3. Chapter 13 would be changed by increasing minimum plan terms and eliminating the superdischarge. §§102, 410, 508.

4. Debtors would be notified about alternatives to bankruptcy, and of their obligations in filing bankruptcy. These obligations would include submission of tax returns to the United States trustee (with disclosure to any interested party), and filing of detailed information regarding income, expenses, and assets, subject to formal audit. §§111, 404, 407.

5. In both Chapter 7 and Chapter 13 cases, secured creditors would receive payment of their claims in an amount no less than the retail value of the collateral that secures the claim, and, in some circumstances, the full amount of the claim, regardless of collateral value. §§ 128, 129, 130, 162. Relief from stay would be granted in certain circumstances without regard to equity available for distribution to creditors generally. §§ 121, 124.

6. "Fraudulently incurred" credit card debt would be determined without regard to the intent of the debtor to repay, but rather on the debtor's objective financial situation at the time the debt was incurred. Such debts would be nondischargeable in both Chapter 7 and Chapter 13 cases. They would be presumed nondischargeable when incurred within 90 days of the bankruptcy filing. §§ 141, 142, 143, 145.

7. New deadlines would be established for important events in consumer bankruptcy cases, but there are conflicting provisions regarding the time for confirmation of a Chapter 13 plan. §§401, 405, 406, 409.

8. Bankruptcy court decisions would be appealable directly to the circuit courts of appeals. §412.

9. Detailed provisions are set out regarding centralized collection and dissemination of bankruptcy data. §§441-43.

H.R. 3150 would make no substantial change in exemption law. §§ 181, 502.

The consumer bankruptcy provisions of H.R. 3150: specific proposals.

More than 40 of the sections of H.R. 3150 affect consumer bankruptcy cases. These provisions are included in three of the bill's titles. Title I ("Consumer Bankruptcy Provisions"), Title IV ("Bankruptcy Administration"), and Title V ("Tax Provisions"). This analysis deals with each of these sections in the order of presentation; cross-references indicate areas in which one proposal affects another. An indication is also given where the substance of the proposal is similar to a provision of H.R. 2500 or of S. 1301.

Title I ("Consumer bankruptcy provisions")

Subtitle A ("Needs-Based Bankruptcy")

§101 ("Needs based bankruptcy") (see H.R. 2500, §101; S. 1301, §102).

The changes. This section of the bill would eliminate the choice of Chapter 7 bankruptcy for certain debtors. Subsection 101(3) of the bill would add a new provision to §109(b) of the Code. This new provision would prohibit an individual from being a debtor under Chapter 7 if the individual had "income available to pay creditors." The remainder of §101 sets up a definition of "income available to pay creditors" and a mechanism for enforcing the denial of Chapter 7 relief to debtors who have such income.

The definition of income available to pay creditors. Whether a debtor has "income available to pay creditors," and thus is ineligible for Chapter 7 relief, depends on the application of three tests, set out in subsection 101(4) . The first test compares the debtor's "current monthly total income" (all of the debtor's income from any sources, averaged over the six months preceding bankruptcy) against the national median income, as established by the Census Bureau. The debtor's income must be at least 75% of the national average in order to meet this test.

The second and third tests are based on the debtor's "projected monthly net income." The projected monthly net income is defined as the debtor's current monthly total income, reduced by three categories of expenses: (1) general living expenses for the debtor and the debtor's dependents, as determined by the Internal Revenue Service for the area in which the debtor lives; (2) all of the payments on secured debt that will come due during the five years after filing, divided by 60 (to obtain a monthly average); and (3) all of the priority debt owed by the debtor, again divided by 60. Finally, there can be a further reduction if the debtor establishes extraordinary circumstances. The debtor will be found to have "income available to pay creditors" if, in addition to meeting the total income test, the debtor's "projected monthly net income" is both greater than $50, and is "sufficient to repay twenty per cent or more of unsecured non-priority claims during a five-year repayment plan."

The enforcement mechanism. Section 101 of the bill contains two mechanisms for enforcing the prohibition against Chapter 7 relief for debtors with "income available to pay creditors." First, Chapter 7 trustees are given the additional duty of investigating and verifying the debtor's projected monthly net income and filing a report with the court as to whether the debtor is disqualified for Chapter 7 relief under the "income available" standard.

The second enforcement mechanism has to do with extraordinary expenses that might be asserted by the debtor. If the debtor asserts such expenses, a statement to that effect is required to be included with the debtor's bankruptcy petition, together with an itemization and detailed description of each expense, and a sworn statement by the debtor and the debtor's attorney that the statement is true. Any party may object to the statement within 60 days after the debtor makes the disclosures required by § 521 of the Code (as expanded by §407 of the bill, discussed below), and if such an objection is made, the bankruptcy court is to determine the matter, with the debtor having the burden of proof.

Impact on Chapter 13. Finally, Subsection 101(6) of the bill sets out a provision unrelated to eliminating Chapter 7 relief for debtors with the defined "income available to pay creditors." This final change would impose on Chapter 13 trustees the additional responsibility of investigating and verifying the debtor's monthly net income, and filing annual reports with the court as to whether the debtor's plan should be modified because of changes in the debtor's net income.

The impact. Section 101 of the proposed bill would effect a major change in bankruptcy policy. That policy has traditionally allowed debtors in financial difficulty to obtain an immediate fresh start in exchange for surrendering their nonexempt assets. That policy is reflected in current § 707(b), which denies Chapter 7 relief only where this would be a "substantial abuse" of the provisions of Chapter 7, and which provides that there is a presumption in favor of granting the relief sought by the debtor. The proposal would change this, denying an immediate fresh start to a significant category of debtors in genuine financial difficulty if they have enough income to pay a specified portion of their debt. Thus, at a given income level, those who have accumulated relatively small amounts of debt can be denied Chapter 7 relief, while those who have accumulated relatively large amounts remain eligible. It can be anticipated that this change would decrease the number of Chapter 7 bankruptcies, with an increase in Chapter 13 cases or in nonbankruptcy resolutions of consumer debts. This may lead to greater payments to creditors. But such a major change in bankruptcy policy may have consequences beyond those that might be anticipated. For example, at the present time, many debtors are able to avoid bankruptcy by working out voluntary arrangements with creditors through credit counseling services. The willingness of creditors to cooperate in such voluntary arrangements may be influenced by the fact that the debtors otherwise have the option of Chapter 7 bankruptcy. If that option is removed, the creditors may be less willing to enter into the voluntary arrangements. The change may also have an impact on home foreclosure rates, since debtors now able to remove other debt in Chapter 7 would be denied that option, and may be ineligible for Chapter 13 or unable to complete a Chapter 13 plan.

There are also two features of the proposal, respecting median income, that may have effects different from those intended. Median household income, varying with size of the household, is used in the proposal to establish a threshold below which there is no need to examine income on an individualized basis&emdash;an individual whose total household income is less than 75% of the median income for a household of the same size would not be disqualified from Chapter 7 relief regardless of the household expenses. The first difficulty with the proposal in this respect is that it requires the use of outdated information. For any given year, the proposal states that household income is based on the most recent Census Bureau figures available as of January 1. As of January 1 of any year, the Census only has information available for the second year before that date. Thus, 1996 income figures are presently the most recent. In this way, the threshold under the proposal compares a debtor's current income to the median income that existed up to two years earlier. In times of high inflation, this would greatly increase the number of cases subject to individual scrutiny. (Similarly, the six-month average used to determine the debtor's current income will result in an artificially high income figure whenever the debtor's income has declined shortly before the bankruptcy filing.)

The second problem has to do with household size. The proposal apparently employs median household income, varying with the size of the household, in order to allow a larger threshold income for larger households. In reality, however, median household income changes erratically with household size. The median income for a single individual (in 1996, the last year for which Census Bureau figures are currently available) was $18,426, so that any single individual earning over $13,819.50 would be subject to individualized scrutiny under the proposal. This is only about $4,500 more than the federal poverty level of $9,260. But median income for a household of two was $39,039, producing a threshold for scrutiny, under the proposed bill, of $29,279.25, more than twice the poverty level of $12,480. The median income continues to increase with household size for households of three and four persons, but household income decreases for families of five and six persons. The median family income for a household of six persons was $44,782 in 1996&emdash;less than the median income for a family of three&emdash;which would result in a threshold for scrutiny, under the proposed bill, of $33,586.50, compared to a poverty level of $25,360. Thus, for single individuals and individuals in large households, the bill is much more likely to require individualized scrutiny than for individuals in households of two to four persons. (Income figures are drawn from U.S. Bureau of the Census, P60-197, Money Income in the United States: 1996, Table 1 (1997). Poverty figures are from the Annual Update of the HHS Poverty Guidelines, 63 Fed.Reg. 9235 (1998).)

Beyond these policy considerations, there are four practical impacts that can be anticipated:

(1) A substantial burden would be placed on the Internal Revenue Service to create standard levels of expense for each distinct economic area in the country, and to keep these standards updated. Such determinations by the IRS will likely require formal rulemaking procedures; the definition of "rule" in the Administrative Procedure Act, 5 U.S. C. § 551(5), includes "an agency statement of general . . . applicability and future effect designed to implement . . . law or policy." In any event, the IRS would be required to establish standard expense levels for house-holds of varying size in each discrete economic area of the country. This would be a particular problem with respect to housing expenses. The bill excludes secured debt payment from projected monthly net income, and so mortgage payments are auto-matically deducted from income available to pay creditors, even if the mortgage payments are much higher than average for the community in which the debtor resides. However, rental payments are not secured debt, and so would only be excluded to the extent that they were part of the standard levels of expense establish-ed by the IRS. Rental expenses vary widely from community to community within a metropolitan area. Unless different expense figures for housing were created for each distinct housing area, the impact of the proposal could be to require all debtors in higher than average rental communities to declare and prove "extraordinary" expenses. Moreover, even if the housing expenses established by the IRS were very detailed, there would remain questions concerning the extent to which bankruptcy courts should allow as "extraordinary expenses" rental payments at a level higher than that determined by the IRS.

(2) An increased burden would be placed on bankruptcy professionals. The proposal requires Chapter 7 trustees to investigate and report on the debtor's net income in each Chapter 7 case. The vast majority of Chapter 7 cases involve no assets for distribution to creditors, and hence only a nominal fee for the trustee. The new investigation and report will substantially add to the work required of trustees in no-asset cases, with no provision for additional compensation. (The investigation and reporting requirements for Chapter 13 would increase the costs of the Chapter 13 trustee, reducing the portion of plan contributions available to creditors.) Similarly, the proposal requires debtors' counsel to swear to the accuracy of any extraordinary expenses claimed by a Chapter 7 debtor. Unless this oath is simply based on the statement of the debtor (in which case it would add nothing to the debtor's oath), this requirement would impose on debtors' counsel the obligation of independently verifying all of the extraordinary expenses claimed by the debtor, thus increasing the cost of the bankruptcy and the time required to file the case.

(3) The proposal would lead to increased "bankruptcy planning by some sophisticated debtors." The formula employed for determining net monthly income is subject to manipulation. Most obviously, because secured debt is excluded from projected monthly net income, a debtor can reduce the income available to pay debts simply by taking on additional secured debt. For example, assume that a debtor with $30,000 in unsecured, nonpriority debt owns a three-year old car with no outstanding car loan, and that the debtor has $300 in monthly net income as defined in the proposed bill. Over five years, that income would total $18,000, well over 20% of the unsecured debt. However, if the debtor trades in the three-year old car for a new one, and finances $12,000 for three years at 5% interest, the debtor will need to make payments on the secured car loan of about $13,000, reducing the total "net income" over the five years after filing to about $5000, less than 20% of the unsecured debt. Similarly, a debtor with projected income that is slightly over 20% of outstanding unsecured debt could increase the amount of that debt to arrive at a point where disposable income is less than 20%. Finally, debtors may be able to manipulate income, by terminating second jobs, reducing hours, or changing employment.

(4) The proposal would lead to greater court involvement in Chapter 7 cases -- cases which now rarely go before a judge. The court will be required to hear any disputes regarding extraordinary income, as well as any questions of good faith arising out of the kind of bankruptcy planning discussed above. These hearings will generate additional expense for the courts and the parties involved in them.

Alternatives. The Bankruptcy Code has limited the availability of Chapter 7 relief in situations of improperly incurred debt by creating exceptions to discharge in Chapter 7. To obtain relief from the improperly incurred debt, the debtor is then required to complete a Chapter 13 plan. Rather than making Chapter 7 relief unavailable to a large class of debtors (many of whom will have incurred their debt in good faith), it may be preferable to define the type of debt (such as excessive credit card debt) that is improper, and make that debt nondischargeable in Chapter 7, regardless of the disposable income currently available to the debtor. Alternatively, if there are to be thresholds for denial of Chapter 7 relief based on household income, those thresholds should be based on some formula (such as a multiple of poverty level) that is not tied to median household income.

§102 ("Adequate income shall be committed to a plan that pays unsecured creditors") (see H.R. 2500, § 102).

The changes. Section 102 of H.R. 2500 proposes essentially two major changes in the operation of Chapter 13.

Plan length. First, §102 imposes an increased minimum plan length for most debtors. Instead of the current three-year minimum, the proposed legislation provides that, if the debtor's total income is 75% or more of the national medium income, based on household size, the debtor's plan must have a duration of at least five years. If the debtor's total income is less than 75% of the national medium income, the three year minimum is retained. (These provisions are elaborated in §410 of the proposed bill which sets out maximum plan lengths of two years in addition to the minimum plan length set forth here.)

Minimum payments to unsecured creditors. The second major change proposed by §102 replaces the current "disposable income test" of Chapter 13 with a two-part formula requiring minimum payments on unsecured nonpriority debt. Under the first part of the formula, the plan must provide for payments of at least $50 per month to unsecured nonpriority creditors who are not insiders. The second part of the formula defines "monthly net income" for purposes of a Chapter 13 plan, and creates a mechanism for requiring that "the total amount of monthly net income" is paid to unsecured nonpriority creditors during the minimum plan period, less only expenses of administering the case.

The definition of "monthly net income" created by §102 is similar to "projected monthly net income" established under §101&emdash;it starts with total monthly income and deducts standard expense allowances to be determined by the Internal Revenue Service, with the potential for adjustment if the debtor has extraordinary expenses or loss of income. In contrast to §102 of H.R. 2500, secured debt and priority debt are also deducted from net income.

To assure that all monthly net income is paid through a plan to unsecured nonpriority creditors (and administrative claimants), §102 requires that the debtor itemize extraordinary expenses or loss of income in a statement sworn to by the debtor and the debtor's attorney. The debtor's statement of extraordinary expenses could be challenged by objection, and the prevailing party in a hearing on the objection could be awarded fees and costs. If the debtor files such a statement, the statement must be refiled, to reflect current conditions, no less than annually during the duration of the plan. All Chapter 13 plans would also be required to provide that future net monthly income will be paid as reasonably determined by the Chapter 13 trustee, with at least annual reviews to determine whether net income has increased or decreased. [This last provision is inconsistent with §101 of the proposed bill. As noted above, §101 imposes a duty of the Chapter 13 trustee to report annually to the court as to whether any increases or decreases in the debtor's net income should result in modification of the debtor's plan. Under the terms of §102, increases or decreases in the debtor's net income, as determined by the trustee, would automatically result in changes in payments to creditors, without plan modification.]

The impact. Three substantial impacts that can be anticipated as a result of the changes made in §102 of the bill:

Plan length. The new five-year minimum plan length would be arbitrarily imposed, depending on size of household. This new plan length is required whenever the debtor's household income is at least 75% of the median household income determined by the Census Bureau, according to the number of persons in the debtor's household. As discussed above, in connection with §101, median income varies erratically with the number of persons in the household. Single individuals would be required, using currently available census figures, to propose a five-year minimum plan whenever their gross annual income was at least $13,819.50, but the trigger point for a married couple would be $29,279.25. Individuals in a household of four would not face the five-year minimum until their household income reached $40,278; but in a household of six, the five-year minimum would be triggered by income of $33,586.50.

Where the five-year minimum plan length is imposed, it may increase payments to general unsecured creditors; however, the longer length can be expected to increase the number of cases that fail for default in payment. A five-year minimum term may also have the effect of discouraging any Chapter 13 filing, giving debtors additional incentive for prebankruptcy planning to meet the proposed new filing requirements for Chapter 7. As discussed above in connection with §101, these limitations may be met by increasing debt and decreasing income prior to filing.

The substitution of "net income" for "disposable" income. Current law requires Chapter 13 debtors to contribute all of their disposable income to the Chapter 13 plan, and, after payment of secured and priority claims, this income would be used to pay general unsecured creditors. Disposable income is very generally defined in the Code (§1325(b)(2)), and courts have varied in their inter-pretation. The proposed change would require that all of a debtor's "net" income be used to pay general unsecured creditors. Because secured priority claims are deducted from the calculation of net income, the principal difference introduced by the proposed legislation is that standard expense allowances would be deter-mined, in the first instance, by the IRS&emdash;rather than by the courts&emdash;subject to individ-ual-ized exceptions, reviewed annually. This process could reduce the arbitrariness associated with the disposable income test; for this reason, some use of general guidelines for determining appropriate levels of Chapter 13 plan contributions has been recom-mended by the National Bankruptcy Review Commission. National Bankr. Review Comm'n, Bankruptcy: The Next Twenty Years 262-73 (1997) ("Final Report"). However, the process of IRS rule-making, followed by individual determinations of exceptions, will involve substantial cost, as noted in the discussion of §101, above.

Minimum monthly payments of $50 to general unsecured claims of noninsiders. The $50 minimum payment to general unsecured creditors, proposed by §102, applies to all Chapter 13 debtors, even those who have no net income, or less than $50 in net income. This minimum payment may make Chapter 13 unavailable, or at least discourage its use, by lower income debtors.

The situation of low or nonexistent net income is common in Chapter 13&emdash;for example, debtors emerging from a divorce may have very great difficulty in making both required support payments and mortgage payments. In order to save their homes or automobiles, Chapter 13 debtors are often willing to attempt to live on substantially less than what would be considered as an appropriate level of expense for necessities. Plans proposing food budgets of $100 for a family of four are not uncommon, with all or almost all of the plan payments going to secured or priority creditors. The $50 minimum for unsecured debt may render such marginal plans completely impossible.

A second problem exists for lower income debtors who owe unsecured debts both to family members and others. Section 102 would require that the first $50 of every monthly payment go to the nonfamily members (since family members are insiders). The $50 minimum thus provides substantial incentive for debtors with low net income to choose Chapter 7, where all of their debts will be discharged, so that they can repay debts owing to family members voluntarily.

Alternative. As suggested by the National Bankruptcy Review Commission, the objective of obtaining payment for general unsecured creditors might be advanced by requiring that payments proposed for general unsecured claims in a Chapter 13 plan be made in equal installments throughout the plan, rather than paid only after secured and priority claims. See Final Report at 262.

§103 ("Definition of inappropriate use") (see H.R. 2500, §115; S. 1301, §102)

The changes. This section makes five changes to §707(b) of the Bankruptcy Code. Section 707(b) currently allows for dismissal of Chapter 7 cases that are a "substantial abuse" of the provisions of Chapter 7. Section 103 of H.R. 3150 would change the operative term from "substantial abuse" to "inappropriate use." Next, the section would require a finding of "inappropriate use" if the debtor is disqualified from Chapter 7 filing by the "ability to pay" provisions of §101, discussed above, or if "the totality of circumstances of the debtor's financial situation demonstrates such inappropriate use." The third change made by this section would be allowing creditors and Chapter 7 trustees to bring motions to dismiss Chapter 7 cases based on substantial abuse. Currently motions under §707(b) can only be brought by the United States Trustee or the court. Fourth, the section would allow conversion to Chapter 13, with the debtor's consent, as an alternative to dismissal of the bankruptcy case. Finally, the section would allow the court to award fees and costs against a creditor who brought a motion seeking dismissal for substantial abuse, upon a finding by the court that the allegations of the motion were unsubstantiated.

The impact. The proposed changes principally provide a means of enforcing the limitation on Chapter 7 relief proposed in §101 of the proposed bill. Current law limits the right to bring § 707(b) motions based on the understanding that debtors should generally be able to choose to obtain an immediate fresh start when they are in financial difficulty, and this understanding would be changed by §101, as discussed above. If creditors are allowed to bring motions for substantial abuse, the fee shifting provision may help to reduce creditor motions brought merely to exert leverage on debtors. Just as current law does not define "substantial abuse," the proposed change would retain a large degree of discretion by allowing courts to grant relief based on the "totality of circumstances." The option of conversion to Chapter 13 would usually exist under present law, pursuant to §706(a), which generally gives a Chapter 7 debtor the option of converting the case to Chapter 13 "at any time."

Subtitle B ("Adequate Protections for Consumers")

§111 ("Notice of alternatives") (see H.R. 2500, §103; S. 1301, §301).

The changes. The major change involved in §111 is to assure that each consumer bankruptcy debtor is given a written notice that both discusses the option of consumer credit counseling and lists credit counseling services with offices in the district in which the bankruptcy is filed. The list would be prescribed by the United States Trustee and questions about whether a particular counseling service should be included in the list would be determined by the court.

The impact. This proposal can result in relevant information being made available to debtors, although it is likely that debtors consulting an attorney will place more weight on the attorney's advice than on the information in a form given to them by the attorney. The proposal will probably have the greatest impact on pro se filers. Difficulties may exist in describing the services available from credit counselors, at least if the description includes any comparison of credit counseling and bankruptcy in satisfying debt or in maintaining or reestablishing credit. The need to administer the list of credit counselors will involve some additional cost to the United States Trustee.

§112 ("Debtor Financial Management Training Test Program") (new)

The changes. This section of H.R. 3150 would require the Executive Office of the United States Trustee (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 con-clusion of the evaluation. The test program is to 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.

The impact. Debtor financial education was a recommendation of the National Bankruptcy Review Commission, but the Commission did not recommend any methodology for implementing it. See Final Report at 114-16. There are two potential problems with the methodology suggested here. First, one year may not be a long enough time to assess the effectiveness of any program. Success in financial management would be indicated by such factors as completion of a Chapter 13 plan, ability to reestablish high quality credit, and (most importantly) avoidance of further financial overspending. None of these bench marks can be assessed after one year. Second, the power to compel debtor education as a condition for discharge is accorded without specifying the circumstances in which it should be exercised, with the potential for widely varying application. Some judges might require debtor education in all consumer cases, while others never require it. Compulsory education in pilot districts also would be subject to constitutional challenge, as nonuniform bankruptcy legislation. See Railway Labor Executives' Assn. v. Gibbons, 455 U.S. 457, 469-71 (1982) (invalidating bankruptcy legislation that applied to a single railroad).

Alternatives. A study could be conducted of the effectiveness of the existing debtor education programs, based on their past experience. Compulsory education should be imposed only after an education program is available nationwide, and should be imposed only in situations defined by law.

§113 ("Definitions") (new)

§114 ("Disclosures") (new)

§115 ("Debtor's Bill of Rights") (new)

§116 ("Enforcement") (new)

The changes. These four sections of H.R. 3150 set up a new system for regulating the providers of consumer bankruptcy services. Section 113 defines the term "debt relief counseling agency" to include both lawyers and non-lawyer providers of consumer bankruptcy goods or services, and the remaining sections establish regulations bearing on these providers. Section 114 would place a new §526 in the Bankruptcy Code, imposing a set of disclosure obligations on consumer bankruptcy providers. The disclosure would include (1) the availability of consumer credit counseling services, (2) the need for a truthful listing of assets and income in bankruptcy, subject to audit and criminal sanctions, (3) the obligation of the provider to issue a contract specifying the services that will be provided and their cost, together with a specification of the services that might be needed, and (4) directions on how to complete bankruptcy schedules. Copies of the first two of these notices would be required to be maintained by the provider for two years after the notice is given, or two years after a discharge is received, whichever is longer.

Section 115 would add a new §527 to the Code, with further regulation of consumer bankruptcy providers. It would require a written contract for bankruptcy-related services, with a copy for the client, and specify that the advertising of consumer bankruptcy providers include a conspicuous disclosure that they are engaged in bankruptcy filing. Finally the section would prohibit consumer bankruptcy providers from (1) failing to perform promised services, (2) negligently making or counseling to be made any false statement in a bankruptcy filing, (3) misrepresenting the services to be provided, or the benefits or detriments of bankruptcy, and (4) advising the incurring of debt to pay for bankruptcy related services.

Section 116 would enforce the new regulations on consumer bankruptcy providers. It provides debtors may not waive the provisions of "section 526" and that contracts not complying with "section 526" are void. [This is apparently a drafting error, since proposed §526 governs notices, while proposed §527 governs the content of contracts and the performance of services on behalf of debtors. ] The section would further impose sanctions on consumer bankruptcy providers who engage in prohibited conduct. There is a mandatory sanction of loss of all fees previously paid by the debtor, and a potential sanction of being required to continue the representation of the debtor without further fees. The prohibited activities include intentional or negligent failure to comply with any applicable requirement of the Code or the Federal Rules of Bankruptcy Procedure applicable to consumer bankruptcy providers, and providing assistance to a debtor whose case is dismissed or converted under §707(b), or dismissed for failure to file bankruptcy papers. The section would allow enforcement of the provisions of §526 by officials of state government, in either federal or state court, with actual damages awarded to the debtors affected, and with the consumer bankruptcy provider required to pay the costs and fees of any successful enforcement action. Finally, the section specifies that its provisions do not supersede any state regulation of consumer bankruptcy services except to the extent of any inconsistency.

The impact. It is questionable whether the proposed regulation would have any significant positive impact on the provision of bankruptcy services. The likely impact of the new regulations imposed by H.R. 3150 on the providers of consumer bankruptcy services can be divided into three classes.

First, some of the requirements merely reiterate existing obligations or good practices. In this category are the obligations (1) to provide written contracts specifying the services to be performed and their cost and (2) to perform the promised services. (Fees and services of petition preparers and attorneys are presently regulated by §§ 110, 329, and 330 of the Code.)

Second, some of the requirements appear to impose unnecessary costs on the providers. For example, the requirement to retain copies of each notice provided to a client or prospective client for at least two years involves substantial cost with no apparent benefit. Similarly, the requirement of "conspicuous notices" in all advertisements would impose unnecessary costs in connection with classified advertisements and telephone directories.

Third, some of the regulations may have a chilling effect on the provision of consumer bankruptcy services. For example, the automatic denial of fees in any case dismissed under §707(b) can be expected to discourage attorneys from filing Chapter 7 cases in situations where eligibility for Chapter 7 relief was questionable. Similar-ly, automatic denial of fees in cases dismissed for failure to file documents may discourage attorneys from filing cases whenever the debtor's ability to produce documents is doubtful. Finally, the provision that a provider may never counsel borrowing to pay for bankruptcy fees is overbroad, prohibiting appropriate advice necessary to permit a bankruptcy filing. While a debtor should never be counseled to borrow money fraudulently, with the intent of discharging the debt, it may be entirely appropriate to enter into a secured loan for the purposes of financing a bankruptcy filing, and a loan from a friend or relative (intended to be repaid despite the discharge) may also be proper.

Alternative. Where it is found that providers of consumer bankruptcy services are engaged in specific misconduct that is not adequately addressed by existing law, the current provisions of the Code can be amended to sanction that misconduct. For example, if it is found that bankruptcy providers are misrepresenting their services as not involving bankruptcy, that misconduct could be specified as a ground for refund of fees under §329 of the Code (with punitive damages, if appropriate).

Subtitle C ("Adequate Protections for Secured Lenders").

§121 ("Discouraging bad faith repeat filings") (see H.R. 2500, §109; S. 1301, §303).

The changes. This section provides (1) that the automatic stay will terminate after 30 days in cases of repeated bankruptcy filings within one year, unless a party in interest demonstrates that the filing of the later case was in good faith, and (2) that the bankruptcy court have discretion to enter orders granting relief from the stay "in rem," providing that the automatic stay will not apply in subsequent cases filed by the same debtor or in cases filed by other parties with specified knowledge of the order.

The impact. The role of the automatic stay differs substantially in Chapter 7 and in Chapter 13. In Chapter 7, the stay has the effect of allowing a trustee to determine whether property of the debtor should be liquidated for the benefit of creditors. For example, a home that is about to be sold in a foreclosure sale, might, in the trustee's judgment, be able to be sold by a broker for a higher price, sufficient to pay the mortgage and have a surplus for distribution to unsecured creditors. The automatic stay prevents a foreclosure from taking place in a situation like this, while allowing the mortgagee to seek relief from the stay by showing that there is in fact no equity in the property. In Chapter 13, the automatic stay has the effect of allowing a debtor to propose and carry out a plan that deals with secured claims in such a way that the debtor is allowed to retain the collateral, even if there is no equity. A debtor who has no ability to deal with a secured claim properly in Chapter 13 may nevertheless file repeated bankruptcy cases in order to prevent a foreclosure or repossession from going forward, by invoking the automatic stay repeatedly. The proposal seeks to limit debtors' ability to use this tactic, and many of its features would be helpful. However, the proposed changes do not reflect the different roles that the automatic stay plays in Chapter 7 and Chapter 13, and thus may have unintended consequences.

In Chapter 7 cases, regardless of whether there was a prior case, the issue involved in application of the automatic stay should be limited to the question of equity. To allow the automatic stay to remain in effect, a Chapter 7 trustee should simply be required to show that there is equity in the property at issue; the good faith of the debtor in filing the case is not relevant. To see the problem with the proposal in this connection, consider the following example: a debtor with limited income has taken out a home equity loan on the family home, and cannot keep up with the payments. The lender files a foreclosure action, and the debtor seeks to save the home in Chapter 13, but fails to make plan payments, so that the bankruptcy case is dismissed and the foreclosure action is recommenced. This time, again to stop the foreclosure, the debtor files a Chapter 7 case. There is considerable equity in the home. Under the proposal, there is a presumption (since the debtor failed to make plan payments) that the second case is filed in bad faith, and if the Chapter 7 trustee wants to keep the automatic stay in effect beyond 30 days, the proposal would require the trustee to establish, by clear and convincing evidence, that the case was filed in good faith. If the trustee is unable to do so, the foreclosure will go forward, and the estate will lose the higher value that could have been obtained in a brokered sale.

On the other hand, the good faith standards set out in the proposal are reasonably applicable to Chapter 13 cases, requiring that the debtor establish good faith for repeatedly invoking the automatic stay.

The impact of the "in rem" provision is difficult to determine, because no standards are set out for the entry of in rem orders. These orders would be most appropriate as applied to property in which there was no equity, and as to which there had been a pattern of bankruptcy filings. In such situations, the orders could help to prevent debtor abuse. In other situations, the orders might again prevent sales by Chapter 7 trustees to the benefit of unsecured creditors. Also, the proposal does not state whether the court would be authorized to vacate an in rem order in a subsequent case upon a showing that the case was filed in good faith. Absent such specification, there may substantial litigation to determine the issue.

Alternatives. The 30-day termination of the automatic stay should be postponed in Chapter 7 cases upon a request by the trustee for a hearing on the question of equity. In rem orders for relief from stay should be limited to situations in which there is no equity in the property and in which the property has been the subject of more than one bankruptcy filing.

§122 ("Definition of household goods and antiques") (see H.R. 2500, §119).

The changes. The proposed legislation would add a definition for "household goods" to the definitions of §101 of the Code. "Household goods" are a category of debtors' assets that may be exempted under §522(d), and as to which certain liens may be avoided under § 522(f). The proposal would define "household goods" by incorporating the definition that appears in 16 C.F.R. § 444.1(i). That regulation of the Federal Trade Commission defines "household goods" as:

Clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of the consumer and his or her dependents, provided that the following are not included within the scope of the term "household goods": (1) Works of art; (2) Electronic entertainment equipment (except one television and one radio); (3) Items a