Home News RoomBankruptcy Research CenterBankruptcy Reports, Research and Testimony ABI Testimony

Report from the
ABI CONSUMER BANKRUPTCY REFORM FORUM

• GROUP IChapter 13: Disposable Income, Valuation, Interest Rates, Lien Stripping
  Moderator: Prof. Richard Flint
• GROUP IISerial Filings, Conversion & Dismissal, "Needs Test," Sanctions
  Moderator: Prof. Veryl Miles
• GROUP IIIReaffirmation, Redemption, Exemptions, Pre-bankrutpcy planning
  Moderator: Prof. Jeffrey Morris

Copyright © 1997, American Bankruptcy Institute

GROUP I--Professor Richard Flint, Moderator

General ObservationsIn an off-the-record format such as the ABI provided, the various creditor and debtor groups showed a spirit of cooperation based upon a genuine awareness of each respective group's concerns and their respective suggestions for change. Although the arrival of a 100 % consensus will never be reached, it is my opinion that agreement can be reached on significant aspects of bankruptcy reform. Any agreement will in large part be driven by the simple fact that each side can live with some of the changes suggested by the other in return for acceptance of some of the changes advocated by the other side. Each of the respective interests will, however, continue to publicly voice some objection to changes which are perceived to adversely affect their respective interest group.

On many of the issues there was a general desire by the parties to maintain the status quo. There was substantial concern with congressional tinkering of some provisions either in light of their relative insignificance in the overall picture (for example, although a majority felt that 523(a) could be amended to eliminate most of the exceptions to discharge following 523 (a)(6), few saw the need, in light of the fact that such debts were rarely involved), the political realities, or the lack of substantial statistical data verifying an actual problem.

Problems and Suggested Solutions in Chapter 13 Cases

The first issue my groups addressed was whether the concept of disposable income needed to be more clearly articulated in the Code. Although many of the participants were satisfied, or had at least grown accustomed to the positions taken in their respective districts concerning what could or could not be considered a valid expense, the participants agreed that some guidance was needed, especially in the area of tithing and repayment of loans to a debtor's pension plan. However, even in these areas, the participants noted that the primary issue was how far did Congress or the courts want to intrude upon the lifestyles of debtors. Many unsecured creditor representatives felt that the debtors had given up their right to maintain a particular lifestyle by filing and that permissible expenses need to be spelled out. On the other hand, debtor representatives noted that if Congress statutorily prohibited tithing (or any other expense), that debtors would still tithe, and just cut back elsewhere on approved projected expenses. Such action, they argued, would lead to an increased number of failures in Chapter 13 cases. It was generally agreed that a prohibition concerning the repayment of loans to pension plans would raise serious tax consequences under the current IRS Code, which would have the effect of reducing disposable income and overall plan feasibility. The majority (including judges) felt that using a template for allowable expense (whether Department of Labor or IRS) would not be fruitful because of the need for the creation of a multitude of such templates for the various districts.

It was also suggested by some that the disposable income problem was not the real issue. The real issue was whether the debtor should be required to make payments (and if so, how much in real dollars or as a percentage) to unsecured creditors (or to just otherwise nondischargeable creditors) in order to receive a superdischarge. Once this fundamental issue is determined, the problem of disposable income could become moot. For example, if a debtor is required to make some payment to these creditors, the plan could be extended to provide for it regardless of the definition of disposable income.

One suggestion, not universally discussed, was an additional requirement that amended schedules I and J (income and expense) be filed annually on the anniversary date of confirmation. The parties in interest would receive copies. Then the trustee, the debtor, or a party in interest could move for a modification. Debtors' lawyers raised three concerns to this proposal. First, they wanted to make sure that they could receive attorneys' fees for such work (of course, this would reduce the amount of disposable income). They also raised the concern that debtors would view this burden as an additional reason not to file Chapter 13. Finally, debtors' attorneys felt that such a requirement of relying upon actual as opposed to projected disposable income would operate as a disincentive to a debtor to work harder to better himself if all the increase went to creditors. Although creditors rejected this argument out of hand, there was consensus that not all the increased disposable income should go to creditors.

The Proper Role of Chapter 13

Most participants agreed that Chapter 13 was being used primarily as a device to restructure secured debt--whether directly through lien stripping, or indirectly through curing arrearages in home mortgages. In such situations, unsecured debt payments are clearly viewed as a secondary concern to the debtor (although clearly a primary point of concern to the unsecured lenders). Is there an obligation to repay any of the unsecured debt in a Chapter 13? Debtors' lawyers asserted that the incentive to file Chapter 13 would disappear in many cases if unsecured debt repayment became a condition. Unsecured lenders countered that if restructuring of secured debt was the motivation factor for most Chapter 13 cases, requiring some repayment to unsecured debtors should not in and of itself inhibit the filing of a Chapter 13 case (although it may lead to many plans becoming unfeasible).

Debtors' lawyers expressed concern about tying the superdischarge to payments to otherwise nondischargeable debts. One proposal was that every Chapter 13 debtor receive the same discharge as the Chapter 7 debtor; for superdischarge, the debtor would be required to file a motion with the court upon the completion of the plan requesting a superdischarge. The court upon notice and hearing would then be required to make a determination of whether the debtor had operated in good faith during the life of the plan (for example, one element might be whether the debtor advised the trustee of increases in income). However, debtors' lawyers objected to this concept. First, was the cost issue for the debtor. Second, they raised the issue of whether there would be a sufficient incentive for the debtor to file Chapter 13 and comply with the terms of a confirmed plan based upon the mere possibility of receiving a superdischarge following completion of the plan. This approach might be an effective way to deal with the abuse of the high wage earner in Chapter 13--if the court determines that good faith has not been established because he has made no payments to an otherwise nondischargeable debt, the judge could order that the debtor continue to pay disposable income into the plan for an additional period of time.

Valuation and Interest Rates

There was not real consensus of what the valuation determination should be based upon, but a near consensus felt that the Code (or the Supreme Court) should provide a clear answer. The judges were generally critical of valuation hearings as a waste of resources and that the parties themselves ought to be able to reach an agreement--and in fact, the judges noted in most cases do reach an agreement based upon the previous position of the respective judges. Many, if not a majority of all participants liked the idea of typing the presumptive value of cars to a regional average between wholesale and retail price as published in the NADA book. Such valuation could be rebutted on a showing that the car was poorly maintained, etc. (Again debtors' attorneys wanted the type of evidence necessary to rebut the presumption to be detailed in the Code). Debtors' lawyers pointed out that creditors in some area often just auction these cars off and therefore wholesale was a better measure. In the area of other personalty, a suggestion was made in one session for a depreciated value based upon given template (for example, 10-20% a year). A consensus also agreed that the statute ought to provide the interest rate, although no consensus existed on the rate. One Chapter 13 trustee advocated a fixed rate; however, others felt that the rate should be tied to some standard (T-bill plus some fixed increment) in order to prevent the need for statutory amended in later years. A near consensus felt Rake ought to be overruled.

Lien stripping

The general consensus was that if the creditor had exercised the right to repossess prior to bankruptcy, the stripped valuation would be all the creditor would have received and the unsecured portion would be discharged in a Chapter 7. There was support among creditors for a presumption to be built into the Code that lien stripping should not be permitted in the case of newly purchased personalty (90-180 days prior to filing). Debtors' lawyers countered that this be a rebuttable presumption based on some clearly definable objective standard. It was also pointed out that crafty debtors would just wait the period out.

In the case of real property, a consensus was reached that purchase money liens on the homestead itself should not be stripped (this agreement may have been the result of a political reality). In the area of second liens some serious disagreement arose. Although there was talk of the growing secondary market in this area, debtors' lawyers raised serious concern about the unscrupulous "home improvement" industry (high interest and shoddy work). The availability of legal action other than lien stripping in bankruptcy was not considered by debtors' lawyers to be a feasible alternative. There appeared to be some agreement that to the extent that the second lien was not tied to improvements to the house itself or taxes--a second mortgage to consolidate credit card debt--that the second lien should be permitted to be stripped; beyond that there was serious disagreement.

Discharge and Dischargeability

The questions of what debts should be discharged was discussed. There was unanimity that no more debts be added to the growing list of nondischargeable debts. Although a majority felt that debts listed past 523(a)(6) be eliminated [the essence of (a)(15) could be incorporated into (a)(5) and the DUI and DWI exception could be carried over into (a)(6)] there was general consensus that those debts were rarely involved in bankruptcy proceedings. One government official noted that all nondischargeable debts should be preserved, if only to give the general public some faith in the system (true wrongdoers can not escape debt by going into bankruptcy). With respect to credit cards, all agreed that the key is to stop the abuse. A credit card representative noted that less than 1% of accounts (although over 10% of dollar volume) end up in bankruptcy.

Assuming that the statistics show that the default rate on student loans was no greater prior to their becoming nondischargeable, a consensus felt that this exception should be eliminated. Furthermore, it was generally agreed that abuse in the student loan area could be successfully stemmed by other Code provisions. In Chapter 7, alleged abuse in student loans could present substantial abuse issues under 707(b). In Chapter 13, the abusive situation could be dealt with under the good faith provision for plan confirmation. The majority felt that even if student loans remain nondischargeable, that something was needed to eliminate the problems associated with trade schools and the like which provide no useful skills training. It was suggested that the hardship exception to nondischargeability needs to be clarified to ease the ability to discharge these types of student loans. Many felt that student loan dischargeability was not a bankruptcy issue but was one that needed to be dealt with more clearly in government guaranteeing procedures.

In the area of superdischarge, consensus was arrived at that 523(a)(5) debts should be nondischargeable (and clarification that costs and attorneys fees need to be included in the nondischargeability), but no agreement was reached as to what other debts should be nondischargeable.

GROUP II-- Professor Veryl Miles, Moderator

Serial Filings, Conversion and Dismissal, "Needs Test," and SanctionsWorkshop Group #1

This group discussed the "substantial abuse test" of §707(b). While there was some disagreement about whether §707(b) should be retained, there was general consensus that if the "substantial abuse test" is to be retained there needs to be a clarification of what "substantial abuse" constitutes because of the great disparity found in the case law. This group generally agreed that the term "substantial abuse" should not include the kinds of abusive conduct covered under the nondischargeability provisions of sections 523 and 727.

If the substantial abuse test is to be retained, it might cover those cases where it is clear that the debtor filing for Chapter 7 relief has the ability to pay all of his or her prepetition debts, or to address abuse by a debtor who is making serial filings. There was no consensus among the group about how to define the "ability to pay" that would clearly represent substantial abuse, but the group generally thought the test should be focused on high income debtors.

This group discussed serial filings under Chapter 13. There was general consensus that there are legitimate repeat filings under Chapter 13, and that the ability to refile should be preserved. The abuse in serial filings that the group agreed should be addressed are those filings where the debtor is simply refiling to invoke the protection of the automatic stay to forestall an inevitable foreclosure against property.

In order to address this abuse there was general consensus that some limitation on the automatic stay would be appropriate in refilings and that an expedited hearing on whether the automatic stay should be imposed or continued would also be necessary. There was no consensus about who should bear the burden of proof in the hearing to determine if automatic stay relief is warranted, or what the standard of proof should be in such cases. It was suggested that the limitation on the automatic stay might be in the form of an injunctive stay or that it be in the nature of a temporary stay.

It also was noted that in some cases of abuse one is dealing with different debtors filing Chapter 13 petitions that include the same property (i.e., several family members having title to the same property, or different transferees of the same property who are engaged in a fraudulent "interest splitting" scheme). In order to prevent such abuse, it was recommended that any order permitting relief from the stay should be in rem to cover the property in question and not just the particular debtor before the court.

Workshop Group #2

This group discussed the problems identified with serial filings. This group also agreed that the ability to make repeat filings under Chapter 13 should be preserved because there are many debtors who legitimately need another opportunity and that the abuse that needs to be addressed is perpetrated by debtors who are filing only to invoke the protection of the stay, with no real intention of performing under Chapter 13 or Chapter 7.

The suggested solution to this problem is to implement some kind of limitation of the automatic stay. There were several suggestions that this might be a stay of limited duration or that it be an injunctive stay. It also was agreed that there needs to be an expedited hearing on the imposition or continuation of stay protection. There was no consensus on what the debtor's burden should be at this hearing (i.e., good faith, feasibility, etc.). For the same reasons expressed by Group #1, the relief order issued in these cases needs to be available in rem as well as in personam to respond to the abuse involving the same property transferred to different debtors simply for the purpose of invoking the stay. With the interests of legitimate repeat filers in mind, several members of the group expressed concern that the expedited hearing not be too burdensome a process for the debtor.

This group briefly discussed the question of whether a Chapter 13 petition should automatically be dismissed if a debtor fails to make two consecutive payments or in the alternative that the stay be lifted if a debtor fails to make two consecutive payments on secured property. There was consensus that both of these suggested sanctions were too draconian and thus were rejected.

On the question of having a "needs-based test" to define substantial abuse under §707(b), this group expressed the view that debtors at certain high income levels who have an ability to pay their debts should not be in Chapter 7 but in Chapter 13. However, there was no agreement about what the appropriate income levels should be or how to determine what income levels constitute substantial abuse. There was a strong sentiment expressed by this group that programs designed to educate and provide counseling for Chapter 13 debtors should continue and be expanded nationwide.

Workshop Group #3

This group also discussed serial filings, and like the other groups agreed serial filings are not problematic per se. They identified the problem with serial filings occurs when the debtors are disingenuous and are making repeat filings only for automatic stay protection. Their suggested remedy to the problem was that in the case of a repeat filing by the same debtor there should be a rebuttable presumption for relief from the stay in favor of secured creditors with mortgages against the debtor's home or who hold purchases money security interests in a debtor's personal property. Under this presumption the debtor would bear the burden of proving that the repeat filing is made in good faith in order to continue the stay, perhaps at an expedited hearing.

To address the concern with abusive filings by different debtors of the same property that has been transferred between debtors to perpetuate a fraud, it was suggested that the term "serial filing" be defined to include cases of repeat filings involving the same property held by different debtors. In such cases, bankruptcy courts should be permitted to grant relief orders against the "property" where there is evidence of bad faith. It was suggested that such in rem orders could be recorded against the property, putting all future transferees on notice that the automatic stay had been lifted.

There was almost complete agreement that there is "substantial abuse" under §707(b) where a debtor has the "ability to pay all of his or her debts as they become due." However, there was no consensus about whether there should be a "substantial abuse" under §707(b) where the debtor can pay some percentage of his or her debts but not all of the debts. In this group as with the others, there was debate about the need to preserve a debtor's right to choose between Chapter 7 and Chapter 13 relief, and the alternative of creating a system that forces a debtor into Chapter 13. There was general agreement that §707(b) should not be limited to consumer debt.

Discharge and Dischargeability

Some urged that consideration of the "totality of the circumstances" needs to be explicitly added to the Code to require this consideration. There were two different views as to how this could be accomplished; some participants recommended that this requirement be explicitly stated in §523 (a)(2)(A). Others suggested that legislative commentary be added to make certain the judges are not basing their findings solely on a criminal fraud standard but also the totality of the circumstances. There was no consensus on whether such a standard would be workable.

It also was suggested by some participants that the process for requesting determinations of nondischargeability under this provision be done through a motion versus a complaint, to reduce the creditors' burden of bringing such actions. It was the general view of the group that there are really only a small percentage of cases that merit determinations of nondischargeability under this provision.

This group briefly discussed whether §523(a)(6) should specifically require a creditor to prove that a debtor actually and specifically intended to harm the creditor or the creditor's property. The consumer credit representatives did not have much experience with this provision and did not recommend any changes. The other participants did not suggest any changes either.

The question of whether a repeal or modification of §523 (a)(8) is necessary to make it easier for debtors to discharge student loans also was addressed. The group generally agreed that this is a political question to be addressed by Congress. However, there was a brief discussion of cases involving debtors who are victims of fraudulent trade school programs and who have received no benefit from the student loan. In such cases it was noted that these debtors need to have easier access before the courts to have a hearing for a determination of discharge due to "undue hardship," and that this might be accomplished by allowing them to do so through motion rather than by filing a complaint.

§523 (a)(15) was discussed briefly. The group did not offer any recommendations about how this provision might be improved. There was some discussion of the case law and it was noted that in cases where it is clear that both the debtor and ex-spouse are struggling to pay their debts after the divorce, the courts seem to uniformly discharge the property settlement/hold harmless agreement, and that the only reasonable course of relief for the ex-spouse is that he or she also file for bankruptcy relief. The participants agreed that this provision was clearly intended to address the high income debtors who are simply trying to avoid the property settlement obligation to their ex-spouse.

It was also suggested by some participants that Congress should take all marital debt issues out of the bankruptcy court and have them addressed by the divorce court. The group also recommended that there needs to be more initiatives and programs to educate the divorce law bar and judiciary about the impact of bankruptcy law on divorce.

On the question of the permissibility of pre-bankruptcy planning, the group generally agreed that as a matter of policy the Code should not explicitly permit pre-bankruptcy planning. The group felt that the way pre-bankruptcy planning is currently permitted and regulated by the courts is adequate. There was one participant who felt that pre-bankruptcy planning is very important for the low income debtor, and the Code should permit pre-bankruptcy planning and define permissible pre-bankruptcy planning in a manner that permits this debtor to maximize his or her exemptions through pre-bankruptcy conversions done in good faith.

This group expressed agreement that the Chapter 13 superdischarge is an important incentive to encourage Chapter 13 filings and should be retained. There was some concern expressed about the way the superdischarge permits abuse by debtors who have incurred liability for "willful and malicious injury" and debtors who have outstanding tax liabilities for which they have not filed a required return. The superdischarge permits a debtor to receive a discharge of these debts, and it was noted that as a matter of policy these kinds of debts should not be discharged. There were different suggestions about how these problems might be addressed. One suggestion was that the right to receive a superdischarge should be based on the debtor paying a certain percentage of unsecured debt under the plan; another suggestion was that the superdischarge be amended to exclude tax liabilities for taxes for which no return has been filed.

One participant did not agree with the suggestion that tax liabilities for which no return has been filed be excluded from the superdischarge because of the difficulty of reconstructing the actual tax liability for the low income debtor who has not kept good records to document income and expenses, and because it would severely affect the debtor's fresh start.

This group briefly discussed the issue of attorney's fees and sanctions. Although the group did not reach a consensus, it was noted that if nondischargeable debts were to include the creditors' attorney's fees expended in successfully prosecuting a nondischargeability action, it would encourage creditors who may be willing to expend far more than the amount of debt at issue to aggressively prosecute a case as a policy matter, to argue that they are entitled by statute to such excessive fees. On the issue of whether creditors should be sanctioned if they file unsuccessful dischargeability complaints, it was noted that §523(d) already provides for an award of attorney's fees where a creditor's position is not substantially justified. It was further noted that fees under §523(d) are not awarded until the conclusion of a trial on the dischargeability complaint, and it was suggested that a mechanism be created to provide for an earlier and more inexpensive determination of such baseless complaints, perhaps on motion by the debtor.

GROUP III--Professor Jeffrey Morris, Moderator

Redemption of Personal Property Subject to LiensThe right of redemption appears to be of little practical value to most consumer debtors. Chapter 13 is usually the choice selected when the debtor needs to retain property. Some defects in §521 were identified. Debtors' failure to perform their stated intention to redeem collateral under §521(b) was identified as a problem that enables debtors to retain property without making appropriate payments. It was also pointed out that any sanctions for failure to perform as stated should be limited to actions that are in the control of the debtor. This of course, would exclude reaffirmation which, by definition, requires the consent of the creditor as well as the debtor.

Exemptions and Prebankruptcy Planning

Again, not a consensus, but a general agreement was reached that it is proper for most personal property exemptions to be selected on a lump sum basis rather than according to discrete categories of property as is currently the case in §522(d) and a number of similar state exemption laws. The most significant exclusion from this lump sum limit (with its concomitant "spill over" which evens out the extent of exemptions for nonhomeowners and those whose home equity is very limited) is a debtor's interest in a pension fund or related asset such as an IRA account.

No consensus was reached regarding pensions and the like, but there was some general support for allowing the courts to evaluate a particular debtor's need for an exemption for the asset. It was recognized that these assets, to the extend that they truly are for the purpose of meeting a debtor's retirement needs, must be evaluated with the notion in mind that they must be sufficient to fund the retirement needs of the debtor.

There was only limited discussion of issues relating to prebankruptcy planning. No consensus was reached regarding bankruptcy law solutions to those issues.

Reaffirmation

There was consensus arrived at concerning creditor activity "outside" of the Bankruptcy Code reaffirmation system. These are reaffirmations that creditors obtain without any participation by the debtor's attorney or the court. They are not filed and are not legally enforceable, but significant concern was expressed that these agreements were being used by unscrupulous creditors to circumvent the bankruptcy system. There was a consensus that these agreements are improper. In response, it was suggested that a mechanism comparable or parallel to §110 (petition preparers) could be used to punish the wrongdoers and serve as an effective deterrent to future actions.

Discharge and Dischargeability

Although not a consensus, a very substantial majority concluded that the full panoply of nondischargeable debts set out in §523(a) should not be imported into Chapter 13. There was some ardent dissent on this point, but the group generally concluded that providing incentives for debtors to use Chapter 13 would improve recoveries for creditors holding the remaining "Chapter 13 nondischargeable debts" via a separate classification of those claims with an ability for the debtor to treat those claims more favorably than other claims that still are protected by §1325(a)(4). Furthermore, some participants noted that Chapter 13 is intended to help debtors shed oppressive debt, and any alteration of the Chapter 13 discharge scheme would defeat that purpose.

The discussion of these issues included repeated reference to the political realities of obtaining repeal of many/any of the current nondischargeable categories.

An attempt was made to identify solutions to the proper application of §523(a)(2), particularly as it applies to credit card debt. Most of the creditor participants agreed that an objective standard of a debtor's intent not to repay the obligation was appropriate. Debtor participants generally opposed a "weakening" of the fraud standard. The session concluded before any consensus, or even substantial agreement could be reached as to the proper test to apply in concluding whether any particular debt is not dischargeable under §523(a)(2).

The group engaged in extended discussions of a number of issues relative to §523(a)(2) that did not lead to any final resolution. Some of those discussions are described below:

1. Concern was expressed that some credit card companies use §523(a)(2) to coerce reaffirmation agreements. A suggestion was made to require heightened pleading requirements, but the limited time often available to the creditor's attorney may make this unrealistic.
2. A proposal was made to delete the reference in §523(a)(2)(C) to luxury goods and make that provision generally applicable to all credit extensions during a specific period prior to the commencement of the case. The charge incurred during the period would be presumptively nondischargeable.
3. One participant asserted that the difficulty posed by §523(a)(2) is already addressed in the market place and is reflected in the rates charged to borrowers. In response, it was argued that the rates are charged to those who pay, and the rates would be reduced to the extent that less debt was discharged in bankruptcy proceedings.