Summary and Report on Options
ABI CONSUMER BANKRUPTCY
REFORM FORUMMay 15, 1997
In January, the American Bankruptcy Institute sponsored the Consumer
Bankruptcy Reform Forum, a gathering of about 50 practitioners, judges,
academics and others representing the views of both debtors and
creditors. The Forum began a spirited dialogue on the existing problems
in consumer cases and helped create a framework for the identification
of areas for reform. From the outset, a goal has been to create a
process, rather than to produce a specific set of proposals. Throughout,
the focus has been on those areas where debtors and creditors could find
To continue the work initiated in January, the ABI established a
representative steering committee to focus on those issues where there
were possibilities of consensus. The steering committee, comprised of
Honorable William Brown, Ken Crone, Saul Eisen, Hank Hildebrand, Steve
Holiga, Richardo Kilpatrick, Gary Klein, Bob Mitsch, Prof. Jeff Morris,
Ike Shulman and Henry Sommer, met a number of times by telephone
conferences and at the National Bankruptcy Review Commission (NBRC)
meetings in furtherance of its stated goal. Through the efforts of the
steering committee, a number of issues were highlighted for review. The
issues were as follows: Default Discharge, chapter 13 Superdischarge,
Credit Report Forum, Repeat Filings, Disposable Income, Treatment of
Rent-to-Own Contracts and Stripdown of Mortgages/Interest on Arrears.
The steering committee and sub-groups prepared and circulated specific
memorandums on each one of the issue areas.
The ABI forwarded to all original participants an invitation to
attend a meeting scheduled for May 15, 1997, to discuss the memos and to
continue the Forum's work.
The Forum's second meeting was held May 15, 1997, from 8:00 a.m. -
12:00 p.m., in conjunction with the ABI’s Annual Spring Meeting in
Washington D.C. Approximately fifty percent (50%) of the original
invitees from the January meeting attended the second meeting, along
with individuals who had come to Washington to attend either the ABI
Annual Spring Meeting or the National Bankruptcy Review Commission's May
meeting. The discussions in all areas were very active and lively.
This report was prepared by Professor Jeffrey Morris, Judge Eugene
Wedoff, Richardo Kilpatrick and Samuel J. Gerdano, ABI Executive
Director, to summarize the events as they transpired at the
Topic 1—Default Discharge Option for Failing chapter 13
Often when a debtor seeks chapter 13 relief, that debtor might have
qualified for a "no asset" chapter 7 discharge at the outset. If the
debtor elects a chapter 13 and the chapter 13 plan subsequently fails,
current law allows the debtor to voluntarily dismiss the case, elect to
convert the case, or the case is dismissed upon the motion of a party in
interest, usually the trustee. If the chapter 13 is dismissed, the
debtor receives no discharge. If the case is converted, the debtor
normally incurs additional attorney's fees and filing fees, must file
new schedules and statements and must attend a new meeting of creditors.
This is so even in a "no asset" case.
The existing system deprives many debtors of a discharge to which
they would have been entitled had they originally filed a chapter 7,
despite the fact that they attempted a repayment plan. This skews two
policies that Congress has articulated - (1) to encourage people to
attempt a repayment plan and (2) to provide debtors with a "fresh
The option below would improve current law in a number of ways.
First, it would provide a discharge for numerous chapter 13 debtors who
attempt but fail to complete payment plans to creditors, leaving them in
at least as good a position as those debtors who elect chapter 7 with no
payment to creditors. Second, because of the increased number of debtors
who will obtain such a discharge, the number of bankruptcy filings
nationwide will be reduced, since a certain portion of refilings to
obtain the discharge will not be necessary. Third, chapter 7
administrative costs will be avoided for "no asset" cases, thereby
increasing the efficiency of the system.
As under existing law, a debtor may elect to dismiss a chapter 13
case at any time, unless the case was previously converted to chapter 13
from another Chapter, in which case the debtor may seek court approval
of a dismissal.
In the event the debtor fails to comply with a confirmed chapter 13
Plan, the trustee or any other party in interest may file a noticed
motion to have the case closed. Upon motion to close, the moving party
(usually the trustee) must disclose, (1) whether the debtor would have
been entitled to a discharge of debts under Section 727 had the debtor
filed a chapter 7 petition, or (2) whether the debtor has met the "best
interest" test by repaying a sufficient amount to unsecured creditors
during the chapter 13 Plan. Notice of a hearing would be provided to all
parties in interest of the motion to close the case with a basic
discharge (equivalent to a current chapter 7 discharge). This notice
would also contain the dates set for parties to bring 523(a) and 727
complaints. No bar date would be set for claims to be filed in these
cases, since no assets would be administered by a chapter 7 trustee.
Unless a party objected (arguing that the estate should be administered
under chapter 7), and a 727 complaint was filed, or the debtor
voluntarily dismissed the case, the motion would be approved by the
court at the hearing and the discharge would be entered. At all times
during the process, the debtor would retain the right to dismiss the
case. If a party filed a 523(a) complaint, the discharge would still be
entered with regard to other creditors, and the 523(a) complaint would
proceed as under current law.
If the trustee perceives that an unconsummated chapter 13 case is no
longer being funded and that the case should be administered because
there are assets sufficient toprovide distribution to creditors, the
trustee shall move to convert the case to chapter 7, unless the
administration would produce only a nominal result, in which case the
trustee shall move to dismiss the case. Unless the case were dismissed
by the debtor or the trustee, the case would be converted to chapter 7
for administration or disposition. Notice of the motion to convert would
also contain the dates set for parties to bring 523(a) and 727
complaints as well as the bar date for claims to be filed.
A debtor could contest the motion to close or convert and would have
the right to modify the chapter 13 Plan or propose a mechanism to cure
the chapter 13 Plan default up to the time that the objection period had
passed. If a case were converted, the debtor would be credited for
payments to secured creditors as provided under current law (Section
If the debtor fails to obtain confirmation of a plan, the option of
closing with discharge would not be available. The debtor could dismiss
or convert to chapter 7, and any party in interest could seek to have
the case dismissed or converted.
Current protections against involuntary conversion for farmers would
There was active discussion of this option with some participants
indicating some questions that had to be addressed prior to any
consensus being reached on this concept. The questions were as
1.Property of the estate—With the effect of 348(f), would this
proposal allow a debtor that had obtained a windfall to exercise the
right to a default discharge while having the ability to repay
2.What would constitute property of the estate in a converted
3.Would the debtor receive credit for payments made during the plan
in the event of a conversion to be applied against secured claims?
4.What would happen with post-petition appreciation of
5.How can this mechanism be crafted in a fashion to avoid misuse by
debtors? (i.e., a pay down of secured debt, then use of the
6.There was a question as to whether there should be a good faith
requirement engrafted upon this new right.
7.In the event that the BRC recommendation for an absolute
prohibition against refiling softened, what would happen in the event of
In summary, there was some general support among both creditors' and
debtors' representatives for this option.
Topic 2—chapter 13 Superdischarge
Stop Further Erosion of the Superdischarge
The chapter 13 superdischarge was intended to be an important
incentive to encourage debtors to elect chapter 13. Debtors who could
propose a confirmable plan would be able to discharge almost all debts
by paying all unsecured creditors a pro rata dividend. However, since
1978 the superdischarge has been eroded through piecemeal amendments to
the Code, making chapter 13 less attractive to debtors. These debtors,
unable to solve their financial problems through chapter 13, are more
likely to find it necessary to file chapter 7, resulting in no dividend
to most unsecured creditors.
Proposals have recently been made to cut back even further on the
superdischarge, specifically regarding certain tax debts. These
proposals have been advanced by taxauthorities, notwithstanding the fact
that chapter 13 has permitted the recovery of substantial tax revenues
at low collection cost. Further restrictions on the superdischarge will
lessen chapter 13 as a viable option for many more debtors, thus
limiting the ability of those debtors to obtain financial rehabilitation
and eliminating repayments to most of their unsecured creditors.
Giving additional classes of creditors nondischargeable status harms
the interest of both debtors and most general unsecured creditors.
Therefore, it is suggested that no further restrictions on the chapter
13 superdischarge be enacted.
Restore the Superdischarge for Student Loans?
Until 1990 most student loans were dischargeable in chapter 13,
providing an incentive for debtors to choose chapter 13. That year,
however, Congress enacted new legislation making most student loans
nondischargeable in 13. This legislation never underwent scrutiny in the
Judiciary Committees of Congress, thus depriving interested parties of
the ability to comment on the effects of such a change on debtors and
creditors alike. Many debtors today simply have no way to repay their
student loans from their current income, and also have little prospect
for significant financial improvement in the near future. In some cases
these debtors attended trade schools, after unscrupulous sales tactics
by those schools.
To provide these debtors with a chance for financial rehabilitation
and to encourage more chapter 13 plans where all unsecured creditors
share in a debtor's repayment, it is recommended that the superdischarge
be restored for student loans in chapter 13 cases.
The Forum was in complete consensus that there should be no further
erosion of the chapter 13 superdischarge.
A substantial amount of time was spent discussing the elimination of
student loans, both as it relates to the chapter 13 superdischarge and
the dischargeability sections under 11 U.S.C. § 523(a). There was a
concurrence on the deletion of student loans, from 523 (a)(8).
Concern was expressed over the other types of obligations, HEAL loans
and others, and the need to make dischargeable those student loans as
well in the event that there was a deletion of the student loan
discharge prohibition in 1328(a).
Topic 3—Credit Bureau Reform
A subgroup of the steering committee recommended the following:
1.Bankruptcies must be reported by Chapter.
2.Completed chapter 13 plans must be reported by the percentage of
the unsecured debt which was repaid. The reporting on this would have to
be forwarded by the chapter 13 trustees to the credit bureaus.
3.If the debtor completes a chapter 13 and the credit reporting on
all the debts included in the bankruptcy plan has expired, the credit
bureau should delete the reporting on various debts and delete the
chapter 13 Bankruptcy, as well.
4.Completion of a consumer finance education program would also be
recorded in the credit bureau history.
After active discussion, there was consensus that points 1, 2 and 4
of the Credit Bureau Reform options should be adopted. Point 3 of the
options was discussed in depth, and there were concerns expressed that
the deletion of the various debts would, in some cases, leave an empty
file; a term utilized in the industry to indicate that a person has no
credit history. There was discussion as to whether the deletion of the
information in total was beneficial or detrimental to the debtors. Some
felt that it would be more beneficial for a debtor to have the
information displayed in their credit report indicating that there had
been repayment on obligations through a chapter 13 bankruptcy. The
creditors' representatives were also concerned that the deletion of this
information would not leave enough information available for a creditor
to make a knowledgeable decision on whether to grant or deny an
extension of credit. It was indicated that in many instances, credit
grantors would extend credit with the information proposed to be
deleted, and it would be unfair to remove this information and not make
it available for their consideration.
As a result of the concerns voiced by both sides of the equation,
debtors as well as creditors, point 3 was deleted from the list of
The discussions then turned to consumer education. There was
consensus and support for consumer education. The parties to the Forum
specifically requested that we avoid indicating whether the education
should be mandatory or optional.
There was also consensus and support for credit rehabilitation
programs, again, with the proviso that there be no indication whether it
should be mandatory or optional.
Topic 4—Option on Repeat Filings
The goals of an effort to deal with serial bankruptcy filings
1.To sort out the abusive cases from the nonabusive cases.
2.To quickly deny the automatic stay to debtors who file abusive
cases, thereby also eliminating the incentive to file such cases.
3.To avoid imposing costs on debtors who are not filing abusive cases
that might make it more difficult or even impossible for them to obtain
4.To avoid imposing costs on creditors or lessors who are delayed
from exercising their rights by abusive bankruptcy cases.
It was agreed that the barriers to serial filings should not be
applicable to the second bankruptcy case a debtor files. It was our
consensus that the second case is far more often legitimate than
abusive. Even in the situation where, in hindsight, it becomes clear the
second case was abusive, such a finding can rarely be determined when
the second case is filed. This would not prevent a creditor or lessor
who wishes to allege an abuse in a second case from filing a motion for
relief from the stay or a motion to dismiss, and even seeking expedited
relief, as that creditor or lessor can do under current law.
However, if a debtor files a third case within a five year period,
and that case is filed within 180 days of the dismissal of the second
case, a new barrier would be erected. In such a case, the automatic stay
would terminate 15 days from the petition filing unless no objection was
filed to the continuation of the stay by any creditor, lessor, or the
trustee. (Calendaring the hearing would be left to local practice.)
Thus, creditors and lessors would have a quick and easy way to trigger a
prompt review of the debtor's filing, and debtors would have little
incentive to file a case that could not be justified, since the
staywould be lost almost immediately.
If no objection to the debtor's motion was filed, the court would
continue the stay without a hearing, subject to current relief from stay
procedures. If an objection was filed, the debtor would have the burden
at the hearing of proving that there was a reasonable prospect of
completing a feasible plan. Absent such a finding, the stay would not be
continued as to the objecting creditor or lessor. If the trustee
objected, the court could consider factors such as any change in
circumstances since the prior cases, level of effort in the prior cases,
amount of arrears, reasons for failure of prior cases, the debtor's
honesty with the court, and differences in chapter 13 plans between the
prior cases and the current case.
For any bankruptcy case filed by a debtor after the third case within
a five year period, there would be no automatic stay. The debtor could
seek a stay from the bankruptcy court and would have the same burden of
proof as in the case.
Court's Power to Issue in Rem Orders
The steering committee agreed that the bankruptcy court must have a
limited power to issue in rem orders granting relief from the
stay with respect to a particular property for future cases filed by
debtors other than the debtor in the case before it. This power is
necessary in order to prevent schemes in which property is transferred
and subdivided for the purpose of repeated bankruptcy filings by
different debtors, invoking a new automatic stay with respect to the
property in each case.
Under this option the court would have the power, on motion of a
creditor or realproperty lessor, to issue an in rem order that
would make the automatic stay inapplicable to particular property in a
subsequent bankruptcy case.
This order could be issued only upon a finding that the property had
been transferred after a prior bankruptcy case in which the stay was
applicable to the property for the purpose of the transferee obtaining
an automatic stay that could not otherwise be obtained with respect to
the property (for example, under the first part of this proposal, if the
transferor had filed two prior cases and could not make the showing
necessary to obtain a stay in a subsequent case.) The order could be
entered only after notice to all known entities having an interest in
the property and an opportunity for a hearing.
The order could be recorded by the moving party in the appropriate
registry for real estate, and if recorded would be deemed constructive
notice of its terms to any transferee who received an interest in the
property after the order was recorded. The order would remain effective
until the earlier of (1) the expiration of six years from the date of
the order or (2) the moving party realizing its collateral or, in the
case of the lessor, obtaining possession of the property.
A transferee or co-owner of the property who is innocent of any
scheme to abuse the automatic stay could move for relief from the order.
Such relief could be granted by the court in its discretion after notice
to the party that sought the order and a hearing.
This was probably the most controversial of the options contained
within the steering committee's submissions. After discussion, the
following areas were highlightedas problems:
1.Definition of abusive cases.
2.The effect on mortgagees in foreclosing in a second filing within
the mechanisms contemplated by the proposal.
3.Many participants felt that the proposal was much too liberal.
4.Many felt that the proposal was much too restrictive.
As is obvious from this summary, this is still an issue that
polarizes the debtor and creditor communities and consensus was not
The area which received the most acceptance was in bolstering the
court's power to issue in rem orders, where appropriate.
Topic 5—Disposable Income
Presently, a debtor must dedicate "all disposable income" to fund a
chapter 13 plan upon the application of the trustee or an unsecured
creditor (see § 1325(b)). A debtor may avoid this obligation by
proposing a plan which satisfies all unsecured claims in full, within a
three year period. Issues have been raised as to what types of expenses
are to be included in a debtor's budget, since "all disposable income"
is statutorily defined as funds which are not "reasonably necessary to
be expended...for the maintenance or support of the debtor or a
dependent of the debtor." Courts have disagreed as to what types of
expenses are appropriate or "reasonably necessary." Courts have also
applied varying standards as to the amount of expenses which are
One proposal under serious consideration is the establishment of a
standardtemplate which fixes the amount of funds which a debtor must
dedicate to pay to unsecured claim holders. The standard template would
be national in scope and adjusted for family size and geographic
At the January ABI Forum, there was a general (though not unanimous)
feeling that, with some exceptions, the idea of paying "all disposable
income," determined on a case-by-case basis works reasonably well,
providing flexibility for debtors in fashioning chapter 13 relief around
their own circumstances, subject to the scrutiny of trustees and
The participants at the ABI Forum have articulated problems, however,
with the uniformity of the application of the § 1325(b) test.
Judges can differ radically on what might be reasonable and
The definition of disposable income will still be those funds not
reasonably necessary for the maintenance and support of the debtor and
the debtor's household dependents. The debtor would list expenses
incurred in several broad categories which would be presumptively
"necessary", and the reasonableness could be subject to challenge. These
¶ Food expense
¶ Housing costs (and housing related expenses)
¶ Laundry and cleaning
¶ Utilities and telephone
¶ Medical expenses
Whether such expenses are reasonable would depend upon the reasonable
needs of the debtor’s family and the reasonable living expenses of
a family of similar size, with similar income living in the same
geographic area. Any party challenging the reasonableness of such
expenses by a debtor's family would bear the burden of proof to
For a self-employed debtor or a debtor engaged in business, expenses
related to the production of income would be presumptively necessary.
Whether the expenses are reasonable would depend upon the expenses
incurred by similar businesses in the same geographic area.
If a debtor incurs other types of expenses (tuition costs,
entertainment, gifts, etc.) such could be reasonably necessary, but, on
request of the trustee or any unsecured creditor, the debtor would bear
the burden of proof to demonstrate the reasonableness and the necessity
of the proposed expense.
If the debtor's plan meets the requirements of § 1325(b),
confirmation of the plan should not be denied solely because the plan
fails to meet any minimum payment requirement beyond that required by
Although this topic was discussed in depth, there was no consensus on
theproposal. The comments ranged from, "This is no different than the
system that exists right now" to "This creates a basis to lie as the
list presumed to be necessary for the maintenance and support of a
debtor or dependent encourages deception."
A substantial portion of the attendees of the Forum indicated a
desire to continue the status quo with no changes, indicating that the
system as it exists allows for those local and geographical variances
that are necessary when dealing with budgets in chapter 13's.
The remainder of the individuals either desired very flexible
guidelines or stringent templates.
Topic 6—Treatment of Rent-to-Own Contracts
There has been continuing debate over how to treat rent-to-own contracts
which do not fit neatly into the definition of "lease" or the definition
of "sale" outside of bankruptcy.
Many instances were cited where the use of these contracts have
created problems throughout the country for low income consumers. In
rent-to-own transactions, consumers enter into agreements to rent
various household and personal items for low payments over extended
terms designed to, in essence, purchase the item through the agreement.
These rent-to-own contracts appear to be an attempt, by those who engage
in this practice, to avoid various state laws regulating interest rates
and lending practices.
These same issues arise in bankruptcy cases with varying results. The
majority of courts have treated these obligations as installment sales
subject to Sections 722 and 1325. A minority of courts have treated
these as "true leases".
It was agreed by consensus that these types of obligations should be
re-characterized as installment sales to allow the treatment as afforded
under the applicable provisions of the Code. The re-characterization of
rent-to-own contracts must be crafted in a manner to avoid any negative
impact on "true leases".
It is possible that the simplest method of dealing with the problem
in bankruptcy is to treat the transaction as an installment sale,
regardless of its characterization under state law, for purposes of
bankruptcy. This could be accomplished by an amendment in Section 365,
or elsewhere, providing that in a case where an individual debtor is the
lessee of consumer goods other than a motor vehicle, the debtor may have
the transaction considered a sale, according the lessor an allowed
secured claim in the amount of the value of the property or the present
value of the remaining payments, whichever is less. The lessor would
have a deficiency claim allowable as an unsecured claim for the present
value of the remaining payments due under the lease minus the allowed
amount of the lessor's allowed secured claim.
The most practical way of doing this may be to amend the definition
of "security interest" to include the rights arising out of rent-to-own
transactions. The transactions would then be subject to the statement of
intentions section in chapter 7, Section 521(2) and the redemption
provision in Section 722. Treating these transactions as security
interests rather than leases is also consistent with the concept of
equality of distribution. By contrast, if rent-to-own contracts are
treated as leases, it skews distribution within chapter 13 proceedings
to the detriment of unsecured and secured claim holders.
This option, with limited discussion, was accepted by consensus. The
only remaining issue that most felt should be addressed was the
determination of the sales price to allow bifurcation and treatment of
Topic 7—Stripdown of Mortgages/Interest on Arrears
Stripdown of Mortgages/Modification
The protections of current Section 1322(b)(2) would be retained for
most first mortgages secured by residential real estate. The revised
section would protect mortgage lenders from stripdown (and other
nonconsensual modification) of secured claims based on mortgages used to
purchase (or construct) the debtor's primary residence. Refinancing of
those mortgages would also be protected unless the annual percentage
rate on the refinanced loan (or the index on a variable rate mortgage)
is more than 5% over the prime rate on the date the loan is made. In
addition, if the debtor has moved out of the mortgaged residence within
180 days prior to filing bankruptcy, the specified protections against
stripdown and modification would apply.
As under current law, deceleration and cure of a mortgage default
consistent with the requirements of the Code would not be considered a
Modifications of protected mortgages involving capitalization of the
arrears and reamortization of the resulting balance would be allowed by
consent of the parties, regardless of state law. Payments under
such a modified mortgage would be made directly to the mortgagee. If a
consensual modification agreement is filed with the courtat the time of
that modification, the secured creditor would be presumptively entitled
to relief from stay upon a rebuttable showing that the debtor is more
than 60 days behind on payments under the mortgage as modified.
Interest on Arrears
Current Section 1322(e) would be expanded to all mortgages,
regardless of their date. Interest on arrears would be allowed only when
permitted by contract and state law, only to the extent of the principal
amount in arrears, and only upon demand by the creditor.
The principle of lien stripping was widely accepted under
circumstances where a creditor obtained a security interest in property,
while consciously and concurrently granting a loan in excess of the
value of the property. The controversy ensued when attempts were made to
discuss the mechanism and determination of who should fall within the
purview of the stripdown provisions. Creditors' representatives posited
the hypothetical that existed in California, Texas and Massachusetts
when property values plummeted during their recessions and indicated
that those creditors who, in good faith, granted loans that were fully
secured should not be subject to stripdown. Creditors' representatives
further disagreed with the proposal in that it did not cover secondary
obligations such as equity lines or second mortgages. No consensus was
 Not surprisingly, there remain areas of
disagreement, even on options where parties narrowed their differences.
Attached to the print version of this summary wre letters from two Forum
participants, Jill M. Sturtevant of Bank of America and Dean S. Cooper
of Freddie Mac, critical of certain options.