|Reprinted from the March 2005 ABI Journal
||March 1, 2005
Bankruptcy Bill Reintroduced, Reported by Senate Committee
Determined Opposition Expected on Senate Floor
Web posted and Copyright © March 1, 2005, American Bankruptcy
n Feb. 1, Sen. Charles Grassley (R-Iowa) introduced S. 256, the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." The bill is similar to that passed by the House in the 108th Congress. The House bill (H.R. 975) passed the House in early 2003, but was never considered by the full Senate. The legislation has a long history of bipartisan support since 1997, yet has never become law. Both the House and Senate approved a version in 2002, but the conference report failed over the inclusion of language to prevent the discharge of debts arising from violation of "laws relating to the provision of lawful goods and services"language aimed at anti-abortion protesters (the "Schumer amendment").
As in prior versions, S. 256 contains a means test for eligibility for chapter 7 relief. A debtor is presumed to be abusing chapter 7 if current monthly income, excluding allowed deductions, secured debt payments and priority unsecured debt, and multiplied by 60, would permit a debtor to pay at least 25 percent of unsecured debt or $100 per month over 60 months for a total of $6,000 to unsecured creditors. The calculation of the debtor's permissible monthly living expenses would again be generally pegged to IRS living standards used for delinquent taxpayers. Debtors seeking to rebut a presumption of abuse would have to demonstrate "special circumstances" to depart from income and expense standards. The debtor is eligible for a safe harbor from the means test if monthly income is less than the highest national or applicable state median family income. The U.S. Trustee may also decline to file a motion to convert the chapter 7 case to chapter 13 if the monthly income is between 100 and 150 percent of the national or applicable state median income.
As a precondition to being eligible for bankruptcy relief under chapter 7, the debtor must undergo credit counseling within 180 days of the filing. This requirement may be waived for 30-45 days if the debtor certifies exigent circumstances or was denied service from an approved counselor. The debtor must also complete a course in personal financial management as a condition for receiving a discharge. Debtor attorneys could be sanctioned for costs, fees and penalties if they do not investigate the circumstances that give rise to the petition and certify that the filing is well grounded in fact, including the accuracy of schedules, and warranted by law.
Chapter 13 debtors would not be permitted to bifurcate security interests in an automobile purchased within two years before the filing. Consumer debts owed to a single creditor for more than $550 for "luxury goods" within 90 days of filing, and cash advances for more than $750 within 70 days, are presumed nondischargeable.
The bill also provides for dozens of new bankruptcy judgeships, expands and makes permanent chapter 12 of the Code, liberalizes the preference defenses for small creditors, modernizes rules for ancillary and cross-border cases and financial contracts in bankruptcy, increases the time period for setting aside fraudulent transfers from one to two years, and sets tighter time limits in small business cases, among other business provisions.
The Senate Judiciary Committee held a hearing on Feb. 10. Despite the bill's history of passage with bipartisan support, the hearing demonstrated that opponents are redoubling their efforts to stall and ultimately kill the legislation. A new report released just before the hearing suggested that health care debts are responsible for about half the new bankruptcy cases, even for filers who have health insurance. The report was hailed by advocates for national universal health insurance. Sen. Grassley disputed the health care connection, citing U.S. Trustee office data showing that 78 percent of bankruptcy filers reported medical debts of less than $5,000.
Other critics focused on the perceived linkage between aggressive credit marketing practices and rising consumer debt and bankruptcy, which critics view as unaddressed by the bill. Still others seek a crackdown on corporate debtors who have shed pension and other obligations via bankruptcy.
More than 80 bankruptcy law professors wrote to the Judiciary Committee in opposition to S. 256. The academics criticized the means test as unnecessary, inflexible, over-inclusive and costly to administer. The letter also cited other provisions that will unfairly deny access to the courts, such as mandatory credit counseling, limits on lien-stripping in chapter 13 and restrictions on the scope of the bankruptcy discharge. The letter is available on the home page of ABI World.
The committee, by a 12-5 vote, favorably reported the bill to the full Senate on Feb. 17, deferring nearly all of some 50 amendments until that time. Among the agreed amendments was a clarification that a violation of securities law cannot be discharged. Another amendment expands the authority of the court to limit retention bonuses and severance to corporate debtors. The bill does not include the Schumer amendment. Sen. Charles Schumer (D-N.Y.) vowed to hold up the bill until it is included. The Senate will be in recess from March 21 through April 4. Senate Majority Leader Bill Frist (R-Tenn.) has identified the bill as a priority for the spring.