ABI - National Bankruptcy Review Commission
National Bankruptcy Review Commission
THE NATIONAL BANKRUPTCY REVIEW COMMISSION
MINUTES OF MEETING HELD:
Thursday, May 16, 1996
Friday, May 17, 1996
San Antonio, Texas
Prepared by: Susan Jensen-Conklin
Approved: June 20, 1996
MEETING - THURSDAY, MAY 16, 1996
Hilton Palacio del Rio
San Antonio, Texas
Commission Members Present:
Brady C. Williamson, Chair
Honorable Robert E. Ginsberg, Vice Chair
Babette A. Ceccotti
John A. Gose
Jeffery J. Hartley
Honorable Edith Hollan Jones
James I. Shepard
Commission Reporter and Staff Present:
Professor Elizabeth Warren, Reporter/Consultant
Susan Jensen-Conklin, Deputy Counsel
Carmelita Pratt, Administrative Officer
Leonora K. Baughman, Chrysler Financial Corporation
Karen Cosgrove, Kemp Management
Professor Richard E. Flint, St. Marys University School of
Jerry Hermesch, CitiBank
Henry E. Hildebrand, III, Standing Chapter 13 & 12 Trustee
Richardo I. Kilpatrick, Shermeta, Chimko & Kilpatrick
D. Jean Ryan, Law Office of D. Jean Ryan, P.A.
Emma G. Scott, Sears, Roebuck and Company
Henry J. Sommer, Consumer Bankruptcy Assistance Project
Stanley P. Spence, Pentagon Federal Credit Union
Professor William C. Whitford, University of Wisconsin Law School
Elizabeth S. Petersen
William E. Brewer
Jill A. Michaux
Scott H. McNutt
Paul W. Rosenbaum
Edgar M. Rothschild, III
James T. McMillin
Louis P. Terrazas
Leon Jon Bonney
J. Thomas Black
Robert H. Waldschmidt
Approximately seventy-five people were in attendance including
from the Administrative Office of the United States Courts, Office of
United States Trustee, United States Navy, Chapter 13 and 7 trustee
state government, professional and trade associations, private industry,
firms, and the media.
Chair Williamson called the meeting to order at 9:06 a.m. and made
comments. He thanked the National Association of Consumer Bankruptcy
for suggesting that the Commission meet at the same time that the
conducted its annual convention. He stated the presence of the
San Antonio reflected its continuing commitment to soliciting and
wide range of viewpoints. The minutes of the April 19 meeting were
approved by oral vote of the Commissioners. Chair Williamson concluded
introductory remarks by reviewing his efforts to open lines of
with members of Congress. He also reviewed the status of pending
affecting bankruptcy law.
After introducing the panel members, Professor Warren explained that
format of the discussion would be open-ended and free-form. The three
topic areas that she identified for discussion were the distinction
Chapter 7/Chapter 13; fraud and abuse in the bankruptcy system; and
relief and uniformity in the bankruptcy system.
Beginning with the first topic area identified, Professor Warren noted
the process of choosing between Chapter 7 and Chapter 13 lies at the
the consumer bankruptcy system. Mr. Hildebrand said that circumstances
a negative cash flow seem to make the selection for the debtor. Where,
however, the debtor has a positive cash flow, he stated that the local
culture steered the debtor. He explained that the local legal culture
attorneys, judges, trustees and the creditor community. It also relates
success or failure of consumer credit counseling services in the area.
While agreeing with Mr. Hildebrand, Professor Whitford expressed
the choice is made more often by debtors counsel than by the
that counsels role in steering a debtor into a particular chapter
relief was a product of the attorneys own self-interest, rather
the debtors interests. He characterized this concern as a crisis
professional responsibility. Among the factors which influenced the
of counsel in this regard that he cited were reputation in the local
community and economic concerns.
Mr. Hermesch concurred with the statements of Mr. Hildebrand and
Whitford with regard to the influence of local legal culture in the
making process. He added that counsel make the decision for their
advise against filing for relief under Chapter 13.
Mr. Hildebrand noted that many debtors file for relief under Chapter 13
the misimpression that it will have a better credit rating impact than
7. Mr. Hermesch observed that the fact that the credit rating for a
filing was the same as that for a Chapter 13 filing should definitely be
Ms. Ryan stated that there was a misconception as to what debtors
counsel does and should be doing. Describing her intake procedure, Ms.
noted that she advises her clients that bankruptcy is a last resort and
they should attempt to work out a solution with their creditors. After
attempting to negotiate with her clients creditors, she then
her clients what their options are under each chapter and that it is
choice as to which chapter under which they will proceed. With regard
Ms. Ryan observed that the fee structure will vary by district. She
no attorney had the right to decide for his or her client under which
Commissioner Shepard stated that Chapter 13 is underutilized as a
the lack of knowledge and experience by the debtor bar. Ms. Ryan
that the decision depended on what the debtor was trying to accomplish
clients financial condition. Ms. Scott noted that the process was
one of financial analysis, involving an assessment of the debtors
level, assets and needs with regard to those assets that had to be
Mr. Sommer explained that this analysis involved reviewing myriad
as the debtors assets, income, type of creditors, whether there
nondischargeable debts, tax obligations, and the clients desire
ability to repay creditors. Other factors that he cited include the
flexibility of Chapter 13 and the fact that sometimes a debtor has no
While he admitted that some debtors attorneys were not very good,
noted that some creditors lawyers were likewise not very good. In
regard, he acknowledged, there will always be some dishonest debtors as
will always be some dishonest creditors.
Professor Warren asked the panelists to clarify whether the problem was
or major. She asked them to articulate what was the nature of the
that is, whether or not a lot of debtors were filing under Chapter 7
should be filing under Chapter 13, whether many debtors were steered
Chapter 13 who did not belong there because counsel made the choice
his or her economic self-interest. She observed that while there was a
collective experience, there were no hard data.
Mr. Kilpatrick maintained that even if the problem was not
great, the perception was that it was a problem. He stated that the
self-interest of debtors counsel should not be a factor in the
decision-making process. Commissioner Hartley conjectured whether the
would be eliminated if debtors counsel fees were made uniform
Mr. Kilpatrick answered that there were alternatives to uniform fees.
suggested that the priority treatment accorded attorneys fees
eliminated or that there could be a requirement that attorneys
stretched out over the life of the plan. This would provide an
the debtor to complete the plan and for the attorney to work with the
accomplish that objective, he noted.
Commissioner Shepard asked whether there were a lot of cases where
debtors counsel bailed out as soon as the fees are paid. Mr.
said that there were and that cases were converted or dismissed
after the fees are paid. Commissioner Shepard inquired as to how this
the administration of the case. Mr. Hildebrand noted that the problem
addressed through judicial enforcement of professional responsibility
obligations. Mr. Sommer agreed that this was really an issue concerning
judicial enforcement of professional responsibility.
Commissioner Jones supported Mr. Kilpatricks suggestion that
attorneys fees be paid over the life of the plan. Mr. Sommer
while he was not totally against this concept, he noted that many plans
consummate. In response to the increased risk of nonpayment, he
fees would increase. Commissioner Shepard stated that it was his
that attorneys do not screen their cases well and if there was some risk
nonpayment, then they may be more hesitant to recommend that their
under Chapter 13. Mr. Sommer remarked that an attorney cannot predict
debtor will become unemployed two years into the case or have a marital
problem. Mr. Kilpatrick responded that the risk is minimized for those
practitioners with sufficient volume to generate an income stream to
for the risk of nonpayment.
Professor Flint described a more fundamental concern, namely, whether
should be two separate chapters for consumer bankruptcy as there was no
philosophical justification or moral basis supporting this current
said that many of the debtors needs that are presently addressed
Chapter 13 such as tax problems, stripping down personal property liens
mortgage defaults can easily be handled in Chapter 7. Commissioner
observed that the purpose of Chapter 13 involved repayment and retention
assets while Chapter 7 offered liquidation and freedom from liability.
Mr. Kilpatrick expressed concerns with a single chapter proposal and
whether it would involve the conditional discharge system that is used
England. Professor Whitford stated that Chapter 7 was not a pure
alternative and that subsequent to obtaining their discharge, debtors
owed a lot of money and that they could reaffirm more obligations. As
implicit premise, however, he noted that the Commission should reinforce
idea that there are supposed to be uniform bankruptcy laws. He stated
data showed that the consumer bankruptcy system was not uniform and
example, the variation between districts regarding filing rates of
and 13 as well as the payout percentages in Chapter 13 cases.
Agreeing with Professor Whitford, Ms. Baughman noted that the variation
implementation of the bankruptcy law caused different results which, in
created increased economic costs to creditors. The expense associated
this lack of consistency constituted a cost that was passed on to the
group of people who borrow money or purchase motor vehicles.
While there may be a need to promote greater uniformity, Ms. Ryan
the basic concept of Chapter 7 and 13 did not need to be changed to any
extent. The current system, she suggested, provided the debtor and
with some options that do not exist elsewhere.
Agreeing with this statement, Mr. Spence explained, however, that
not differentiate between Chapter 7 or 13 as to credit rating impact
the inconsistency with regard to payment percentages to unsecured
under Chapter 13 plans. Where the payment to unsecured creditors under
Chapter 13 plan was nominal or zero, then there was no difference
and a Chapter 7 discharge. In response to Commissioner Jones
query as to
what benefit did Chapter 13 offer an unsecured creditor, Mr. Spence
there were no benefits if the Chapter 13 case involved a zero percent
Commissioner Jones then asked Ms. Ryan to address the practice of some
bankruptcy courts to confirm plans that provide for a minimum payout of
percent or more. While Ms. Ryan noted that in her district there was a
threshold required payout minimum of 20 to 25 percent for unsecured
which Commissioner Jones described as pennies. Ms. Scott rejoined
creditors nevertheless would like to receive these pennies. Although
not sure if uniformity with regard to a specific payment percentage was
solution, she did believe that debtors with zero percent plans belonged
Ms. Ryan stated that debtors counsel can use Chapter 13 to save
debtors house from foreclosure even though only a zero percent
proposed and that this was no better than what the unsecured creditors
have received if the debtor filed under Chapter 7. The Bankruptcy Code
provides a mechanism, she noted, to make sure that these creditors
under a Chapter 13 plan at least as much as they would receive if the
filed under Chapter 7. To prohibit zero percent plans, she observed,
create other problems.
Mr. Kilpatrick explained that there were other problems concerning the
of inconsistency. He cited disposable income as an example of a term
interpretation has varied from judge to judge. Nevertheless, Ms. Ryan
cautioned that standardization in this area could be problematic and
recent efforts by the Internal Revenue Service to set national living
guidelines. Commissioner Ginsberg asked whether this would be like the
bankruptcy version of sentencing guidelines. Mr. Kilpatrick, however,
responded that some of the bankruptcy judges discretion should be
Mr. Sommer stated that attempts to make bankruptcy judges decide all
the same way or to have national standards of living would not succeed.
radical surgery is attempted to achieve uniformity, he suggested that it
important to keep in mind that the bankruptcy system has helped and
to help millions of people by saving their jobs, homes, jobs and mental
He said that it is part of the safety net and keeps these people from
the rest of the safety net, all at very little expense to the
Commissioner Jones asked whether Chapter 7 should be amended to permit
negotiation of tax, mortgage and motor vehicle obligations. In
Sommer said that he tended to agree that Chapter 7 should be more
that Chapter 13 deals a wide variety of other problems not addressed by
7. Mr. Hildebrand noted that 43 to 46 percent of the debtors who
Chapter 13 discharge in his district had repaid 100 percent of allowed
Another concern that should be addressed according to Mr. Kilpatrick
to the cost of the bankruptcy system to society as a whole. He
the cost of credit increased two to four percent as a result of
filings. Mr. Sommer disputed this estimate as being entirely bogus.
that it was based on figures derived from total debt, most of which
have been paid whether or not the debtor filed for bankruptcy relief.
addition, he noted that creditors adjust their interest rates to account
the different types of risk.
Ms. Scott stated that Mr. Sommer was missing the point as there was
some increase in the cost of credit due to bankruptcy and that the
beyond what retail creditors have anticipated which, in turn, were
to others. She agreed with Mr. Kilpatrick that there should be greater
uniformity with regard to the application of such terms as disposable
the lack of uniformity has led to increased administration and
While Mr. Sommer stated that in most places people know what the judge
going to do and that this cuts down on litigation, Mr. Kilpatrick said
this was not true as there can be different rulings from the same judge
different days with regard to a debtors budget. Citing the
constitutional issue presented by tithing as an example, Ms. Ryan warned
there would be still be litigation. Mr. Kilpatrick clarified that the
should not be changed to define these areas, but to provide parameters
limit judges discretion. He suggested, for instance, that the
under Section 1325(b) be tied to a Consumer Price Index or similar
regard to Mr. Sommers concern that there would be exceptional
Kilpatrick said the judge would have to exercise discretion.
Professor Whitford observed that there should be some clarification as
is meant by uniformity and that he thought the problem was the lack of
uniformity among the districts. With regard to the losses being
the credit industry, Professor Whitford noted that the percent of debt
by revolving charge companies increased by 15 percent which was greater
any other entity in the credit market. Thus, he observed, while losses
increasing, this has not led to credit curtailment and that profits must
very strong. He also explained that historically the idea behind
to give people a chance to get on their feet and become more productive.
Professor Warren asked the participants to consider the essential
the bankruptcy system. She restated Professor Whitfords comments
regarding the purpose of discharge, namely, to free future income, to
economic units, i.e., debtors, back in productive use again. She asked
were the elements that constituted the core of the consumer bankruptcy
Responding, Mr. Sommer cited the cure of long-term secured debt,
secured debt, executory contracts such as rent to own leases as well as
and residential leases. Commissioner Ginsberg observed that the current
offers a debtor the opportunity to undo financial damage that is
to a discreet event such as job loss or extended illness. A further
consumer bankruptcy, Mr. Sommer added, was to pay creditors to liquidate
debtors non-exempt property.
From a creditors perspective, Mr. Kilpatrick said that certainty
finality were desired. Commissioner Gose noted that there was no quick,
inexpensive way to obtain uniformity by appeal. Agreeing, Mr.
that one had to proceed to the circuit court level to have binding
certain districts. In addition, he stated that there was an extensive
time incurred in litigating the issue to the appellate level.
Mr. Sommer noted, however, that in half of the appeals the circuit
defers to the bankruptcy courts discretion because it finds that
matter depends on the facts of the case. Mr. Hildebrand responded that
direct appeal to the circuit court would still be a time-consuming and
expensive process. Mr. Kilpatrick agreed with Commissioner Hartley
appellate system would be improved if district judges were taken out of
process and the bankruptcy appellate panels were eliminated.
Hartley suggested that this may address the need for uniformity.
Commissioner Shepard noted that this would satisfy the need for
within the circuit, Mr. Spence said that it would satisfy the need for
predictability. Mr. Spence observed that the issue not only concerns
uniformity as well as procedural and practical uniformity. He cited
timing of payments in Chapter 13 cases as an example.
Summarizing, Ms. Ryan said that it seems like the bankruptcy system is
generally working and that it just needed some adjustment to provide
guidelines and specific provisions. Professor Flint, however, disagreed
this summary. He said that he had heard nothing from the panelists
contradicted his position that Chapter 7 cannot accommodate all consumer
bankruptcy needs. In particular, he noted that less than 40 percent of
13 cases result in discharges.
Mr. Sommer noted that while there is some talk about abusive repetitive
filings, most filings were sincere efforts. When asked by Commissioner
what percentage of these filings were sincere, Mr. Sommer responded that
were, but he did not have data. Commissioner Shepard then asked Mr.
define success in the context of Chapter 13. Mr. Sommer answered that
to obtain a discharge or, at a minimum, to cure a mortgage default.
Commissioner Shepard wondered whether this was a proper use of Chapter
there was no payout to unsecured creditors. Mr. Sommer stated that it
proper use and was absolutely contemplated by the Codes drafters.
Commissioner Shepard asked whether it would be better to modify the
reaffirmation provisions under Chapter 7 cases to allow deferred
Ms. Ryan noted that unsuccessful Chapter 13 cases typically involved
who are desperate to save their homes and have unrealistically low
which cannot not accommodate the unforeseen such as job loss or extended
illness. With regard to these debtors, she insists that they have a
ability to pay before their cases are refiled.
Commissioner Jones noted that several creditors had written the
about abusive repetitive filings. Ms. Ryan said these were mostly the
of paralegal services. Mr. Hildebrand said that in the Western District
Tennessee there was a high employment turnover rate which would be a
the Districts high rate of re-filing. In the Middle District of
Tennessee, he noted, one did not see abusive filings because they are
when they occur and bankruptcy petition preparers are criminally
Mr. Spence commented that of the 450 bankruptcy cases that he reviewed
credit union last year, ten re-filed Chapter 13 cases. Mr. Hildebrand,
referring to certain statistics regarding recidivism in Chapter 13 that
acquired, said that the trustees from California reported a much higher
of refilings than other districts in the nation.
Commissioner Shepard stated that the District of Oregon from February
to March 15, 1996 had 223 debtors file 520 cases of which 209 were
He said that this would appear to show that there was a very high number
repeat filings, where debtors commonly filed two to four cases each and
sometimes up to six or seven cases. Mr. Sommer noted that those
could not be drawn from these statistics because, for example, the total
filings for the district was not stated. He also observed that he did
think anyone would disagree that there were legitimate and illegitimate
filings and that it was the job of the judge to distinguish between the
Mr. Spence said that was the problem and that judges cannot do this.
Professor Warren sought to refocus the discussion on the
perspective that there should be predictability and uniformity.
she asked the panelists to discuss the differences and difficulties that
among the various creditor subgroups such as unsecured creditors,
creditors who would ordinarily be repaid within three years, mortgage
With regard to landlord interests, Ms. Cosgrove said that the biggest
is that a bankruptcy filing stays the eviction process. In California,
noted, advertisements promise seven months free rent. She said that
were more interested in regaining possession than in receiving payment
past due rent. In response to Commissioner Shepards question as
whether the problem was regional or nationwide, she noted that the
surfaced in other states.
Although acknowledging that there were always going to be situations
there were bad tenants, Mr. Sommer did not view this a problem caused by
bankruptcy. The staying of the eviction process is important to the
it allows time for the default to be cured, he observed. The problem
the petition preparers. Commissioner Shepard asked Mr. Sommer whether
attorneys advised clients to use bankruptcy to avoid paying rent. While
were exceptions, Mr. Sommer said that attorneys were held to a code of
professional responsibility that they generally take seriously and that
were also concerned about their reputation.
Commissioner Shepard shared Ms. Cosgroves concerns about the time
cost of obtaining relief from the automatic stay. Likewise,
asked why should bankruptcy give recalcitrant tenants an additional
Mr. Sommer responded that this was a benefit that was part of the fresh
that is, to provide a breathing spell within which the debtor can catch
paying the past due rent.
Ms. Ryan wanted to know the extent of the problem as it was not
her district. She observed that the problem was not with the bankruptcy
but with the people who are putting these debtors into the system.
Commissioner Jones postulated that if the automatic stay did not apply
residential leases, then these debtors would not be put into the system.
Ryan asked about those debtors that do need the benefit of the automatic
to protect their residential lease interests. Although Commissioner
and Ms. Cosgrove did not see any benefit to the estate that could be
Commissioner Ginsberg noted that it would provide housing to the debtor
pursuing job opportunities. He also noted that the discussion was very
anecdotal and that there were protections for the landlord under current
The delay between the filing of the bankruptcy case and the scheduling
eviction hearing in the Central District of California, according to Mr.
Sommer, was related to state law. Commissioner Shepard asked why should
bankruptcy provide a remedy that differs from that available under state
Mr. Sommer answered that bankruptcy provides certain rights for debtor
rehabilitation, but that a debtor who is to be evicted is not going to
successful Chapter 13 case. If a debtor is abusing the Code, he noted
there were remedies available. Ms. Cosgrove observed that there is an
erroneous perception that landlords are large corporations which are
profitable. She noted, for instance, that approximately 50 percent of
landlords in Texas owned buildings consisting of four or less units.
Professor Whitford said that there was a need to remain focused on the
uniformity issue as there were some states that were protective of
concerns while there were other states that were not. As one of the
of bankruptcy law is to provide a form of safety net, he suggested that
may be some way to craft legislation that tries to distinguish. He
there was a tenuous balance between federal and state law. He explained
one of the historic purposes has been to provide a kind of minimal
protection similar to other federal protections such as welfare and
Professor Flint recalled that during the time when he was a trustee in
Southern District of Texas there were no problems with residential
although there were serious problems with commercial lease tenants. To
extent that the problem did exist, he viewed it as being associated with
problem of multiple re-filers. He proposed that a simple amendment to
109 would eliminate most of this problem, that is, by simply providing
automatic dismissal of a subsequent bankruptcy case filed within 180
the filing of a prior case. When asked by Commissioner Shepard for the
definition of a bad faith filing, Professor Flint responded that the
was that it was unclear what constituted a bad faith filing. Ms.
the problem is a major issue in some parts of the country causing
lose millions of dollars in lost rents.
Professor Warren queried whether there could be a system which provides
the termination of the automatic stay for evictions based on current
non-payment of rent. Mr. Hildebrand said that the system was already in
in his district. He explained that if the debtor wants to retain the
interest, she or he must sign off on an order which provides for the
relief from the automatic stay upon the filing of a notice of
The panelists discussed possible remedies to serial filings which
eliminating the automatic stay in the second filing unless the debtor
for its imposition. Another was to prohibit a second filing within 180
from the filing of the prior case. Commissioner Shepard stated that he
envisioned bankruptcy as an extraordinary remedy limited to those
cases where relief is truly justified and that it was not just something
can be used against creditors any time the debtor wanted to stop
Mr. Sommer said that most of his clients were current with their rent
obligations and that bankruptcy involved an array of one-time costs for
debtor such as attorney fees, filing fee, utility deposits and other
disruptions to the debtors income. While Commissioner Hartley
these costs can be folded into a Chapter 13 plan, Mr. Sommer stated that
courts would not permit this. In addition, he said that cost is a
barrier to debtors contemplating bankruptcy and that this was why there
many low income debtors who, unable to afford legal representation,
petition preparers. He cautioned that every time you put a burden on the
debtor, it increases the cost. Commissioner Hartley asked whether that
additional cost should be weighed against the real estate
Commissioner Shepard inquired about the cost to society if you
bankruptcy. He said that this furthers and fosters the view that
permits everyone to file and get away with murder. Mr. Sommer said
perception exists both for corporate as well as consumer bankruptcy.
Commissioner Shepard queried whether the charge of the Commission was
owed a responsibility to the public. Commissioner Jones suggested that
creditors should be heard on this issue.
Ms. Baughman said that vehicle leasing was increasingly a big business
that one-third of financed vehicle purchases were done through leasing.
Chapter 7 and 13, however, did not appropriately deal with motor vehicle
leases, she observed. In Chapter 7, Ms. Baughman explained that
trustees have the duty to reaffirm the lease, they have no interest in
so, even though the debtors have a very serious interest in retaining
vehicles. Chapter 13 does not contemplate how to deal with leases that
beyond the length of the lease or that terminate prior to the term of
Disagreeing with Ms. Baughman, Ms. Ryan said that the Bankruptcy Code
motor vehicle leases very well. If the Chapter 7 trustee does not
lease, then the debtor can either assume it or give the vehicle back,
noted. In a Chapter 13 case, the plan will provide for the curing of
arrearages or else provide that it be paid outside of the plan if there
default and the creditor can pursue the same remedies they had
Professor Whitford said that it should be kept in mind that from a
creditors perspective a lease is frequently an alternative to a
loan. In response to his query as to whether it was true that car
pushing prospective purchasers into car leases because the lenders fare
should the purchasers subsequently file bankruptcy, Ms. Baughman said
not sure. She explained that while leasing was more common, it was not
that the creditors were doing the pushing or that it was because of the
structure. Responding to Ms. Ryans statements, Ms. Baughman said
she was not sure if all Chapter 7 trustees act similarly and that she
different scenarios from different districts. She also noted that there
greater concern with regard to insurance because the if there is an
the owner/lessor is liable. Professor Warren observed that the
lessors is much better given the fact that, unlike a lien, a lease
stripped and that the lessor was less likely to lose money than a seller
sold the vehicle on credit. Mr. Kilpatrick noted that the status of
based on leases is problematic and noted that in was unclear as to how
complete the proof of claim form. He also cited the long hiatus
time when the Chapter 13 case is filed and when payments from the
the plan commence and the unclear status of postpetition,
Mr. Spence concurred with Mr. Kilpatricks statements regarding
in receiving payments in Chapter 13 cases. Another concern he expressed
the fact that there were debtors filing Chapter 7 who could pay their
He said that of the 450 files that he reviewed last year, at least a
had disposable income, although this was not always disclosed in the
debtors schedules of income and expenses.
Focusing on disposable income, Professor Warren noted that unsecured
rely on it in two ways. In Chapter 13 cases, the unsecured creditor was
entitled to disposable income, she noted. In Chapter 7 cases, the
was in the form of Section 707(b) which provides for dismissal for
abuse. Professor Warren asked the panelists to discuss the problems
disposable income and possible solutions.
Mr. Hildebrand cited a technical problem with Section 1325(b). He
that this provision requires the debtor to repay 100 percent of the
debt in three years or all projected disposable income for three years.
asked that if the debtors plan was for more than three years, why
not the debtor be required to pay all disposable income for the duration
plan. Mr. Sommer questioned why a debtor should be hostage to paying
creditors for that additional time. He said it was basically a matter
the debtor has less ability to pay.
Professor Warren asked why creditors should receive better treatment in
where the debtor has mortgage arrearages and credit card debt as opposed
those cases where the debtor is a tenant or whose mortgage is not in
Specifically, she queried why should the only motivation for filing a
13 case and locking ones disposable income into a plan be to
home or motor vehicle. Mr. Kilpatrick said it was a matter of assuming
burdens along with the benefits of the system. He said that Chapter 13
intended to allow debtors to keep their property and obtain a discharge
end of payment stream to which the debtor was committed for a period of
Professor Whitford proposed amending Section 722 to allow installment
redemptions in Chapter 7 with very stringent conditions, such as payment
commence within thirty days of filing. He suggested that many debtors
presently are filing Chapter 13 may consider Chapter 7 if this
available. Mr. Spence noted that certain districts were currently
this repayment option. He said the problem was implementing the
conditions and making sure that the debtor follows through. In response
Commissioner Jones query as to whether the proposal contemplated
installment payments according to the contract or cram down amount,
Whitford explained that it would be a cram down amount. Professor
suggested that this proposal attempts to de-link the payment of
to the payment of secured debt. The issue presented, she noted, was why
two are linked and whether they should remain linked.
The panelists then discussed the practices of Sears with regard to its
different repayment arrangements with debtors which they generally
to be successful.
Mr. Hermesch suggested that unsecured creditors would like some form of
guarantee or ability to forecast what type of distribution and when will
receive it in a Chapter 13 case. With regard to disposable income, he
at what point should the repayment schedule no longer be based on
but on actual income where the latter is greater than the former. Mr.
said that requirement was already codified as part of the ability to pay
Mr. Hildebrand disagreed and cited the Ninth Circuits
decision. Although Mr. Sommer stated that creditors can currently move
modify the plan, Mr. Hildebrand noted that the evidence supporting the
modification was not in the possession of the trustee or creditor. Mr.
Kilpatrick noted he had not become involved in this part of the
because he was aware that the issue regarding the amount of scrutiny and
oversight was slated for discussion later that day.
After a short recess, the meeting resumed with the open forum for
ELIZABETH S. PETERSEN
Ms. Petersen identified herself as a bankruptcy attorney and Chapter 7
from Durham, North Carolina. As an attorney, she stated that she
debtors as well creditors. She said that her firm does from 200 to 250
bankruptcy cases a year and that most of these were Chapter 13 filings.
She cautioned against making any significant amendments to Chapter 13.
said the system as presently constituted worked extremely well from both
perspective of the debtor and creditor. The return to creditors in
she noted, was much greater than what was discussed this morning. She
that the average individual debtor usually wants to pay his or bills and
not abuse the system. As a Chapter 7 trustee, she stated that she had
instances of abuse. Usually, these debtors seek relief because
happened in their lives that prevents them from paying their bills such
illness, divorce, death, employment disruption or retirement. She
that these people were living close to the edge prior to the occurrence
triggering event, but that they have no reserves to deal with it.
Ms. Petersen noted that the schedules do not explain why a debtor has
bankruptcy. For example, she noted that they do not disclose that the
has cancer and an 18-month life expectancy, or that he is about to lose
home through foreclosure and the creditor is refusing to work with him.
then described an instance that occurred earlier this week where her
offered to assign the rents to the mortgagee to try to avoid filing for
under Chapter 13. The mortgagee refused the rent assignment. Ms.
then described another situation where her client has recently been
has limited income and lacks medical insurance. Even though Ms.
advised the client to consider filing a Chapter 7 case, the client,
that she wanted to pay her bills, chose instead to file a Chapter 13
With regard to Mr. Sommers statement that a case was not
failure if a Chapter 13 debtor does not finish making all of the
payments, Ms. Petersen said that in most cases the creditors would not
received any payment as many of these debtors are judgment proof. The
factor that should be considered, she maintained, was the phenomenal
money being paid to the Internal Revenue Service under Chapter 13.
Concluding, she asked that Chapter 13 not be changed significantly as
very well for individuals.
WILLIAM E. BREWER
Mr. Brewer, a practitioner from Raleigh, North Carolina, said
had two points. First, he stated that the consumer bankruptcy system
broken and thus need not be fixed other than some fine tuning. Second,
declared that his bankruptcy clients, though often depressed, were among
most honest and best people of his other clients.
He observed that when clients seek assistance from him they are often
depressed. He said that they come to him for one reason: debt relief.
choices that he discusses with them include options other than filing
bankruptcy relief. As to whether they should file for relief under
or 13 he said was a decision they made. He said every good bankruptcy
simply educates his clients and then lets them make the decision.
Mr. Brewer indicated that he was amazed at those comments made at the
which suggested eliminating Chapter 13 and tinkering with Chapter 7 to
some of Chapter 13's attributes. He said there were goals which can
accomplished in Chapter 13, namely, curing arrearages and the
retention of property. A reaffirmation agreement, Mr. Brewer observed,
required both sides to agree and, absent agreement, Chapter 13 provides
debtor leverage which can enable him or her to cure the arrearage.
With regard to the residential lease abuses discussed at the meeting,
Brewer said that this may be a regional problem, but not one that exists
district. He noted that he has two types of clients, those that own
double-wides and those that rent single-wides. Concerning the latter
client, Mr. Brewer said that the automatic stay prevents the landlord
evicting the debtor for nonpayment of a $75 obligation. Absent such
protection, the other creditors suffer, he noted.
As to the question of fraud, Mr. Brewer said that he files 250 to 300
cases per year and that he has probably seen four cases of abuse over
In response to the credit industrys claims with regard to its
resulting from bankruptcy, he said that these claims were fallacious.
creditors should analyze how much of the debt would have been paid had
debtor not filed bankruptcy and how much money did they save as a result
hiring collection agencies. He said all that bankruptcy does is help
credit industry identify those debtors who are unable to pay and to stop
from being squeezed by the credit industry.
JILL A. MICHAUX
Ms. Michaux of Topeka, Kansas stated that she represents debtors along
her husband and that they file about 40 cases per month. She said that
45 percent of these filings are under Chapter 13 and the remainder are
She said that most of their clients agonize over the prospect of having
file for bankruptcy relief, but generally have no other option. Some of
individuals try to work out their financial difficulties under the aegis
consumer credit counselors, but are told that they cannot be helped
they owe too much money. She noted that creditors are increasingly
work with consumer credit counselors. Ms. Michaux observed that most of
clients are just ordinary people who make $6 to $7 per hour. Some of
clients are single-parents, some work two or three jobs to make ends
With regard to the possibility of eliminating Chapter 13, Ms. Michaux
expressed concern. She said that there were many benefits associated
form of bankruptcy relief and was incredulous that some believe that
file Chapter 13 cases just to get rich. She said that they do not get
filing Chapter 13 cases and that they must function as social workers,
counselors and psychologists during the three to five year term of the
She said that many of her clients lack medical insurance and that there
increasing number of bankruptcies being filed in response to the
portion of the medical debts. She also said that there starting to be
bankruptcy filings because of foreclosures of second mortgages, to the
detriment of the first mortgagee. She suggested that the debtor should
to cram down and strip off these second mortgages
She remarked that the system works very well and that Chapter 13 should
left alone. With regard to fraud, Ms. Michaux noted that virtually
wants to repay their creditors.
Mr. Segal, a debtors attorney from Las Vegas, Nevada, said that
percent of his clients were driven into bankruptcy by the Internal
Service. To this end, he noted that Chapter 13 provides the most
for debtors to deal with their tax obligations over time without the
interest and penalties.
He noted that hundreds of millions of dollars are paid to the Internal
Service through the Chapter 13 process. In addition, this process
other creditors to be paid which, outside of bankruptcy, would not have
Mr. Segal then discussed other matters. He commended Sears for
his clients. He noted that debtors want to pay their bills and do not
willingly file for bankruptcy relief. The triggering event, at least
clients, is the Internal Revenue Service. He expressed amazement at
the practices of credit card companies with regard to their willingness
extend credit. He observed that debtors who are forty years old or more
more concerned about the need to pay their debts than the younger
He attributed this to the greater ease of obtaining credit. He
remarks by noting that NACBA provides valuable educational experiences
to deal with real-life problems.
In response to Commissioner Shepards question as to whether
education would be beneficial, Mr. Segal thought that it would as most
who filed for bankruptcy relief were not financially sophisticated.
Mr. Mason, Assistant Director of the UAW-GM Legal Services Plan,
that his firm represents approximately one million clients. Agreeing
prior speakers with regard to the low level of financial sophistication
debtors, he said that any consumer education would be valuable.
He stated that he had surveyed the 400 attorneys who work for his firm
offices located throughout the nation as to specific suggestions for
the bankruptcy system. The responses suggested relatively few changes,
which could be described as major, he noted. As an example, he cited
suggestions which favored uniform exemptions.
Commissioner Hartley recalled that he and Mr. Sommer had worked for
derive language for uniform exemptions. Mr. Mason noted that the
would be to allow a debtor to opt for either federal or state
Commissioner Shepard asked Mr. Mason to comment on whether there should
cap because of the perceived inequity among the state exemption laws.
Mason responded that as his firm primarily operated in the Midwest and
the need for a cap was not a major issue.
Mr. Mason then discussed certain specific suggestions. He said that
Commission must consider the consequences that may occur in the context
economy that may not presently exist. With regard to serial filings, he
mentioned one instance where his firm filed three Chapter 13 cases for a
and, by the third filing, the client was able to make the requisite
He explained that blanket rules which terminate the automatic stay or
subsequent filings would be problematic in those cases where it takes
attempts to have a successful case.
As a final comment, Mr. Mason observed that bankruptcy is a part of the
fabric as it is designed to give people a fresh start, a breathing spell
which to get back on their feet, which is the underpinning of the
SCOTT H. McNUTT
Mr. McNutt stated that he practiced in San Francisco and Los Angeles
vice-chair of the Debtor-Creditor Committee of the State Bar Section,
he was speaking in his individual capacity.
He said that serial and abusive filings are a major problem especially
Angeles and that this causes disrespect for the system. Most of these
filings, he observed, are pro se with lawyers assisting in the
background. He noted that the state legislature enacted an amendment
Civil Code saying that the filing of bankruptcy does not stop an
eviction by a
sheriff, but no judge in California will enforce that provision.
solution is to enforce existing laws concerning criminal conduct, he
In response to Commissioner Hartleys question as to whether
judges would exercise criminal contempt powers if they were so
McNutt responded absolutely. He said the bankruptcy judges in southern
California are very concerned about their inability to address the
PAUL W. ROSENBAUM
Mr. Rosenbaum described himself as a volume practitioner from
Antonio, Texas. He said that notwithstanding some of the proposed
regarding Chapter 13 that have been discussed at the meeting, he said
system works wonderfully well in his venue. He said this view is shared
debtors, creditors and governmental users of the system.
He noted that 85 percent of the cases he files for his clients are
Chapter 13 not because there is more profit for him, but because the
want to repay their debts. He stated that debtors are looking for
rehabilitation and that Chapter 13 provides this opportunity. In this
district, he said that the Chapter 13 trustee facilitates the credit
With regard to abusive serial filings, Mr. Rosenbaum observed that the
bankruptcy judges in this district enter orders granting relief from the
automatic stay in subsequently filed cases. Concerning the
obligation to report changes regarding his or her budget, he explained
Chapter 13 trustee closely examines the debtor about this matter at the
341 meeting and requires the debtor to supply annual or monthly budget
during the term of the plan, where appropriate.
EDGAR M. ROTHSCHILD, III
Mr. Rothschild stated that he was an attorney from Nashville,
and that he had been in private practice for 18 years. He said that his
files approximately 1,000 consumer cases annually and that 70 percent of
were Chapter 13 cases.
He observed that the system was client-driven rather than
described the practice of his firm as consisting of advising the client
or she can do nothing, referring the client to a consumer credit
service, or recommending against bankruptcy, which occurs often. Then
clients options under the Bankruptcy Code are examined and what
are. With regard to profitability, he said that although Chapter 7 was
probably more profitable for his firm, the bulk of his firms fees
generated from Chapter 13. He noted that Chapter 13 was attractive to
for a number of reasons: it allows people to save their home or motor
it permits them to deal with tax obligations without having penalty and
interest continuing to accrue; and it provides some flexibility with
dealing with child support issues. In addition, he noted that
favor Chapter 13 because of their strong moral desire to repay their
Mr. Brady described himself as a consumer attorney from San
that he files between 500 to 600 cases annually. Of this amount,
are Chapter 13 cases.
He agreed with those statements by other speakers that most debtors
repay their debts. He noted that the main factor which motivates his
to seek his services is a drop in income due to some form of employment
disruption. One issue that has not been addressed today, however,
the requirement that retroactive interest be paid on student loan
he observed. He asked that this matter be addressed by the Commission
was very problematic for his clients.
CONTINUED PANEL DISCUSSION
After the lunch recess, Chair Williamson called the meeting to
and advised the panelists that they would each be asked by Professor
some point during this portion of the meeting for their specific
recommendations for changes or modifications in the Bankruptcy Code or
statements that no changes are warranted.
Professor Warren explained that this portion of the discussion
focus on fraud and abuse. She identified four issues that should be
what constitutes abuse, what different forms does it take, what can be
about it and what is the magnitude of the problem.
Ms. Baughman articulated one example of abuse where the debtor,
he needs to purchase a new motor vehicle, either purchases or leases a
vehicle and files for bankruptcy relief shortly thereafter. If the
files a Chapter 7 case and obtains an installment payment redemption,
lender loses $3,000 to $5,000. Mr. Kilpatrick noted that Ms. Baughman
describing, in essence, a situation where there was a certain amount of
pre-bankruptcy planning. Mr. Sommer, however, noted that this does not
very often. Commissioner Shepard suggested that the problem was not the
planning, but the strip down. Mr. Kilpatrick added that the problem
included the lack of uniformity in the decisions. In response to
Warrens query, Ms. Baughman indicated that Chrysler maintained
statistics on how old loans are at the time the debtor declares
Mr. Sommer reminded the panel that debtors were not the only parties
abuse the bankruptcy system. He said, for example, that he regularly
proofs of claim filed by mortgagees which double count the escrow. He
stated that he has seen even more instances where creditors claim
attorneys fees often for just filing a proof of claim. He noted
are coerced into reaffirmations by threats of repossession or other
where the debtors lack the resources to litigate against those actions.
In response to Commissioner Goses question as to whether the
of the amount due under a mortgage involved merely a mathematical
Mr. Hildebrand noted that this figure was not easily determined as it
included attorneys fees, foreclosure costs, and a back due escrow
Mr. Spence explained that the law in some jurisdictions was unclear as
inclusion of certain amounts of interest which, in turn, caused
uncertainty and the need to utilize the services of an attorney to
proof of claim form. Mr. Hildebrand clarified that Mr. Sommers
was not based on the fact, but on the amount of the fees charged for
an item which is not reviewed or monitored unless the debtor has the
sophistication to challenge the claimed fee.
Mr. Kilpatrick observed that there were sufficient tools that already
with regard to this concern such as Federal Rule of Bankruptcy Procedure
and the requirement that the proof of claim be prepared under penalties
perjury. He disagreed with those statements that suggest creditors
money out of debtors by obtaining reaffirmation agreements through the
of filing dischargeability actions. He said that creditors holding
claims of nondischargeability are simply trying to resolve these claims
of filing adversary proceedings.
Ms. Ryan said that the bankruptcy judges in the Southern District of
discerned a practice of creditors who threatened pro se debtors
discharge objections or dischargeability exception actions to extract
reaffirmations. Mr. Kilpatrick noted, however, that there may be
claims of nondischargeabilty. Ms. Ryan acknowledged that there may and
Mr. Hermesch stated that one of the problems unsecured creditors face
they do not have a lot of avenues of recourse. He also mentioned the
of attorneys advising their clients to get cash advances outside of the
presumption period that can then be used to pay the attorneys
There was also the advice given by some attorneys to their clients to
one account by taking a cash advance from another credit account so that
debtor can at least maintain credit by virtue of the paid account. He
suggested that this type of abuse and potential remedy should be more
identified under the Bankruptcy Code. Ms. Scott agreed that some cases
filed until the presumption period expires so that the cash advances or
purchases for luxury goods fall outside the 60-day time period. Mr.
said that the presumption period could be lengthened, but that the
would still have to prove fraud as it was only a presumption.
A debtor who has an account for five years and then six months before
bankruptcy changes from a pattern of never obtaining cash advances to
cash advances was cited by Mr. Hermesch as an example where the Code
better define fraud. Commissioner Hartley questioned whether this
would constitute a nondischargeable debt if the debtors pattern of
obtaining cash advances changed due to the fact that the debtor just
job. Commissioner Shepard agreed that one would never find intent in
scenario. Mr. Hermesch maintained that the debtor should exercise some
responsibility when it becomes clear that he or she is insolvent. Mr.
Hildebrand asked whether the creditor has the responsibility to protect
by restricting cash advances. Commissioners Hartley and Ceccotti
that a creditor could exercise some form of control over a debtors
to cash advances.
Professor Whitford observed that the problem substantively concerns
pre-bankruptcy exemption planning. While there will be some
said the question was how much is acceptable and how much control on
that right can be imposed at an acceptable cost. He noted that Section
523(a)(2)(C) was one attempt which was hardly perfect.
Commissioner Jones recalled that as a bankruptcy lawyer she found
meetings to be a questionable vehicle to obtain information and that
be even less helpful now because of their brevity in some jurisdictions.
Scott concurred that Section 341 meetings were not very helpful as in
instances debtors did not appear at either the initial or subsequently
scheduled meetings and the cases were not timely dismissed. She also
that some trustees did not permit creditors to ask questions of the
the creditors were not represented by counsel. She noted that her firm
attempts to attend every Section 341 meeting.
Ms. Baughman noted that her firm routinely conducts a Rule 2004
prior to filing a nondischargeabilty proceeding as the Section 341
offered an opportunity that was too brief. Mr. Hermesch agreed that his
company generally does not attend Section 341 meetings as they often do
provide sufficient information in the time permitted. Mr. Spence also
that his firm does not routinely attend all Section 341 meetings due to
resources. Rather, his firm relies on himself to review the files and
determine which cases should have a representative at the Section 341
In addition, he observed that the schedules do not provide enough
in making this determination. He explained that the debtors do not
of the information required by the schedules in a manner that can be
discerned by the creditor and that no one insists that the schedules be
completed in their entirety. The panelists then discussed examples of
incomplete or less than meaningful responses on schedules.
Mr. Hermesch also noted that there was no system in place to validate
information set forth on the schedules. Professor Warren asked whether
should be someones obligation to routinely audit these schedules.
Sommer said that the issue to some extent concerns non-enforcement of
that presently exist. He noted that this responsibility falls squarely
domain of the United States Trustee.
Mr. Hildebrand explained that a trustee sometimes can identify an error
schedules only through the assistance of a creditor. Moreover, after
is brought to the attention of the debtor, he or she simply admits that
a mistake or simply converts his or her case to one under Chapter 13.
he noted that trustees who pursue these concerns are not compensated by
system. Professor Flint, a former Chapter 7 trustee, concurred with Mr.
Hildebrand. He said that in the eight years that he was a trustee the
schedules were incomplete, but that there was nothing that alerted him
error was anything more than insignificant. He stated that while there
presently existing laws and rules which address these concerns, the
that a violation is not given much credence.
As trustees counsel, Ms. Ryan said that where the debtor has not
disclosed a material asset, her practice is to immediately file a
objecting to discharge. Commissioner Shepard asked whether it was more
effective to object to discharge or to move for dismissal of the case.
Ryan explained that the former was more effective as it prevents the
from obtaining a discharge. Commissioner Shepard posited that the case
be dismissed and the court retain jurisdiction of the debtors
Mr. Hildebrand remarked that this could be a solution, but Ms. Ryan
upon dismissal of the case, there was no estate. Mr. Hildebrand
the court for cause could prevent the property from vesting in the
dismissal of the case. He suggested that a party who discovers
assets should be compensated for the cost incurred in discovering those
Mr. Sommer noted that this suggestion somewhat addressed his prior point
there should be an economic incentive so that if a debtor or creditor is
committing fraud, the winning side should be entitled to attorneys
Absent the provision of incentives, issues of fraud will not be
Ryan noted that the bankruptcy judges in her jurisdiction authorize the
of administrative expense claims under Section 503(b) to persons who
assets and bring them into the estate. Mr. Hildebrand noted that a
trustee who discovers unscheduled assets and the case converts to
Chapter 13 is
not compensated for his or her efforts.
Commissioner Shepard asked how one funds a system to encourage the
known fraud where there was little likelihood of recovery. While there
be some provision for criminal sanctions or dismissal of the case, he
questioned how these efforts would be funded. Commissioner Jones noted
the debtor has not been honest in making all of his or her non-exempt
available to creditors, the debtor will still receive a discharge
because it is
not worth while for anyone to pursue it. Mr. Sommer suggested that one
ask how often this occurs as the vast majority of debtors do not have
hide. Ms. Ryan agreed that one of the issues involved an assessment of
impact of the problem.
Commissioner Jones reminded the panelists that her questions with
the schedules and Section 341 meeting were related to the idea that the
was supposed to be somewhat self-regulating and discerning of fraud.
added that these should be considered in light of the United States
Trustees philosophy at least in her district that Chapter 7
should not bother to recover these assets unless they exceed a certain
amount. Commissioner Jones summarized that there were problems with
States Trustee oversight, trustee compensation, and inadequate
Ryan observed that part of the problem pertaining to the schedules
the inadequacy of the forms themselves in that certain questions were
Returning to the issue of fraud, Mr. Sommer noted that the amount of
committed by debtors has not been quantified and that he believed the
significant fraud that occurs is very small. He recommended that each
Commissioner spend a day attending Section 341 meetings. He encouraged
Commission to be as concerned about the fraud committed by creditors as
about the fraud committed by debtors.
Commissioner Gose asked what tools could be utilized to raise the level
sophistication of the users of the bankruptcy system. Ms. Ryan noted
is one case out of 5,000 that causes the system to be subject to
that whether the schedules are accurate will have an absolutely minimal
on identifying fraud as it will occur regardless.
Professor Warren asked the panelists to comment on whether or not
707(b) was effective in dealing with fraud and abuse in the bankruptcy
Mr. Hermesch said that it is extremely difficult to prove a case under
provision. Mr. Kilpatrick noted that Section 707(b) has not been very
effective as it has been utilized disparately through the nation. In
he observed that if the schedules are not accurate or if the Section 341
meeting is ineffective, there is no way to make an analysis under this
provision. The standard should be a totality rather than a means test,
advised. He also suggested Section 707(b) should be amended to remove
creditor taint provision, that is, creditors should be permitted to
and bring information to the appropriate parties so that they may
Section 707(b) analysis. Mr. Spence noted that creditor intervention
is not allowed under Section 707(b).
Commissioner Ginsberg queried whether the panelists meant intervene
initiate, because if the United States Trustee does not initiate
there is no need for creditors to intervene. Mr. Spence said creditors
like to initiate the Section 707(b) action, but at least be able to
United States Trustee. Commissioner Shepard asked whether it was likely
the United States Trustee would follow up on such complaints. Ms. Ryan
Commissioner Shepard agreed that the United States Trustee would
high profile and unusual cases and ones having the most impact. Ms.
observed that the bankruptcy system is premised on limited
Mr. Kilpatrick warned that if there is no effective statute like
707(b), then the result is aberrations like Section 707(a) litigation
currently being utilized to dismiss cases for bad faith and cause. He
described a Sixth Circuit decision which permitted a Chapter 7 case to
dismissed for cause under Section 707(a) because the case could not be
dismissed under Section 707(b) as the debtor had business debt and the
creditors could not communicate the information they had to the parties
had the ability to bring the Section 707(b) action.
Professor Whitford advocated that Section 707(b) should be made
all debtors, not just consumer debtors. He also suggested that the
should recommend an amendment that overrules those decisions that have
interpreted this provision as creating a mandatory requirement that
debtors belong in Chapter 13. He said that this provision should be
the type of abuse discussed at this meeting. Ms. Baughman agreed that
should be some standards with regard to the application of Section
general and that ability to pay should not be the test for its
Ms. Scott proposed that examples of substantial abuse be included in the
provision such as hiding assets or actual fraud that has been found by a
Commissioner Hartley expressed concern that if Section 707(b) was
allow creditors to bring these actions, then the courts would become
with them. He said that one of the main goals of the Commission is to
system more effective and streamlined. Mr. Kilpatrick responded that
should not be permitted to bring the actions directly themselves, but
should be allowed to communicate with the appropriate parties such as
United States Trustee or the court. Ms. Ryan asked Mr. Kilpatrick what
creditors would do if the United States Trustee or court fails to act
being supplied with such information. Mr. Sommer said that providing
information to the decision maker was problematic. Commissioner Shepard
that the real problem was that no one was charged with the
pursue and follow-up on these matters. Commissioner Ginsberg observed
the inclusion of the bankruptcy judge in this process was an aberration
worst kind as the judge was not in a position to conduct his or her own
discovery. He strongly recommended that the court be removed entirely
the process except as decision maker.
Mr. Kilpatrick proposed that a method whereby a notice containing all
information from a creditor regarding a substantial abuse case be served
United States Trustee, debtor and the court. Eventually, he noted, the
States Trustee would have to fulfill some of its responsibilities in
regard. Commissioner Hartley suggested that there should perhaps be a
bankruptcy administrator system where one could go directly to the Chief
responsible for overseeing the bankruptcy administrator.
Turning to a different topic, Professor Warren asked the panelists to
the impact of making student loans nondischargeable. Mr. Sommer
there was a popular perception that doctors, lawyers and others that
college sought to discharge their educational loans by filing
contrast, he noted that the vast majority of debtors seek to discharge
obligations owed to trade schools, correspondence course providers,
driving schools and other entities that engage in a variety of fraud.
that many debtors were lured from welfare offices by commissioned
sign up for these courses based on phony tests that said they would
from these schools. He stated that these obligations were no different
other obligations owed to the government and thus should not be treated
Professor Flint stated that the undue hardship standard for
has failed because it is not defined in the Bankruptcy Code and
subject to differing interpretation by bankruptcy judges. With regard
Sommers statements, Professor Flint said that there really two
debtors involved, those who have attended professional schools and
employment and the other group which consists of those who have attended
schools. He said that the Commission should consider making the loans
by the debtors in the second category to be dischargeable. Although she
not seen many doctors in her practice, Ms. Ryan did acknowledge that
young attorneys with substantial educational loans with no ability to
them due to unemployment or underemployment.
Professor Warren asked the panelists to discuss their experiences with
luxury goods dischargeability exception. Mr. Hermesch said that it is
relatively well-defined and basically works well. Professor Whitford
on the effort to expand this provision to make any use of a credit card
nondischargeable and its impact on the debtors fresh start. He
that debtors may not fight these dischargeability exceptions because it
money to litigate them and the simple solution is for debtors
simply advise their clients to pay or reaffirm them and discharge the
With regard to support arrears, Professor Whitford noted that they are
permanently nondischargeable unlike educational loans which can be
after seven years. He likened support obligations to a life sentence.
Sommer suggested that there should be a distinction between support
owed to a spouse or child from those owed to a governmental agency.
Commissioner Shepard asked why should there be any distinction between
person who has to pay a spouse and a person who has to pay the
paid the spouse. Mr. Sommer answered that the government is in a
position form the spouse. Professor Whitford noted that whereas the
objective of the consumer bankruptcy discharge is to supply an incentive
debtor to re-enter the work force and reestablish his or her financial
standing, nondischargeable support arrears impacted on that objective.
Mr. Kilpatrick stated that Section 523(a)(2)(A) is a vague statute that
applied to prior practice where the loan officer and borrower sat across
each other when they executed the loan application. Soon, he noted,
applications will be executed on the Internet and Section 523(a)(2)(B)
longer apply as there will be no statement in writing. Professor
explained that this was why Section 523(a)(2)(C) should be reviewed so
provides clearly established guidelines.
Turning to the issue of exemptions, Professor Warren asked the
discuss whether there should be uniform exemption provisions or whether
or ceiling should be established. Commissioner Hartley responded that
very difficult to prepare a list of uniform exemptions. Ms. Ryan
that this was due to the economic diversity that exists among various
in the nation. She also explained that Floridas 100 percent
exemption was based on a policy decision made in response to the fact
retirees settle in that state. Commissioner Shepard observed that
a reputation where out of state debtors can move to in order to purchase
expensive homesteads and escape their creditors. Ms. Ryan asserted that
creditors had options which they did not pursue.
Mr. Hildebrand suggested that giving the debtor the option to chose
federal and state exemptions should be considered. In addition,
Jones observed that many state legislatures have been driven by their
constituents frustration to enact state laws to get around the
law. Mr. Sommer explained that the opt out provision was enacted in
to creditors who wanted the states to be able to eliminate the federal
exemptions and now these creditors want to eliminate some of the state
exemptions. He noted, however, that there should be at least a minimum
that is reasonable in every state. Commissioner Shepard said that this
address the problem with unlimited homesteads. Professor Whitford
that Paterson v. Shumate be legislatively overruled as the
whether or not a pension fund should be excluded from the estate is a
Professor Warren mentioned the possibility of establishing an exemption
Mr. Kilpatrick advised that there should be an attempt to quantify the
impact of a uniform exemption provision. In addition, he said some
given to the constitutionality of such an attempt.
Recalling that there was discussion concerning the limited financial
sophistication of debtors, Professor Warren asked the panelists to
what role should the bankruptcy system play in educating debtors. Mr.
cited the work of certain Chapter 13 trustees in credit education and
rehabilitation as being a remarkable success. He also noted that
credit counseling has had a very positive impact. Commissioner Shepard
questioned the need or desirability of required counseling. Ms. Ryan
the real focus should be on the prevention of bankruptcy, not after the
gets into trouble. Mr. Sommer stated that he would not underestimate
played by debtors counsel in this regard and also noted there was
issue of who was to pay for debtor schools.
Mr. Hildebrand explained that he originally believed that the court and
trustee had no responsibility to act in loco parentis. After
determining that 45 percent of debtors admit that they do not know how
manage their money, he now sees that Chapter 13 trustees could offer
assistance in learning how to live on a budget and how to make credit
decisions. He suggested that the Commission consider amending Section
to authorize Chapter 13 trustees to provide credit education and
services to debtors. Ms. Ryan added that there should be the equivalent
Chapter 13 for small businesses and that these debtors be provided
Professor Warren noted that consumer credit counseling services have
influence on where and when debtors file for bankruptcy relief. She
whether creditors should have some responsibility to cooperate with
services in order to provide alternatives to bankruptcy for debtors.
Spence explained that his firm works very closely with consumer credit
counseling services. He said that it was in everyones best
educate the consumer debtor and that the responsibility in this regard
shared by the creditors, debtors counsel, and Chapter 13 trustees.
Scott noted that most retail creditors were already participating in
credit counseling programs and have brochures which explain the use of
terminology and how payments are made and applied. Mr. Spence stated
these efforts are done inconsistently around the nation, they perhaps
made more consistently available.
Commissioner Gose agreed with Mr. Kilpatrick that there no longer was a
personal relationship between lenders and borrowers. Mr. Sommer noted
consumer credit counseling cannot deal with recalcitrant creditors or
with mortgage claims guaranteed by the government who have a perverse
Commissioner Jones asked whether the trend toward disclosure in
lending and truth in lending laws over the past 25 years has been a
time given the panelists comments regarding the need for consumer
education. Mr. Sommer said the trend is being reversed as a lot of
were being repealed which, in turn, is causing these problems.
Gose agreed that loan closing statements are difficult for a consumer to
Professor Whitford asked whether the discussion was going beyond the
Commissions scope. He said that there was a tremendous growth in
consumer credit notwithstanding the fact that 70 percent of the
living with stagnant or declining wages. The whole idea, he noted, was
people from getting to the point where they have to turn to
Professor Warren then asked the panelists each to identify the two most
important changes to the bankruptcy system that they would to have
accomplished. Mr. Spence proposed that there should be consistency in
timing of when payments begin in Chapter 13 plans. The other change he
discussed was to not allow Chapter 13 to be used to discharge fraud
under Section 523.
Mr. Kilpatrick said that the Commission should eliminate those
areas of conflict that need not exist such as valuation. Specifically,
suggested that there should be some definition of valuation incorporated
Section 1325(a)(5). His second suggestion concerned the creation of
central agency to oversee the bankruptcy process and to improve the
of the system. He noted that small or insignificant abuses should not
ignored and somebody should be there to ensure that those who benefit
system, also assume its burdens.
Mr. Sommer recommended that access to the bankruptcy system
broadened through such avenues as in forma pauperis and that the
field should be more level so that if debtors have to object to a claim
defend against a dischargeability proceeding, they should be entitled to
attorneys fees. He also recommended that greater use of Chapter
should be encouraged by restoring the flexibility and incentives that
there originally, such as the discharge of student loans, and the
in dealing with taxes and secured creditors. It should be clear, he
that the plan is voluntary and that if creditors receive at least as
they would receive in a Chapter 7 case, then they should not
Mr. Hildebrand reaffirmed his previously discussed suggestions. He
that there should be a prompt confirmation and that there was no reason
court to defer confirmation until after the claims bar date. The
Section 1327(a) should be restored and it should specifically include
valuation of collateral to avoid the claims allowance process which is
expensive, cumbersome and litigious. His other suggestion was that a
valuation should be established that everyone can understand.
Ms. Ryan advocated that efforts to modify or change the Bankruptcy Code
stop or be done only after careful consideration. A specific change
recommended was the elimination of Section 523(a)(15) as it has created
litigation and duplicates what can be done under Section 523(a)(5). Ms.
also noted that the notice of intent provisions of Section 521 and their
enforcement were problematic.
Professor Flint suggested that the Commission should consider whether
any need for two forms of consumer bankruptcy relief. The matters
addressed by Chapter 13 such as home mortgages, tax claims and
redemption of personal property can easily be dealt with in Chapter 7,
noted. And for those debtors who feel an obligation to repay their
Chapter 7 did not prevent this from happening. Professor Flint also
recommended that the Commission advise Congress to quit continually
Ms. Scott asked that Section 524 be clarified with regard to the
enforceability of reaffirmation agreements. In addition, she
there be at least a minimum time period in Chapter 13 cases between the
341 meeting and confirmation hearing. She noted that in numerous
both are held on the same day.
Professor Whitford suggested that installment redemptions in Chapter 7
permitted under Section 722. Further, he proposed that there be
minimum federal exemptions perhaps coupled with maximums on state
He also asked that Patterson v. Shumate be repealed.
Ms. Baughman requested that Chapter 13 be consistently implemented and
the bankruptcy system as a whole be consistently implemented.
Mr. Hermesch recommended that there be some form of debt counseling
the filing of bankruptcy.
Professor Warren concluded this portion of the meeting by thanking the
participants for their contribution to the discussion. Chair Williamson
expressed his thanks to the panelists. He then announced the resumption
open forum portion of the meeting.
CONTINUED OPEN FORUM
JAMES T. McMILLIN
Mr. McMillin of Corpus Christi, Texas noted that he had been practicing
for 21 years. He said that the biggest problem that he has seen is
fraud. He cited the practice of filing claims for the full amount of
principal and interest as an example. Although there were several
made during the meeting regarding bad debtors, he said that he has not
them, except in rare instances. The treatment accorded debtors after
bankruptcy was another concern that he discussed. He observed that
debtors fare better than their Chapter 13 counterparts as they are able
obtain credit sooner. With regard to criticism of the consumer debtor
concerning certain of its practices, Mr. McMillin said that the courts
responsibility to monitor these practices.
Mr. Rosenbaum introduced his client, Mr. Hall. Mr. Hall said he was a
inspector for the City of Castle Hills. He said that he filed a Chapter
bankruptcy case in 1986 and repaid his creditors 100 percent. The
was filed, he explained, for numerous reasons including the Internal
Service. He stated that he had started a business with a business
withdrew all the money from the business and left.
After he filed his bankruptcy case, he said that the education classes
conducted by Mr. Olson, the Chapter 13 trustee, showed him the mistakes
made in business. He said that he repaid 100 percent of his debts and
paid them 13 months early by working a second job. Mr. Hall noted that
case shows that the system works. When asked by Chair Williamson if
anything he would change about the system, Mr. Hall responded that there
nothing. He concluded his remarks by noting that he has learned from
experience and that Chapter 13 does benefit some people.
Another of Mr. Rosenbaums clients, Ms. Williams of San Antonio,
explained that she and her husband had to file for bankruptcy relief
Chapter 13 as the result of several factors including back child support
student loan obligations and their inability to obtain employment. She
that they were 2 1/2 years into their case and that their plan will
unsecured creditors 65 percent.
Before they filed for bankruptcy, she noted, their creditors refused
payments and that they were getting harassing calls every day. Since
filed their Chapter 13 case, she said that they have had piece of mind
look forward to re-establishing their credit after attending Mr.
credit rehabilitation classes. She noted that they had already attended
classes and that they established a bank account for emergencies. She
concluded her statement by noting that bankruptcy was the best thing to
to her family and herself. In response to Chair Williamsons
to whether there was anything she would change about the bankruptcy
Williams said that the continual accrual of interest on student loans.
LOUIS P. TERRAZAS
Mr. Terrazas, another of Mr. Rosenbaums clients, said that he
Chapter 13 case five years ago and that he would complete payments under
plan later this year which will yield a 100 percent payout to his
Noting that he was 65 years old, he stated that to make the payments
plan, his wife had to go to work at age 58. As a result of the
filing, he was able to save his business of thirty years which employs
workers. He said that he resorted to bankruptcy as a result of
owed to the Internal Revenue Service and the 100 percent penalty.
there may be occasional abuse, he asked the Commission to not change
as the majority of debtors are honest, hard-working people. When asked
Chair Williamson if there was anything he would change about the
Terrazas said the unwillingness of the Internal Revenue Service to
PAUL W. ROSENBAUM
Mr. Rosenbaum noted that the three clients who spoke were not
merely happened to be available. He said that he echoed their
particular, he stated that the nondischargeability of student loans in
13 and the unabated accrual of interest were real problems.
Mr. Zeltzer said that he practiced in San Jose, California and that he
his first consumer bankruptcy case more than 30 years ago. He noted
practice is 80 percent bankruptcy at this time.
He observed that his clients are increasingly employed on a part-time
temporary basis and therefore lack health benefits or pensions. He also
that support obligations are problematic to obligors who have been
for very long periods of time and lack the legal assistance to modify
support orders. These obligations, he stated, interfere with the
ability to complete his or her Chapter 13 plan.
He suggested that if a debtor makes a good faith effort to repay more
percent of his or her obligations, then that debtors positive
history should be restored.
LEON JON BONNEY
Mr. Bonney identified himself as the chief counsel for Duncan
standing Chapter 13 trustee, located in the Northern District of
San Jose Division. He said that they currently administer approximately
cases and that they disburse annually between $20 to $26 million to
He observed that Mr. Kester has been a Chapter 13 trustee for nearly 30
and disbursed hundreds of millions of dollars over the course of
hundreds of thousands of cases.
Mr. Bonney said that the consumer bankruptcy system works very well.
minor tweaking may be necessary, anything of a major nature was not
he asserted. With regard to the issue of fraud, he said that this
always emanates from those cases filed by non-attorney petition
And, concerning the issue of uniformity, Mr. Bonney said that any legal
can only be as uniform as the diversity of the United States.
Uniformity is a
function that should be performed by the courts.
On behalf of the National Association of Consumer Bankruptcy Attorneys
), Mr. Shulman thanked the Commission for coming to San Antonio and
the opportunity for a broad range of people to comment about their
with bankruptcy. He encouraged the Commissioners to talk with the
attending the NACBA convention.
Ms. Stewart identified herself as a debtors attorney from
Houston, Texas. She said that consumer education should be mandatory,
her experience as a practitioner. Ms. Stewart mentioned that the
Financial Planning in Denver provides financial management training
designed for high school students at no charge. Her second concern
to the nondischargeability of student loans in Chapter 13 and the
J. THOMAS BLACK
Mr. Black described himself as a consumer bankruptcy attorney
Houston, Texas. He said that Chapter 13 works quite well and that its
percent completion rate was comparable to the marriage completion rate
He stated that consumer education is a good idea. His clients often
never prepared a budget before they see him and are surprised at how
costs to live. Chapter 13 provides them with the opportunity to make
payments to their creditors, even though it may not be 100 percent, he
With regard to student loans, he suggested that payments should be made
directly under Section 1322(b)(5) so at least the amount of the debt
balloon and leave the debtors with a large amount at the end.
ROBERT H. WALDSCHMIDT
Mr. Waldschmidt said he was a Chapter 7 trustee from the Middle
District of Tennessee and an officer with the National Association of
Bankruptcy Trustees. He stated that the Section 341 meeting provides the
trustee with the opportunity to assess the debtors credibility and
gives secured creditors the opportunity to have the debtors enter into
reaffirmation agreements or sign agreed orders for relief from the
stay. While the Section 341 meeting is not conducive for building a
case for a
discharge objection, the Rule 2004 examination is a convenient mechanism
achieve this end. In response to Commissioner Hartleys question
the average length of a Section 341 meeting, Mr. Waldschmidt stated that
last between three to four minutes. If the case is very complicated, he
schedules a Rule 2004 examination. He stated that he allows a creditor
questions, but when the time exceeds ten or fifteen minutes and other
waiting, he suggests that they schedule a Rule 2004 examination of the
Commissioner Jones asked how a creditor, having a small claim, who
afford to hire counsel, would invoke a Rule 2004 examination. Mr.
says that he arranges to have the creditor come to his office to conduct
examination. Ms. Ryan asked how many cases out of the forty that he
he set down for Rule 2004 examinations. Mr. Waldschmidt answered
or two. Usually, he asks the debtor to supply books and records by a
date and, if the debtor fails to do that, the debtor must appear for the
2004 examination. Occasionally, he advises creditors to consult with
to determine if they have grounds for a discharge objection or
When he suspects fraud, he chases the debtor into Chapter 13, he
is done by a discharge objection, objection to exemptions or preference
Commissioner Jones asked whether these types of problems can be solved
abolishing the debtors right to convert. Mr. Waldschmidt answered
explained that it was in the public interest to get people into Chapter
his jurisdiction, the court grants him an administrative expense claim
Chapter 7 case if he has commenced litigation. On the other hand, he is