MEMORANDUM
The Consumer Bankruptcy Working Group has developed two of the three major
recommendations the Commission is considering. The first, uniform federal exemptions, will come
to a
final vote at the Commission meeting on May 16. The second, the basic framework, will be
presented
to the Commission for initial consideration at the same meeting. The third piece,
recommendations on
dischargeability, will be discussed in plenary session at the May Commission meeting.
Attached is the latest version of the basic consumer framework. It reflects consideration of
the
testimony, letters, and advice the Commission has received since the first version of the
framework was
circulated on March 5. Some parts of the first draft of the framework have been omitted, while
others
have been strengthened. The draft retains the basic structure, which deals with refiling, repayment,
reaffirmations, audits, and education, and more details have been developed based on extensive
discussions.
The changes recommended in the framework leave intact the basic debtor-creditor balance.
The
changes are designed to help improve public confidence in the system and reduce costs for both
creditors and debtors. The balance struck here will not please any single interest group, but it
reflects
loyalty to the principles of fairness and integrity.
CONSUMER BANKRUPTCY WORKING GROUP
May 6, 1997 Draft
Key Concepts
Balancing Debtor and Creditor Interests The approach taken in this framework is
not
designed to further the interests of either debtors or creditors, but rather to improve
circumstances for both. The framework incorporates essential elements gleaned from testimony
before
the Commission and submissions to the Commission by both creditor and debtor representatives.
Some
creditors might give up some benefits, such as nearly-unrestricted reaffirmations, but they would
receive
the benefits of clearer guidelines on repayments in chapter 13 and sharp restrictions on repeated
bankruptcy filings. Other creditors that, practically, can never take advantage of the current
reaffirmation provisions also would receive these benefits and would be assured of greater
equality of
treatment on par with all creditors. Debtors would face more constraints in the system, but their
fresh
start would be better protected and they would have more incentives to undertake repayment
plans in
chapter 13. The approach would resolve a number of ambiguities that result in litigation, which
would
reduce cost and delay for both sides. The only "losers" under these proposals would
be
both the debtors and the creditors who try to abuse the system and who try to use it in ways not
originally contemplated in the design of the bankruptcy system.
Restrictions on Refiling This proposal would eliminate the ability of debtors to
abuse the
process by refiling repeatedly to avoid either foreclosure of their property or eviction by their
landlords.
Virtually open access to chapter 13--and to its automatic stay--would be eliminated. To the extent
that
bankrupt debtors are repeat filers, this approach would dramatically decrease bankruptcy filings.
Repayment of Debt The Consumer Bankruptcy Working Group framework would
encourage debtors to file for chapter 13 and repay debts, rather than liquidating their debts in
chapter
7, in several ways:
1) By using income guidelines, debtors who currently are denied access to chapter 13
because
they are unable to pay pre-determined proportions of their debts will have an opportunity to
confirm
chapter 13 plans based on their incomes. For example, in many districts today debtors who cannot
pay
at least 50% of their unsecured debt face an informal restriction that denies them the opportunity
to
confirm a chapter 13 plan. This proposal makes chapter 13 plans based on income, not debt, to
make
chapter 13 plans accessible to all debtors.
2) Restrictions on reaffirmation of secured and unsecured debt will reduce chapter 7 partial
repayment plans that discriminate against some creditors. Debtors who makecommitments to
repay
debts will do so in chapter 13 under the supervision of the bankruptcy court. For example, debtors
who
commit future income to repay one car lender, one credit card issuer and one finance company
loan in
order to keep certain assets and gain access to future credit will be forced to make those
arrangements
in chapter 13 according to established distribution rules and under the supervision of a trustee.
3) Debtors who today use chapter 7 to make "deals" to restructure defaulted
loans
will have to make those deals in chapter 13, again under court supervision. For example, debtors
who
are in default on a car loan and who want to make an agreement for future payment of secured
and
unsecured debt will have to make those arrangements in chapter 13 according to established
distribution rules and under the supervision of a trustee.
4) More debtors will have an incentive to try chapter 13 repayments without becoming worse
off
for the effort because a debtor who is unable to make repayments in chapter 13 will be
automatically
converted to chapter 7. In the current system, a poorly advised debtor who is in trouble in chapter
13
often drops out of the system with no protection, facing new attorneys' fees and filing fees to get
any
help. Under this proposal, even the debtor who does not seek additional legal help or who is
poorly
advised will not be penalized for trying to repay in chapter 13 rather than filing initially in chapter
7.
5) Debtors who repay some debt in chapter 13 would receive more favorable treatment in
their
credit reports than debtors who file in chapter 7. For example, chapter 13 filings will be listed
differently
than chapter 7 filings. This should be a significant incentive to use chapter 13.
6) chapter 13 systems would include opportunities for credit rehabilitation for debtors.
Chapter 13
trustees will be authorized to develop programs that include access to credit as part of the
ongoing
educational programs for bankrupt debtors.
Saving Homes This approach would advance the national policy of helping
homeowners
make their mortgage payments and stay in their homes. The proposal has several features
designed to
protect homeowners.
1) By disallowing selective reaffirmation agreements that encumber a debtor’s future
income, debtors would have more future income available to deal with their mortgage debts if
they
faced financial problems down the road. A debtor who has received a true fresh start following a
bankruptcy filing in either chapter 7 or chapter 13 is more able to continue to make future
mortgage
payments.
2) Debtors would be able to treat second and third mortgages against the home like all other
secured debt. To the extent the second or third mortgagee is fully secured, this creditor would
have to
be repaid in full. Debtors with second and third mortgages that exceeded the value of their homes
would not face losing their homes if they could not repay the unsecured portion of these loans.
3) By implementing a standardized income-based repayment plan, the approach would
eliminate
the practice in a number of districts of denying debtors the opportunity to deaccelerate and cure
secured debt obligations if they could not make certain percentage repayments to their unsecured
creditors.
4) Restrictions on refiling put a premium on debtors solving their home mortgage problems
within
the framework of an existing chapter 13 plan, and if the debtor has a reasonable possibility of
making
mortgage payments, the proposal protects both the right to modify a plan when necessary and to
ask
the court for reimposition of a stay following a dismissal. The proposal does not, however, make
bankruptcy a haven to delay foreclosure or eviction when the debtor does not have a reasonable
likelihood of paying off the mortgage.
While it provides increased homeowner protection, the proposal also furthers the policy of
protecting lenders in the primary mortgage market, particularly by the strict restrictions on
refiling,
enhancing the availability of home mortgages at lower cost and for marginal borrowers.
Integrity of the System This proposal would impose, for the first time, auditing
requirements to verify the accuracy of the information available to the court, the trustees and the
creditors. Inaccuracies could result in a denial or revocation of discharge and possible
prosecution. In
addition, improved computerized monitoring of debtors' filing records would enhance the ability
to
detect fraudulent activities. The proposal would eliminate most unlimited exemptions so that
debtors in
some states could no longer put a million dollars in an exempt home or in an annuity contract on
the eve
of bankruptcy. At the same time, the law would proscribe certain abuses, such as economically
ill-advised reaffirmation agreements, including "post-bankruptcy reaffirmations."
Secured
creditors would receive postpetition repayments of debt in a chapter 13 plan to the full extent of
their
security and would receive pro rata distribution for the remainder along with all other
unsecured
creditors.
Reduced Cost Secured creditors would have more expedient access to the courts
to
protect their collateral and to have the automatic stay lifted promptly when debtors could not
make their
payments. The proposal also would eliminate ambiguities and issues that are the subject of much
litigation, such as proper valuation, appropriate interest rates, and calculation of disposable
income.
Increased Uniformity This framework would eliminate many non-uniform practices
that
result in very different treatment for similar debtors and creditors in different regions and districts.
The
adoption of a repayment template would end the dispute on whether "zero-payment
plans"
are confirmable or whether courts could demand minimum percentage payments (of widely
varying
amounts) to unsecured creditors within chapter 13. The proposal would sharply reduce the
disparity in
the amount of property that debtors could keep, so that, for example, all debtors would be entitled
to
some exemptions, but not unlimited ones. The dispute over the "ride through" of
secured
debt, currently permitted in some circuits and prohibited in others, would be resolved. Similarly,
the
standard for valuation would be settled legislatively.
Debtor Education In addition to providing an opportunity to participate in a
financial
education program, the establishment of specific amounts that debtors could be expected to repay
in a
chapter 13 plan would encourage debtors to develop realistic budgeting skills. They would be free
to
save and to reestablish their financial integrity. The projected budgets would leave some flexibility
to
deal with the true emergency and the courts would be relieved of making routine investigations
into each
debtor's lifestyle.
Debtor Rehabilitation/Equality of Distribution The proposal retains the essential
features
of consumer bankruptcy that have been the mainstay of debtor-creditor policy for more than a
century.
Debtors can come into the bankruptcy system to discharge their debts, to get the fresh start that
encourages them to continue to work, to care for their families and to avoid welfare. Creditors
can
count on the system to terminate the "race of the swift" of state law that characterizes
individual debt collection and to distribute the debtors' assets on a pro rata basis that benefits all
creditors equally and protects collateral.
Amendments Applicable to Both chapter 7 and chapter 13
Audits (New) All debtors would be subject to random audits to verify the accuracy
of
the representations made in the debtors' schedules. Audits could be conducted anytime until 90
days
following the section 341 meeting with creditors. Irregularities might result in the denial or
revocation of
discharge or prosecution by the Department of Justice. Based on initial results from audits, the
Executive Office of the U.S. Trustee would develop auditing guidelines. In addition, to enhance
the
capacity to detect debtor fraud and abuse, a national filing system using social security numbers or
other
unique identifying numbers would be established so that debtor refiling (in the same or other
districts)
and debtor fraud could be detected more easily. The U.S. Trustee would designate special audit
agents, and additional resources should be allocated to fund such audits and to monitor audit
compliance.
False Claims (New) Courts would be authorized to require creditors who file false
claims
in bankruptcy to pay the debtors' attorneys' fees involved in correcting the claim. If a creditor
knowingly filed a false claim, the court could impose appropriate sanctions.
Filing Protocols (New) Because the Code would restrict re-filings--not merely
subsequent discharges--requirements for monitoring in the clerks' offices would change
substantially. All
clerks would need access to a nation-wide data base that would contain a six year list of
bankruptcy
filings. Pro se debtors would have to present identification when filing a petition, and attorneys
would
have to present photocopied evidence of such identification at the time of filing. All debtors
would be
required to provide correct social security numbers; such numbers would be verified through the
social
security administration database. The details of this proposal, including a mechanism to monitor
the
database and to create an opportunity for debtor or creditor correction, could be developed by a
specialized working group of judges, clerks and trustees.
Education (New) All debtors, both in chapter 7 and in chapter 13, would have the
opportunity to participate in a financial education program. Pilot programs would be established
to
develop effective methods of debtor education. Bankruptcy judges would have the power to order
debtors to participate in education programs in appropriate cases.
Amendments Applicable to chapter 7
Ride-through of Secured Debt. (11 U.S.C. §§ 362, 524(c), 722) A
debtor would not be permitted to make a legally enforceable obligation to be personally liable to
repay
a debt discharged in bankruptcy. The debtor could continue to make payments on a secured loan
according to the contract terms without further involvement of counsel or the court and retain the
property, if the debtor were not in default on the contract at the time of the bankruptcy (other
than by
the bankruptcy filing itself) or if the secured creditor waived any defaults inwriting at the time of
the
bankruptcy. If the debtor subsequently ceased making payments or defaulted on other contract
obligations, such as the obligation to insure, the creditor would be entitled to seek relief from the
stay
prior to discharge or to repossess the collateral post-discharge. A creditor would be permitted to
contact a debtor directly regarding post-petition contract defaults. Redemption under section 722
would remain unchanged.
Secured and unsecured debts (New, 11 U.S.C. § 522(f)) For purposes of
determining the secured and unsecured status of certain loans in bankruptcy, loans secured by
household furnishings, wearing apparel, appliances, books, animals, crops, musical instruments,
jewelry,
implements, professional books, tools of the trade or professionally prescribed health aids for the
debtor or a member of the debtors' household that are worth $2,500 or less in value for each item,
shall
be deemed unsecured.
Postbankruptcy Payments--Unsecured Debt (11 U.S.C. § 524(c), (f)) Any
debtor could voluntarily repay any debt, including an unsecured debt, that had been discharged in
bankruptcy. A debtor would not be permitted to reaffirm personal liability on a debt discharged in
bankruptcy, and federal law would make it an unlawful practice for a creditor to make any
postpetition
effort to collect from the debtor a debt that already had been discharged in bankruptcy.
Amendments Applicable to chapter 13
Repayment Plans (11 U.S.C. §§ 1322, 1325)
Repayment requirements would depend on the nature of the debt. The concept of disposable
income would be changed.
Homes The chapter 13 debtor would have the opportunity to deaccelerate and cure
a
mortgage in default, just as the debtor can do under current law. The restrictions in section
1322(b)(2)
would be limited to first mortgages and refinanced first mortgages. Payments on a mortgage
arrearage
would be spread over the three to five year life of the plan, in equal monthly payments, along with
payments to unsecured creditors.
Other Secured Debt A secured creditor would be entitled to full repayment of the
present value of its allowed secured claims. Valuation of personal property would be pegged at
the
median point between wholesale and retail. Valuation of real property would be valued at fair
market
value less the cost of foreclosure or sale. The rate of interest would be set by the court using
guidelines;
a suggested starting point for the interest rate is treasury bill plus three points, but the amount
would
vary with market conditions and risk factors. Interest under section 1322(e) would run at the
contract
rate. The unsecured portion of these debts would receive a pro rata distribution in theChapter 13
plan
along with all other unsecured debts. Payments to secured creditors would be spread over the
three to
five year life of the plan.
Unsecured Debt Debtors would make secured and unsecured debt payments
simultaneously. Debtors would repay a fixed amount to unsecured creditors throughout the life of
the
chapter 13 plan, which would be a minimum of three years in length. The amount to be repaid
would be
determined by guidelines, which would be based on a graduated percentage of income. The
trustee or
any unsecured creditor could file an objection to any plan that deviates from the guidelines, and a
court
would determine whether the deviation was appropriate in all the circumstances (e.g., a debtor
with a
chronically ill dependent might have much higher expenses than average and pay a lower fraction
of
income). (A sample guideline will be attached in a later draft, but it provides for a nominal
repayment
for debtors with incomes below $20,000, and a graduated repayment climbing to about 7% of
adjusted
gross income for debtors with incomes above $75,000. The guideline has a multiplier for the
number of
people claimed as dependents for income tax purposes and for regional variations in the cost of
living.)
The percentage payable would be distributed pro rata to unsecured creditors holding
dischargeable
and/or nondischargeable debts.
The trustee would be obligated to verify income and to review, at least annually, a debtor's
income
for changes and possible modification -- upward or downward -- of the required amounts. In
addition,
debtors could attempt to pay more of their unsecured debt, either to meet the "best
interest" test or because they voluntarily chose to do so. Any such debt repayments would
be
monitored and distributed by the chapter 13 trustee.
Tax Debt and Other Nondischargeable Debt Discussion of nondischargeability and
the
treatment of nondischargeable debts will be the subject of a session at the Commission's May
meeting.
Consequences of Completion of a Plan of Repayment
Credit Reporting (15 U.S.C. § 1681 et seq.) Debtors who choose chapter
13
repayment plans would have their bankruptcy filings reported differently from those who do not.
For
debtors who complete repayment plans, bankruptcy filings would be reported for a shorter period
of
time.
Credit Rehabilitation Trustees would be encouraged to establish credit
rehabilitation
programs to help give debtors better, cheaper access to credit for those who participate in
repayment
plans.
Dismissal/Conversion/Refiling (11 U.S.C. §§ 1307, 362, 109)
Grounds. The grounds for dismissing or converting a chapter 13 case will be the
same
as under current law, but the effects of dismissal and conversion will change.
Chapter 7. After filing for chapter 7, a debtor could not file again for chapter 7 for
six
years or for chapter 13 for two years, except as noted below.
Chapter 13. After dismissal, discharge, or plan completion in either chapter 7 or
chapter
13, a debtor could not file again in chapter 13 for two years. A debtor dismissed from chapter 13
would be automatically converted to chapter 7, with claims against the estate and property of the
estate
determined at the time of conversion. A debtor could petition the court to permit a filing in
chapter 13
sooner than the two year time bar following a chapter 7 or chapter 13 if the debtor demonstrated
a
significant change in circumstances since the last filing and proposed a confirmable plan with
demonstrated feasibility and a reasonable likelihood of success.
In rem orders. On a motion and a hearing, bankruptcy courts would be empowered
to
issue in rem orders barring the application of a future automatic stay to identified property
of
the estate for a period up to six years. In rem orders could be issued on a showing that the
debtor had transferred property or fractional shares of property to avoid creditor foreclosure or
eviction. A subsequent owner of the property who files for bankruptcy (or the same owner in a
subsequent filing) could petition the bankruptcy court for the imposition of a stay to protect the
property. The court would lift the ban and impose a stay to protect innocent parties who were not
a
part of a scheme to transfer the property to hinder a foreclosure or eviction. Bankruptcy court
in
rem orders could be filed in the state recording system to provide notice to purchasers and
other
parties.
|
