Consumer Bankruptcy Proposal
Submitted by M. Caldwell Butler
Summary of Recommendations
I. National Filing System
A national filing system should be established and maintained that would identify
bankruptcy filings using social security numbers or other unique identifying numbers.
II. Heightened Requirements for Accurate Information
The Bankruptcy Code should direct trustees to perform random audits of
debtors’ schedules to verify the accuracy of the information listed. Cases
would be selected for audit according to guidelines developed by the Executive Office for
United States Trustees.
Courts should be authorized to order creditors who file and fail to correct
materially false claims in bankruptcy to pay costs and the debtors' attorneys' fees involved
in correcting the claim. If a creditor knowingly filed a false claim, the court could impose
appropriate additional sanctions.
The Commission should endorse the amended Rule 9011 of the Federal Rules of
Bankruptcy Procedure, to become effective on December 1, 1997, which will make all
submissions subject to the "reasonable inquiry" standard and
will help ensure that attorneys take responsibility for the information that they and their
clients provide.
III. Financial Education
All debtors in both chapter 7 and in chapter 13 should have the opportunity to
participate in a financial education program.
IV. Reaffirmation Agreements
11 U.S.C. § 524(c) should be amended to provide that a
reaffirmation agreement is permitted, with court approval, only if the amount of the debt
that the debtor seeks to reaffirm does not exceed the allowed secured claim, the lien is not
avoidable under the provisions of title 11, no attorney fees, costs, or expenses have been
added to the principal amount of the debt to be reaffirmed, the motion for approval of the
agreement is accompanied by underlying contractual documents and all related security
agreements or liens, together with evidence of their perfection, the debtor has provided all
information requested in the motion for approval of the agreement, and
the agreement conforms with all other requirements of subsection (c). [Specific statutory
language of this recommendation is attached as Appendix A].
Section 524(d) should be amended to delineate the circumstances under which a
hearingis not required as a prerequisite to a court approving an agreement of the kind
specified in section 524(c): a hearing will not be required when the debtor was
represented by counsel in negotiations on the agreement, the agreement is not part of a
settlement of litigation regarding the dischargeability of a debt under section 523, and a
party in interest has not requested a judicial valuation of the collateral that is the subject
of the agreement. If one or more of the foregoing requirements is not met, or in the
court’s discretion, the court shall conduct a hearing to determine whether
an agreement that meets all of the requirements of subsection (c) should be approved.
Court approval of an agreement signifies that the court has determined that the agreement
is in the best interest of the debtor and the debtor’s dependents and does not
impose undue hardship on the debtor and the debtor’s dependents in light
of the debtor's income and expenses. [Specific statutory language of this
recommendation is attached as Appendix B].
An additional subsection should be added to section 524 to provide that the court
shall grant judgment in favor of an individual who has received a discharge under section
727, 1141, 1128, or 1328 of this title for costs and attorneys fees, plus treble damages,
from a creditor who threatens, files suit, or otherwise seeks to collect any debt that was
discharged in bankruptcy and was not the subject of an agreement in accordance with
subsections (c) and (d) of section 524.
Section 521(2) should be amended to clarify that a debtor with consumer debts
that are secured, as determined by the provisions of Title 11, by property of the estate
must redeem the property or obtain court approval of an agreement under section 524(c)
of this title in order to retain the property post-discharge, except for a security interest in
real or personal property that is the debtor’s principal residence.
The Commission should recommend that the Advisory Committee on Bankruptcy
Rules of the Judicial Conference prescribe a form motion for approval of reaffirmation
agreements that contains information enabling the court and the parties to determine the
propriety of the agreement. Approval of the motion would not entail a separate order of
the court. [Specific language of this recommendation is attached as Appendix C].
V. Security Interests on Household Goods
Section 522(f) should provide that a creditor claiming a purchase money security
interest in exempt property held for personal or household use of the debtor or a
dependent of the debtor in 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
debtor’s household must petition the bankruptcy court for continued
recognition of the security interest. The court shall hold a hearing to value each item
covered by the creditor's petition. If the value of the item is less than $500, the petition
shall not be granted; if the value is $500 or greater, the security interest would be
recognized and treated as a secured loan in chapter 7 or chapter 13.
Consumer rent-to-own transactions should be characterized in bankruptcy as
installmentsales contracts.
VI. Chapter 13 Payment Plans
A chapter 13 plan could not modify obligations on first mortgages and refinanced
first mortgages, except to the extent currently permitted by the Bankruptcy Code. Section
1322(b)(2) should be amended to provide that the rights of a holder of a claim secured
only by a junior security interest in real property that is the debtor’s
principal residence may not be modified to reduce the secured claim to less than the
appraised value of the property at the time the security interest was made.
Payments on secured debts that are subject to modification should be spread over the life
of the plan, according to fixed criteria for valuation and interest rates.
Payments on unsecured debt should be determined by guidelines based on a
graduated percentage of the debtor’s income, subject to upward
adjustment to meet the section 1325(a)(4) requirement that creditors receive at least the
present value of whatever they would have received in a chapter 7. The trustee or an
unsecured creditor should be authorized to file an objection to any plan that deviates from
the guidelines, and a court would determine whether the deviation was appropriate in
light of all the circumstances.
VII. Effect of Payment under chapter 13 Plans
Debtors who choose chapter 13 repayment plans should have their bankruptcy
filings reported differently from those who do not.
Debtors who complete voluntary debtor education programs should have that
fact noted on their credit reports.
Trustees should be encouraged to establish credit rehabilitation programs to help
provide better, cheaper access to credit for those who participate in repayment plans.
VIII. Limitations on Serial Filing; Uncompleted Payment Plans; In Rem Orders
Section 362 should be amended to provide that the filing of a petition by an
individual does not operate as a stay if the individual has filed two or more petitions for
relief under Title 11 within six years of filing the instant petition for relief and if the
individual has been a debtor in a bankruptcy case within 180 days prior to the instant
petition for relief. On the request of the debtor, after notice and a hearing, the court may
impose a stay for cause shown, subject to such conditions and modifications as the court
may impose.
The Bankruptcy Code should provide that a case under chapter 13 that otherwise
meets the standards for dismissal shall be converted to chapter 7 after notice and a hearing
unless aparty in interest objects on the basis that the debtor had been granted a discharge
in a chapter 7 case commenced within six years of the date on which the conversion
would take place, in which case the chapter 13 case will be dismissed. In addition, the
debtor may object to conversion without grounds, in which case the chapter 13 case will
be dismissed. The standards for modification, dismissal, and discharge in chapter 13
would not otherwise change.
Section 362 should be amended to provide that the filing of a petition by an
individual does not operate as a stay with respect to property of the estate transferred by
that individual to another individual who was a debtor under Title 11 within 180 days of
the filing of the instant petition, unless the court grants a stay with respect to such
property after notice and a hearing on request of the debtor.
After notice and a hearing, a bankruptcy court should be empowered to issue
in rem orders barring the application of a future automatic stay to
identified property of the estate for a period of up to six years when a party could show
that the debtor had transferred such real property or leasehold interests or fractional
shares of property or leasehold interests to avoid creditor foreclosure or eviction. A
subsequent owner of the property or tenant of the leasehold who files for bankruptcy (or
the same owner or holder in a subsequent filing) should be permitted to petition the
bankruptcy court for the imposition of a stay to protect property of the estate, which the
court would be required to grant to protect innocent parties who were not a part of a
scheme to transfer the property to hinder foreclosure or eviction.
Appendix A
Proposed Statutory Language for 11 U.S.C. § 524(c)
11 U.S.C. § 524(c): An agreement between a holder of a claim and the
debtor, the consideration for which, in whole or in part, is based on a debt that is
dischargeable in a case under this title is enforceable only if:
1)the agreement was made and has been filed with the court before the granting of
the discharge;
2) the agreement contains a clear and conspicuous statement advising the debtor
that the agreement is not required under this title, nonbankruptcy law, or any agreement
not in accordance with the provisions of this section, and that the agreement may be
rescinded at any time prior to discharge or within sixty days after the agreement is filed
with the court, whichever occurs later, by giving notice of rescission to the holder of such
claim;
3) the amount of the debt that the debtor seeks to reaffirm does not exceed the
allowed secured claim, the lien is not avoidable under the provisions of this title, no
attorney fees, costs, or expenses have been added to the principal amount of the debt to
be reaffirmed, and the agreement stipulates that the lien will be released after the payment
of the debt that the debtor has reaffirmed;
4)the motion for approval of the agreement is accompanied by underlying
contractual documents and all related security agreements or liens, together with evidence
of their perfection, and the debtor has provided all information requested in the motion
for approval of the agreement;
5) if the debtor is represented by an attorney in negotiations on the agreement, the
agreement is accompanied by a declaration or affidavit of the attorney stating that:
(A)the agreement is voluntary;
(B) the agreement does not impose undue hardship on the debtor or the
debtor’s dependents;
(C)the agreement is, in the view of the attorney, in the best interest of the debtor
and the debtor’s dependents; and
(D) the attorney fully advised the debtor of the legal effect and
consequences of such an agreement and the consequences of default and alternatives to
reaffirmation, such as redemption under section 722 of this title;
6) the court has held a hearing at its discretion or if required under subsection (d)
of this section, reviewed the agreement and its terms and has approved the agreement as
being consistent with this section and the provisions of this title; and
7) the debtor has not rescinded the agreement at any time prior to discharge or
within sixtydays after such agreement is filed with the court, whichever occurs later, by
giving notice of rescission to the holder of such claim.
Appendix B
Proposed Statutory Language for 11 U.S.C. § 524(d)
11 U.S.C. § 524(d): In a case concerning an individual, when the court has
determined whether to grant or not to grant a discharge under section 727, 1141, 1228,
or 1328 of this title, the court may hold a hearing at which the debtor shall appear in
person. At any such hearing, the court shall inform the debtor that a discharge has been
granted or the reason why a discharge has not been granted. If the debtor seeks to make
an agreement of the kind specified in subsection (c) of this section, a hearing on the
proposed agreement is not required when:
1) the debtor was represented by an attorney in negotiations on the agreement and
the debtor’s attorney has signed the affidavit as provided in section
524(c);
2) the agreement has been made prior to the date of the debtor's discharge;
3)a party in interest has not requested a judicial valuation of the collateral that is
the subject of the agreement.
If one or more of the foregoing factors is not satisfied, or in the court’s
discretion, the court shall conduct a hearing to determine whether the agreement should
be approved. At this hearing, the court shall inform the debtor that the agreement is not
required under this title, under nonbankruptcy law, or under any agreement not made in
accordance with the provisions of subsection (c) of this section. The court shall explain
the legal effects and consequences of the agreement and of a default under such an
agreement. In addition to meeting all requirements of subsection (c), an agreement can be
approved after a hearing only if the court has determined that:
1) the agreement is in the best interest of the debtor and the
debtor’s dependents; and
2)the agreement will not impose an undue hardship on the debtor and the
debtor’s dependents in light of the debtor's income and expenses.
Appendix C
Proposed Requirements for Motion for Approval of Reaffirmation Agreements
The motion for approval should include the following information:
·320·Name of the
parties.·320
·320·Summary terms of new agreement,
including the principal amount, the interest rate (APR), the amount of monthly payment,
the date on which payments will commence, the total number of payments, the total
amount of payments (interest and principal) if paid according to schedule and the date on
which the lien will be released, whether payments were in default as of bankruptcy filing,
and ways in which terms differ from original agreement.
·320
·320·Description of security, including
manufacturer, year, and model if applicable, value of security and the basis for the
parties’ determination of that value, and current and anticipated use of
collateral.·320
·320·The effect of the proposed
reaffirmation on the debtor, including information on the debtor’s monthly
income and expenses, whether the agreement will impose an undue hardship on the
debtor, the reasons for the debtor entering into this agreement, whether the agreement is
in the debtor’s best interest, and whether the debtor considered the option
of redemption under section 722.·320
·320·Whether the agreement is part of a
settlement of litigation on the dischargeability of this debt under section 523 of the
Bankruptcy Code.·320
·320·Whether the debtor was represented
by an attorney during the course of the negotiations on the
agreement.·320
·320·A statement of the
parties’ understanding that the agreement is entirely voluntary and is not
required, that the debtor may rescind the agreement at any time prior to discharge or
within 60 days after agreement is filed, whichever is later, and that the agreement will be
fully enforceable under state law.·320
·320·Certification of the parties that they
have attached the instrument creating the debt and any security interest or lien along with
any documents necessary to show perfection of the interest.·320
Explanation of Replacement Recommendations
IV. Reaffirmation Agreements
When an individual debtor receives a discharge in bankruptcy, the debtor is relieved of
personal liability for prepetition claims for dischargeable debts, with one very significant
exception: debtors currently are permitted to reaffirm and reestablish personal liability for selected
prepetition debts if the reaffirmation agreement satisfies certain baseline requirements. Due to
concern that such agreements can seriously undermine a debtor's financial rehabilitation, the 1973
Commission on the Bankruptcy Laws of the United States had recommended that reaffirmation
agreements be prohibited generally but that debtors could reaffirm secured debts to the extent of
the fair market value of the collateral. Although Congress shared the 1973 Commission’s
underlying concern, Congress did not adopt the Commission’s approach and instead
imposed a series of procedural prerequisites, presumably to filter out all reaffirmation agreements
except those that were in the debtor’s best economic interest and would affirmatively
promote the debtor’s fresh start and postbankruptcy productivity. While Congress
endorsed the repayment of creditors, this was to be accomplished through a chapter 13 repayment
plan in accordance with specific statutory priorities.
The experience with reaffirmations under the 1978 Code has demonstrated that procedural
statutory constraints have not accomplished the intended goals. Few people may have
contemplated in 1978 that completely- or partially-unsecured debts could be reaffirmed routinely
in light of the new reaffirmation provisions, and yet this has become a pervasive practice, [ FN: According to the preliminary results of the
bankruptcy reaffirmation project at Creighton University School of Law, 30% of the cases in their
three-district sample contained at least one reaffirmation agreement, at least 20% of the
agreements involved the reaffirmation of completely unsecured debts, and the principal amount
reaffirmed constituted a substantial percentage of their annual net income from wages. Over 42%
of the debtors in the Credit Research Center at Purdue University study proposed to reaffirm one
or more debts, and proposed non-housing debt was $11,311 in principal alone, a significant
amount compared to the Purdue Study ’s report that the debtors had average annual
income of $19,284.] especially in cases with less active involvement by the
debtor’s attorney. When chapter 7 debtors emerge from bankruptcy with such high levels
of encumbrance, they are hindered from regaining postbankruptcy productivity. The high volume
of repayment obligations outside the structure of a chapter 13 payment plan also magnifies the
differential treatment of similarly-situated creditors.
For the first time, this recommendation would introduce significant substantive, as well as
procedural, parameters on the reaffirmation of dischargeable prepetition debt. Under this
recommendation, the court could permit a debtor and creditor to enter into a agreement to
reaffirm secured debt as long as the new obligation did not exceed the amount of the allowed
secured claim, e.g., the value of the collateral. Whether the debt is a secured debt would be
determined under the provisions of Title 11, and any party in interest could request a judicial
valuation of the collateral. The parties could negotiate and determine all other terms of
theagreement, which would be fully voluntary on both sides. If a debtor and creditor could not
reach an agreement and the debtor did not redeem the property, the creditor would be free to
exercise its state law remedies after the court entered the discharge order or by seeking relief from
the automatic stay. Reaffirmation of unsecured debt would not be permitted; in furthering the
principle of equality of distribution to creditors that is central to the collective bankruptcy process,
this approach would address the current inequality between creditors who systematically pursue
reaffirmation agreements and other legally-similar creditors who do not have the resources to do
the same. This approach also reduces the disincentives for debtors to file for chapter 13 that are
present in the current system; well-counseled debtors would not be able to structure beneficial
bankruptcies using a combination of chapter 7 and reaffirmations of selected debt. As under
present law, a debtor always could voluntarily repay a debt after bankruptcy, and the
creditor would be free to keep payments that the debtor willingly remits, although a
creditor’s expectation of such payments would be legally unenforceable. Factors other than
personal liability, such as the possibility of future extensions of credit from a credit union, might
encourage debtors to voluntarily repay some debts. Because creditors cannot pursue the
collection of discharged debts, the responsibility to better inform debtors of their rights to pay
debts voluntarily post-discharge is allocated to debtors’ attorneys, case trustees, and the
courts.
As a prerequisite to court approval of a reaffirmation agreement, the parties would have to
provide detailed financial information about the collateral and the debt and to explain the basis of
their valuation and include all supporting documentation. The court would review each agreement
to ensure that the documentation showed a valid non-avoidable lien and supported valuation of
the property for the amount to be reaffirmed. This recommendation also allocates responsibility to
debtors’ attorneys to provide greater assistance to their clients in the preparation of the
paperwork for the motion for the approval of a reaffirmation agreement. The success and integrity
of the bankruptcy system is the responsibility not only of the bankruptcy bench but of the
bankruptcy bar as well. Accordingly, the Commission endorses amended Rule 9011 of the Federal
Rules of Bankruptcy Procedure that will make all submissions subject to the
"reasonable inquiry" standard and will help ensure that attorneys take responsibility
for the information that they and their clients provide, and the Commission hopes that nothing will
prevent the amended rule from becoming effective on December 1, 1997 as planned.
A court would be required to hold a hearing in the instances set forth in the recommendation
and could hold hearings in other instances at its discretion. In all cases, the court and/or the
debtor’s attorney would have to make a determination of whether the agreement will
impose an undue hardship on the debtor and whether the agreement is in the best interest of the
debtor and the debtor’s dependents. The term "best interest of the debtor"
should be strictly construed.
Redemption under section 722 would remain unchanged by this recommendation.
Corresponding Changes to the Framework for Changes to Chapters 7 & 13
The endorsement of the instant recommendation to permit reaffirmation of prepetition debts
to the extent of the value of the collateral would entail two corresponding changes to the
Framework for Changes to Chapters 7 & 13 that the Commission discussed and tentatively
adopted at the June 1997 meeting. First, the instant recommendation would replace the
recommendation to prohibit all reaffirmations. Thus, the following language would be
omitted:
Notwithstanding applicable non-bankruptcy law, debtors should not be able to
reaffirm personal liability on a debt discharged in bankruptcy. Federal law should
prohibit creditors from attempting to collect from the debtor any debt that has been
discharged in bankruptcy.
However, the instant recommendation retains the notion expressed in the latter sentence of
the superseded recommendation: federal law must be even clearer that creditors cannot pursue
collection of discharged debts from the debtor. To this end, this recommendation includes a
statutory amendment to section 524 that would authorize a court to impose fees and treble
damages on any creditor who violates the discharge injunction in this fashion.
Second, the following recommendation would be omitted:
Section 524 should be amended to provide that the filing of a bankruptcy petition
or a discharge in bankruptcy alone does not create a post-bankruptcy default on a
loan. A creditor could continue to collect payments on a secured debt
postpetition without court involvement. After the debtor has received a discharge, nothing
in the Bankruptcy Code would prevent a creditor from repossessing property if a debtor
defaulted under the loan agreement.
The debtor who did not reaffirm or redeem could not prevent repossession post-discharge
even if the debtor had been current in her secured debt payments at the time of the bankruptcy
filing. Instead, the Commission would recommend that section 521 be amended to clarify that the
Code does not authorize "ride-through" and would resolve the debate and circuit split
on this issue; the recommendation would adopt the position taken by the Fifth, Seventh, and
11th Circuit Courts of Appeals. [ FN: SeeIn re Johnson, 89 F.3d 249 (5th Cir.
1996) (no retention of collateral without reaffirmation or redemption),In re Taylor, 3 F.3d
1512 (11th Cir. 1993) (same),In re Edwards, 901 F.2d 1383 (7th Cir. 1990) (same).
CfIn re Belanger, 962 F.2d 345 (4th Cir. 1992) (permitting retention of collateral without
reaffirmation or redemption); Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir.
1989) (same).] This recommendation contemplates one exception to the
"no ride-through" rule: consistent with current practice and consonant with the
federal policy to preclude modification of home mortgages to protect the mortgage market,
mortgages on the debtor’s primary residence could ride through at the contract rate if they
were not in default (other than by the filing of the bankruptcy petition). Mortgages that are in
arrears generally will lead debtors to chapter 13 where they can deaccelerate and cure. Regardless
of the size of their losses, mortgage lenders rarely seek deficiency judgments against debtors, and
approximately fifteen statelegislatures already partially or completely limit the ability of
mortgagees to collect deficiency judgments. [
FN: See, e.g., John Mixon & Ira B. Shepard, "Antideficiency Relief for Foreclosed
Homeowners: ULSIA Section 511(b), " 27 Wake Forest L. Rev. 455, 475 and accompanying end
notes (1992).] Thus, permitting ride-through of mortgages would not
cause a significant change but would be consistent with longstanding federal policy. Of course,
the debtor would be expected to meet all other contract terms, including insurance requirements,
and ultimately pay the mortgage loan in full.
VI. Chapter 13 Repayment of Home Mortgage Loans
Under section 506 of the Bankruptcy Code, secured debts are bifurcated into secured and
unsecured portions based on the value of the property. The Code provides a special exception for
loans secured only by a chapter 13 debtor’s primary residence, an exception that is based
on the laudable goal of preserving families’ access to financing for purchasing homes.
Home mortgages provide a valuable source of financing for families that goes beyond home
acquisition; mortgage loans also are used to fund important family life events, such as sending a
child to college.
Traditional banks grant home mortgages and home equity lines of credit on strict
underwriting standards. The maximum combined home loan to value ratio for bank mortgages at
loan origination generally falls around 75%. These loans generally cannot be modified
under current law, [ FN: The Bankruptcy Code
already treats some holders of liens on homes like other secured creditors. For example, some
home mortgages can be modified if the house is not the debtor ’s "primary residence. "
Likewise, section 1322 does not prohibit modification of a mortgagee ’s loan if the loan is
secured by additional collateral. In addition, since the 1994 amendments, section 1322 has
authorized modification of an undersecured residential mortgage if final payment will become due
during the chapter 13 plan, a provision that makes most balloon-payment mortgages eligible for
stripdown.] and could not be modified under this recommendation.
However, some lenders that obtain mortgages on the homes of American families are lending
on a partly unsecured basis as of the day they make the loans. Under this relatively new
phenomenon, some lenders permit and encourage debtors to borrow over 100% -- and sometimes
up to 125% -- of the value of their homes at higher-than-market interest rates. [ FN: " Less than one-tenth of conventional mortgage
loans had LTVs of greater than 90% at the start of the decade. At their peak of popularity in
mid-1995, 90% plus LTV loans were closing in on one-third of conventional mortgage loan
originations. Mortgage loans equal to 125% of house values have also become increasingly
common. " Mark M. Zandi, "The Lender of First and Last Resort, " Regional Financial Review
at 3 (July 1997).] Home equity loans where the loan exceeds the value of
the property are priced more like credit card lending, with interest rates of around 14% and
higher, as compared to banks’ more traditional home equity loans with 8.5-9% interest
rates. Loans that exceed the value of the property are blended loans with an unsecured component
from the inception and should be treated accordingly in thebankruptcy process.
This modest change to current law would continue the policy that mortgage liens generally
are fully protected notwithstanding section 506 of the Bankruptcy Code, but would permit
modification to a limited extent for certain loans that were made on a partly unsecured basis. This
recommendation is similar in approach, although not identical in detail, to provisions in H.R. 6020
and S.1985, two bills that led up to the Bankruptcy Reform Act of 1994. [ FN: H.R. 6020 would have permitted stripdown of
undersecured mortgages on the debtor ’s personal residence, but would have limited
stripdown of first mortgages to the extent they were unsecured from the time the mortgage
interest attached to the property. H.R. Rep. No. 996, 102nd Cong., 2nd Sess. 1992, 1992 WL
322481 (October 3, 1992). S. 1985, by contrast, would have permitted the modification of claims
of junior mortgagees that were partially unsecured when the interest attached, but the extent to
which they could be modified does not seem to be limited by the value at the time of attachment.
Sen. 1985, 102nd Cong., 2d Sess. (May 7, 1992). These versions of the bills preceded the
Supreme Court ’s decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993),
which held that the chapter 13 anti-modification provision prevented mortgagee ’s claims
from being bifurcated into secured and unsecured portions pursuant to section
506.]
Under this recommendation, the rights of a bank or other lender holding a mortgage that was
fully secured when the loan was granted could not be modified. Yet, if junior interests
were partially unsecured when the secondary mortgage was made, the lender would be treated as
a fully secured creditor only to the extent it was secured when it made the loan. However, even
these lenders would get special protection as compared to other creditors: the secured claims of
undersecured mortgage lenders would not be reduced below the value of the property when the
loan was made, even if the value of the property has since declined.
Permitting this modification of junior mortgages taken on a partly unsecured basis comports
with the continuing effort to treat like creditors alike. Enabling certain unsecured mortgagees to
remain entitled to payment in full on account of a partly unsecured lien diverts assets from other
creditors and prefers some creditors over others. This recommendation also is consistent with
underlying federal policies promoting home ownership. Mortgage loans can put homeownership
at risk as the loan-to-value ratio continues to climb, and particularly when the loans exceed the
value of the property. To the extent that creditors who lend far in excess of a home’s value
can demand full repayment or can force a foreclosure, some homeowners will lose their homes,
and debtors with second and third mortgages that exceed the value of their homes are less likely
to confirm a chapter 13 plan, thereby yielding no payments to any creditors.
The home mortgage market is unlikely to be affected adversely by this recommendation
because the underwriting standards of traditional mortgage lenders preclude high-loan-to-value
mortgages, particularly those in which the loan exceeds the value of the collateral. The Federal
Home Loan Mortgage Corporation does not purchase high-loan-to-value home equity lines of
credit. Risky high-loan-to-value mortgages are packaged into securities that are sold in a separate
securities market. In any event, there is no empirical evidence that this recommendationwould
affect mortgage pricing. [ FN: In predicting the
effect of different collection laws on mortgage rates, empirical studies of state mortgagor
protection statutes (e.g., anti-deficiency laws) have demonstrated that mortgage interest rates are
relatively insensitive to the existence of mortgagor protection laws. See, e.g., Michael H. Schill,
"An Economic Analysis of Mortgagor Protection Laws, " 77 Va. L. Rev. 489 (1991) (50-state
empirical analysis of mortgage protection laws and mortgage rates). Professor Schill has argued
that, if anything, such mortgagor protection laws might promote economic efficiency because they
encourage lenders to value risk correctly.]
Corresponding Change to the Framework for Changes to Chapters 7 & 13
The endorsement of the instant recommendation would entail one corresponding change to
the Framework for Changes to Chapters 7 & 13 that the Commission discussed and
tentatively adopted at the June 1997 meeting. The language of the recommendation in the
Framework would be altered as follows:
A chapter 13 plan could not modify obligations on first mortgages and refinanced
first mortgages, except to the extent currently permitted by the Bankruptcy Code
. . . Payments on all other
secured debts should bethat are subject to
modification; such payments should be spread over the life of the
plan, according to fixed criteria for valuation and interest rates.
VIII. Restrictions on Refiling [
FN: For more detailed information and further discussion on this recommendation, see
letter and exhibits from Hon. Joe Lee to M. Caldwell Butler, at 1 (July 18,
1997).]
With very few limitations, debtors may file for bankruptcy under current law whenever they
present the appropriate papers to the clerk of the court and pay the filing fee. Restricting access to
the bankruptcy system or to the automatic stay would be an historic change. Although courts have
developed methods to deal with abusive filings, [
FN: For summaries of cases dealing with successive filings by debtors to delay foreclosure
or other creditor action, see id., Exhibit B.] a change in debtors’
repeated access to consumer bankruptcy relief is, in part, based on evidence that some debtors
repeatedly seek bankruptcy relief to use the tools that enable them to continuously defeat their
creditors’ collection efforts without making the commitment required either in chapter 7 or
chapter 13 to resolve their financial problems. A restriction on successive filing also is premised
on the principle that frequent and repetitive access to the tools of bankruptcy should be
discouraged if one trip to the bankruptcy system provides the relief that Congress intended.
Corresponding Change to the Framework for Changes to Chapters 7 & 13
The following language would be omitted:
An individual debtor who receives a discharge in chapter 7 should be barred from
refiling in chapter 7 for six years and chapter 13 for two years after the case is closed. An
individual debtor who files for chapter 13 should be barred from filing for chapter 7 or
chapter 13 for two years. A debtor should be permitted to petition the court to permit a
filing in chapter 13 sooner than two years if the debtor could demonstrate a significant
change in circumstances since the last filing and proposed a confirmable plan with
demonstrable feasibility and a reasonable likelihood of success. Within the time periods
listed here, a debtor could not file and receive the protection of the automatic stay
without advance court approval.
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