Working Group Proposals
ABI CONSUMER BANKRUPTCY
REFORM FORUMMay 15, 1997
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Report fromt the Consumer
Reform Forum, held January 17-18, 1997, in Alexandria, Va.
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DEFAULT DISCHARGE PROPOSAL FOR FAILING CHAPTER 13 CASES
Statement of Problem
When a debtor seeks Chapter 13 Relief, often that debtor might have
qualified for a "no asset" Chapter 7 discharge at the outset. If the
debtor elects a Chapter 13 and the Chapter 13 plan subsequently fails,
current law allows the debtor to voluntarily dismiss the case, elect to
convert the case, or the case is dismissed upon the motion of a party in
interest, usually the trustee. If the Chapter 13 is dismissed, the
debtor receives no discharge. If the case is converted, the debtor
normally incurs additional attorneys fees and filing fees, must file new
schedules and statements and must attend a new meeting of creditors.
This is so even in a "no asset" case.
The existing system deprives many debtors who attempt to consummate a
repayment plan of a discharge to which they would have been entitled had
they originally filed a Chapter 7. This skews two policies that Congress
has articulated—1) to encourage people to attempt a repayment plan
and 2) to provide debtors with a "fresh start."
The proposal below would improve current law in a number of ways.
First, it would provide a discharge for numerous Chapter 13 debtors who
attempt but fail to complete payment plans to creditors, leaving them in
at least as good a position as those debtors who elect Chapter 7 with no
payment to creditors. Second, because of the increased number of debtors
who will obtain such a discharge, the number of bankruptcy filings
nationwide will be reduced, since a certain portion of refilings to
obtain the discharge will not be necessary. Third, Chapter 7
administrative costs will be avoided for "no asset" cases, thereby
increasing the efficiency of the system.
A debtor may elect to dismiss a Chapter 13 case at any time, as under
existing law, unless the case was previously converted to Chapter 13
from another Chapter, in which case the debtor may seek court approval
of a dismissal.
Upon the failure of the debtor to comply with a confirmed Chapter 13
Plan, the trustee or any other party in interest may file a noticed
motion to have the case closed. Upon motion to close, the moving
(usually the trustee) must disclose 1) whether the debtor would have
been entitled to a discharge of debts under §727 had the debtor
filed a Chapter 7 petition, or 2) whether the debtor has met the "best
interest" test by repaying a sufficient amount to unsecured creditors
during the Chapter 13 Plan. Notice of a hearing would be provided to all
parties in interest of the motion to close the case with a basic
discharge (equivalent to a current Chapter 7 discharge). This notice
would also contain the dates set for parties to bring §§523(a)
and 727 complaints. No bar date would be set for claims to be filed in
these cases, since no assets would be administered by a Chapter 7
Trustee. Unless a party objected (arguing that the estate should be
administered under Chapter 7), a party filed a §727 complaint, or
the debtor voluntarily dismissed the case, the motion would be approved
by the court at the hearing and the discharge would be entered. At all
times during the process, the debtor would retain the right to dismiss
the case. If a party filed a §523(a) complaint, the discharge would
still be entered with regard to other creditors, and the §523(a)
complaint would proceed as under current law.
If the trustee perceives that an unconsummated Chapter 13 case is no
longer being funded and that the case should be administered because
there are assets sufficient to provide distribution to creditors, the
trustee shall move to convert the case to Chapter 7, unless the
administration would produce only a nominal result, in which case the
trustee shall move to dismiss the case. Unless the case were dismissed
by the debtor or the trustee, the case would be converted to Chapter 7
for administration or disposition. Notice of the motion to convert would
also contain the dates set for parties to bring §§523(a) and
727 complaints as well as the bar date for claims to be filed.
A debtor would contest the motion to close or convert and would have
the right to modify the Chapter 13 Plan or propose a mechanism to cure
the Chapter 13 Plan default up to the time that the objection period had
passed. If a case were converted, the debtor would be credited for
payments to secured creditors as provided under current law
If the debtor fails to obtain confirmation of a plan, the option of
closing with discharge would not be available. The debtor could dismiss
or convert to Chapter 7, and any party in interest could seek to have
the case dismissed or converted.
Current protections against involuntary conversion for farmers would
CHAPTER 13 SUPERDISCHARGE
Stop Further Erosion of the Superdischarge The Chapter 13
superdischarge was intended to be an important incentive to encourage
debtors to elect Chapter 13 and Chapter 7 when the Bankruptcy Code was
enacted in 1978. Debtors who could propose a confirmable plan would be
able to discharge almost all debts by paying all unsecured creditors a
pro rata dividend. However, since 1978 the superdischarge has been
eroded through piecemeal amendments to the Code, making Chapter 13 less
attractive to debtors. These debtors, unable to solve their financial
problems through Chapter 13, are more likely to find it necessary to
file Chapter 7, resulting in no dividend to most unsecured
Proposals have recently been made to cut back even further on the
superdischarge, specifically regarding certain tax debts. These
proposals have been advanced by tax authorities notwithstanding the fact
that Chapter 13 has provided tax agencies with substantial revenues at
low collection cost. Further restrictions on the superdischarge such as
this will remove Chapter 13 as a viable option for many more debtors,
thus limiting the ability of those debtors to obtain financial
rehabilitation and eliminating repayments to most of their unsecured
Given additional classes of creditors nondischargeable status harms
the interest of both debtors and most general unsecured creditors.
Therefore, it is recommended that no further restrictions on the Chapter
13 superdischarge be enacted.
Restore the Superdischarge for Student Loans Until 1990 most
student loans were dischargeable in Chapter 13, providing an incentive
for debtors to choose Chapter 13. That year, however, Congress enacted
new legislation making most student loans nondischargeable in 13. This
legislation never underwent scrutiny in the Judiciary Committees of
Congress, thus depriving interested parties of the ability to comment on
the effects of such a change on debtors and creditors alike. Many
debtors today simply have no way to repay their student loans from their
current income, and also have little prospect for significant financial
improvement in the near future. In some cases these debtors attended
trade schools, after unscrupulous sales tactics by those schools.
To provide these debtors with a chance for financial rehabilitation
and to encourage more Chapter 13 plans where all unsecured creditors
share in a debtor's repayment, it is recommended that the superdischarge
be restored for student loans in Chapter 13 cases.
CREDIT BUREAU REFORM
Our suggestions for credit bureau reform are:
- Bankruptcies must be reported by Chapter.
- Completed Chapter 13 plans must be reported by the percentage of the
unsecured debt which was repaid. The reporting on this would have to
come from the Chapter 13 Trustees to the credit bureaus.
- If the debtor completes a Chapter 13 and the credit reporting on all
the debts included in the bankruptcy plan has expired, the credit bureau
should delete the reporting on various debts and delete the Chapter 13
Bankruptcy, as well.
- Completion of a consumer finance education program would also be
recorded in the credit bureau history.
- The intent of these suggestions is to increase the attractiveness of
a Chapter 13 over that of Chapter 7 by giving more favorable reporting
in the credit bureaus. The ABI participants encourage and welcome any
further ideas that contribute toward this end.
PROPOSAL ON REPEAT FILINGS
Judge William Brown
Prof. Jeff Morris
The goals of an effort to deal with serial bankruptcy filings
- to sort out the abusive cases from the nonabusive cases;
- to quickly deny the automatic stay to debtors who file abusive
cases, thereby also eliminating the incentive to file such cases;
- to avoid imposing costs on debtors who are not filing abusive cases
that might make it more difficult or even impossible for them to obtain
needed relief; and to avoid imposing costs on creditors or lessors who
are delayed from exercising their rights by abusive bankruptcy
The subcommittee agreed that the barriers to serial filings should
not be applicable to the second bankruptcy case a debtor files. It was
our consensus that the second case is far more often legitimate than
abusive, and that even in the case where in hindsight it becomes clear
the second case was abusive, that rarely can be readily determined when
the second case is filed. Our proposal would not prevent a creditor or
lessor who wishes to allege an abuse in a second case from filing a
motion for relief from the stay or a motion to dismiss, and even seeking
expedited relief, as that creditor or lessor can do under current
However, if a debtor files a third case within a five year period,
and that case is filed within 180 days of the dismissal of the second
case, a new barrier would be erected. In such a case, the automatic stay
would terminate 15 days from the petition filing unless no objection was
filed to the continuation of the stay by any creditor, lessor, or the
trustee. (Calendaring the hearing would be left to local practice.)
Thus, creditors and lessors would have a quick and easy way to trigger a
prompt review of the debtor's filing, and debtors would have little
incentive to file a case that could not be justified, since the stay
would be lost almost immediately.
If no objection to the debtor's motion was filed, the court would
continue the stay without a hearing, subject to current relief from stay
procedures. If an objection was filed, the debtor would have the burden
at the hearing of proving that there was a reasonable prospect of a
feasible plan being completed. Absent such a finding the stay would not
be continued as to the objecting creditor or lessor. (If the trustee
objected, the court could consider factors such as any change in
circumstances since the prior cases, level of effort in the prior cases,
amount of arrears, reasons for failure of prior cases, the debtor's
honesty with the court, and differences in Chapter 13 plans between the
prior cases and the current case.
For any bankruptcy case filed by a debtor after the third case within
a five year period, there would be no automatic stay. The debtor could
seek a stay from the bankruptcy court and would have the same burden of
proof as in the case.
Court's Power to Issue In rem Orders
The subcommittee agreed that the bankruptcy court must have a limited
power to issue in rem orders granting relief from the stay with respect
to a particular property for future cases filed by debtors other than
the debtor in the case before it. This power is necessary in order to
prevent schemes in which a property is transferred and subdivided for
the purpose of repeated bankruptcy filings by different debtors invoking
a new automatic stay with respect to the property in each case.
Under this proposal the court would have the power, on motion of a
creditor or real property lessor, to issue in rem order that would make
the automatic stay inapplicable to a particular property in a subsequent
This order could be issued only upon a finding that the property had
been transferred after a prior bankruptcy case in which the stay was
applicable to the property for the purpose of the transferee obtaining
an automatic stay that could not otherwise be obtained with respect to
the property (for example, under the first part of this proposal, if the
transferor had filed two prior cases and could not making the showing
necessary to obtain a stay in a subsequent case.) The order could be
entered only after notice to all known entities having an interest in
the property and a hearing.
The order could be recorded by the moving party in the appropriate
registry for real estate, and if it was recorded it would be deemed
constructive notice of its terms to any transferee who received an
interest in the property after the order was recorded. The order would
remain effective until the earlier of 1) the expiration of six years
from the date of the order or 2) the moving party realizing its
collateral or, in the case of the lessor, obtaining possession of the
A transferee or co-owner of the property who is innocent of any
scheme to abuse the automatic stay could move for relief from the order.
Such relief could be granted by the court in its discretion after notice
to the party that sought the order and a hearing.
Prof. Jeff Morris
Presently, a debtor must dedicate "all disposable income" to fund a
Chapter 13 plan upon the application of the trustee or an unsecured
creditor (see §1325(b)). A debtor may avoid this obligation by
proposing a plan which satisfies all unsecured claims in full, within a
three year period. Issues have been raised as to what types of expenses
are to be included in a debtor's budget, since "all disposable income"
is statutorily defined as funds which are not "reasonably necessary to
be expended...for the maintenance or support of the debtor or a
dependent of the debtor." Courts have disagreed as to what types of
expenses are appropriate or "reasonably necessary." Courts have also
applied varying standards as to the amount of expenses which are
One proposal under serious consideration is the establishment of a
standard template which fixes the amount of funds which a debtor must
dedicate to pay to unsecured claim holders. The standard template would
be national in scope and adjusted to family size and for geographic
At the January ABI forum, there was a general (though not unanimous)
feeling that, with some exceptions, the idea of paying "all disposable
income," determined on a case-by-case basis works reasonably well,
providing flexibility for debtors in fashioning Chapter 13 relief around
their own circumstances, subject to the scrutiny of trustees and
The participants at the ABI forum have articulated problems, however,
with the uniformity of the application of the §1325(b) test. Judges
can differ radically on what might be reasonable and necessary.
The definition of disposable income will still be those funds not
reasonably necessary for the maintenance and support of the debtor and
the debtor's household dependants. The debtor would list expenses
incurred in several broad categories, which type of expense would be
presumptively necessary, and the reasonableness could be subject to
challenge. These categories are:
- Food expense
- Housing costs (and housing related expenses)
- Laundry and Cleaning
- Utilities and Telephone
- Medical Expenses
Whether such expenses are reasonable would depend upon the debtor's
family reasonable needs and the reasonable living expenses of a family
of similar size, with similar income living in the same geographic area.
Any party challenging the reasonableness of such expenses by a debtor's
family would bear the burden of proof to demonstrate
For a self-employed debtor or a debtor engaged in business, expenses
related to the production of income would be presumptively necessary.
Whether the expenses are reasonable would depend upon the expenses
incurred by similar businesses in the same geographic area.
If a debtor incurs other types of expenses (tuition costs,
entertainment, gifts, etc.) Such could be reasonably necessary, but, on
request of the trustee or any unsecured creditor, the debtor would bear
the burden of proof to demonstrate the reasonableness and the necessity
of the proposed expense.
If the debtor's plan meets the requirements of §1325(b),
confirmation of the plan should not be denied solely because the plan
fails to meet any minimum payment requirement beyond that required by
TREATMENT OF RENT-TO-OWN CONTRACTS
This proposal is forwarded pursuant to the discussions held with
Henry and Gary on our conference call which was held on April 24,
Treatment of Rent-to-Own Contracts
There has been continuing debate over how to treat rent-to-own
contracts which do not fit neatly into the definition of "lease" or the
definition of "sale" outside of bankruptcy.
Through discussions held during our conference call, many instances
were cited where the use of these contracts have created problems
throughout the country for low income consumers. In rent-to-own
transactions, consumers enter into agreements to rent various household
and personal items for low payments over extended terms designed to, in
essence, purchase the item through the agreement. These rent-to-own
contracts appear to be an attempt, by those who engage in this practice,
to avoid various state laws regulating interest rates and lending
These same issues arise in bankruptcy cases with varying results. The
majority of courts have treated these obligations as installment sales
subject to §§722 and 1325. A minority of courts have treated
these as "true leases."
During our conference call, it was agreed by consensus that these
types of obligations should be recharacterized as installment sales to
allow the treatment as afforded under the applicable provisions of the
code. The recharacterization of rent-to-own contracts must be crafted in
a manner to avoid any negative impact on "true leases".
It is possible that the simples method of dealing with the problem in
bankruptcy is to treat the transaction as an installment sale,
regardless of its characterization under state law, for purposes of
bankruptcy. This could be accomplished by an amendment in §365, or
elsewhere, providing that in a case where an individual debtor is the
lessee of consumer goods other than a motor vehicle, the debtor may have
the transaction considered as a sale, according the lessor an allowed
secured claim in the amount of the value of the property or the present
value of the remaining payments, whichever is less. The lessor would
have a deficiency claim allowable as an unsecured claim for the present
value of the remaining payments due under the lease minus the allowed
amount of the lessor's allowed secured claim.
The most practical way of doing this may be to amend the definition
of "security interest" to include the rights arising out of rent-to-own
transactions. The transactions would then be subject to the statement of
intentions section in Chapter 7, §521(2), and the redemption
provision in §722.