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May 17, 1999
MEMORANDUM FOR HILLARY RODHAM CLINTON
FROM:
NICOLE RABNER
CC:
MELANNE VERVEER
SUBJECT:
BANKRUPTCY REFORM
Tomorrow morning, Melanne and I participating in a meeting with the President's
advisors on bankruptcy reform legislative strategy. The President's advisors are in the process of
devising a plan for the bill's likely movement to the Senate floor next week. Attached please
find a very preliminary draft of a strategy memorandum for the President - its bleak outlook
underscores the pessimism of the President's advisors about our leverage at this stage.
If your schedule permits, we recommend that you hold a very brief conference call or
meeting with President's advisors on this issue (Gene Sperling, Larry Stein, Maria Escheveste
and Sarah Rosen). The purpose of the call would be to brief you on our strategy. We believe it
would be helpful for you to ask for a report on our proactive strategy to influence and improve
the bill before it reaches the President's desk.
VERY PRELIMINARY DRAFT MEMORANDUM FOR THE PRESIDENT
ACTION FORCING EVENT: On April 6, 1999, we wrote to you recommending a strategy to deal
with Bankruptcy legislation moving through both chambers in Congress. The goal was to increase our
leverage and reduce the likelihood of a veto override. We have made little progress, however, in the
face of an extraordinary campaign by the credit industry. The House recently passed a bill that is still
fundamentally flawed. Nonetheless, it passed by a vote of 313 - 108 (with fewer votes in opposition
than last year's Conference Report). We anticipate that an only slightly better bill will pass in the
Senate by a similar veto-proof margin, making exercise of the veto a futile gesture that will only
highlight weakness.
RECOMMENDATION: Given this prognosis, your advisors recommend a new strategy designed to
achieve very modest improvements that would allow you to reluctantly sign the bill, while expressing
concern about the impact of the legislation. Specifically, we propose to:
(1)
develop a tactical amendment to be offered on the Senate floor that would give
the court discretion to consider the special circumstances of sympathetic debtors, e.g.,
those who care for non-dependent elderly or children, who are protecting themselves or
their families from domestic violence, or who are trying to move from welfare to work;
(2)
work with Democratic supporters of both House and Senate legislation in an
effort to win their help in obtaining modest changes;
(3)
adjust the tone of Administration statements about the pending Senate
bankruptcy bill, showing greater favor for this slightly better bill in hopes of increasing
the chances that its more reasonable provisions will prevail in Conference; and
(4)
recommend that you sign the bill that comes to your desk, while expressing
concern that its provisions will hurt low- and moderate-income families struggling to
make a fresh start and making the case for further scrutiny of the bill's impact and
reconsideration of its provision if harm is found.
BACKGROUND: In April, we proposed a strategy to:
(1)
exploit publicly the vulnerabilities of the legislation (by presenting sympathetic
scenarios of debtors denied access to a fresh start under the bill, attacking provisions in
the bill that roll back existing protections against abusive and coercive collection
practices, highlighting the bill's failure to improve disclosure and stem credit card
abuses, and critiquing lingering danger it presents to child support and alimony
collection);
2
(2)
work with bill proponents and opponents (including Senators Torricelli and
Grassley and Representative Nadler) to advance alternative provisions that would
substantively improve the current bills;
(3)
work with Representatives Nadler, Conyers, Frank, Gephardt, and Bonior to
produce a more palatable House bill, or, if that is not possible, to garner the 20-25
additional House votes necessary to sustain your veto; and
(4)
work with Senators Durbin, Kennedy, Leahy and others to develop a Senate floor
strategy and identify message amendments which could motivate Republicans to
compromise.
Thus far, the effort has been unsuccessful. Representative Nadler began the debate by offering an
alternative that was to the left of the Senate bill last year. We convinced him that a different strategy
was necessary - that the Democrats should instead offer an amendment that made only a limited list of
targeted changes necessary to win the President's support. Minority Leader Gephardt, who last year
voted for the Conference Report, agreed to support this strategy. He issued a statement indicating his
opposition to the Judiciary Committee print and support for the Democratic alternative. However, it
appears that the nature of the alternative was largely irrelevant in the face of an extraordinary lobbying
campaign by creditors reminiscent of major tax legislation. The Democratic alternative received votes
from Democrats, but only were willing to oppose the underlying bill after the alternative failed.
[Stats to come.]
The poor showing of the Democratic alternative in the House bodes badly for the Senate debate
scheduled for the week of May 17th or May 24th. In extensive discussions with numerous Senate
members and their staff, we find little willingness to advance changes to the complex means test and
reaffirmation provisions that need revision. They are interested in advancing "message" amendments
(e.g., a Schumer amendment to make nondischargeable in bankruptcy judgements for violation of the
Freedom of Access to Clinics Act) or limited technical changes sought by narrow constituencies (e.g.,
credit counselors). In any event, few Democratic amendments are likely to succeed; and the majority
of Democrats appear prepared to vote for the bill on final passage provided they have an opportunity to
offer their amendments. If the Majority Leader takes procedural steps to limit debate in the face of
Minimum Wage or Patients' Bill of Rights amendments, Democrats may oppose cloture as a party
rights matter; however, a time agreement for consideration of Democratic amendments is likely to be
reached.
The advocates fighting against the current bill - largely consumer groups and women's organizations -
continue to press the Administration to hold firm, either to exact significant concessions from the
industry or to veto the bill. They argue that the creditor industry fears a veto and the negative publicity
that would follow and that the Senate Democrats sponsoring last year's promising Senate bill will be
strong on the floor. Finally, the advocates remember the rhetorical strength of you and the First Lady
from last year and see Administration pressure as significant. The advocates have a more optimistic
view than most of your advisors of our leverage at this stage. Unfortunately, they have been severely
outspent and outnumbered by the bill's formidable lobbyists - congressional staff report that they have
not even been a presence on the Hill.
3
In light of our limited leverage, the best possible outcome would be further modest changes to the
Senate bill, with key provisions from the Senate version prevailing in conference. To that end, we will
find a sponsor for an amendment that will be hard to oppose. This amendment would give the court
discretion to consider the special circumstances of those who care for non-dependent elderly or
children, who are protecting themselves or their families from domestic violence, or who are trying to
move from welfare to work. Our greatest concern with these bills has been that they provide
bankruptcy judges inadequate discretion to consider the unique circumstances of individual debtors.
As we have been unable to argue compellingly for judicial discretion, we will propose that they
provide discretion in specific cases where the strict application of the rigid means test formula would
impose clear hardship.
We also will work with Democratic supporters of both House and Senate legislation in an effort to win
their help in obtaining modest changes that will allow the Administration to demonstrate that we
obtained concessions. We will craft a more balanced Statement of Administration Policy on the
Senate bill when it comes to the floor - a statement less critical than others that we have issues thus far.
We need to show favor toward the Senate proposal in hopes that its slightly more modest provisions
will prevail in conference. Finally, we will begin to lay the groundwork for a signing statement that
expresses your concern about the adverse impact of this legislation on some debtors and their families.
In signing the legislation, you may wish to direct the Departments of Justice and Treasury to undertake
studies of the bill's impact so that, if adverse implications are found, you can advance limited
proposals to remedy the harm in the future.
Agree
Disagree
Let's Discuss
4
Summary of Hyde Amendments
The amendments that Chairman Hyde offered during the House Judiciary Committee's mark-up
of H.R. 833 address in part the Administration's concerns about the lack of balance in H.R. 833.
Specifically, the Hyde amendments:
Substitute standards to be drafted by the Justice Department in place of H.R. 833's use of
IRS standards in the bill's means test to determine a debtor's expenses and eligibility for
Chapter 7 relief. (Sens. Grassley and Torricelli recently wrote Secretary Rubin asking for
Treasury to assist in the modification of IRS standards so they would be suitable; so this
provision is within the mainstream.)
Include a presumption that debtors with income below the median income level are not
abusing the bankruptcy system in filing under chapter 7. Debtors below this income level
have little repayment capacity and therefore almost no chance of successfully completing
a chapter 13 repayment plan. This common-sense provision goes a long way toward
addressing the Administration's concerns about reducing the cost of administering the
means-test bankruptcy for the courts, the trustees, and the debtors.
Substitute a straightforward test that debtors with the ability to repay a total of $6,000
over 60 months, or $100/month, would be presumed to be abusing the bankruptcy system
by filing under chapter 7. This test would replace the test in H.R. 833 that debtors with
$5000 in net income over 5 years, or the ability to pay 25 percent of their general
unsecured indebtedness over the same period, would face the presumption. Very
preliminary Treasury estimates suggest that this change would noticeably reduce the
number of debtors affected by the means test, because those with low dollar repayment
capacities (who were caught by the 25% provision) would be dropped. These debtors are
disproportionately low- and moderate-income. The Hyde amendments also include
estimated administrative expenses of 10 percent and reasonable legal fees in the
calculation of the debtor's repayment capacity.
An important clarifying edit that is critical for Administration support of the amendment:
The Hyde amendment means test provides that a debtor's monthly expenses shall be
those "reasonably necessary" for the maintenance or support of the debtor, the spouse of
the debtor, and dependents of the debtor, and, if the debtor is engaged in business, for the
payment of expenditures necessary for the continuation, preservation, and operation of
such business. This is the standard currently applied in Chapter 13. However, debtors
who are subjected to motions to convert to Chapter 13 must demonstrate "extraordinary"
circumstances that make adjustments to income or expenses "necessary and reasonable."
We believe that these terms should be deleted to reduce confusion regarding the
appropriate standard; for example, creditor motions that require "extraordinary"
circumstances to overcome would have the effect of undoing the appropriate Trustee
discretion in deciding not to submit a motion.
Additional changes that the Administration would like to see in the Hyde amendment:
The amendment should clearly include discretion for courts to dismiss filings in bad faith
and based on the totality of circumstances.
The means test should be further modified to reduce administrative costs without
reducing repayment capacity. Specifically, debtors with incomes between 100% and
150% of median should be subjected to a preliminary "screen" based on formulaic
expenses only; most of them will fail this test, and so would certainly fail a full (and more
costly) means test that included a detailed review of additional expense categories.
The specific time period and threshold ($6,000 repayment capacity over five years) may
not provide the most appropriate standard for Chapter 13 referrals. Previously, the
Administration has supported a three-year window for calculating repayment capacity.
However, the Hyde Amendment is based on capacity to repay $100/month; changing the
standard to $3,600 repayment capacity over three years would probably have little effect
on the debtors captured by the test.
Talking Points on HR 833, Bankruptcy Reform Bill
The Administration has issued a veto threat on this bill. If it passes with a veto-proof margin,
we have no leverage to get a better bill in conference. We need you to oppose it.
The Administration wants bankruptcy reform. As part of reform, debtors who can repay a
significant part of their debts should be required to do so. The problem with the current bill
is that it lacks balance in addressing debtor and creditor abuses in bankruptcy.
We want you to join us in supporting the Nadler/Conyers/Meehan "Democratic alternative"
amendment. This amendment sticks with the basic framework of the bill, but includes
specific changes that give balance and fairness to the bill. In fact, the amendment represents
a limited list of narrowly tailored changes to the Judiciary Committee report -- changes that
are necessary to win our support.
The biggest problem in the bill is that it includes an unfair and rigid "means test" for
determining access to Chapter 7 and the discharge of debts in bankruptcy.
First, the bill uses IRS expense formulas to determine a debtor's repayment ability.
These standards were created for tax collection, not bankruptcy, and are not
appropriate for bankruptcy purposes.
Second, the bill proposes to use the IRS standards rigidly, with exceptions for
"extraordinary" cases only. But the IRS only uses the standards as rough guidelines,
because many households have unusual circumstances. There is no reason to apply
standards for collection of credit card debt more rigidly than standards for collection
of tax debt and other priority debt.
Hyde and Conyers are also offering an amendment that addresses these problems with the
bill's means test. They have a "Dear Colleague" letter that makes the same points. We urge
you to support this amendment.
The Democratic alternative amendment addresses the Administration's other major concerns
with the bill, which must be addressed for the President to support the bill.
The bill places the payment of high-priority debts like child support and alimony at
risk after bankruptcy, by reducing the debts that can be discharged in bankruptcy. For
example, the bill would make broad new categories of credit card debt
nondischargeable.
The bill does not address clear evidence of creditor abuses in bankruptcy. For
example, there is much evidence of coercive and misleading reaffirmations of
unsecured debts and low-value secured debts in bankruptcy.
The amendment also includes new credit card disclosures, for example of teaser rates
and of the implications of making minimum payments, that consumers need to
manage their credit card debts effectively.
Amendment to S. 625 to Protect Debtors with Special Expenses
In Section 102(a)-
At the end of proposed subsection 707(b)(2)(A)(ii), insert the following:
"The expenses shall include, if applicable, the debtor's actual expenses incurred-
"(a) to maintain the debtor and his or her family safe from domestic violence as identified
under applicable federal laws"
"(b) by a debtor who is receiving or has received payments under the Temporary
Assistance for Needy Families, applicable state welfare assistance laws, unemployment
insurance, or the Social Security Act as amended, and is attempting to obtain and maintain
employment"
"(c) for care and support of a household member or member of the debtor's immediate
family (including parents, grandparents, and siblings of the debtor, the dependents of the debtor,
and the spouse of the debtor in a joint case) that is not a dependent, not exceeding two times the
poverty threshold published by the Census for the current year"
[
"(d) for care and support of foster children that exceeds reimbursements under applicable
state and federal law, or associated with an ongoing adoption."]
MEMORANDUM
TO:
Larry Stein
FROM:
Joel Wiginton
Date:
May 17, 1999
RE:
Where the Key Senators are on the Bankruptcy Issue
General Background
As you know, there are now two competing bills in the Senate: S. 625, the Grassley-Torricelli
bill; and S. 945, the Durbin bill (this is S. 1301, the Grassley-Durbin bill as passed by the
Senate last Congress). S. 625 currently has five Democratic cosponsors: Sens. Biden,
Johnson, Breaux, Bob Kerrey, and Robb. The Durbin bill has four Democratic cosponsors:
Leahy, Sarbanes, Kennedy, and Feingold.
Given this backdrop, here is a brief run down of where the key Senators are on the bankruptcy
issue (based on information supplied by their staffs).
The Republicans
Grassley: Sen. Grassley has always been more reasonable than many of his colleagues on this
issue. Continuing that stance, his staff has shown some interest in dealing with us on our
means-test proposal. Although he may be willing to negotiate on other matters as well, this
will probably not occur unless he feels that there will be 34 Democrats voting against his bill.
Hatch: Although Sen. Hatch has generally been very conservative on these issues, his staff has
at least been quite up front. Sen. Hatch may be willing to negotiate "to some degree" on our
means-test and reaffirmations proposals but will not move on the cram-down and the
nondischargeable debt issues. Although Sen. Hatch's rhetoric notes that he is not worried about
a veto, his staff strongly implied that they would like to avoid this if at all possible. In doing so,
his the staff also implied that we could get some "reasonable" changes but would then have to
affirmatively support the bill. This is definitely an avenue we should explore (Treasury sent
Hatch's staff proposed language on Friday), but in the end Sen. Hatch is unlikely to move too far.
The Democrats
Durbin: Sen. Durbin is ready for a fight. He is reportedly quite displeased by the efforts of
Sen. Torricelli and will try and remedy this on the floor. He is likely to pressure the White
House to come out with a strong veto threat.
Torricelli: Although Torricelli sent a letter to Sen. Grassley outlining six major
improvements he needed in the bill to support it, there is little evidence that he is ready to vote
against the bill if these improvements are not achieved. Indeed, he did not offer any
meaningful amendments in Committee and currently only plans on offering an omnibus
consumer protection amendment on the floor. He may, however, also offer the "Hyde
amendment." In addition, on Friday his staff presented Sen. Grassley with the improvements
he needed to see in the Manager's mark. No word on Sen. Grassley's response to those
demands.
Leahy: Sen. Leahy will likely be much more involved this year. He will primarily focus on
getting consumer protections and financial privacy in the bill. It would be quite helpful to our
efforts if he decides to be a real player on this matter. He voted against the Grassley-
Torricelli bill in Committee.
Kennedy: Sen. Kennedy - as he was last year - will likely be very far to the left on this issue
(i.e., he would probably prefer that there be no bill at all). That being said, he signed on as a
cosponsor to the Durbin bill, because he thought it was politically necessary. He has said that
he will most likely offer Patients Bill of Rights or Minimum Wage as amendments on the
floor. It would also be beneficial if we can get him to do a more technical bankruptcy
amendment such as reaffirmations. He voted against the Grassley-Torricelli bill in
Committee.
Kohl: Sen. Kohl is fairly centrist on bankruptcy. His staff notes, however, that he is
disappointed that the homestead exemption provision (he added this with an amendment in
Subcommittee last year) and the consumer credit protections are not in the bill. He will,
therefore, offer a homestead exemption amendment on the floor (which will pass). He may
also offer an amendment on cram-downs. In the end, however, he will likely vote for the
Grassley-Torricelli bill. He voted for the Grassley-Torricelli bill in Committee.
Feingold: Sen. Feingold is just like Kennedy on this issue. He too was originally reluctant to
cosponsor the Durbin bill, because he believes it is too centrist. He will offer a number of
amendments on the floor dealing primarily with the access to justice restraints in the bill. He
voted against the Grassley-Torricelli bill in Committee.
Schumer: Sen. Schumer may carry a great deal of water for us on this issue on the floor. He
is currently likely to offer a version of our means-test proposal and is considering offering our
reaffirmations proposal. He is also offering an amendment that would make damages awarded
under the FACE Act nondischargeable. We sent a letter through the DoJ in support of this
amendment last week. He voted against the Grassley-Torricelli bill in Committee.
Sarbanes: Although Sen. Sarbanes has cosponsored the Durbin bill, he has noted that he will
not be very involved in the debate beyond those issues that would fall within the jurisdiction of
the Banking Committee (i.e., the TILA and financial privacy issues). He will almost
certainly, however, offer or cosponsor amendments on these matters on the floor.
Dobb: Sen. Dobb was very involved in this issue last year, because he was quite concerned
about the impact of the legislation on women and children. Up to this point, he has been
relatively silent but may offer an amendment remedying the remaining women and children
problems on the floor. His staff has also shown some interest in our reaffirmations proposal.
Jack Reed: Like Sen. Dobb, Sen. Reed was very active on this issue last Congress but has
not engaged as of yet this year. His staff has shown some interest in offering credit card
consumer protection amendments on the floor and may also consider offering a means-test
discretion amendment.
Column on Bankruptcy Reform
OUTLINE SUGGESTION
I.
Lead such as "If you had told me a few months ago that I would write a column agreeing
with Chairman of the House Judiciary Committee Henry Hyde, I wouldn't have believed
it.
II.
Open with bankruptcy reform and how some reform is in order - with the proliferation of
bankruptcy filings over the past years.
III.
Talk about how this bill has serious flaws that need to be addressed (see SAP).
Something like, "I find myself thinking about those who this bill would hurt and those it
would let off scot-free."
IV.
Who this bill would hurt. Debtors in the following scenarios:
A. Imagine a couple who takes care of his elderly mother. Although she receives
Social Security and is not technically a dependent of her son, she relies
heavily on the financial support her son provides, enabling her to stay in her
small apartment.
B. Imagine a woman who has been the victim of domestic violence and who is
incurring unplanned expenses for a security system for her home, added
transportation costs (had to move out of the house and now commutes further
to work), or attorneys fees for a restraining order.
C. Imagine a laid-off steel worker or an out-of-work farmer who is trying to get a
better job and is enrolled in a job-training program to learn a new skill and
advance.
D. Imagine a couple who has been waiting years for an adoption to go through
and incurs significant one-time expenses relating to that adoption, such as
legal fees or transportation.
V.
This bill could hurt these people because the new bankruptcy rules that these bills would
create would mean that if any of these people found themselves seeking bankruptcy, the
system would not be able to take into account any of their individual compelling
circumstances in determining how much the debtor must repay. Background: the Means
Test proposed in the pending House and Senate bills are rigid and use an IRS formula of
expenses to determine how much a debtor can pay back to his/her creditors. These IRS
standards were never meant to be used in this way (they were developed for tax-
collecting purposes - rather they were meant to be used with significant discretion on the
part of the IRS). Used in bankruptcy, they effectively determine how much a debtor is
allowed to live on, while the balance of his/her income going to pay back debts, such as
credit card debt. One of the problems with the rigid system is that because they don't
take the specific circumstances of the debtor in mind and only tabulate certain allowable
areas of expenses, they can be used to harm Americans who find themselves in unusual
but sympathetic circumstances (see attachments for further discussion).
VI.
Who this bill would not hurt.
A. Coercive creditors who scare debtors into reaffirming debt that they could
otherwise discharge in bankruptcy (and the bill rolls back the only effective
current remedy to these practices - class action suits, which help for instance
to stop Sears)
B. Credit card companies who send out billions of credit card solicitation - they
would not have to provide meaningful disclosure to consumers to ensure that
they know what they are doing when they take on this debt. (i.e. the minimum
payment disclosure requirement).
C. The rich -- who have loopholes to hide their wealth and protect it from
creditors, by, for instance, buying a lavish home in certain states (see NYT
opinion piece)
VII.
Plea to fix the bill -- hopes that when this measure is taken up by the Senate that they
show leadership and address these important concerns.
ONE MORE THOUGHT - I'M NOT SURE WHERE TO PUT THIS:
I think it's important that somewhere in here she also mention that the problems of child support
and alimony collection, while narrowed since last year's bill, have not been entirely fixed.
This is a memo
That went to
The Pres (Two is
a draft but the
substance didn't
April 5, 1999
change - see
MEMORANDUM TO THE PRESIDENT
The sect m on
FROM:
GENE SPERLING
LARRY STEIN
1 Exploit
MELANNE VERVEER
unlnerable what
RE:
BANKRUPTCY REFORM STRATEGY
for commen
ACTION FORCING EVENT: Bankruptcy legislation is moving rapidly through the House and
the Senate. Both chambers plan to complete committee action after recess and take floor action
in May. Last year, we worked closely with Senator Durbin, resulting in a 97-1 Senate vote for a
moderate and balanced bill. The moderating provisions were largely abandoned in Conference.
Your advisors informed Congress that they would recommend a veto of the Conference Report.
If the Senate had voted on the Conference Report, we do not know what the outcome would have
been, but Senator Durbin threatened delay and bill lobbyists predicted Republican gains in the
1998 election and decided to wait. The House approved the Conference Report by a veto-proof
vote of 300-125. Minority Leader Gephardt was among the 80 or so Democrats supporting the
Conference Report.
This year, while Congressman Nadler is leading efforts against the Conference Report and
working to enlist greater support for a more moderate approach, we expect the House to approve
a bill like the Conference report by a similar margin. In the Senate, there seems to be less
support than previously among Democrats for fighting unbalanced legislation. Absent a strong
effort to influence the legislation, it is likely that you will be presented legislation that you will
not want to sign, yet with sufficient support to override a veto.
RECOMMENDATION: We seek your approval of a strategy designed to increase our leverage
and reduce the likelihood of a veto override. Specifically, we seek authority to: (1) exploit
publicly the vulnerabilities of the legislation (by presenting sympathetic scenarios of debtors
denied access to a fresh start under the bill, attacking provisions in the bill that roll back existing
protections against abusive and coercive collection practices, highlighting the bill's failure
improve disclosure and stem credit card abuses, and critiquing lingering danger it presents to
child support and alimony collection); (2) work with bill proponents and opponents (including
Senators Torricelli and Grassley and Representative Nadler) to advance alternative provisions
that would substantively improve the current bills; (3) work with Senators Durbin, Kennedy,
Leahy and others to develop a Senate floor strategy and identify message amendments which
could motivate Republicans to compromise; and (4) work with Representatives Nadler, Conyers,
Frank, Gephardt, and Bonior to produce a more palatable House bill, or, if that is not possible, to
garner the 20-25 additional House votes necessary to sustain your veto.
THE STATUS OF BANKRUPTCY LEGISLATION IN CONGRESS
In the House, Representative Gekas, introduced H.R. 833, which is virtually identical to last
year's Conference Report. It now has 93 cosponsors, including nearly 40 Democrats (e.g.,
Representatives Boucher, Frost, Kennedy, Holden, Menendez, Roemer, Maloney, and
Velazquez). Minority Leader Gephardt supported the conference report last year, and would
likely do so again (albeit with a low profile). However, if a strong balanced alternative can be
constructed that would give him and other House Democrats a viable pro-reform and
pro-consumer bill to support and that has the strong public backing of the White House,
Gephardt might be willing to rally his caucus vigorously around such a vehicle.
Representatives Conyers and Nadler recently wrote to you praising you and the First lady for
your leadership last year and asking you to reiterate your opposition to last year's Conference
Report. On March 23, 1999, Jack Lew sent a reply noting that your senior advisors had
recommended a veto of the Conference Report last year and that "our position
has not
changed." Armed with that letter and an alternative bill being developed by a group of
bankruptcy experts at the National Bankruptcy Conference, Representative Nadler is confident
(perhaps more than we are) that he can prevent some Democrats, who last year supported the
Conference Report, from doing so this year. Doing so is critical to a credible veto threat.
In the Senate, we originally hoped that Senator Torricelli would not co-sponsor Senator
Grassley's bill, modeled after the Conference Report, demonstrating to other
Democrats that the bill was not ready for the caucus' support. Unfortunately, Senator
Torricelli did agree to cosponsor S. 625, although extracted some moderating changes
as a precondition of his sponsorship. He also wrote a letter to Senator Grassley
outlining six areas where the bill needs to be improved before it leaves the Senate.
Although we would like to see some other changes as well, we largely agree with the
six areas that Torricelli outlined. (The First Lady urged Senator Torricelli to hold firm on
these issues.) We are skeptical, however, that the Republicans will accept many of
these amendments either in committee or on the floor. (Even if they did, as last year,
we can expect any progress made to be undone in conference with the House.)
Senator Grassley is more reasonable on bankruptcy than many Republicans, but we do
not believe that he will be able to hold off his colleagues who believe they can get
Democratic support without further compromise. Senator Biden is already a co-sponsor and
five or six other Democrats have expressed interest in signing on the bill. Senator Leahy also
may support the bill in Committee as a demonstration of support for Senator Torricelli,
who replaced Senator Durbin as ranking member on the relevant subcommittee. Many
signs suggest that Senator Torricelli will not oppose the bill even if the additional
changes he seeks are not made. Senator Daschle, who wants a bankruptcy reform bill,
will likely support S. 625 in the end if enough Democrats move in that direction. Well
positioned Democratic staff believe there may be enough votes in the Senate to
override a Presidential veto.
Finally, last year, Banking Committee Chairman D'Amato raised no objection to
provisions inserted on the Senate floor that required credit card companies to provide
greater disclosure to consumers. These provisions were important to our support of the
Senate bill. However, the new Banking Committee Chairman, Senator Gramm, recently
noted his opposition to any bankruptcy bill which contains the credit card protections
that we view as important. Senator Gramm has reportedly said that a bill with these
consumer protections "will pass over [his] dead body."
At this time, neither the Administration nor effective advocates like Senator Kennedy
have mounted any offensive. Thus, our assessment is preliminary and we hope to
affect it. Some House and Senate Democrats are looking to the White House for
political guidance and leadership on this issue. While they want to support bankruptcy
legislation, we should be able to keep them from supporting the bills moving in each
chamber if we give them a viable alternative and a strong rationale not to do so.
RECOMMENDED STRATEGY
While we believe that the current bills before Congress are sufficiently flawed as to merit
continued opposition, we also believe that bankruptcy reform is not only desirable but necessary.
Our goal is to gain sufficient leverage in the debate on Capitol Hill to make modest but important
changes to the bills, so that we could recommend that you sign the resultant legislation. We
recommend the four-prong strategy described below.
1.
Exploit Vulnerabilities
It is difficult to rally Members or the public around complicated technical issues like
nondischargeable debt and means test formulas. However, there are messages we
can use to address each of our major areas of concern.
A.
The Formulaic Means Test Will Block Efforts of Responsible Debtors
to Get Back on Their Feet
One of our most significant concerns with the current bill is that the procedures established do
not afford debtors a meaningful opportunity to have their specific circumstances evaluated and
do not give the court the necessary discretion to take those circumstances into consideration.
While it is difficult to defend judicial discretion, we can tell stories about sympathetic debtors
who would be caught by the bill's rigid approach.
Under the bill, the bankruptcy trustee would determine whether a debtor can afford to
repay some of their debts by looking at the debtors income, less certain standard
allowances for food, clothing, transportation, and housing expenses rather than at what
they actually spend for those items. There may be cases where the actual expenses
are above the allowance amount for good reason, but the court can only provide an
exception if the debtor meets the burden of proving that their circumstances "
exceptional" and the additional expenses "necessary." So, for example:
*
No exception likely would be made for a debtor who helped his
non-dependent mother meet her expenses so that she could live on her
own and stay out of a nursing home. That debtor could be denied access
to Chapter 7's "fresh start" and the funds used to pay for his mother's
housing expenses would instead go to pay off his credit cards.
*
Similar problems arise especially in ethic and lower-income communities
where neighbors, friends, and relatives often bear significant costs to help
children, elderly, the disabled, the unemployed, and others who are not
legally their dependants.
*
No allowance likely would be made if a debtor's transportation expenses
to get to work on the other side of the region are above the area
allowance. The choice posed could be stark: (1) find a job closer to home
(even if less likely to provide career advancement) to lower transportation
costs and free up money to repay your creditors; or (2) fail to feed or cloth
your children.
*
No allowance likely would be made if the debtor's rental costs are higher
than the area allowance, even thought her apartment allows her to live
near to a relative who can safely watch the children after school. The
current test could force that single mother to move her family from her
home without an opportunity for individualized assessment of the
tradeoffs.
In addition to these scenarios, we can make much of the false representation made by
bill proponents that the bill no longer would impact below-median income debtors (who
make up 80% of those in bankruptcy). All debtors would be subject to the new mean
test; while creditors could only bring "abuse" motions against above-median income
debtors, the bankruptcy courts and trustees would be required to apply the means test
to all debtors.
B.
The Bills Roll Back Existing Protections Against Abusive Collection
Practices and Coercion.
In a famous, recent case, Sears was found to have harassed creditors into agreeing to
repay debts that they no longer had -- having been discharged in bankruptcy. The court
found that Sears had violated the "discharge injunction" and was liable for millions in
damages to hundreds of thousands of debtors. Under the House bill, creditors could
harass debtors to repay discharged debt with little fear of consequences, as class
actions and punitive damages -- the tools that brought the Sears' practices to an end --
would be barred.
Another concern is the bills failure to deal with coerced reaffirmations of debt.
Thousands of bankruptcy debtors each year agree to "reaffirm" one or more debts --
agreeing to pay it back even though they have the right to have the debt discharged in
bankruptcy. We have no objection to letting debtors make an informed choice about
whether to repay debts, but we see widespread evidence that decisions are not
informed and creditors coerce debtors into reaffirming debts by threating to challenge
the bankruptcy proceedings if they do not reaffirm, promising new credit lines in
exchange for reaffirmation, and harassing collection efforts aimed at debtors ignorant of
their rights. Provisions of these bills will create new opportunities for creditors to
threaten and harass debtors.
In numerous cases, debtors "agree" to reaffirm debts even though they do not have
sufficient income to pay their current expenses. While some may be optimistic, many
more feel they have no choice when approached by a creditor threatening to challenge
their bankruptcy. It would not be unusual to see a reaffirmation agreement, for
example, where the debtor agrees to repay $1000 in order to get a $500 line of credit --
an effective interest rate of 200% on the new debt, even though far less expensive
credit lines are now available even for those currently in bankruptcy. Even where a
debtor makes an informed choice, reaffirming the debt may harm ex-spouses and
children whose child support and alimony may not get paid because the
reaffirmed debt is paid instead.
The Bankruptcy Review Commission concluded that reaffirmations of unsecured debt
should be banned outright. We proposed instead a "coercion" check -- a review by the
bankruptcy court of any reaffirmation of unsecured debt to ensure that it was an
informed choice in the best interest of the debtor and others. We will press this issue
more visibly this year, while developing compromise alternatives that we could offer in
final negotiations.
C.
Consumer's Right-to-Know and Protection from Credit Card Abuse
Consumers are well aware of intense and misleading credit card marketing efforts. Last
year's Senate bill contained a number of important credit card provisions including: (1) a
requirement that credit card companies disclose on monthly statements how long it
would take (and how much it would cost) if consumers only made the minimum
payment; (2) a requirement that consumers be notified when credit card companies or
retailers take a security interest in the goods purchased; and (3) a requirement that
credit card companies inform debtors that they have not assessed the debtors' capacity
to repay additional debt and provide a worksheet so that the debtor can easily make
that calculation for themselves. Most of these provisions were stripped in conference,
leaving only a requirement for the Federal Reserve to study what further disclosures
would be helpful.
Legislation incorporating these provisions has been introduced in the Senate. In
addition, Representative LaFalce and Senator Schumer have introduced bills that
contain a host of additional credit card protections, many of which the Administration
supports. One, for example, would eliminate the misleading advertising of "teaser"
rates -- which leave consumers shocked by dramatic interest rate increases when rates
expire or they incur a penalty for a minor late payment. You are scheduled to unveil a
consumer financial protection package the week that Congress returns, which includes
many of these credit card provisions, as well as privacy protections. At that time, you
can praise the efforts of Democrats in both chambers to protect consumers against
abusive credit card practices. While we will not make passage of any specific credit
card provisions a precondition for bankruptcy support, some balance in this regard is
essential. By raising the profile of credit card issues, you will increase the leverage of
Democrats seeking to incorporate some of these provisions in the bankruptcy bill and
give Democrats an issue around which they can rally.
D.
Child Support and Alimony Collection
The bankruptcy bills create or expand categories of nondischargeable debts -- i.e.,
debts that can be collected after bankruptcy. Last year we argued that these new
nondischargeable debts would impair the collection of child support and alimony. In
response, the bills' proponents both narrowed the categories of new nondischargeable
debts and added a host of provisions that genuinely make it easier for former spouses
and custodial parents to collect child support and alimony from debtors in bankruptcy.
As a result, the bills probably improve the collection of family support obligations more
than it is harmed. However, two concerns remain; we can continue to argue credibly
that child support and alimony collection is harmed in some cases.
The bills now provide that, in the supervised context of a bankruptcy plan, child support
and alimony payments must be given the highest priority. However, under these bills,
some debtors will have obligations to repay reaffirmed or newly nondischargeable debt.
After the bankruptcy discharge, there is no court supervision or other mechanism to
ensure that child support and alimony are paid first. The custodial parent or former
spouse is unlikely to be as effective as the card company in collecting payment. Once
these lower-priority payments are made, it is not practical to require the custodial parent
or former spouse to go after the creditor to assert a claim on those payments.
The bills also raise another concern for the payment of child support and alimony. lif
debtors are forced into Chapter 13 who do not genuinely have the capacity to repay --
as we fear will occur under the current versions of the means test -- they will eventually
return to Chapter 7 with a diminished ability to repay their nondischargeable debts -- in
particular their child support and alimony -- because while under the plan, they devoted
some of their assets to paying their other creditors.
E.
The Bills Leave in Place Huge Loopholes for Wealthy Homeowners While
Squeezing Low and Moderate Income Debtors in over Their Heads.
Some of the most famous cases of abusive bankruptcy filings involve celebrities who live in
multimillion dollar mansions protected by "homestead exemptions" but walk away from other
debts. State exemptions also protect such luxuries as race horses and silver spoons in Virginia.
Yet, at the same time we are creating a system that will ask low and moderate income debtors to
behave responsibly to pay back some of their debts if they can -- these bills leave in place the
biggest loopholes used by the wealthy. (The House bill currently has a homestead
exemption cap of $250,000 but we expect even that to be removed on the floor.)
2.
Try to Improve the Legislation
While the Republicans are not presently receptive to significant changes, we must
continue to work in good faith with Senators Torricelli and Grassley (and key House
members) to make improvements to the bills where possible. On a few important
issues, we may be able to offer compromises that will be more attractive to the credit
industry than provisions that were in the Senate bill last year. For example, we think we
can propose ways to make the means test more "self-executing," requiring judges to
explain when they vary from formulaic standards and lowering the costs to creditors of
bringing motions to keep debtors from using Chapter 7 when they could repay under
Chapter 13. This proposal should address at least one of the creditors' concerns with
the discretion that we insist be granted to the courts. While these proposals may not be
embraced by the Republicans initially, we hope they will be considered in the "end
game." More importantly, they will allow us to present a new "Administration proposal"
around which Democrats can rally.
3.
Senate Strategy
Senior staff will consult directly with key Democratic Senators especially Senators
Durbin, Kennedy, and Leahy -- in developing a Senate floor strategy. If Senator
Torricelli is unable to lead the caucus in demanding balance for these bills, Senators
Durbin and Kennedy may be willing to do so. With them, we will identify the best
amendments (both germane and non-germane) to offer on the floor to provide
negotiating leverage.
4.
House Strategy
Senior staff will work with Representatives Nadler, Conyers, and possibly Frank to try to
develop an alternative for full Committee and floor consideration that will represent a balanced
approach to bankruptcy reform. We will also seek to engage Minority Leader Gephardt and
other House Democratic leaders who may view this year's debate as an opportunity to promote a
strong, pro-consumer perspective. The ultimate goal will be either to greatly improve the House
bill or, more likely, produce the necessary votes to sustain a possible veto in the House.
Special Expenses Not Included in House/Senate Bankruptcy Reform Means Test
Many debtors face unusual expenses that are essential for their well-being or for the
well-being of those who depend on them. Debtors may incur certain expenses in the course of
protecting themselves against domestic violence, or in overcoming barriers to the transition from
welfare, disability, or unemployment to work and financial independence (for example, for
expenses for job training, relocation, or special equipment). Many debtors provide support for
family members to enable them to live in dignity, even when the family member lives apart and
does not receive enough income to qualify as a dependent of the debtor. [Possible addition,
though critics may argue that those in bankruptcy shouldn't be continuing these responsibilities:
Debtors who adopt children incur one-time and ongoing expenses related to the adoption and
care of the child.]
At-Risk Debtors
1.
Victims of Domestic Violence
Debtors may incur certain expenses in the course of protecting themselves against
domestic violence. These can include relocation expenses to move the debtor and his or her
household away from the violent spouse, additional transportation expenses for the debtor to get
to work from a new location or for the debtor to undertake work in a workplace location removed
from the knowledge of or access by the violent spouse, the legal costs associated with getting and
enforcing court protective orders, the costs associated with increasing the security of the debtor's
own home, and income gaps associated with unavoidable absences from work due to the danger
of being threatened or assaulted at the workplace. Federal law under the Temporary Assistance
for Needy Families and Title IV of the Social Security Act as amended provide guidance to states
for establishing methods of identifying individuals at risk for domestic violence. It is essential to
recognize the additional expenses or gaps in income incurred by such debtors to protect
themselves and their households.
2.
Individuals Trying to Move from Welfare or Unemployment to Work
Debtors who are welfare recipients can incur certain expenses associated with
overcoming barriers to obtaining and maintaining employment. These include education and
training expenses to prepare themselves for a work situation, care of a dependent child or family
member, additional transportation expenses, additional housing expenses in case the work
situation demands relocation, and expenses associated with freeing themselves from substance
abuse. Assisting debtors who have lost jobs to regain their financial stability and independence
is also a vitally important "fresh start," with long-term benefits for creditors, taxpayers, and our
economy. Just as in making a transition from welfare to work, such debtors may need to incur
certain expenses in making the transition to financial independence and security, and the ability
to repay their debts. For example, many debtors who have lost jobs need to retrain for new jobs,
or need to develop new skills to improve their job prospects in their profession. In addition,
debtors may incur other expenses associated with seeking new economic opportunities, such as
additional transportation or housing expenses, or relocation expenses. These expenses must be
allowed in order for the debtor to increase future income and ability to repay debts.
3.
Caregivers and Providers for Non-Dependent Family Members
Many debtors provide support for elderly or disabled family members to enable them to
live and thrive in the community, as there are many situations in which the family member does
not receive enough income to do so. Often, if the family member receiving assistance lives
independently, the financial assistance may not be large enough to make the family member a
dependent of the debtor. Yet the payments may be essential to the family member's well-being,
for example to provide home care or household goods that make institutionalization unnecessary.
[4. Foster Parents and Adoptive Parents
Debtors who adopt children incur one-time and ongoing expenses related to the adoption and
care of the child. Debtors who care for a foster child in their homes often have expenses above
the payments they receive for the support of these children. These are expenses necessary for the
support of these children. ]
Use of IRS Standards for the Means Test in S. 625
The Administration supports the development and use of fair and reasonable expense
standards for bankruptcy that reduce the costs and improve the fairness of means testing.
S. 625 currently requires the use of IRS Collection Standards for this purpose, but the
standards are not meant to be used alone and without discretion.
The Tax Code permits the IRS to compromise when the taxpayer makes an offer to settle
unpaid tax debt for less than the full amount of the balance due.
The Internal Revenue Manual (IRM) provides further guidelines for revenue officers to
determine whether an offer-in-compromise is adequate.
The IRM also explicitly supports discretionary application of the standards: it states that the
IRS should avoid rejection of an offer solely based on a narrow evaluation of assets and
income, and formulaic expenses.
Last year during its consideration of the IRS Restructuring and Reform Act, Pub. L.
105-206, Congress criticized the inflexible application of the IRS Collection Standards, even
though the standards were applied with more discretion than in S. 625. Congress directed
the IRS to further increase flexibility in applying the standards.
The Reform Act requires that the Collection Standards must be used so that taxpayers entering
into an offer-in-compromise have adequate means to provide for basic living expenses.
The IRS is explicitly required to consider the facts and circumstances of a particular
taxpayer's case in determining whether the Standards are adequate for that taxpayer.
If the facts indicate that use of the Standards' expense allowances would be "inadequate under
the circumstances," the taxpayer is not limited by the national or local expense formulas.
The Reform Act further authorizes the Treasury Secretary to prescribe additional guidelines
for whether an offer-in-compromise is adequate and should be accepted, such as whether the
taxpayer faces hardship or a substantial reduction in income (e.g., due to job loss).
The Reform Act also requires the IRS to allow the taxpayer to appeal any rejection of such
offer-in-compromise directly to the IRS Office of Appeals, whose role is to attempt to resolve
disputes between the IRS and taxpayers without resort to expensive and time-consuming
litigation. There is no parallel body with such discretion in bankruptcy.
Without comparable flexibility when applied in bankruptcy, the IRS Collection Standards
are not well-suited to bankruptcy.
The Joint Committee on Taxation expressed the sense of Congress that flexible application of
the IRS Standards "enhances taxpayer compliance," encourages them "to meet their
obligations and remain in the tax system," and thus improves the government's ability to
collect tax debts when taxpayers default on payments.
The application of the IRS Standards in the means test in S. 625 only allows any flexibility if
the debtor can prove "special" circumstances that make adjustment of income or expenses "
necessary and reasonable."
This is more restrictive than the "inadequate under the circumstances" standard that Congress
directed the IRS to use for every case of tax debt. Congress would correctly criticize the IRS
if it imposed inflexible, formulaic standards on taxpayers.
Inflexible use of the IRS Standards ultimately will result in more unsuccessful Chapter 13
reorganization plans and ultimately greater costs both to the courts and to creditors.
MAY-05-99 09:40 FROM:
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PRESIDENT STATE
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
May 5, 1999
(House)
STATEMENT OF ADMINISTRATION POLICY
(THIS STATEMENT HAS BEEN COORDINATED BY OMB WITH THE CONCERNED AGENCIES.)
H.R. 833 - Bankruptcy Reform Act of 1999
(Gekas (R) Pennsylvania and 106 cosponsors)
The Administration strongly opposes H.R. 833. If the bill were presented to the President in its
current form, his senior advisers would recommend that he veto the bill. However, the
Administration strongly supports the Democratic alternative offered by Representatives Nadler,
Conyers, and Meehan, which would make a limited number of targeted changes to address the
most significant problems with H.R. 833.
The Administration continues to support bankruptcy reform that asks both debtors and creditors
to act more responsibly. However, H.R. 833 fails the test of balance between creditors and
debtors. As currently drafted, many of the bill's provisions are unfair to middle- and low-income
debtors; at the same time, the bill fails to close loopholes in current law that protect the
wealthiest debtors. The bill focuses on perceived abuse of the bankruptcy system by debtors
without adequately addressing abuses by creditors, and takes an excessively rigid approach to
limiting access to discharge of debts under Chapter 7 of the Bankruptcy Code.
H.R. 833 in its current form would limit access to Chapter 7 to debtors who meet an inflexible
and arbitrary means test. The Administration agrees that debtors who can repay a portion of their
debt should not have access to Chapter 7. The Administration also agrees that some expense
standards should be used to guide the determination of ability to repay, analogous to how
expense standards are used by the Internal Revenue Service (IRS) to guide the collection of tax
debt. However, H.R. 833 simply takes IRS expense standards, which were not developed for
bankruptcy purposes, and applies them rigidly to determine ability to repay in bankruptcy.
Under H.R. 833, a debtor whose ability to repay according to the IRS formulas was even $1
above the minimum threshold would have to demonstrate "extraordinary circumstances" in order
to gain access to Chapter 7.
Representatives Hyde and Conyers will offer an amendment that also includes a means test but
which would use expense standards that are tailored for bankruptcy purposes and that would
allow bankruptcy judges limited and appropriate discretion in their application. The
Administration could support the Hyde-Conyers amendment (provided that one technical and
conforming change is made to make the language of the amendment internally consistent).
MAY-05-99 09:41 FROM:
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The Democratic alternative includes a means test very similar to the Hyde-Conyers amendment
that would ensure that debtors who genuinely have the ability to repay a portion of their debts
would remain responsible for those debts. Moreover, the Democratic alternative would
significantly reduce the administrative and legal burden of means testing by limiting paperwork
requirements on low-income debtors with little ability to repay.
The Democratic alternative also would address creditor abuses in bankruptcy, especially those
abuses that place priority debt such as child support and alimony payments at risk. There is
extensive evidence of coerced or abusive reaffirmations of unsecured debt and low-value secured
debt Such reaffirmations frequently are the result of misleading information or threats from
creditors. Remarkably, H.R. 833 would ban class actions filed against creditors who violate
reaffirmation requirements - the mechanism that was effectively used to end abusive practices in
important consumer protection cases. Rolling back an avenue of consumer redress for such
significant creditor abuse is simply unacceptable.
Many bankruptcy experts have advocated either banning or severely curtailing such
reaffirmations because they jeopardize both a debtor's "fresh start" and a debtor's ability to pay
priority obligations. The Democratic alternative proposes more limited changes to help address
this abuse. Reaffirmations of unsecured and low-valued secured debt would be subject to
streamlined court review as part of the means-testing process. If the creditor provided certain
easily-calculated disclosures about the financial implications of the reaffirmations (such as the
effective annual percentage rate and the amount of any fees and penalties that could be applied),
and if the means test suggested that the debtor truly could afford to repay all of his priority debts
after taking on this additional obligation, then the reaffirmation would be presumed not to create
undue hardship and to be fully understood by the debtor. In addition, those persons to whom the
debtor owes child support or alimony obligations would have an opportunity to present evidence
that the reaffirmation would place payment of their priority debt at risk.
The Administration also remains concerned about provisions in H.R. 833 that put additional
credit card and other nonpriority debts in greater competition after bankruptcy with child support,
alimony, and other societal priorities like educational loans and taxes. The Democratic
alternative is consistent with the view of the Administration that caution should be exercised in
the creation of additional types of nondischargeable credit card debt. H.R. 833 also eliminates
virtually all "cramdowns" of secured debt to the actual value of the secured item in bankruptcy.
While there are good reasons to limit the most dramatic cramdowns that occur for debts incurred
close to bankruptcy, barring most cramdowns, as HR. 833 would do, puts at risk repayment of
other secured and priority debts.
2
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The Administration continues to believe that reform must ensure that debtors are treated fairly
and responsibly in the bankruptcy process, recognizing creditors' superior information and
bargaining power. The Democratic alternative includes provisions adapted from H.R. 900,
sponsored by Representative LaFalce, that would provide key information to consumers about
credit card debt, including clear notice about the expiration of low "teaser" rates and the length of
time to pay off a debt if only the minimum payment is made. Better information will help
consumers avoid high debt burdens.
Finally, the Administration supports changes that would close loopholes in current bankruptcy
law, such as those enabling unlimited homestead exemptions and exemptions from repayment
requirements for individuals who are able to file for bankruptcy under Chapter 11, that protect
some of the wealthiest debtors from having to repay a significant portion of their debt.
Bankruptcy reform should not place a greater responsibility for debt repayment on moderate- and
low-income debtors than it does on high-income debtors.
The Administration remains ready to work with the House to address these concerns, building on
the responsible and balanced reform of the Nadler, Conyers, and Meehan Democratic alternative
and the bipartisan approach of the Hyde-Conyers amendment.
*******
3
The New York Times
THE NEW YORK TIMES EDITORIALS/LETTERS SUNDAY, MAY 9, 1999
Editorial Observer/FLOYD NORRIS
Bankruptcy Reform That Spares the Wealthy
Watching a rich man stiff his cred-
forced into plans requiring some re-
companies sent out 3.4 billion card
itors while walking away with mil-
The House helps
payment of debts, even if future in-
solicitations, a 15 percent increase. II
lions can grate on people. Yet a gap-
come is likely to be less because the
would appear that rising bankrupt-
ing loophole in the bankruptcy laws
a few lucky debtors
person has lost his previous job. The
cies have not yet caused lenders to
mutinely allows that to happen.
calculations regarding how much a
grow more cautious.
That loophole enabled such people
go broke in style.
person can afford to pay may not
One interesting feature of the
as Martin A. Slegel, the former in-
take into consideration his actual liv-
House bill is that it requires the
vestment banker who was convicted
ing costs. It is reasonable to try to
Government to pay for random all
of insider trading; Bowie Kuhn, the
The wealthy can often stay mil-
force bankrupts to pay what they can
dits of bankruptcy filings to see if
former baseball commissioner, and
lionaires because the laws in a hand-
afford, but this bill, with its lack of
people are cheating. Yet Congress
Burt Reynolds, the actor, to emerge
ful of states - most notably Florida
discretion for bankruptcy trustees
will not spend money to let the Inter-
from bankruptcy with ample assets
and Texas - set no limit on the value
and judges, is likely to bring unrea-
nal Revenue Service conduct ran-
sometimes valued in the millions
of a home that a bankrupt son can
sonable hardship for some.
dom audits of tax returns. Protecting
-- even as their creditors suffered
keep even as his debts are dis-
This bill was pushed by the credit
Visa's revenues would seem to be a
huge losses.
charged by the court. So some peo-
card companies, who worry that peo-
higher priority than protecting those
Last week, amid much rhetoric
ple, as bankruptcy nears, sell their
ple abuse them by taking on credit
of the Government.
about how outrageous it was that
homes in states like New York and
card debts and then going broke. The
Two centuries ago, it was common
people who could afford to pay some
buy million-dollar homes, for cash. in
companies already can challenge
for states to allow creditors to throw
of their bills were able to walk away
Florida.
any bankruptcy on fraud grounds,
people Into prison if they had not paid
from all of them, the House of Repre-
A fair bill would put a limit on the
but doing so costs money and may
their debts. But even then, the credi-
sentatives passed a bankruptcy re-
amount of home equity that could be
not seem to be worth it when only a
for had to pay the state the cost of
form bill. If enacted, the bill will
protected from creditors. The Senate
few thousand dollars or less are at
imprisoning the man. Now, if this bill
make it much easler for creditors -
tried to do that last year, with a limit
stake in any one filing. They hope
passes, the taxpayers will foot the
particularly credit card companies
of $100,000. but that bill was killed.
that strict rules will enable them to
bill to force people to pay their debts.
to collect money from bankrupts.
The House wants no limits on what
force many more people to repay at
Unless, of course, they are once-
But while It will become harder to
state legislatures let the rich keep.
least some money.
rich people who can afford to buy
evade a few thousand dollars of cred-
The House bill will make life hard-
The 1990's have seen booms in
expensive houses in Texas or Flor-
it card debt, It will not be any more
er for poor and middle-class people
bankruptcy fillings - and in credit
ida. Those people are to be protected
difficult for millionaires to shelter
who file for bankruptcy. People
card issuance. Last year, 1.45 million
even as the Government cracks
their assets while declaring bank-
whose income has been above the
people filed for bankruptcy, up 3 per-
down on middle-class people who
ruptcy.
regional median income will be
cent from 1997, while credit card
have fallen on hard times
HR 833 and the Democratic Alternative: Bankruptcy Reform
The Democratic alternative (offered by Nadler, Conyers, and Meehan) makes a limited number
of targeted changes to the House Judiciary Committee print that are necessary to achieve
balance and fairness to low and moderate income debtors. The changes to the bill are:
Means Test: The Democratic alternative makes a few key changes to make the means test fair
and less rigid.
Expense Standards Designed for Use in Bankruptcy: H.R. 833 uses IRS expense
formulas to determine a debtor's repayment ability. These standards were created for
tax collection, not bankruptcy, and are not appropriate for bankruptcy purposes. The
Democratic alternative would allow Treasury and the Executive Office of the U.S.
Trustee to develop standards specifically for use in the bankruptcy context.
Limited Judicial Discretion. Whatever the guidelines, I.R.S. experience shows that
they should not be applied rigidly. H.R. 833 requires a showing of "extraordinary
circumstances" and "necessary" expenses. The Democratic alternative would require
that the expenses be only "reasonably necessary" allowing the court to determine
whether a person truly has the capacity to repay.
Reducing Unnecessary Paperwork Burden and Unnecessary. H.R. 833 requires
that a complex means test analysis be performed on debtors even though a quick
review could tell that they have no capacity to repay. The Democratic alternative
would provide a streamlined process so that the paperwork and analysis is only done
for those for whom there is some possibility they can repay under a Chapter 13 plan.
Limiting Coercive Reaffirmations: There is extensive evidence of coerced or abusive
reaffirmations of unsecured debt and low-value secured debt. Such reaffirmations frequently are
the result of misleading information or threats from creditors. H.R. 833 would ban class actions
filed against creditors who violate reaffirmation requirements -- the mechanism that was
effectively used to end abusive practices in important consumer protection cases. The
Democratic alternative eliminates this rollback of existing consumer protections and would
provide a streamlined process for reviewing if the creditor is making an informed choice and has
the capacity to repay the reaffirmed debt.
Protecting Child Support and Alimony - Limiting New Nondischargeable Debts: H.R. 833
places the payment of high-priority debts like child support and alimony at risk after bankruptcy,
by reducing the debts that can be discharged in bankruptcy. The Democratic alternative does
not.
Balance - Responsibility for Creditors: H.R. 833 asks greater responsibility of debtors but not
of creditors. The Democratic alternative asks credit card companies to provide information that
consumers need to manage their credit card debts effectively, including equally conspicuous
display of all terms accompany marketing of teaser rates and disclosure of the implications of
making minimum payments.
Why Squeeze Every Last Penny From the Bankrupt?
face. Declaring bankruptcy can be a
legislation with a "reasonably neces-
amendment had been adopted, many
penses, perhaps in similar legislation
By Henry J. Hyde
traumatic experience, and as we jus-
sary" standard that has been used
Americans still could have been
to be taken up as early as this week
tifiably bolster creditors' rights, we
for the past 15 years in voluntary
channeled into repayment plans
in the Senate or in a House-Senate
WASHINGTON
ought not ignore the need to leave the
debt repayment plans. Although ex-
without depriving debtors and their
conference to reconcile different ver-
arly this month, with the
debtor with a decent standard of
isting case law already interprets
families of the means to pay for their
sions of bankruptcy reform legisla-
E
support of more than
living during the repayment period.
and applies this standard, I proposed
basic needs.
tion. Decency and dignity need not be
300 of my colleagues,
A majority of my colleagues be-
that the Department of Justice issue
I hope Congress will reconsider
victims in an otherwise useful re-
the House of Repre-
lieve that we should be guided by the
more precise guidelines. If my
this humane approach to living ex-
form.
sentatives approved
Internal Revenue Service's expense
sweeping changes in
allowance standards in determining
our national policy on bankruptcy.
the expenses of bankrupt individuals
and their families for certain basic
Generally, these are much-needed
reforms, but one part of the legisla-
needs like food, clothing, rent and
utilities. These standards, which are
Book, Movie, War, Reality
tion could leave some debtors with-
far too restrictive, were developed
out enough money for basic needs.
by the I.R.S. to maximize the collec-
For the last century, Americans
ment - by commandment in totalitar-
"That's going to make a lousy pic-
tion of taxes from delinquent taxpay-
filing for bankruptcy generally have
By Larry Beinhart
lan countries, by mutual agreement
ture; let's not do it."
ers, and I do not think it is a particu-
been able to receive an Immediate
(with some few exceptions) in the
But now the Clinton Administra-
larly Republican idea to advance
WOODSTOCK, N.Y.
democracies.
financial fresh start. The legislation
tion has put it into production. They
them. In our successful effort last
aking a detour into the
Until Vietnam. In its analysis of that
now making its way through Con-
too should have gone back to the book
year to curb abuses by the I.R.S.,
gress effectively channels many
Congress required it to apply these
T
absurd, a Yugoslavia
failure, as Colin Powell pointed out in
first - not necessarily my book, "the
standards more flexibly in tax collec-
official, Goran Matic,
his biography, the American military
debtors into a form of bankruptcy
book." If somebody had actually
claimed last week that
explicitly understood that it is neces-
worked on the plot, story confer-
tion cases.
there are no real Koso-
sary to plan how the war will play out
enced it, they might have said:
The treatment of food needs is an
"O.K., let's say we bomb them, and
TUESDAY, MAY 18, 1999
Even those
example of what Is wrong here. The
var refugees. That the
people we see acting like refugees are
Milosevic doesn't fold, he just steps
I.R.S. allowance applies uniformly in
the contiguous 48 states, failing to
just that - actors, 3,000 to 4,000 of
in debt
Combat is now a
up his campaign against the Koso-
them, getting paid $5.50 a day by
vars. What then?" What now?
reflect regional differences in the
York
cost of food. In addition, under the
NATO. The way it was in the film
We know several things about war
need to eat.
"Wag the Dog.'
theatrical event.
movies. First of all, it's necessary for
I.R.S. schedule, allowable expenses
As if to match him, a NATO spokes-
the good guys to do bad things,- We
for food increase dramatically with
increases in income, a confirmation
man would deny the story only on
That's good.
have to prepare for that; we have to
know that the bad things really are
that the standards are not designed
condition of anonymity.
necessary. Also, it's better if the
to reflect actual need. Serious prob-
But nobody believed Mr. Matic any-
relief where they will have to repay a
good guys seem purposeful and
lems are evident when a debtor earn-
way. His problem was that he only
portion of what they owe for up to
saw the movie. He didn't go back to
on television as well as on the ground.
smart, not confused and ineffectual.
five years, a fair expectation in a
ing $51,000 a year gets $421 per
society operating on the premise that
month for food when living alone and
the book it was based on. The book has
That sounds like a bad, cynical
Finally, we know that we'll need an
$619 per month - less than 50 per-
thing. But it's not. As we learned In the
ending, preferably happy.
a different title - "American Hero"
obligations will be honored. The
So Mr. Matic's remark Inadvertent-
- and it's about the creation of an
Persian Gulf, a well-thought-out, thor-
sticking point is how to determine
cent more - when supporting a
ly gives us a lesson, unfortunately too
household of four. If more than a 5
actual war as a theatrical event, while
oughly planned war in which civilian
late to follow this time: if wars are to
whether an individual has some
percent increase beyond these stand-
the movie is about the creation of the
casualties are avoided and our casual-
be theatrical events, never start shoot-
meaningful ability to repay.
ards in a family's food budget is
illusion of a war.
ties are lower than they are for stunt
ing without a script. Which is the
I'm a conservative, and I'm cer-
needed, the bill passed by the House
The thing is that modern war really
men working on normal movies, a war
Hollywood version of what Karl von
tainly a market capitalist, but I also
does not allow it unless the debtor
is a theatrical event. In the old days,
that has a definite conclusion and is
Clausewitz used to say: "No one
believe in capitalism with a human
can demonstrate extraordinary cir-
the media cooperated with govern-
over quickly, is better than an unfo-
starts a war - or rather no one in his
cumstances.
cused, messy, dragged-out war.
senses should do SO - without being
Henry J. Hyde, a Republican from
An amendment that I offered
Larry Beinhart, the author of
Thus the Bush Administration took
clear in his mind what he intends to
Illinois, is chairman of the House
would have replaced the I.R.S. ex-
"American Hero," is working on a
a look at Yugoslavia years ago and
achieve by that war and how he in-
Judiciary Committee.
pense allowances in the bankruptcy
screenplay titled "Divorce."
said - I'm paraphrasing here -
tends to achieve it."
Unethical Referrals
To the Editor:
Re the May 16 and 17 front-pa
"Research for Hire" series: The :
lationship of trust between a patier
and a physician is paramount. Whe:
Enforce Campaign Laws
Bottom Line on Kosovo
a physician accepts money for refer-
ring patients to clinical trials, that is
To the Editor:
To the Editor:
the ultimate abuse of that trust and
Once again you are advocating
Owen Harries (Op-Ed, May 16) is
an abuse of power.
more laws regarding campaign fi-
right when he castigates the Clinton
The American Medical Associa-
nancing (editorial, May 12). What is
Administration for using "parsimo-
tion's Council on Ethical and Judi-
wrong with the laws that exist? Ac-
nious means" to solve the Kosovo
cial Affairs has had a clear policy
tive enforcement of existing laws
humanitarian crisis. The Adminis-
on this issue for more than 20 years.
would provide sufficient control to
tration wants the Yugoslav Govern-
Payment by or to a physician solely
prevent the abuses we saw during
ment to accept terms that neither it
for the referral of a patient is
1996. The Justice Department has
nor any other government would
fee splitting and is unethical. A phy-
fallen asleep in its enforcement re-
ever accept unless threatened by a
sician's primary concern must al-
sponsibilities, the members of the
more than adequate use of force.
ways be with the health of the pa-
Federal Election Commission act as
The Administration, however, does
tient. Receiving payment for refer-
if they are political appointees (sur-
not want to send the ground troops to
ral to a clinical trial violates the
prise!). and both political parties are
fight a war over what it officially
requirement to deal honestly with
taking advantage of the situation by
does not wish to dispute - Yugosla-
patients.
D. TED LEWERS, M.D.
pushing the limits as far as they can.
via's sovereignty over Kosovo. This
Vice Chairman, Board of Trustees
If the President took the lead by
forces the Administration to modify
American Medical Association
telling Attorney General Janet Reno
its demands and negotiate with the
Chicago, May 17, 1999
to take the gloves off on law enforce-
Yugoslav Government. The Adminis-
ment, more legislation would become
tration will have to do what Mr.
unnecessary. Adding more subhead-
Harries suggests: "bear fully in
Saving City Gardens
ings to the legal code is counter-
mind the interrelatedness of things."
productive and will lead to more lob-
It must be prepared to do something
To the Editor:
bying and more campaign contribu-
it has so far refused to do: negotiate
The celebration of Bette Midler's
tions.
DAVID M. BARRETT JR.
over Kosovo's future political status
philanthropic support for New York
LaGrange, Ga., May 12, 1999
and convince the Yugoslavs that
City's community gardens (editorial,
the Kosovars will neither now nor in
May 14) obscures the government
the future have de facto independ-
failure that precipitated the need for
Insuring Our Children
ence.
JOHN P. PAVELEC
this private intervention.
Lakewood, N.J., May 16, 1999
Mayor Rudolph W. Giuliani's ex-
To the Editor:
tortionate demand that private par-
Re "Kids' Insurance Fund" (let-
ties pay the city not to destroy the
ter, May 16)
Raise Teacher Standards
community gardens located on city-
If states are having trouble finding
owned property will make it more
children without medical insurance,
To the Editor:
difficult to save hundreds of other
they should print pamphlets about
In the debate over the Board of
community gardens across the city.
the program that schools could give
Regents' push to raise graduation
Viewed as a potential national mod-
to parents when they register chil-
standards and New York State legis-
el, it establishes a high price for our
dren for school. No child's registra-
lators' rebellion against it (front
own government not to destroy the
tion should be complete without
page, May 12), little attention has
livability of our communities.
proof that he or she has medical
been paid to teacher preparation. It
Preservation of publicly owned ur-
coverage from a private insurer,
is true that employers expect schools
ban green space should be recog-
Medicaid or a state-subsidized pro-
to provide better prepared students,
nized as a legitimate function of gov-
gram.
ELLEN FREILICH
but this cannot be done with current
ernment, not left to the serendipitous
New York, May 17, 1999
staffing, particularly in mathemat-
intervention of one generous movie
ics. The recent import of Austrian
star.
JOHN D. ECHEVERRIA
mathematics teachers, which I
Washington, May 17, 1999
helped arrange, demonstrated the
The writer is the director of the
severe shortage of qualified teach-
Environmental Policy Project at
ers.
Georgetown University Law Center.
This is a national crisis. Raising
standards without addressing teach-
er shortages and providing appropri-
America's Love for Guns
ate teacher training will result
in higher failure rates and punish
To the Editor:
the very students we are trying to
help.
ALFRED S. POSAMENTIER
President Clinton blames Holly-
New York, May 12, 1999
wood and television for encouraging
The writer is a professor of mathe-
gun crimes like the massacre in Col-
matics education at City College,
orado (news article, May 16), but the
CUNY.
same television shows and movies
are watched by children and adults
in almost every other country of the
NYT)
world without producing the same
degree of slaughter. Canada, for ex-
ample, had fewer than 200 gun
The New York Times
deaths in 1997, while the United
States had 10,000.
Company
The real issue is the almost nation-
229 West 43d St., N.Y. 10036-3959
wide desire to embrace guns as a
necessary and normal way of life,
ARTHUR OCHS SULZBERGER JR., Chairman
which only increases the availability
RUSSELL T. LEWIS. President
of weapons to Americans of all ages.
Chief Executive Officer
As long as it is considered reason-
MICHAEL GOLDEN. Vice Chairman
able to own a gun, the United States
Senior Vice President
will continue to have the highest
JOHN M. O'BRIEN. Senior Vice President
death toll by guns in the world. Re-
Chief Financial Officer
versing that mind-set and removing
CYNTHIA H. AUGUSTINE. Senior Vice President
guns from homes is the real chal-
SOLOMON B. WATSON IV. Senior Vice President
lenge to a bold leader. Television and
LAURA J. CORWIN, Vice President. Secretary
film are useful scapegoats for a cau-
ELLEN TAUS. Vice President. Treasurer
tious one.
DAMON MCELHONE
Brooklyn, May 16, 1999
The New York Times
TUESDAY,
MAY
18,
1999
Morally Bankrupt Creditors
By David S. Broder
Sunday, May 16, 1999; Page B07
Politics, as everyone knows, makes strange bedfellows. But it still raises
eyebrows -- and suspicions -- to discover Hillary Rodham Clinton and
Henry Hyde making common cause on the bankruptcy bill that passed the
House on May 5 and is scheduled to be up for debate in the Senate this
week.
A year ago, when similar legislation was close to final approval on Capitol
Hill, the first lady sounded the alarm inside the White House and a veto
threat from the president stopped it cold. When it was revived earlier this
month in the House, Hyde, the chairman of the Judiciary Committee and
leader of the effort to impeach and remove President Clinton, found himself
in the odd position of repeating some of her arguments.
Conscious that he was in strange company, the veteran Illinoisan explained,
"I am as capitalist as anybody, but it does not seem to me when there is a
bill that is truly tilted toward the creditors, that giving a little flexibility for
living standards for people who are bankrupt is a violation of one's
credentials as a conservative."
Hyde had made the same argument in committee, recounting some of the
"75 enhancements here for the creditors" and pleading with his colleagues
to "throw a little, small bone to the debtor." But his amendment was
defeated by what he called the "awesome creditor lobby" led by the banks
that control the credit card market.
The complexities of bankruptcy law are beyond my understanding, but the
odd alliance between Hyde and Hillary -- who argued inside the
administration that the legislation might give the issuers of plastic as much
claim to a bankrupt worker's earnings as his ex-wife or their children -- is
not the only signal that this legislation may deserve more scrutiny than the
press has given it so far.
There's also the fact that the members of the National Conference of
Bankruptcy Judges endorsed Hyde's amendment, as did Brady
Williamson, the chairman of the bankruptcy law reform commission, and
major consumer groups.
They all admit there is a problem in the explosion of bankruptcy cases in
this decade. Last year, more than 1.4 million Americans filed for individual
bankruptcy, seeking legal protection against their creditors. That is almost
a threefold increase in 12 years.
No one disputes that among these cases, there are a number of people --
the estimates range from 4 percent up to 15 percent -- who could, if
pressed, pay off some of their debts. A few of them are the publicized
wealthy individuals who run up big bills for luxuries, then put all their assets
into lavish homes in states with high homestead exemptions and laugh when
their creditors try to collect.
It is only these cases the bankers and retailers say they want to reach, by
making it harder for people to file under Chapter 7, which basically lets
you wipe out your debts and start clean, and forcing them instead to file
under Chapter 13, which requires repayment of at least some debts over a
period of up to five years.
But statistics show most of the Chapter 7 filers are people with modest
incomes who just get in over their heads. The fastest-rising category of
debt is in revolving credit card accounts, and the banks that dominate that
business have been the most aggressive lobbyists for tightening the
bankruptcy law.
But they have been at least as aggressive in marketing their cards, mailing
out an incredible 3.45 billion -- not million but billion -- solicitation letters
last year. Beth Climo, a spokeswoman for the American Bankers
Association, told me that since the banks underwrite these loans, they are
careful about issuing credit.
But Elizabeth Warren, a Harvard Law School professor who has studied
this issue, countered that banks make so much money on unpaid credit
card balances -- thanks to interest rates much higher than on home
mortgages, car loans or other forms of "secured" debt -- that they
deliberately lure people into borrowing beyond their means. Now, she
said, they are trying to get Congress to rig the rules so their loan losses will
be reduced.
Critics of the legislation say it should at least force the credit card bankers
to include more specific consumer warnings on the monthly bills, telling
customers, for example, how many months (or years) it will take them to
pay off the outstanding balance if they make only the minimum required
monthly payment. But disclosure provisions in the House bill are modest --
and in the Senate version, almost nonexistent.
After his amendment was defeated, Hyde voted for final passage of the
bill, expressing the hope that it will be improved in the Senate. But the
Clinton administration -- with Hillary Clinton riding herd -- is demanding
big changes and threatening a veto.
This one bears watching.
©
Copyright 1999 The Washington Post Company
"
$0
Find myself agreeing of Herry Hyde
Bankinpty bill with senous Flaws.
Reform is in order- - delators ml capac to repay should
be reguired to do so put this bill does not stn be the
right balance
Let me decribe for your scenaires of Mose who wd be
affected - hurt by the bill which does not take into
account spen circumstances people find Menselves in
108m
(1) victim 8 domestic violence
debtor has to in
refour of
limagine who ineurs expenses relating to protection
hereing from an abusive spouse 1 security,
(2) Imagine an out of to land-off sheel worker who
has emoked in work training program to
get a better job
(3) produc Imagine a couple taking care of an elderly
parent to keep Them out of a nursng have - only
has her SS check - needs add support
Got tech a dependent
has
(9) Imagine a couple who warfed for years to adopt a
child Expluses aesociated w/ it
None of These debtors would have new uram
reviewed in delivery how much they need to
love on and Therefore how much of new
need to for pay Lack
Prace by de - gave judges the describe 1.0
consider the circum. unfort. The
Chairmans amendment was defeated
in the face of the aggressive eveden
lobby mg.
Now Lets talke about more who avent
hurt by Mrs leg
(1) creditors who coercise debtors to
reaffirm dest
(2) credit card CO. who mail sohe - not
stemed
(3)
The Rich - homestead exempter
Plea - we need to do This right - hopes no
Senato shows leadership
somewhere - hild support of ahmony payments.
molative and alt
Leaving Surhamas
the
amendmed - Ken, in bill
Jor / need / Schnn
thr yeted amendments
Hyde.
- we fave to non dep. who Ca rear adv.
5 ex - tall through the cracks.
sub adopting fostence
Henry Hyde
Hyde - dometric.vislence
limited disc.
evelit card -
realth
land off sleellucons. socitation
work -
hand tures - training -
famers.
prasse Hyde
to
need vegorn
need balane
the corg.
view wd not get hust -
hope will
r
realt.
eved it and tayab
not off. homestead
felows - the -
Imagine who a woman
Bust Rey
w.d. he must -
Imagine -
down violence -enb
Steat
4 kids coalumn
my
working oft
002
05/05/99 WED 13:33 FAX
NEWS FROM THE HOUSE DEMOCRATIC LEADER
For Immediate Release:
House Democratic Leader Richard A. Gephardt
May 5, 1999
H-204, U.S. Capitol
Gephardt Statement on H.F. 833, The Bankruptcy Reform Act of 1999
"Today, the House will consider H.R. 833, legislation that will make unprecedented
changes to the consumer bankruptcy laws. of our country. While I support a balanced approach to
bankruptcy reform that places equal responsibility on both debtors and creditors, I must oppose
H.R. 833 because it fails to strike such a balance.
"Reps. Nadler, Conyers, Meehan and Berman will offer a substitute to H.R. 833 that
moderates the bill in significant ways that achieves this necessary balance. The
Nadler/Conyers/Meehan/Berman substitute would moderate the means test in H.R. 833 to hold
responsible debtors who have the ability to repay a portion of their debts. But at the same time,
the Democratic sponsored substitute wou d address creditor abuses that would jeopardize the
repayment of priority debt such as child support and alimony payment. In addition, the substitute
includes a very important bipartisan farm provision that would raise the eligibility threshold for
family farmers to seek protection under Chapter 12 which was left out of H.R. 833.
"I also support the Hyde/Conyers amendment to H.R. 833 which would make a modest
but important improvement to the bill's needs based formula by striking its reliance on a rigid IRS
expense allowances formula and maintain current law under which bankruptcy judges are given
limited discretion to tailor expense standards for bankruptcy specific purposes. Proponents of
H.R. 833 have unreasonably rejected even this modest change to the bill.
"The reforms that we make to our consumer bankruptcy system could have as significant
an impact on the lives of hardworking American families as any legislation that we will consider in
the 106th Congress. As such, we must approach this effort with the greatest responsibility on
achieving balance in our bankruptcy system. H.R. 833 fails to accomplish this goal; therefore, I
must oppose it."
###
Contact:
Laura Nichols/Sue Harvey (202) 225-0100
1
HRC TPs for
Dascule mg
Talking Points on Bankruptcy
May 18, 1999
Bankruptcy is coming up for floor action very soon.
As you know, the Administration has serious problems with the bill. We are also realistic about
our prospects for making significant improvements.
Still, I believe if we work together we can make a difference. I am asking you to:
(1) Do all you can to get 34 votes against final passage (veto proof margin), enabling us to have
leverage in conference to improve the bill.
(2) Mobilize behind the Durbin substitute, co-sponsored by Leahy, Kennedy, Sarbanes and Reed
- which passed last year by 97-1.
(3) Support a group of targeted amendments to improve the bill - including the Hyde
Amendment (which we hope will be offered by Torricelli or Schumer).
For my part, I will do everything I can to be helpful.
The Honorable Charles Grassley,
Chairman
The Honorable Robert G. Torricelli,
Ranking Member
Subcommittee on Administrative Oversight and the Court
Committee on the Judiciary
United States Senate
Washington, D.C. 20510-6275
Dear Chairman Grassley and Senator Torricelli:
We are responding to your letter of April 21 regarding the bankruptcy reform legislation,
S. 625, that you introduced and that is under consideration in the Senate. As you know, the
Administration supports bankruptcy reform that is balanced and that asks both debtors and
creditors to act more responsibly. We appreciate your bipartisan efforts to produce such
legislation, and we look forward to working with you in this important process.
Your letter asks us to consider either modification to the Internal Revenue Service (IRS)
National Standards Expense Allowances, or to create an appropriate set of alternatives
specifically tailored to bankruptcy, for use in the "means test" of S. 625. These standards would
be used to guide judicial decisions about whether individuals who have filed for relief under
Chapter 7 of the Bankruptcy Code have the capacity to repay a portion of their debts and must
therefore file a Chapter 13 repayment plan rather than seek liquidation under Chapter 7.
As you noted in your letter, some have suggested that the IRS Standards are insufficiently
flexible for use in the bankruptcy context. In a March 24 letter to Chairman Gekas of the House
Judiciary Subcommittee on Commercial and Administrative Law, the Justice Department agreed,
stating that
the use of Internal Revenue Service (IRS) Standards for allowable expenses is
inappropriate because those standards were not intended for these purposes. The IRS
standards were meant to provide guidelines for determining appropriate expenses. Last
year
Congress criticized the inflexible application of those guidelines and directed the
IRS to also consider the taxpayer's facts and circumstances.
The Administration supports the development and use of fair and reasonable expense standards
for bankruptcy purposes, to limit costs and improve the fairness of the means testing process. To
achieve this goal, we believe that the most effective approach is for the Treasury Department and
the Justice Department to work together to develop standards tailored to bankruptcy, using IRS
expense allowance standards as appropriate.
We also agree with you that the best way to apply such standards is as a "rough guide,"
with appropriate exceptions for "special circumstances" of debtors. Rigid enforcement of any set
of standards is both more administratively burdensome (because standards must be developed
and applied in far more detail, to deal with the complexity of individual household, work
expense, and business situations) and ultimately more costly (because they inevitably fail to
account for the actual circumstances of some debtors, leading to unachievable repayment plans
and further litigation and administrative costs).
As you know, Chairman Hyde introduced an amendment to H.R. 833 during the House
Judiciary Committee's mark-up with a similar intent. That amendment required, among other
things, the Director of the Executive Office for the United States Trustee (EOUST) to develop
standards for bankruptcy. It also provided appropriate, limited discretion in the application of
these standards, much as you envision. We support the addition of such requirements to S. 625,
and also recommend additional language requiring the EOUST Director to consult with the
Treasury Department in the development and application of the standards.
We would be happy to continue to work with you and your staff to draft specific language
on this topic, and to assist you in enacting bipartisan and balanced bankruptcy reform legislation.
Thank you again for your letter on this important topic.
Sincerely,
Robert E. Rubin
Janet Reno
Secretary of the Treasury
Attorney General
cc:
The Honorable Orrin Hatch
The Honorable Patrick Leahy
The Honorable Henry Hyde
The Honorable John Conyers
The Honorable George Gekas
The Honorable Jerrold Nadler
AMENDMENTS SUBMITTED TO H.R. 833 - BANKRUPTCY REFORM ACT OF 1999
Monday, March 2, 1999; 7:15 p.m.
(listed in alphabetical order)
Member
Summary
Barrett #10 Caps liability for the unauthorized use of a debit card at $50, the same level as
credit cards.
Barrett #11 Provides that if a credit card company rejects an application for credit which is
submitted in response to their own "pre-approved" solicitation, they may
not report that rejection to credit bureaus or otherwise sell or distribute
that information.
Bentsen #15 Strikes all provisions preempting state homestead laws.
Bentsen #16 Changes the effective date of the national homestead exemption so the state
legislatures can enact legislation that would opt out of this new national
standard.
Bentsen #17 Preserves a state's ability to enact legislation to opt out of the new national
homestead standard prior to the effective date of this legislation.
Conyers #19 Grants debtors in possession of consumer goods under a rent-to-own contract, and
the lessor or bailor, as having the same rights and obligations with respect
to the consumer goods as would have been accorded if the rent-to-own
contract had been a purchase contract.
Conyers #23 Waives the provision of chapter 11 relating to small business debtors or to single
asset real estate in cases where the application of those provisions could
result in the loss of 5 or more jobs.
Conyers #24 Excludes from the bill's definition of current monthly income any benefits
received under the Social Security Act, in addition to excluding payment
to victims of war crimes and crimes against humanity (as the bill already
does).
Delahunt/Kanjorski/Houghton/Rothman/Barrett: #27
Strikes paragraph (3) of section 147 of the bill, which permits States to
"opt out" of the provision in section 147 that establishes a $250,000
Federal cap on the value of real or personal property that a debtor (other
than a family farmer) may exempt in bankruptcy under the "homestead
exemption."
1
Delahunt/LaFalce/Watt/Roybal-Allard #28
Adds a new subsection 154 to the bill disallowing claims in bankruptcy for
consumer credit card debts if, at the time of the solicitation to open the
account, the debtor was not informed in writing in a clear and conspicuous
manner of 9 specific factors.
Doggett/Watt #29
Provides residents of continuing care retirement communities with the
status of "priority unsecured creditor" so that they may increase their
chances of getting some or all of their initial deposit back from a bankrupt
continuing care retirement community.
Dooley #35
Late. Requires the Federal Trade Commission to set standards to be used by the
United States Trustees in approving credit counseling agencies, programs
described in section 109(h) and instructional courses concerning personal
financial management.
Gekas #13
Manager's Amendment. The Amendment (1) makes various technical changes;
(2) makes a clarifying revision to the type of expenses that a debtor may
claim pursuant to the IRS Other Necessary Expenses categories (the
revision specifies that the debtor must claim actual monthly expenses for
the specified categories); (3) revises certain provisions so that they
conform with the Bankruptcy Code's other provisions pertaining to an
award of attorneys' fees; (4) clarifies that the chapter 7 trustee must file a
statement as to whether or not a case should be presumed to be an abuse in
every case administered by such trustee; (5) revises chapter 13's
requirements for confirmation to require the court to find that the debtor
filed the chapter 13 case in good faith; (6) revises the title of section 134
of the bill; (7) deletes Section 215 (claims relating to insurance deposits in
cases ancillary to foreign proceedings) as this provision is included in title
XI of the bill, as revised by this Amendment; (8) adds a new provision to
describe certain procedural matters pertaining to appeals, as amended by
the bill; (9) adds provisions with respect to the treatment of certain funds
subject to state insurance law or regulation for the benefit of claim holders
in the United States; (10) repeals sections of the Bankruptcy Code that are
no longer necessary; and (11) amends a statutory cross-reference so that it
better comports with the drafters' intent, which is to include in the
definition of a "financial participant" certain securities contracts, forward
contracts, repurchase agreements and swap agreements in addition to
certain commodity contracts.
Graham #14 The bankruptcy code prohibits the discharge of federally made, guaranteed or
insured education loans or education loans made by non-profit institutions.
This amendment would extend the prohibition from discharge to all
qualified education loans. Includes exceptions for undue hardships.
2
Hyde/Conyers #12
Deletes the reported bill's application of modified IRS expense allowances
for determining permissible projected living expenses of debtors and their
families during the life of chapter 13 plans. In its place, the amendment
adopts a standard that allows only "reasonably necessary" expenses and
directs the Executive office of United States Trustees to issue guidelines
that will assist in making assessments of whether expenses qualify. The
amendment does not affect other provisions of section 102 that are
designed to limit the availability of an immediate fresh start in chapter 7,
channel significant numbers of chapter 7 debtors into five-year chapter 13
repayment plans, and generate greater recoveries from creditors.
Jackson-Lee #3
Disallows the discharge of debts by corporations under chapter 11 of the
Bankruptcy Code, when the debt arises from a tobacco-related action that
involves a claim of false pretenses, false representations, or fraud.
Jackson-Lee #4
Changes chapter 11 bankruptcy, disallowing the discharge of debts
incurred by health care organizations when they arise from judgments
based on false representation, false pretenses, or fraud.
Jackson-Lee #5
Excludes Social Security benefits from the determination of what
constitutes an individual's "current monthly income" for the purposes of
this bill.
McCollum #31
Amendment in the nature of a substitute. Substitutes H.R. 833 as
introduced for H.R. 833 as reported by the Committee on the Judiciary.
Moakley #34 Late. Provides bankruptcy protection for funds placed in qualified state tuition
programs under the Internal Revenue Code for post-secondary education
costs.
Moran/Ackerman/Dooley(need letter) #32 Late.
Inserts a disclosure requiring that a debt relief agency providing
bankruptcy assistance to an assisted person shall provide a written notice
within three business days after the first date on which a debt relief agency
first offers to provide any bankruptcy assistance services to an assisted
person, advising assisted persons of their rights and responsibilities of
disclosure. Requires that an attorney or bankruptcy petition preparer give
an assisted person a written contract specifying what the attorney or
preparer will do and the cost. Inserts a "debtor's bill of rights." Requires
that a debt relief agency disclose in any advertisement of bankruptcy
assistance services or of the benefits of bankruptcy that the services or
benefits are with respect to proceedings under this title of the Bankruptcy
Code.
3
Moran #33
Late. Amend the Truth in lending Act (TILA) to require Credit Card Issuers to
make disclosures regarding minimum monthly payments. It would also
ensure that consumers have all the information they need in order to avoid
the imposition of late fees and requires that Worldwide Web-Based Credit
Card Solicitations are subject to the same "Schumer Box" disclosures as
all other credit card solicitations.
Nadler #18
Permits debtors to choose between the Federal law or their state law for
determining which property would be exempt in bankruptcy.
Nadler #20
Strikes section 130 of the bill which restructures chapter 13 to apply the standards
in the means test to the calculation of repayment plans in chapter 13. The
deleted section also gives unsecured non-priority creditors improved status
vis-a-vis other creditors in chapter 13.
Nadler #21
Excludes from the bill's definition of a debtor's current monthly income, which is
used to determine that debtor's ability to repay debts, any payments
received in satisfaction of a domestic support obligation. Strikes that
provision of the bill that permits lessors of residential real property from
evicting debtors-tenants who have not made payments as required by a
lease agreement. Requires that domestic support payments to the parent,
child, and government due during the plan be made, but that only arrears
due to the custodial parent and child, not the government, must be
provided for in the plan. Creates exceptions for the automatic stay actions
necessary to assist or protect families and children. Makes alimony,
maintenance, support or property reasonably traceable to such alimony,
maintenance or support, as well as amounts payable as a result of a
property settlement agreement with the debtor's spouse, or of an
interlocutory or final divorce decree - but only to the extent reasonably
necessary for the support of the debtor or a dependent of the debtor -
exempt from property in bankruptcy. Requires that funds received by a
creditor whose debt has been made nondischargeable under the newly
added exceptions to discharge in the bill, must hold it in trust for five
years, make every effort to pay it to individuals holding debts in the nature
of support obligations (but not governments). They must make these
payments to any such individual whose identity is reasonably
ascertainable.
Nadler #22
Strikes that provision of the bill that prevents debtors who bring lawsuits against
creditors for violations of reaffirmation agreements or of discharges of
debts from bringing those lawsuits as class actions.
Nadler #25
Makes nondischargeable in bankruptcy any debts that arose out of (1) a violation
of Federal, state, or local law that protects access to health care facilities
4
or reproductive health care facilities, (2) harassment or intimidation of
any person attempting to enter or use a health care facility or reproductive
health care facility, or (3) damage to or destruction of a health care
facility or reproductive health care facility, or (4) an actual or attempted
violation of a court order or injunction that protects access to a health
care facility or reproductive health care facility.
Nadler #26
Would disallow a claim for a debt under 11 USC 502(b) if it is based on the
extension of credit to an individual who the lender knew or should have
known was already over extended (i.e. the extension of credit would cause
the debtor's aggregate unsecured debts to exceed 40% of the debtor's
annual gross income) or if the claim was based on a secured debt if the
creditor has violated section 129(h) of the Truth in Lending Act.
Nadler/Conyers/Meehan(ned letter)
#37 Late. Substitute. Provides a realistic means test which takes into account the
debtor's actual income and expenses. Does not omit expenses a debtor
would have to pay in a chapter 13 plan from the test used to determine
whether the debtor must file for chapter 13. Does not rely on IRS
guidelines to determine how much a debtor should live on. Allows
adequate judicial discretion to determine whether the debtor appropriately
belongs in chapter 7. Avoids using a debtor's ability to repay a specified
percentage of unsecured non-priority debts which is easy for debtors to
manipulate. Holds both debtor and creditor attorneys to strict application
of Rule 9011's penalties for misconduct or bringing a frivolous case.
Contains a safe harbor for families below the median national income.
Provides a balance by requiring credit card lenders to behave responsibly
and to provide borrowers with the information they need to avoid
bankruptcy. Prevents some of the more highly publicized cases in which
creditors illegally enforced debts after bankruptcy through "reaffirmation
agreements." Deletes a section which would have denied victims in these
cases a legal remedy by prohibiting class action suits. Eliminates new
grounds for making credit card debts non-dischargeable, but leaves intact
current law which makes prebankruptcy debt run-up and fraudulently
incurred debt non-dischargeable. Eliminates a provision which would
have allowed landlords to evict debtors without obtaining the permission
of the bankruptcy court. Removes a provision which allows secured
creditors to treat the unsecured part of some loans as secured debt.
Modifies the child support portions of the bill to take away the special new
rights over families that state and local governments would have obtained
in a bankruptcy case. Places families first.
Scott #2
Exempts Veterans benefits from the calculations of monthly income for the
purpose of determining income available to creditors.
5
Thompson (MS) #30 Protects monetary awards given to individuals in cases where the award is
made on a finding of discrimination based on race, religion, gender and
national origin.
Watt #6
Replaces the provisions of H.R. 833 which require that all bankruptcy filers file
their tax returns with the court and instead require that a debtor file tax
returns with the court at the request of any party in interest.
Watt #7
Requires that credit card billing statements contain disclosures which advise
consumers of: (1) the number of payments it would take the consumer to
pay of the current balance if the consumer only pays the minimum
payment each month and (2) the total dollar amount which the consumer
would pay if the consumer only pays the minimum payment each month.
Watt #8
Allows a bankruptcy filer to object to a creditor's claim in bankruptcy if the
creditor had not made the disclosures to the debtor described in Watt #7.
Watt #9
Clarifies that the burden of proving that a filing is an abuse of the bankruptcy
code is on the moving party by a preponderance of the evidence. Deletes
the provisions of the bill which allow a debtor to rebut presumed abuse by
demonstrating "extraordinary circumstances."
Whitfield #36 Late. Establishes a mechanism whereby bankruptcy trustees may receive
compensation when they transfer cases from chapter 7 to chapter 13.
Under this provision, the level of compensation would be determined by
the bankruptcy judge.
Velazquez #1 To allow the expansion of the credit committee membership under chapter 11
bankruptcies to include a small business when it is determined that the
small business' claims are disproportionally large to its gross revenues.
And to ensure better access to information for those small businesses not
included in the committee by allowing the committee to be open for
comment and subject to additional reports or disclosures.
*
Summaries derived from information submitted by the amendment sponsors.
6
DRAFT - NOT FOR RELEASE
May 4, 1999
(House)
H.R. 833 - Bankruptcy Reform Act of 1999
(Gekas (R) Pennsylvania and 103 cosponsors)
The Administration strongly opposes H.R. 833. If the bill were presented to the
President in its current form, his senior advisers would recommend that he veto the bill.
Many of the bill's provisions are simply unfair to middle- and low-income debtors; at
the same time, the bill fails to close loopholes in current law that protect the wealthiest
debtors. The Administration continues to support bankruptcy reform that asks both debtors
and creditors to act more responsibly. However, H.R. 833 fails the test of balance between
creditors and debtors, particularly in its provisions affecting low- and middle-income debtors.
The bill focuses disproportionately on perceived abuse of the bankruptcy system by debtors
and takes an excessively rigid approach to limiting access to discharge of debts under Chapter
7 of the Bankruptcy Code.
H.R. 833 in its current form would limit access to Chapter 7 to debtors who meet an
inflexible and arbitrary means test. Reps. Hyde and Conyers intend to offer an amendment
that also includes a means test but which would use expense standards that are appropriate for
bankruptcy and would allow limited, appropriate discretion in their application so that debtors
denied access to Chapter 7 are those who are likely to be able to repay a portion of their debt
under a Chapter 13 repayment plan. Provided one technical change is included, the
Administration could support the Hyde-Conyers amendment. [Do we know yet if the change
has been made?] The Democratic amendment to be offered achieves the same goals and also
significantly reduces the administrative and legal burden of means testing by screening out
low-income debtors with little ability to repay. Under either amendment, debtors who
genuinely have the ability to repay a portion of their debts would remain responsible for those
debts.
The Administration continues to believe that reform must ensure that debtors are
treated fairly and responsibly in the bankruptcy process, recognizing creditors' superior
information and bargaining power. In addition to the changes described above, H.R. 833
needs to be revised to so that the bill: (1) appropriately balances greater repayment of
dischargeable debts with the need to protect child support, alimony, secured debts, and other
societal priorities like educational loans and taxes debts; (2) adds procedural protections and
clear guidelines for reaffirmations of unsecured and low-value secured consumer debts to
ensure that the financial terms of the reaffirmation are adequately disclosed and to enable
judges to use streamlined procedures to identify potentially unwise and possibly coercive
reaffirmations; (3) limits the anti-cramdown provision in the bill such that [Treasury please
supply]; and (4) includes new disclosure requirements to ensure that credit card companies
provide consumers with the information they need to manage their credit card debts, to help
consumers avoid the need for bankruptcy. The Democratic amendment addresses all of these
concerns.
In addition, the Administration supports changes that would close loopholes in current
bankruptcy law, such as those enabling unlimited homestead exemptions and exemptions from
repayment requirements for individuals who are able to file for bankruptcy under Chapter 11,
that protect some of the wealthiest debtors from having to repay a significant portion of their
debt. Bankruptcy reform should not place a greater responsibility for debt repayment on
moderate- and low-income debtors than it does on high-income debtors.
The Administration remains ready to work with the House to address these concerns,
building on the responsible and balanced reform of the Democratic amendment and the
bipartisan approach of the Hyde-Conyers amendment.
Message Sent To:
Sarah Rosen/OPD/EOP@EOP
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
Joel K. Wiginton/WHO/EOP@EOP
[email protected] @ inet
[email protected]@ inet
[email protected] @ inet
Broderick Johnson/WHO/EOP@EOP
[email protected]@ inet
[email protected] @i inet
Nicole R. Rabner/WHO/EOP@EOP
Sonyia Matthews/OPD/EOP@EOP
Douglas W. Elmendorf/CEA/EOP@EOP
Joseph J. Minarik/OMB/EOP@EOP
Ophelia D. West/OMB/EOP@EOP
Sarah Rosen Wartell/OPD/EOP@EOP
Sonyia Matthews/OPD/EOP@EOP
Alice Veenstra/OMB/EOP@EOP
Ronald E. Jones/OMB/EOP@EOP
Rebecca M. Blank/CEA/EOP@EOP
Jennifer M. Luray/WHO/EOP@EOP
Nicole R. Rabner/WHO/EOP@EOP
Cynthia A. Rice/OPD/EOP@EOP
Alexandra Gianinno/OMB/EOP@EOP
Joel K. Wiginton/WHO/EOP@EOP
Broderick Johnson/WHO/EOP@EOP
David W. Beier/OVP@OVP
[email protected]@ inet
[email protected] @ inet
[email protected] @inet
[email protected] @ inet
[email protected]@inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected]@i inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected]@ inet
Sandra Yamin/OMB/EOP@EOP
[email protected]
05/04/99 07:33:56 PM
Record Type:
Record
To:
See the distribution list at the bottom of this message
CC:
Richard E. Green/OMB/EOP
Subject: Hyde-Conyers May 3 Dear Colleague letter on amendment
Date: 05/04/1999 07:26 pm (Tuesday)
From: Mark McClellan
To: Dom13.DOPO7(BurmanL, DEVLINC, HUFFMANL, KALAMBOKIDIS),
DOM3.DOPO5(TooheyF), DOM3.DOPO6(MCGIVERNT),
ex.mail"[email protected]", "[email protected]",
"[email protected]", "[email protected]",
"[email protected]", "christine.devlin",
"[email protected]", "[email protected]",
"David_W._Beier%[email protected]", "[email protected]",
"[email protected]", "[email protected]",
"frank.toohey","[email protected]"
"[email protected]", "[email protected]",
"[email protected]", "[email protected]",
"[email protected]",
"[email protected]",
"[email protected]",
"[email protected]", "[email protected]",
"[email protected]",
"[email protected]", "laura.KALAMBOKIDIS",
"[email protected]", "LEONARD.BURMAN",
CC: ex.mail"[email protected]"),
Subject: Hyde-Conyers May 3 Dear Colleague letter on amendment
FYI
Hyde-Conyers Dear Colleague Letter:
May 3, 1999
Dear Colleague:
During floor consideration of H.R. 833, the "Bankruptcy Reform Act of
1999," we hope to offer a bipartisan amendment relating to permissible
living expenses of debtors and their families. If our amendment is
adopted, the legislation will remain overwhelmingly pro-creditor but will
treat those experiencing financial distress more humanely.
Our amendment makes a significant improvement to H.R. 833's
needs-based formula. It replaces the bill's
reliance on IRS expense allowances and instead incorporates a test
based on the disposable income standard of current law--whether
income is "reasonably necessary
for
maintenance or support." To
enhance predictability, the amendment requires the Director of the
Executive Office for United States Trustees to issue guidelines that will
be considered in the application of the "reasonably necessary" standard.
In our view, the limited effort to modify the IRS standards in the
Committee on the Judiciary--by including a five percent add-on for food
and clothing only and providing for the continuation of certain private
school expenses--fails to solve major problems with incorporating IRS
schedules into our bankruptcy law.
H.R. 833 contemplates a major overhaul of our consumer bankruptcy
system. For the last century-- dating back to the first permanent
bankruptcy law of the United States, the "Bankruptcy Act of 1898"--
individual debtors generally have been able to receive an immediate
financial "fresh start" without having to encumber their future incomes.
By greatly enhancing the potential for dismissing Chapter 7 "liquidation"
cases--bankruptcies that provide immediate, limited discharges of
obligations in return for debtors giving up any nonexempt assets--H.R.
833 channels many debtors into five year Chapter 13 repayment plans.
This major shift in bankruptcy policy necessitates focusing on what
portion of a debtor's future income will be available for living expenses.
The reported bill says in effect that debtors and their families must
adhere to a somewhat modified version of the IRS to facilitate
compromises with delinquent taxpayers. The delinquent taxpayer model,
however, is inappropriate for imposition in bankruptcy because (1) the
successful collection of taxes is a matter of national self-preservation,
and (2) the private sector can minimize the risk of losses by adhering to
prudent creditor practices. The great irony here is that Congress recently
gave expression in the Internal Revenue Service Restructuring Act of
1998 (P.L. 105-206) to the need for flexibility in the application of IRS
expense allowances--with the IRS to determine the appropriateness of
applying the schedules to individuals. Relief from modified IRS expense
allowances in this bankruptcy legislation, however, requires debtors to
demonstrate "extraordinary circumstances" more rigid and inflexible
approach than even the IRS practice.
Professor Jack Williams of Georgia State University School of Law, who
chaired the National Bankruptcy
Review Commission's Tax Advisory Committee, pointed out in a written
submission for our bankruptcy
hearings this year: "Tying debtor eligibility to a formula that the IRS
deviates from on a regular basis makes
no sense." He described the IRS collection standards as "too
parsimonious." Professor Williams stated:
"[O]ne must conclude that the standards are unrealistic. The IRS
personnel know this fact and often deviate from the collection standards
in an effort to permit settlement of tax claims."
A few days ago we heard from the Commercial Law League of America,
an organization with over 4,600
individual members that describes itself as having "long been associated
with the representation of creditor interests, while at the same time
seeking fair, equitable and efficient administration of bankruptcy cases
for all parties involved." The League wrote:
"Utilizing the IRS guidelines is problematic because: (i) it converts a
guideline utilized in a nonbankruptcy
setting, that is subject to discretion, to a rigid standard in the bankruptcy
setting, under which the court is
expressly prohibited from exercising any discretion (i.e., a guideline is
converted to an absolute standard), (ii) it will ultimately reduce
distributions to creditors because fewer individuals will seek Chapter 13
relief and those that do will be far less likely to complete the payment
plan, and (iii) it takes discretion away from the court to be flexible enough
to apply a now well-developed standard to realistically assess the
debtor's prospect for reorganization."
Judge Randal Newsome, President of the National Conference of
Bankruptcy Judges, also wrote on April
30th after reviewing a similar amendment offered in the Committee on the
Judiciary. He stated:
"On behalf of the 319 members of the National Conference of Bankruptcy
Judges, I firmly believe that your amendment would lead to a far less
complex and far more workable needs-based bankruptcy system than
one which attempts to incorporate IRS expense standards.
Replacing
those standards with your flexible test will lead to far less confusion,
and thus far less litigation."
An unfortunate consequence of applying IRS living allowances in
bankruptcy cases is to penalize some family members because they live
with the debtor and cannot benefit from a support order. The bill includes
protections for the beneficiaries of support orders issued by family
courts that are not constrained by the
living allowances IRS seeks to impose on delinquent taxpayers. Spouses
and children in families that stay
together effectively may be penalized by being forced to live under very
restrictive, modified IRS allowances,
whereas a noncustodial parent-with sufficient income--who is subject to
a support order may be able to provide for his or her former spouse and
children more generously. Parents who remain married to each other and
live with their children should be able to provide for "reasonably
necessary" living expenses. Regrettably, the bill as reported does not
give bankruptcy judges the flexibility to achieve such an outcome.
We urge our colleagues to support our amendment which recognizes
that we can dramatically change current law--by requiring large numbers
of debtors to make future income available to creditors--without depriving
debtors and their families of "reasonably necessary" living expenses.
Sincerely,
Henry J. Hyde
John Conyers, Jr.
Message Sent To:
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Alexandra Gianinno/OMB/EOP
Alice Veenstra/OMB/EOP
Broderick Johnson/WHO/EOP
[email protected]
Cynthia A. Rice/OPD/EOP
[email protected]
David W. Beier@OVP
[email protected]
Douglas W. Elmendorf/CEA/EOP
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Jennifer M. Luray/WHO/EOP
Joel K. Wiginton/WHO/EOP
[email protected]
Joseph J. Minarik/OMB/EOP
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Nicole R. Rabner/WHO/EOP
Ophelia D. West/OMB/EOP
[email protected]
[email protected]
Rebecca M. Blank/CEA/EOP
Ronald E. Jones/OMB/EOP
Sandra Yamin/OMB/EOP
Sarah Rosen Wartell/OPD/EOP
Sonyia Matthews/OPD/EOP
[email protected]
[email protected]
TARGETED MEANS TESTING FOR CHAPTER 7
The principal goal of this proposal is to minimize the total cost of a means test for
moving potential Chapter 7 filers who can repay some of their debt into Chapter 13. The benefit
of moving filers who can repay is the increased debt repayments that would result. The direct
costs of means testing include the costs to the panel trustees, bankruptcy administrators and filers
of providing information for testing, the attorney's and administrative costs associated with
challenges to trustees' findings, and the additional administrative costs of inappropriate referrals
to Chapter 13 that result in failure. Beyond these costs are the burden of personal compliance,
and the inherent rights of debtors to a fair hearing on their particular circumstances, if they are to
be denied access to Chapter 7. By targeting means testing effectively, the proposal assures that
virtually all debtors who can repay are moved fairly and at minimum cost to the system. Much
as the IRS uses its repayment capacity standards today, the proposal allows for limited discretion
by Trustees and judges to consider special circumstances of debtors, subject to clear
presumptions created by the detailed guidelines. Thus, this proposal would reduce the costs of
means testing compared to current bills, permitting greater debt repayment.
Summary of Proposal
The resources expended to scrutinize debtors' ability to repay are related to the "payoff"
in terms of expected repayment. Evidence on filers' actual ability to repay suggests that the best
screen approach has two parts: low-cost screens for debtors who are unlikely to be able to repay,
plus a more complete means test targeted to those who have some chance of being able to repay.
Figure 1 summarizes the proposal.
(I)
Very Low Potential to Repay: Debtors who document incomes below 75% of the
national median, adjusted for family size, are not subject to further means testing. Unless the
totality of circumstances suggests abuse, it is automatically presumed that filing for Chapter 7 by
such debtors is not abusive.
(II)
Low Potential to Repay: Debtors with incomes between 75% and 150% of the
national median are initially screened using a simple preliminary test of repayment capacity.
This preliminary test calculates ability to repay the lesser of 30% of debt, or $15,000, given that
they can repay a minimum of $50/month, based only on their income and the subset of allowable
expenses included in the formulaic portions of the IRS standards, the National and Local
Standards, determined only by income, family size, and area of residence. If they cannot repay
according to this test, they certainly could not pay if the additional nonformulaic expenses
allowed under the IRS' Other Necessary Expenses are included, and they are presumed to be
filing appropriately in Chapter 7. Debtors who may be able to repay according to this screen are
subject to a complete means test involving a detailed review of income and expenses, and any
other special circumstances that substantially influence the likelihood of repayment success.
(III) Some Potential to Repay: Debtors with incomes above 150% of the national
median are fully examined for the ability to repay according to a complete means test involving a
detailed review of the debtor's income, expenses, and any special circumstances.
ANALYSIS
Who can be expected to repay?
Recent national studies of the repayment capacity of Chapter 7 filers show that income is
a very strong predictor of repayment capacity and therefore is an appropriate measure for a
simple initial screening test.
*
According to Ernst & Young, March 1998, and additional data provided to the Treasury,
filers with incomes below 75% of the national median adjusted for family size
represented 54% of Chapter 7 filers. Their repayment capacity was extremely low. Ernst
& Young found that only about 3 out of every 100 filers in this income category had the
ability to repay even $3,000 or 20% of their debt. Moreover, the debtors who met this
$3,000/20% threshold had the lowest average ability to repay among all income groups.
*
Those with incomes between 75% and 150% of the national median constituted 36% of
Chapter 7 filers. About one-fourth of these filers -less than 3 out of every 10 -- had
some ability to repay even a small portion of their debt. The degree of repayment
capacity did not differ substantially at different levels of income within this range.²
*
Those with incomes above 150% of median comprised only 9.7% of all Chapter 7 filers.
But nearly 5 out of every 10 of these filers had some ability to repay.
What is the repayment potential?
Available data preclude a precise estimate of the amount of debt each debtor would
actually repay in a Chapter 13 plan. As we note below and as other studies have argued, many
factors suggest that actual repayment may be significantly less than ex ante repayment capacity
would suggest: the administrative and legal costs of executing means testing (which our
proposal is intended to minimize), the potential for "gaming" means-test expense formulas and
repayment thresholds, the limited actual success of voluntary Chapter 13 plans, the variability in
debtor circumstances post-bankruptcy and the real possibility that debtors forced into an
I
Ernst & Young, "Chapter 7 Bankruptcy Petitioners' Ability to Repay", March 1998,
with additional data provided to Treasury; Culhane & White, "Taking the New Consumer
Bankruptcy Model for a Test Drive", December 1998, using the needs-based provisions of HR
3150; and Ernst & Young's March 1999 update based upon HR 833.
2
Of those debtors with incomes between 75% and 100% of the national median, over
20% had some capacity to repay. Of those debtors with incomes between 100% and 150%, 37%
had some capacity to repay.
involuntary Chapter 13 may be even less motivated to adhere to a repayment plan- all imply
that actual repayment may be significantly below potential repayment. Thus, formulating a
precise estimate of expected repayment is very speculative. Instead, we consider potential
repayment - that is, the maximum possible repayment assuming that none of the factors just
mentioned reduce repayment. We assume that debtors who would be moved by the means test
have between median and average debt repayment potential for their income range. As we have
argued, it is likely that repayment will be less. Moreover, repayment is probably
disproportionately lower for the lower-income ranges, since administrative and other costs are
more likely to exceed the repayment capacity of debtors in these income ranges.
What are the costs of means testing?
Additional Administrative Costs of Means Testing
The Congressional Budget Office estimated that the additional federal costs of last year's
House bill would be $16-24 Million annually. This includes approximately $8 Million per year
in costs for the U.S. Trustees due only to oversight of the means testing provisions and
maintaining the tax information required by the testing, and $8-$16 million in additional
judgeship costs due to the new burden on the court system of means test determinations and
associated litigation.³ We assume that these costs are unaffected by whether or not the means
test is targeted effectively; this is likely to be a conservative assumption, because oversight and
court costs would probably be reduced proportionally with the burden of the means test itself.
CBO did not estimate the additional costs for the private Trustees, who are responsible
for the actual management of bankruptcy filings under the current system. Under the House bill,
both Chapter 7 and Chapter 13 Trustees would be required to conduct a means test. These
expenses will reduce the debt ultimately recovered by creditors. Chapter 13 Trustees' expenses
are covered under current compensation rules. We presume the Chapter 7 Trustees' expenses for
conducting the tests would be also covered by allowing an additional percentage of any
repayment ability discovered, like their current law compensation in Section 326 (a) of Title 11.
The current Senate bill gives responsibility for administering the Chapter 7 means test to the U.S.
Trustees. In that case, the additional costs to the private Chapter 7 Trustees would be borne
instead by the Federal government.
The additional private Trustee costs of means testing can be separated into the costs of
determining the debtor's monthly total income, the monthly total allowable expenses under the
IRS formulaic standards, the determination of the debtor's secured and priority monthly debt
payments, and the assessment of nonformulaic, case-specific factors under the IRS' Other
Necessary Expenses allowance.
3 Cost Estimate, H.R. 3150, CBO, May, 1998
We developed evidence on the likely cost of each component of means testing from a
number of sources. The Chapter 13 Trustee from the Northern District of California has
estimated the additional costs to the private Trustees of means testing under H.R. 3150.4 She
reports that total out-of-pocket administrative expenses of the district (not including overhead)
are likely to increase by about $90-110 per new case due to the full means testing requirement.
The income-determination portion of the test accounts for a little more than half of this amount,
with the remainder covering the determination of expenses and debt repayment. This is likely a
generous assumption. Other experts we questioned (including bankruptcy trustees and IRS
administrators) believed that income determination -- which only requires tax records and
evidence on pay from current employment -- would be far simpler than assessment of
case-specific expenses, and so would comprise a relatively smaller share of the cost of means
testing. In contrast, assessment of case-specific expenses, including both nonformulaic expenses
and debt payments, would be a far larger share. Based on these expert recommendations, we
estimate the administrative costs per case for the income test would be around $20; the cost of
the secured and priority debt determination would be around $40; and the calculation of
case-specific expenses would be around $30-50 per case.⁵ The high-end estimates assume more
Trustee time for review of expenses. Presumably the Chapter 7 Trustees' expenses would also
rise by comparable but slightly lower amounts, perhaps by about 75-80% of the Chapter 13
expense, as they will be performing much the same examination but do not apply this
information in the formulation of a Chapter 13 plan.
Additional Attorney Costs
Debtors' lawyers' fees for a Chapter 7 filing have averaged about $800 per case, and, for
Chapter 13 cases, have averaged about $1300 per case. Requiring the Chapter 7 attorney to
apply a means test would increase fees, perhaps near to that of the average Chapter 13 fee. An
income-only or formula-based screen would increase the Chapter 7 lawyer's costs by perhaps
one-quarter of the difference between a Chapter 7 filing and a Chapter 13 filing today due to the
additional demands upon the lawyer's time --by about $100-125 per case. (The attorney time
could be considerably lower for an income-only screen.) A complete means test would increase
debtor attorney costs by perhaps $200 per case.
Costs of Contesting a Finding
Additional administration and litigation expenses are incurred when debtors or creditors
4 Devin Derham-Burke, Chapter 13 Standing Trustee, N.D. of California, "Report on
Cost to Administer Chapter 13 Cases under H.R. 3150", March, 1998.
⁵The estimates all assume that well-designed, standardized forms for expense reporting
are developed, and that debtors must comply in good faith with providing the required expense
information prior to Trustee review. Costs to the debtors of providing this information are not
included in our calculations.
choose to contest a Trustee's conclusion with regard to ability to repay. Cases involving debtor
challenges are assigned to the U.S. Trustee. We assume the debtors most likely to attempt to
rebut a Trustee motion for dismissal will primarily consist of those "at the margin" of apparent
ability to repay, for whom only a modest increase in expenses or adjustment in income could be
the difference between satisfying the ability to repay criterion or not. Debtors who would most
obviously fall into this category include those above 100% of median income who are estimated
to be able to repay between 25-50% of debt, comprising about 3% of total Chapter 7 filers.⁶
Creditors are also likely to find it cost-effective to challenge filings by debtors who are at
the margin of ability to repay and who have substantial outstanding debt, but who did not
generate Trustee motions. This group of debtors probably has, on average, somewhat less
favorable apparent repayment circumstances than those who do generate motions. Debtors who
could most obviously fall into this category include the debtors above 100% of median income
who are estimated to be able to repay between 0-25% of debt, comprising about 2% of total
Chapter 7 filers. Thus, up to 5% or more of filings could result in further informal action and
formal litigation after the means test, by both debtors and creditors.
The number of such cases, and the intensity of litigation, would be significantly smaller if
the means test was applied with appropriate judicial discretion comparable to that now applied by
the IRS - specifically, a standard of review in which the means test result creates a rebuttable
presumption in the case of unusual circumstances. With such a standard, the Trustee would be
able to address the case-specific factors that would lead debtors to believe that they would not
succeed in Chapter 13 during the means-test review, rather than having to address them in
subsequent, more costly litigation. Similarly, the Trustee could account for other factors that
would likely affect repayment capacity, so that those who are moved would be significantly more
likely to succeed in Chapter 13 - thereby making further litigation less likely to be viewed as
worth the cost by either debtors or creditors. Without such discretion, debtors who truly believe
that they will not do well in a Chapter 13 plan have little to lose by litigating, because their
attorney fees will simply come out of their (already-limited) ability to repay used to determine
their Chapter 13 plan. Similarly, a very strict "extraordinary" standard may cause creditors to
pursue additional litigation, in the belief that they would have a better opportunity to overturn
any judgment by the Trustee. IRS collection officials indicate that they use considerable
discretion in applying the collection financial standards to individual taxpayers, to avoid the
additional administrative and legal costs associated with taking enforcement actions based on
rigid standards; they have found that applying rigid standards is not cost-effective.
The estimates of rates of further action following the Trustee's means test determination
are consistent with those of the U.S. Trustees, who estimate that additional cases requiring action
We assume that few filers below 100% of median income would seriously contest a
Trustee motion for dismissal, due in part to their limited willingness and ability to incur
additional attorney costs.
by the U.S. Trustee due to challenges of motions for dismissal could total between 1-6% of
current filings, and that a small share of cases (about 8%-10% of these actions, or 0.1-0.5% of
filings) would go through complete formal litigation. The high-end estimates are based on the
assumption that a large number of "marginal" Chapter 7 filers challenge. The Trustees estimate
the total U.S. Trustee costs of these cases to be $2-11 million per year.⁷
Debtor attorney costs for these further actions would also reduce the debts ultimately
recovered. Based on discussions with U.S. Trustees, we estimate debtors' lawyers hourly fees to
be about $150-200/hour. Using the estimates of time requirements for additional actions and
litigation developed by the U.S. Trustees for their own costs, we estimate the debtors' legal fees
for additional administrative actions to be about $750-$1,000, and attorney costs for litigation,
about $ 3,000-$5,000.
Notice Costs
The U.S. Trustees have estimated that the costs of providing notice to all creditors of the
findings of the Trustee's investigation of the debtor's ability to repay are $5 - $10 million per
year, as a result of mailing costs and associated administrative expenses. The Trustees have also
noted that preliminary, easily verifiable information - such as information on debtor income - can
be provided at the first meeting of creditors. Though we do not consider these savings in the
following comparison, more than half of the notice costs (approximately $3-$5 million per year)
could be avoided under the Administration proposal.
Cost and Debt Recovery Comparison of Administration and Current Bill Means Tests
Table 1 below summarizes the cost advantages of the "targeted discretion" means test.
The principal reason that administrative and legal costs are much lower in the Administration
proposal is that full means tests are avoided for the large share of Chapter 7 filers who, through
simple screens, can be identified as having virtually no capacity to repay. The screens require
only a determination of income and family size (for all debtors), and of debt expenses (for a large
group of middle-income debtors). As the Table shows, screening out these individuals has
essentially no impact on the debt recovery, because essentially all individuals with some
repayment capacity are still subject to a full means test. Second, the Administration proposal
also reduces administrative and legal costs by providing limited judicial discretion in reviewing
the means test results, subject to clear presumptive guidelines. We have used conservative
assumptions regarding the estimated reduction in challenges and further legal action; as noted
above, IRS experience and consideration of debtor and creditor incentives to challenge the
outcome of a nondiscretionary review in the 5% or more of bankruptcy filings that are close
cases suggest that the savings could be significantly larger. The substantially lower cost of the
Administration means test would significantly increase the repayment potential of Chapter 13
7 Communication from Executive Office of U.S. Trustees.
plans resulting from the means test.
What are the additional costs and benefits of referring debtors to Chapter 13?
In addition to the administrative and legal costs of means testing are the costs of the
resulting Chapter 13 plans. These costs must be weighed against the benefits of additional debt
repayment by the additional Chapter 13 filers resulting from the means test. It is likely that these
costs would be higher and benefits lower compared to the voluntary Chapter 13 filings that occur
today. In this section, we compare the consequences for debt repayment and additional
administrative and legal expenses of the "targeted discretion" approach to the current
House/Senate approach for debt repayment in Chapter 13.
Table 1 reports the repayment potential of debtors under each means test. As the Table
notes, the targeted screen does not make mistakes for debtors with incomes above 75% of the
median; virtually all debtors who can repay a nontrivial portion of their debt will be identified for
potential movement to Chapter 13.⁸ Thus, a key question is whether the limited discretion in the
targeted test would lead to a significant reduction in debtors actually moved, and whether this
reduction in turn would have a significant impact on actual debt repayment net of administrative
and legal costs.
What share of debtors might meet a standard of "special circumstances" in determining
access to Chapter 7 but not a standard of "exceptional circumstances"? Debtors with substantial
ability to repay - that is, far above the repayment thresholds for the means test - are unlikely to be
able to meet either standard except in truly unusual cases. The group most affected is likely to be
those near the test threshold, that is, those with 25-50% repayment capacity according to the test.
To provide an upper bound on the potential loss of repayment capacity, we assume that all
debtors in this repayment range are able to convince the Trustee that they have unusual
circumstances that make them unable to pay. (This is a truly extreme assumption; more
realistically, only a subset of these debtors will be affected by the greater discretion, as well as a
small share of debtors with greater apparent repayment capacity.) According to Ernst & Young
estimates, less than one-fourth of filers who meet the means test (3.2% of the 14% who meet the
test) are in this category. These debtors account for a significantly smaller share of potential
repayments than their numbers suggest because they are close to the margin of the means test.
In actuality, the impact of the Administration's proposal for limited discretion on the
debtors moved to Chapter 13 is likely to be much smaller than one-fourth of all debtors who
meet the means test. About two-thirds of these "marginal" debtors are above 100% of median
⁸As the Table notes, there is very slight repayment capacity in debtors with incomes less
than 75% of median, who would be screened out under the targeted test. No studies have
concluded this modest repayment capacity can be recaptured by any of the bankruptcy reform
proposals.
income and would be subject to creditor motions, which creditors have appropriate incentives to
bring if the debtors truly can repay. Because the share of repayment capacity in this "marginal"
group is disproportionately low and because of the threat and use of creditor motions, we
estimate that the impact of allowing limited discretion on actual repayment would be well under
10% of potential repayment. This "upper bound" on the reduction in repayment potential would
be significantly offset by the reduction in administrative and legal costs from the reduction in the
number of Chapter 13 plans that would fail, compared to a rigid means test.
Movement to Chapter 13 does not guarantee debt repayment. Debtors filing Chapter 13
voluntarily have had relatively low success rates. On a nationwide basis approximately one-third
of those who file complete plans and receive a discharge, but the rates of plan completion and
discharge vary widely by district. Available data on repayment rates is entirely local; most
recently the Chapter 13 trustee for the Western District of Missouri reported that about 20% of
district debtors completed their plan, and that those completing their plans repaid about 43% of
their nonpriority unsecured debt.⁹ Of the remainder, approximately 63% ultimately fail in their
repayment plan and are either dismissed or converted directly to Chapter 7 (and many of those
dismissed refile for Chapter 7, in worse financial circumstances, incurring the costs of means
testing once again).
Success rates in Chapter 13 are likely to be particularly low for debtors who have
marginal capacity to repay and who are close to the means-test limit. For example, consider a
debtor judged by the means test to have 31% capacity to repay. If this debtor has any sort of
unusual circumstances - such as the need to provide financial support for a nondependent parent
or other relative, slightly higher-than-median work or personal expenses (e.g., because of longer
commute distances or having a home in an area that is slightly more expensive than average) -
then it is likely that either priority debt repayment will suffer or the Chapter 13 plan will be
unsuccessful. The study by the Chapter 13 Trustee of the costs of H.R.3150 report that the
administrative costs of failing Chapter 13 cases is significantly greater than for cases that
succeed. The IRS has found that a significant number of "borderline" tax debtors have
reasonable expenses that are not "median." To avoid the additional administrative expenses
associated with failing tax collection cases and the legal expenses associated with the application
of rigid standards, the IRS applies its standards with at least as much discretion as a means test
that allowed for "special circumstances" would imply.
A means test with limited discretion to account for such unusual circumstances would
avoid the additional administrative costs of a significant number of unsuccessful Chapter 13
plans. Thus, targeted means testing with limited discretion would allow the bankruptcy system
to direct greater attention to determining the true repayment capacity of the subset of debtors
who are likely to be able to repay a significant portion of their debt.
9 Hon. Arthur Federman, "What Means Testing Really Means--An Empirical Study,"
Consumer Bankruptcy News, April, 1999.
Table 1. Cost Comparison of Current Bill Means Test vs. Targeted Discretionary Testing
Income
Share
HR 3150 Means Test
Targeted Discretion
of
Ch. 7
filers
Share
Share
Potential
Add'l
Add'l
Share
Share
Potential
Add'l
Add'l
of Ch.
of filers
Repaymen
adminis-
legal
of Ch 7
of filers
Repaymen
adminis-
legal costs
7
with
t
trative
costs
filers
with
t
trative
filers
repay-
costs
subject to
repayment
costs
subject
ment
screens
potential
to full
potential
test
<75%
54%
all
1.7%
<.09B*
$86M
income
0
0
$8-9M
$43M
$38-51
screen:all
M
full test: 0%
75-150
36%
all
9.3%
$.7B
$34-41
$142-1
income/formulai
9.3%
$.7B
$16-19M
$105-110
%
M
46M
c
M
expense
screen:all
full test: 11.3%
>150%
10%
all
4.7%
$1.9B
$9-12M
$137-1
full test: all
4.7%
$1.9B
$8-11M
$113-117
41M
M
Total
100%
100%
16%
$2.6B
$356-3
21.3%
14%
$2.6B
$257-266
$81-104
64M
$32-39M
M
M
*The total repayment capacity for this category of debtors is around $85 million. However, as Ernst & Young note, because of the absence of creditor
motions and marginal capacity to repay of the few debtors in this category with any capacity to repay, it is very unlikely that any of this debt could be
recaptured through means testing.
Conclusion
(I)
A cost-effective screen should not examine low income debtors. It should expend
resources examining debtors with some capacity to repay.
The costs simply do not justify examining debtors with incomes below 75% of the
national median to find those with any capacity to repay. A Chapter 7 filing by a debtor
with income less than 75% of the national median should automatically be presumed not
be abusive with regard to the means test.
(II)
The optimal screen should minimally examine the disposable incomes of moderate
income debtors, eliminating those who do not have the ability to repay, and giving a full
Trustees' examination only to those remaining.
Since one must examine on average 10 such debtors to identify 3 who can repay, it is not
cost-effective to examine all of them fully. A minimal screen would calculate the
debtor's ability to repay, basing the allowable expenses on only those portions of the
means-test-allowed expenses that are set in formula. We do not make a mistake using
this screen: debtors without the ability to repay formulaic amounts will clearly not be able
to repay if consideration is given to all their expenses.
(III) Debtors with incomes greater than 150% of the national median should be fully
examined, applying a means test.
Reaffirmations
Administration Proposal
The Administration supports the following reforms in bankruptcy law governing the
approval of reaffirmations:
Court review of reaffirmations that are least likely to be in the debtors best interest: court
review is required for reaffirmation of unsecured debt and of secured personalty debt with
original purchase price under $500, to determine that these reaffirmations are fully
informed, voluntary, in the debtor's best interest, and do not pose undue hardship. In
addition, costs and attorneys' fees cannot be added to these reaffirmations. This proposal
is similar to the ABI proposal, which requires review for unsecured debt and secured debt
of less than $3000.
*
Guidance to determinations of whether the debtor is fully informed and whether the
reaffirmation creates an undue hardship: An affidavit filed with the reaffirmation would
create these presumptions.
*
A presumption that the debtor is not fully informed would be created if the
affidavit did not include the model form on disclosure of financial terms
developed by the Judiciary Committee.
*
A presumption that the reaffirmation presents undue hardship would be created if,
when the cost of the reaffirmation is added to the debt expenses calculated in the
means test, the debtor's income is insufficient to repay all nondischargeable debts.
This guidance applies both for court review (where it is required) and for reaffirmations
subject to review by the debtor's attorney.
Notice and standing for domestic support creditors, allowing them to object to a proposed
reaffirmation that is likely to jeopardize payment of their priority debt.
No coercion: the Court must find that the agreement was not part of a threat, as in the
current bills.
Current House and Senate Bill
The current House and Senate bills require that creditors who seek reaffirmation of
wholly unsecured debts provide a disclosure that the debtor is entitled to a court hearing, and that
the debtors can waive their rights to hearings if represented by counsel. Thus the court must hold
a hearing to determine whether the agreement should be approved if: (1) the debtor was not
represented by counsel (as in current law), or (2) has unsecured consumer debt and was
represented by counsel but did not waive the right (which rarely occurs). The bills also require
that the court must find that the agreement was not the result of a threat.
Background on Administration Position
The Administration agrees with the Bankruptcy Commission that debtors need to receive
full and complete disclosure of the facts of reaffirmation agreements, that many reaffirmations
involve terms that are far worse than those available elsewhere, that the existing attorney
affidavit procedure provides inadequate protection from unfavorable reaffirmations. Thus, the
Administration has sought additional protection against unwise reaffirmations. Along with the
American Bankruptcy Institute, the Administration has endorsed court review of reaffirmations
that are least likely to be in the best interest of debtors and priority creditors like divorced
spouses. Such reaffirmations include unsecured debt and debt secured by small personalty items
of little value, which are often the basis of reaffirmations that are very unfavorable and/or are the
result of misleading or coercive offers by creditors. Finally, believing that debtors with adequate
information and protection against coercion were capable of making wise decisions even in the
case of unsecured credit, the Administration does not support a ban on reaffirmations of
unsecured credit.
Accordingly, the Administration supported the reaffirmation reform proposed in last
year's Senate bill, S. 1301. The Senate bill required that the reaffirmation agreement contain a
clear disclosure of the components of the reaffirmed debt--principal, interest, late fees, creditor's
attorneys fees and other costs of collection. In addition, in cases where the debt was unsecured
or was for purchase of a personalty item of original value less than $250, the bill required the
court to make a number of findings for approval, including finding that the agreement was in the
debtor's best interest, did not impose undue hardship, was not the result of coercion, and was not
excessive relative to collateral value. The Administration also sought further protections, by
requiring that the court find clear and convincing evidence that the agreement was in the debtor's
best interest and would not cause a hardship, and by applying the bill's provisions to debts for
purchases of somewhat higher original value than $250. One criticism of the Senate proposal
was that the bill language did not provide clear guidance for courts to use in deciding whether
reaffirmations met the conditions for approval, so that reaffirmations would be costly to review
and the diverse standards currently used by courts might continue to be applied.
This enhanced Administration proposal addresses the concerns about feasibility and clear
guidance. It also builds on the new information on repayment capacity to be collected as part of
the bankruptcy reform process - indeed, it applies the same results and standards to
reaffirmations as the reform bills apply in the means test for determining ability to repay -
thereby limiting costs of reaffirmation review and assuring that priority debts will be paid. Thus,
the enhancements to the reaffirmation proposal make it largely self-executing.
Detailed Description of Administration Proposal
The proposal for "no coercion" is the same as the finding required in the current House and
Senate bills. We describe below the specific guidance for whether "full disclosure" has occurred,
and for whether the reaffirmation constitutes an undue hardship for the debtor.
Presumptions for affidavits/court approvals:
By providing clear guidance for courts, attorneys, and parties at interest in developing
reaffirmations that are in the best interest of the debtor, yet do not harm priority creditors, the
proposal would improve the quality of all reaffirmations without imposing significant new
administrative burdens on the bankruptcy system.
(1) fully informed: Debtor is presumed not to be fully informed unless the creditor who is party to
the agreement discloses credit terms according to forms provided by the Judicial Conference, and
provides the disclosures to the court as part of filing. This form is provided at Attachment A.
The disclosures included on the form are standard information that the debtor, the attorney, and
the court need in order to assess whether the reaffirmation is in the debtor's best interest:
the amount of the prepetition claim
total amount of the reaffirmed debt, and component amounts attributable interest accrued,
attorney fees, late fees, other costs relating to collection
*
the monthly payment of the reaffirmed amount or, if the reaffirmation agreement extends
new or additional credit, the minimum monthly payment on that amount
*
annual percentage rate of interest (APR) and other types of finance charges and their
manner of calculation, including but not limited to late fees, service fees, etc, assuming
that Regulation Z applies to the transaction and treats it as a refinancing; separately, the
same information for any new or additional credit extended
date payments start
total number of payments made to satisfy the reaffirmed indebtedness, if paid on schedule
if secured: date any lien is released, if payments are made on schedule
if secured: description of collateral, value, and basis for valuation
Disclosures that meet these requirements create a presumption of full information.
(2) undue hardship: A proposed agreement is presumed to be undue hardship if, when all
monthly payments in the proposed reaffirmation are added to the debtor's monthly expenses as
calculated in the Section 707(b) means test, the total expense exceeds the debtor's monthly
income. This test simply adds one line (the expense of the reaffirmation) to the ability to repay
calculations that will be performed for all Chapter 7 debtors.
For debtors who undergo the full 707(b) means test, this calculation is straightforward -
documentation on income, expenses, and nondischargeable debt payments not counted in
expenses is filed as part of the case. The only additional information required of the debtor is the
I There is debate over the exemption granted to credit agreements that are the result of "
court proceedings" in Regulation Z. This proposal does not suggest changing the exemption.
total monthly payment for the proposed reaffirmation; if the total expenses counting the
reaffirmed debt are greater than the debtor's monthly income, the reaffirmation is presumed not
to be in the debtor's best interest. For reaffirmations that do not involve a regular monthly
schedule of payments, the debtor's total expenses over the period of the reaffirmation (including
the total payments for the reaffirmed debt) are compared to the debtor's total income over the
same period.
For debtors who are "screened out" of the means test under the Administration proposal, the
debtor's monthly expenses are estimated to be 1.4 times the applicable monthly expenses under
the IRS National and Local Standards for food, clothing and other items²; housing and utilities;
and transportation. The "undue hardship" presumption is then whether the debtor's monthly
income is greater than the sum of these monthly expenses, plus monthly payments on existing
nondischargeable debts, plus monthly payments on the proposed reaffirmations.
The debtor may rebut a presumption of undue hardship by demonstrating circumstances that,
despite the presumption, justify the proposed agreement. For debtors who were not subject to the
full Chapter 7 means test or who did not have adequate ability to repay according to the means
test, this would require documenting expenses and required debt payments to provide evidence
that the reaffirmation does not jeopardize payment of nondischargeable debts. Any such
evidence can also be used by the court as a factor in determining whether the Chapter 7 filing is
presumed abusive, and/or in setting the terms of a Chapter 13 repayment plan.
Notice and standing for domestic support creditors
(1) Notification: The debtor must notify creditors owed child support and alimony payments of
any proposed reaffirmation agreement with sufficient time to allow such creditors to object to the
court's approving an agreement.
(2) Standing for parties at interest: A creditor with a domestic support claim may object to the
approval of an agreement because of substantive or procedural defects on the grounds that the
debtor's future income and/or expenses are not described adequately in the information provided
by the debtor on capacity to repay and that the true capacity to repay is insufficient to protect his
or her own claim adequately. If an objection is made, the court must hold a hearing.
(3) Fee shifting: The court may award the creditor all reasonable costs in bringing an objection,
if the court grants the objection and finds that the position of the debtor who proposed the
agreement was not substantially justified (as guided by the presumptions). The court may award
the debtor all reasonable costs in contesting an objection brought by a party in interest if the
2 According to the data in the BLS's Consumer Expenditure Survey, average total
consumer expenditures are about 40% larger than annual expenditures for the items covered in
the National and Local Standards.
court does not grant the objection and the court finds that the position of the party in interest was
not substantially justified, or that the party brought the objection solely for the purpose of
coercing a debtor into waiving the right to reaffirm.
NY Times 5-9-99
How Much Protection
For Bank Customers?
Consumers Union, the nonprefit pub-
Banking trade groups say that 15-
By DAVID CAY JOHNSTON
lisher of Consumer Reports maga-
sues as complex as privacy and dis-
zine, wants Congress, at a minimum,
closure should be dealt with sepa-
OUR bank can collect details
to require full disclosure in plain
rately, rather than having them jeop-
Y
about your spending habits,
English when banks sell information
ardize legislation needed now.
like how much you charged
about their customers and their
"These consumer protection issues.'
last year at lingerie, liquor and lawn-
spending habits. Better yet. she said,
said Ed Yingling, chief lobbyist for
and-garden stores, and then sell that
customers should be able to block the
the American Bankers Association.
information to companies that mar-
sharing or sale of this information.
are not germaine to the bill.'
ket bras. booze and bug killers.
as President Clinton has proposed
But Stephen Brobeck. executive di-
And your bank is not required 10
But in the Senate, which last week
rector of the Consumer Federation
tell you if it does. Nor can you do
passed a bill to repeal the core laws
of America. said that the longer the
anything about it, except maybe pay
that have governed the banking in-
delays, the greater the need to police
for everything with cash (in which
dustry since the Depression, the fo-
bank practices. "Banks are pushing
case your bank can and sell
cus
was
much
the envelope in every direction, test-
data on your
sumers
ing consumers and regulators." he
Last
week,
Clinton
as and securities firms one
said. "And why? Because their con-
pressed for tougher. to curb or
another's businesses.
sumer business is far and away their
at least improve disclosure of what
The President says that as banks
most profitable business."
he called banking industry abuses
expand their domains, there is great-
like these. Consumer advocates say,
er need for new restrictions and pri-
however, that with/the Government
vacy protections. When one company
unlikely to afford adequate protec-
can own a bank. an insurance compa-
nons, bank customers must be wary
ny and a brokerage firm. he said last
The President wants to have banks
week. "you should not have to worry
improve disclosure of fees, charges
that the results of your latest physi-
and interest rates. Consumer groups
cal will be used to deny your applica-
say that bank customers shouldn't
tion for a mortgage or a credit card
have to be corporate lawyers or ac-
Consumer advocates also wan:
countants to comprehend what their
Congress to prohibit banks from
banks are offering.
pitching insurance and investment
"Many people in this country are
products to people with pending loan
essentially math-illiterate, and they
applications. a practice they regard
need information disclosed in terms
as coercive. Banks aren't allowed to
that they can understand but that
turn down loan applicants for refus-
Congress IS not requiring." said
ing to buy other products, but those
Gary Klein of the Consumer Law
seeking loans often have the opposite
Center in Boston.
impression. Consumer advocates ad-
Mr. Clinton wants credit card issu-
vise applicants to get their loans
ers who lure customers with low
first. then choose insurance and in-
teaser rates to state prominently
vestments separately and free from
how much they charge after the in-
untoward pressure.
troductory periods III some cases.
more than 2 percent a month. For
now. customers should concentrate
T
HE consumer groups say the
President should have tried to
not on the initial rates. often promot-
give customers who buy securi-
ed even on the envelopes containing
ties from banks at least as many
these offers. but on the regular rates.
rights as those who buy from bro-
sometimes disclosed in small print
kers. Most important. they say. are
and sometimes not at all.
protections against being steered
Automated teller machines
into unsuitable investments, like an
present special challenges. People
especially volatile mutual fund or
who use A.T.M.'s operated by banks
Internet stocks for an elderly wid-
where they do not have accounts
ower with only modest savings.
often have to go through several
Also missing from the President's
steps to learn whether and what they
proposals are limits on the rates
will be charged. Last week. the Sen-
banks can charge on loans or credit
ate approved a requirement that
cards. consumer groups say. States
banks post charges on the machines.
used to set limits, but Congress. with
Several of the President's propos-
the backing of the Supreme Court.
als are meant to protect customers
has asserted its dominance.
privacy. Mary Griffin. a lawver for
Banks say the loosening of restric-
nons benefits many customers. at:-
cause interest rates can be set ac-
cording to each borrower's credit
risk While some people pay higher
rates because of poor credit histo-
ries. the banks say. others now bor-
row at lower rates
Bur with credit card lenders have
ing 10 write off only I percent of the
money owed them, Mr Klein said.
Dunitive rates are not justified.
While the President IS threatening
10 veto the Senate bill for weakening
regulations aimed at making sure
banks lend in the uner cities. be has
not listed the other consumer issues
as veto bait
Limited Improvements in the Means Test
All of these proposals improve the performance of the means test in identifying debtors who
truly can repay a significant enough portion of their debt to make a Chapter 13 plan worthwhile,
and/or lower the administrative costs of the means test. All can be implemented as specific,
incremental changes in the current Senate bill. These proposals are all in addition to our
proposal for appropriate, limited judicial discretion. Status of proposals in italics.
Development of Expense Standards Appropriate for Bankruptcy
Direct Dept of Justice (EOUST) in coordination with Treasury Dept. to develop expense
standards appropriate for bankruptcy.
Hyde Amendment/ Nadler Amendment.
$100/Month Threshold for Means Test
Change the threshold from the percentage amount to a flat $100/month or $6,000 over 5 years, as
it is now in HR 833.
Already in House bill (Hyde, Graham).
Means Test "Screens" to Reduce Administrative Burden
Safe harbor creating a presumption of nonabuse based only on income for those below median
income.
Similar to provision in House bill (however, though no motions are allowed, bill still appears to
require detailed means test and Trustee report on all filers).
Presumption of nonabuse for middle income debtors (100-150% median income) if they cannot
pass the threshold based only on income, priority/nondischargeable debt payments, and
formulaic expenses. These changes would reduce burden of means testing by over 80% - over
$100 million/year in administrative and attorneys' costs - without missing any debtors who can
pay.
Similar provision in Nadler; Administration proposal.
Additional Allowed Categories of "Other Necessary Expenses"
Administrative expenses and reasonable attorneys' fees (up to 10% of Chapter 13 expected
payments).
In House bill.
Continuation of educational expenses of dependent child under 18, up to $10,000.
In House bill.
Continuation of charitable contributions.
In House bill.
Expenses for care of nondependent member of debtor's immediate family (child, parent,
grandparent, or sibling of debtor, and of debtor's spouse in joint cases).
Expenses to maintain debtor and family safe from domestic violence.
Expenses for education, supplies, and other services that help debtor move from welfare to work.
Expenses associated with foster care or adoption.
New Administration proposals.
Limited Flexibility for Formulaic Standards for Categorical Expenses
Up to 10% adjustment to debtor's formulaic monthly expenses as specified by National and
Local Standards, if debtor demonstrates such adjustments are "reasonably necessary" or "
reasonable and necessary."
House bill includes 5% adjustment to food and clothing allowance if debtor demonstrates "
reasonable and necessary. IRS reports larger problems for appropriately addressing
variations in housing costs than for food and clothing.
Allowance for Current Income that Is Not Expected to Recur
Debtor required to provide documentation on income from past 6 months that is not
representative of future income because of unusual circumstances, for example because of job
loss or taking a new job. Trustee can consider this information in determining whether to file
motion, and court in acting on it.
Nadler Amendment; possible Schumer Amendment.
Appropriate Adjustment of Median-Income Safe Harbors for Debtors in Large Families and with
Support Obligations
If debtor is making child support or alimony payments to nonresident children or former spouse,
relevant median income for determining debtor's safe harbor is increased by the amount of the
payments.
Not yet proposed; discussed as Administration fallback.
Debtors with family size larger than four receive an additional increase in relevant median
income for each additional family member ($592 per month per family member).
Similar provision in House bill; Nadler Amendment; Schumer Amendment; Administration
proposal.
Consideration of Additional Required Payments in Chapter 13 Not Included in Means Test
In decision to bring motion of abuse and in evaluation of motion, Trustee shall consider
additional expenses that are likely to be required in Chapter 13 plan but were not included in
means test determination, e.g., required payments on arrearages, etc. Otherwise have debtors that
meet means test but cannot work out repayment plan.
Nadler Amendment; likely Schumer Amendment; Administration proposal.
Reasonable Flexibility in Implementing Chapter 13 Plans
IRS "3 Year Rule": Debtor who can pay 100% of debt payments over 3 years is required to do
so in 3 years, rather than taking all disposable income (per means test) to repay in less time.
IRS "1 Year Rule": Debtor with expenses higher than allowed expenses, but which are not
reasonably necessary, is allowed one year to adjust allowed expenses; repayment for the first
year is according to actual disposable income for the first year, not disposable income per means
test.
IRS generally applies both rules in developing repayment plans under its guidelines.
Other Issues
Limited Improvements in Reaffirmations
Current Administration proposal: court review required for all reaffirmations of unsecured debt
and low-valued (<$500) secured debt, guided by presumptions for undue hardship and full
disclosure. A more modest proposal would require court review only in cases where clear "undue
hardship" and "full disclosure" tests indicate a problem (review still required if debtor not
represented by counsel or does not waive right to hearing, as in current Senate bill).
"Undue Hardship" Test
Determine whether means test shows positive ability to repay after adding reaffirmation
payments. If not, presumed undue hardship and court review required.
"Full Information" Test
If full disclosure per terms developed by Judicial Conference (already in use in some districts),
then debtor presumed fully informed. If not, court review required.
Protection of Child Support and Alimony Payments
Creditors owed child support and alimony given notice and standing to challenge proposed
reaffirmation, on grounds that it jeopardizes debtor's ability to repay.
Moderation on Anti-Cramdown Provisions
Balance between rights of secured and unsecured (but often priority) debtors. For example,
prohibition of lien stripping for autos purchased within 2 years of filing and all other goods
within 6 months of filing.
Credit Card Disclosure Provisions
Items from recent Administration proposal.
Nondischargeability
Most important is probably increasing "safe harbor" for cash advances in 90 days before
bankruptcy from $250 to something more reasonable, e.g., $1,000.
Dear Senator Schumer,
The Administration is deeply concerned by the [ ] incidents of violence, vandalism, and
harassment perpetuated [word choice???] against family planning clinics. Some of these acts
have resulted in the deaths and maiming of innocent people. The Administration believes [ ] that
these unlawful activities must not be tolerated, and that when they are committed, those found
liable should be held accountable under the law.
The Administration has a strong record of supporting efforts to end clinic violence. In addition to
supporting the Freedom of Access to Clinic Entrances Act (the "FACE Act"), the Administration
has made a modest request [is there a reason why you use the modifier "modest?" -- are you not
trying to draw attention to this? - if so perhaps we should leave it out completely???] in its FY
2000 budget to provide security enhancements to clinics.
The FACE Act, of which you were the principal House sponsor, and which the President
signed into law, provides federal protection against unlawful and violent actions while it protects
the right to engage in peaceful picketing and protest unaccompanied by force or physical
obstruction. Violators of FACE are subject to criminal penalties of imprisonment, a fine or both.
In addition, the court may also assess civil [ ]penalties for a particularly egregious offense or
against a repeat offender. State clinic access laws and state and federal anti-racketeering laws
are additional tools used to prosecute clinic violence.
Unfortunately, some defendants found liable for clinic violence are abusing the bankruptcy
system in an effort to shield themselves from civil monetary penalties assessed under these
laws. More specifically, these defendants are filing for Chapter 7 to discharge their
obligations to the victims of their clinic violence and to escape responsibility for their
actions. In order to [ ] stem the tide of clinic-related violence by ensuring that penalties for
these acts are strictly enforced, we support your amendment that would make court-ordered
fines and debts resulting from clinic violence nondischargeable.
Although the Administration's general position has been to oppose the expansion of
nondischargeable debt, we view your amendment as an important tool in our current efforts to
end this type of violence. [ ]
Certainly, one could argue that damages awarded for all intentional torts should be
nondischargeable. Indeed, this is largely the case under the "willful and malicious injury"
exception contained in Section 536(a)(6) of the Bankruptcy Code. Some damages resulting
from clinic-related violence, however, are not protected under this exception. This is made
clear by the Supreme Court's recent decision in Geiger V. Kawaauhau, 523 U.S. 57 (1998),
in which the Court held that the word "willful" "modifies the word 'injury' indicating that
nondischargeability takes a deliberate or intentional injury, not merely a deliberate or
intentional act that leads to injury Although some clinic-related violence is committed
with the direct intention to inflict injury, some such violence indirectly results in injury.
Take for example a family planning clinic which is bombed at night. The perpetrator may
not know that some of the clinic's employees are working late and still in the building. The
bomb, nonetheless, still injures these employees. Should damages awarded to victims such
as these be any less protected simply because the bomber did not intentionally intend to
injure them with his or her bomb?
In addition, there is another compelling reason to create a specific nondischargeability
carve-out for clinic-related violence damages. There are numerous reports of those who
have been found liable for such acts blatantly - even enthusiastically - announcing how
they are going to escape responsibility for their actions by filing for Chapter 7. Indeed,
such abuse of the bankruptcy system appears to be part of a concerted plan on the part of
these perpetrators to perpetuate their acts of violence and intimidation.
This issue and your amendment are not about [ ]abortion. Reasonable parties on both sides of
this matter agree that violence against clinics should not be tolerated. This is why we have laws
in place designed to deter such activity. We must not permit those who have committed odious
acts of violence to escape responsibility for their actions. Your amendment goes a long way
toward achieving this goal.
Reafos credit card
stomesled
The Senate Bankruptcy Amendments as of May 12
Means Test
General Disclosure/Creditor Responsibility Amendments:
not enough
(1)
The Moran Disclosure Amendment from the House debate;
right
(2)
Hatch reportedly okay with: (a) Feinstein back-end credit extention amendment; and (b) the Fed
study from last year.
'frguerent
Durbin:
(1)
S. 1301 as a substitute;
(2)
Consumer credit disclosure provisions form S. 1301 (as a whole or in pieces);
(3)
The Durbin "means-test" or "needs based bankruptcy."
Kennedy:
(1)
Maybe reaffs; yes
(2)
Non-germane amendment (patients or minimum wage).
Sarbanes:
(1)
Consumer credit disclosure provisions (perhaps with or in addition to Durbin). hu pill
sup.
Leahy:
(1)
Consumer credit privacy provisions of S. 187; right dir
(2)
IRS records privacy.
Biden:
(1)
Median income safe harbor.
Kohl:
(1)
Homestead;
(2)
Cram downs.
Feinstein:
(1)
Back-end credit extension amendment.
Torricelli:
(1)
Maybe Hyde.
Schumer:
Theatf
(1)
Small business exemption to replace provision which would exclude creditors attempting to
collect a debt of less than $1,000 from the creditor abuse protection sections;
(2)
FACE amendment;
(3)
Means-test replacement;
(4)
Smaller means-test fixes (e.g., 5 to 3 years, consideration of administrative costs, etc);
(5)
TILA provisions from the Schumer bill.
Feingold:
(1)
Attorney fees shifting;
(2)
In forma pauperis;
(3)
Credit counseling exigent circumstances expansion;
(4)
Apartment automatic stay amendment;
(5)
A carve-out making FEC damages nondischargeable.
Treas 5/12
Protection of retirement savings
Section 203 of HR 833 and 224 of S. 625 exempt from the bankruptcy estate a qualified
retirement fund, pursuant to certain standards. The effect of the amendments would be to
enhance debtors' ability to prevent their interests in tax-benefited retirement accounts and funds,
including Individual Retirement Accounts, from being used to satisfy their debts. The
Administration has made encouraging adequate retirement savings a singular priority. We
recognize that a fresh start is not meaningful if it requires the debtor to accept an impoverished
retirement. However, a debtor should not be able to shield abundant resources from creditors,
including federal, state and local governments, in the form of retirement savings. In addition, the
amendments lack any safeguard against contributions made from proceeds of a fraud. Finally,
and of lesser importance, the jurisprudence on the treatment of true spendthrift trusts and tax
favored savings plans is confused; and clarification would be useful. We could propose the
following:
(1) fraud: amounts in trusts or tax-favored plans cited in the two bills that arise from fraud and
to which an order of restitution would apply under applicable nonbankruptcy law are not
excluded from the estate
(2) amounts held in plans:
(A) cap. amounts retained in such plans, contracts, funds, or trusts in excess of $250,000
[higher] shall not be excluded from the estate
(B) lookback. if the debtor converts property that is nonexempt to amounts in such plans,
contracts, funds, or trusts, in the 2-year period ending on the date of filing of the petition, such
property shall not be exempt under this section to the extent that the value of the converted
property exceeds $100,000.
(3) contributions:
(A) current bill: proposals that repayments of a loan, if applicable, are not subject to the
automatic stay
(B) explicit necessary expense: continuation of most recent [3 year average ] amounts
from wages and collection of amounts withheld into tax favored savings plans established under
Internal Revenue Code up to average over past three years of such amounts