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Bankruptcy - Internal Memos/Papers 1999 [2]
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Bankruptcy - Internal Memos/Papers 1999 [2]
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Potential Admini .ration Amendments for Special Expenses
1.
Protection from 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.
We propose to amend S. 625 by replacing its proposed section 707 (b)(2)(A)(ii) in
Section 102(a). Dismissal or Conversion, with new 707(b)(2)(A)(ii); and by adding to its
proposed section 704(b)(2):
SECTION 102. DISMISSAL OR CONVERSION
After "(II) $15,000" at the end of proposed subsection 707(b)(2)(A)(i), strike currently proposed
subsection 707(b)(2)(A)(ii) and replace with the following:
"(2)(A)(ii) The debtor's monthly expenses shall be the applicable monthly (excluding payments
for debts) expenses under standards issued by the Internal Revenue Service for the area in which
the debtor resides, as in effect on the date of the entry of the order for relief, for the debtor, the
dependents of the debtor. and the spouse of the debtor in a joint case, if the spouse is not
otherwise a dependent. for monthly expenses. The expenses shall include—
(a) if applicable, the debtor's actual expenses, including, but not limited to,
relocation expenses. transportation expenses, legal and other costs associated with
obtaining and enforcing protection orders, to maintain the debtor and his or her family
safe from domestic violence as identified under applicable state or federal laws"
Add after "to all creditors" at the end of proposed Section 704 (b)(2)(B) the following:
"(C) For purposes of determining whether a motion would be appropriate to be filed, the U.S.
trustee shall consider -
"(I) adjustments to current monthly income for income items received over the
1
most recent 180 days that are not reasonably expec d to be reflected in future income, or
for income losses that are reasonably expected to recur in the future, including, but not
limited to, income adjustments due to absences from work incurred as a result of the need
to maintain the debtor and his or her family safe from domestic violence as identified
under applicable state or federal laws";
"(II) adjustments to expenses likely to be due under a chapter 13 plan that are not
included in the statement of the debtor's actual monthly expenses.
The debtor shall, at the request of the U.S. Trustee, provide documentation for any
current income items that are not reasonably expected to be reflected in future income,
and a detailed explanation of the circumstances that warrant making such adjustments."
2A.
Welfare to Work (Narrow Definition)
Debtors who receive welfare can incur certain expenses associated with overcoming
barriers and moving themselves from welfare to work and maintaining their 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, addtional housing
expenses in case the work situation demands relocation, and expenses associated with freeing
themselves from substance abuse. It is essential to recognize the additional expenses incurred
by such debtors as they endeavor to lift themselves and their households out of poverty and
dependence on government programs in accordance with federal law and the laws of their state.
We propose to amend S. 625 by adding to its proposed section 707 (b)(2)(A)(ii) in Section
102(a). Dismissal or Conversion. as amended above. new 707(b)(2)(A)(ii)(b).
After new subsection 707(b)(2)(A)(ii)(a) above. add the following:
"(b) if applicable. the debtor's actual expenses, including, but not limited to,
education and training expenses. transportation expenses. housing expenses, expenses
associated with recovery from or prevention of substance abuse, and support and care
expenses for dependents of the debtor (including a household member or member of the
debtor's immediate family). that the debtor who is receiving or has received payments
under the Temporary Assistance for Needy Families program and is attempting to obtain
and maintain employment under applicable state laws and the provisions of Title IV of
the Social Security Act as amended.
2B. Welfare to Hork (Broader Definition)
Assisting debtors who have lost jobs to regain their financial stability and independence
is essential to a fresh start, and benefits creditors and taxpayers. Yet, just as in making a
transition from welfare to work. debtors may need to incur certain expenses in making the
transition to financial independence and security. For example, many debtors who have lost jobs
2
need to retrain for new jobs, or need to retrain to keep their current jobs. 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 repay debts. We propose to amend
S. 625 by adding to its proposed section 707 (b)(2)(A)(ii) in Section 102(a), Dismissal or
Conversion, as amended above, new 707(b)(2)(A)(ii)(b).
After the new subsection 707(b)(2)(A)(ii)(a) above, add the following:
"(b) if applicable, for a debtor who is unemployed within six months of the time of the
filing and is receiving or has received payments under the Unemployment Insurance program, or
other applicable state and federal laws, the debtor's actual expenses, including, but not limited to,
education and training expenses, transportation expenses, housing expenses, and support and care
expenses for dependents of the debtor (including a household member or member of the debtor's
immediate family). that the debtor reasonably incurs in the course of applying for a job, or for
education or training expenses that are reasonably required in the course of his current
employment [as allowed under the Internal Revenue Code]."
3.
Support for nondependent family members
Many debtors provide support for family members to enable them to live in dignity, as there are
many situations in which the family member does not receive enough income to do so. In many
cases. the payments may not be large enough to make the family member a dependent of the
debtor. Yet because the payments may be essential to the family member's well-being, for
example to provide home care or household goods that enable an elderly parent to continue to
live in the community, these support payments should be allowed to continue. We propose to
amend S. 625 by adding to its proposed section 707 (b)(2)(A)(ii) in Section 102(a), Dismissal or
Conversion. as amended above. new 707(b)(2)(A)(ii).
After the new section 707(b)(2)(A)(i)(b) above. insert as follows:
"(c) if applicable. the continuation of actual expenses paid by the debtor 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"
4. Support for foster children and adoption
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
3
support of these children. We prpose amending S. 625 by adding, after the new section
707(b)(2)(A)(ii)(b) above, the following sections:
"(c) if applicable, the debtor's actual expenses, including but not limited to relocation or
other housing expenses, transportation expenses, health expenses and legal costs associated with
adoption"
"(d) if applicable, the debtor's actual expense for care and support of foster children that
exceeds reimburements under aplicable state and federal law"
5.
Adjustment of median incomes for debtors with child support or spousal support.
In the current House and Senate bills, income thresholds for motions do not account for the
support expenses of divorced parents and spouses. We would amend S. 625 by adding after its
proposed 704(b)(2)(B) the following new section:
"(C) In the case of a debtor who is making child support payments for a noncustodial
dependent child. or spousal support payments. in accordance with applicable nonbankruptcy law,
the relevant national or applicable State median income for purposes of this subsection shall be
the highest of the national or applicable State median household income, increased by the median
payment for-
"(I) child support due for the most recent year, as reported by the Bureau of the
Census: or
"(II) alimony paid for the most recent year. as reported by the Bureau of the
Census
as applicable to the situation of the debtor."
4
Treasury analysis 5/12
Reforms to Treatment of Individual Debtors in Chapter 11
Background
Bankruptcy reform proposals will channel individuals who file for bankruptcy who can
repay a meaningful portion of their debts into Chapter 13, where they are required to devote their
disposable income to payment plans. The proposals maintain the current debt limits on Chapter
13 filings and continue to provide, appropriately, that debtors with higher debt levels (who
generally have more complex business-related debts) file for Chapter 11. Yet debtors filing for
Chapter 11 are free of the requirement to repay from their own incomes.
Administration Proposal
To restore equity and prevent abuse, the Treasury, the SBA, and the SEC's Division of
Enforcement propose closing this loophole. The best way to do so is to make the treatment of
future income of debtors filing for Chapter 11 as parallel as possible with the treatment of future
income of debtors filing for Chapter 13. Hence we propose that: (i) the debtor's disposable
income be committed to the plan if need be to assure creditors receive as much as they would
have if the debtor did file under Chapter 13, (ii) disposable income and associated reasonable
expenses be defined as provided in Chapter 13, and (iii) debtors with primarily nonconsumer
debts, such as these debtors, be subject to the 707(b) means test before being allowed to file for
Chapter 7 soithat, if need be, their incomes are committed to repay creditors.
Specific Amendments
(1) amend Section 303(a) to prevent creditors from being able to file an involuntary Chapter 11
petition against an individual
(2) amend Section 1129(a)(7)(A)(ii) to add, before the semicolon,
"and, if the debtor is an individual, will receive or retain under the plan on account of
such claim or interest property of a value, as of the effective date of the plan, that is not
less than the amount that such holder would so receive or retain in a case filed by the
debtor on the petition date under chapter 13, whether or not the debtor is eligible to file
under than chapter"
(3) amend Section 707(b) to delete "whose debts are primarily consumer debts"
(4) amend section 1141(d):
(A) in (2), by striking "The confirmation of a plan" and inserting in its place
"A discharge under this chapter"
(B) By adding a new paragraph
"(5) Except as otherwise ordered for cause, shown, the discharge of an individual debtor
under this chapter is not effective until the confirmed plan
(6) Section 363(b) is amended by renumbering existing paragraph (2) as paragraph (3) and by
inserting the following new paragraph (2):
"(2) The court may permit an individual debtor performing the duties of a trustee under
section 1107(a) of this title to transfer property of the estate to pay reasonably necessary personal
expenses of the debtor or dependents of the debtor, but only after notice and a hearing."
(7) Amending section 363(b) by adding the following new paragraph:
"(4) The court may permit a debtor performing the duties of a trustee under section
1107(a) of this title to transfer property to an insider of the debtor but only after notice and a
hearing.
Treasury s/ve
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.
Better Thresholds for Means Test
Reduction in debt amount trigger from $15,000 to $10,000, in return for "safe harbor" provision
for low-income debtors (below).
McMickle signaled willing to offer. Good trade.
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.
In House bill (Hyde. Graham). Helps moderate-income debtors compared to current Senate
provisions. McMickle hopes to use as negotiating point in conference.
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.
1
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.
Personal business expenses. (May already be covered if "income" is interpreted to include net
rather than total income from business, as in calculation of taxable income. Presumably
noncontroversial.)
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.
2
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.
3
Other Issues
Limited Improvements in Reaffirmations of Unsecured and Low-Value Secured Debts
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. More modest versions of these proposals would require court review only in cases
where clear "undue hardship" and "full disclosure" tests suggest 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 in Anti-Cramdown Provisions
Push toward anti-cramdown protection for autos only, to the extent possible.
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.
Additional Consumer Group Concern about Fraud Allegations
Prior to the 1978 reforms, creditors often brought allegations of fraudulent credit card use after
bankruptcy. Bills should require that allegations of nondischargeability should be allowed during
bankruptcy proceedings only, not after, to prevent subsequent actions by creditors.
4
$00
THE WHITE HOUSE
NT
THE
OFFICE OF LEGISLATIVE AFFAIRS
HOUSE LIAISON
-FAX COVER SHEET-
DATE: 5-4-99
TO:
Nicole
FAX:
6-2878
FROM:
CHUCK BRAIN
BRODERICK JOHNSON
AL MALDON
ELISA MILLSAP
DARIO GOMEZ
JADE RILEY
LISA KOUNTOUPES
(202)456-6620 (TELEPHONE)
(202)456-2604 (FAX)
SUBJECT:
1 OF 6:
05/05/99 WED 08:11 FAX
5
002
Will you OPPOSE H.R. 833, the Bankruptcy Reform Act?
Y
Baird (WA)
5-3536
Schakowsky (IL)
5-2111
Baldacci (ME)
5-6306
Sherman (CA)
5-5911
Baldwin (WI)
againtGekas
5-2906
Shows (MS)
5-5865
Bentsen (TX)
5-7508
Smith (WA)
5-8901
Berkley (NV)
5-5965
Snyder (AR)
5-2506
Bishop, Jr. (GA)
5-3631
Spratt, Jr. (SC)
5-5501
Blagojevich (IL)
5-4061
Stabenow (MI)
5-4872
Melam
Blumenauer (OR)
5-4811
Strickland (OH)
5-5705
Capuano (MA)
5-5111
Thompson (CA)
5-3311
Cardin (MD) melanne
5-4016
Towns (NY)
Melance
5-5936
Clyburn (SC)
5-3315
Traficant, Jr. (OH)
5-5261
Crowley (NY)
5-3965
Turner (TX)
5-2401
Deutsch (FL)
5-7931
Udall (CO)
5-2161
Dicks (WA)
5-5916
Udall (NM)
5-6190
Doggett (TX)
5-4865
Velázquez (NY)
5-2361
Etheridge (NC)
5-4531
Weiner (NY)
5-6616
Frost (TX)
5-3605
Weygand (RI)
5-2735
Gonzalez (TX)
5-3236
Wise, Jr. (WV)
5-2711
Gordon (TN)
5-4231
Wu (OR)
5-0855
Hill (IN)
5-5315
Wynn (MD)
5-8699
Hoeffel (PA)
5-6111
Holt (NJ)
5-5801
Hooley (OR)
5-5711
Hoyer (MD)
Mclanine
5-4131
Inslee (WA)
5-6311
Jefferson (LA)
5-6636
Jones (OH)
5-7032
Kennedy (RI)
5-4911
Kind (WI)
5-5506
Kleczka (WI)
5-4572
Larson (CT)
5-2265
Lipinski (IL)
5-5701
Lucas (KY)
5-3465
Maloney (NY)
5-7944
Matsui (CA)
5-7163
McCarthy (MO)
5-4535
McCarthy (NY)
5-5516
Menendez (NJ)
5-7919
Moore (KS)
5-2865
Napolitano (CA)
5-5256
Neal (MA)
5-5601
Pascrell, Jr. (NJ)
5-5751
Phelps (IL)
5-5201
Pomeroy (ND)
5-2611
Rivers (MI)
5-6261
Sandlin (TX)
5-3035
Sawyer (OH)
5-5231
Please Phone Results Into the Whip Office at 5-3130
05/05/99 WED 08:11 FAX
106th Congress
1st Session
H. RES.
H.R. 833 - Bankruptcy Reform Act of 1999
1. Structured rule.
2. Waives points of order against consideration of the bill for failure to comply
with section 302 (prohibiting consideration of legislation which exceeds a
committee's allocation of new spending authority) or section 311 (prohibiting
consideration of legislation that would cause the total level of new budget
authority or outlays in the most recent budget resolution to be exceeded or cause
revenues to be less) of the Congressional Budget Act.
3. Provides one hour of general debate to be equally divided between the chairman
and ranking minority member of the Committee on the Judiciary.
4. Provides that it shall be in order to consider as an original bill for the purpose of
amendment under the five-minute rule the amendment in the nature of a
substitute recommended by the Committee on the Judiciary now printed in the
bill.
5. Waives all points of order against the committee amendment in the nature of a
substitute and amendments thereto.
6. Makes in order only those amendments printed in the Rules Committee report
accompanying the resolution.
7. Provides that amendments made in order may be offered only in the order
printed in the report, may be offered only by a Member designated in the report,
shall be considered as read, shall be debatable for the time specified in the
report equally divided and controlled by the proponent and an opponent, shall
not be subject to amendment, and shall not be subject to a demand for division
of the question in the House or in the Committee of the Whole.
8. Allows for the Chairman of the Committee of the Whole to postpone votes
during consideration of the bill, and to reduce voting time to five minutes on a
postponed question if the vote follows a fifteen minute vote.
9. Provides one motion to recommit with or without instructions.
05/05/99 WED 08:13 FAX
004
SUMMARY OF AMENDMENTS TO BE MADE IN ORDER TO
H.R. 833 - BANKRUPTCY REFORM ACT OF 1999
Gekas #13
(10 Minutes). 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.
Moran/Dooley/Ackerman #33
(20 Minutes). 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.
1
05/05/99 WED 08:14 FAX
1
005
Moran #32
(20 Minutes). 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.
Velazquez #1
(20 Minutes). 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.
Graham #14
(20 Minutes). 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.
Dooley #35
(20 Minutes). 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.
Conyers #23
(20 Minutes). 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.
Watt #6
(20 Minutes). 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.
Whitfield #36
(20 Minutes). 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.
2
05/05/99 WED 08:14 FAX
006
Hyde/Conyers #12 (40 Minutes). 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.
Nadler #37
(60 Minutes). 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.
3
Treasury analysis
5/12
Moran Amendment on Consumer Credit Disclosures
3 yrs hence
Minimum payments
When the consumer first opens an account, credit card issuers would be required to include
disclosures which state:
that paying only the minimum balance will increase the amount of interest that will be paid
and the time it takes to pay the balance;
that if the card permits the consumer to forego making a minimum payment, the finance
charges will accrue; and
several examples of how long it would take to repay a balance if the consumer makes only
minimum payments.
The number and type of examples would be tailored to the size of the card issuer's
typical account balance.
If the average account balance for all consumer accounts under a creditor's plan is
$1,000 or less, the credit card company must include in account opening materials two
examples, based on
an annual percentage rate and method for determining minimum periodic payments
recently in effect for that creditor, and
outstanding balances of $250 and $500,
showing the estimated minimum periodic payments, and the estimated period of time it
would take to repay those outstanding balances, if the consumer paid only the minimum
periodic payment on each monthly or periodic statement and obtained no additional
extensions of credit.
If the average account balance for all consumer accounts under a creditor's plan is more
than $1,000, the credit card company must include in account opening materials three
examples, based on
an annual percentage rate and method for determining minimum periodic payments
recently in effect for that creditor, and
outstanding balances of $1000, $1500, and $2000
showing the estimated minimum periodic payments, and the estimated period of time it
would take to repay those outstanding balances, if the consumer paid only the minimum
periodic payment on each monthly or periodic statement and obtained no additional
extensions of credit.
During at least one billing cycle per year, the credit card company must disclose:
the statement on paying only the minimum balance;
the statement that finance charges will accrue if the consumer foregoes making a minimum
payment;
an example, based on the
APR
method for determining minimum payments, and
a $500 balance
showing the estimated minimum periodic payments, and the estimated period of time it
would take to repay the $500 outstanding balance, if the consumer paid only the minimum
2
periodic payment on each monthly or periodic statement and obtained no additional
extensions of credit, and
a worksheet prescribed by the Fed to assist the consumer in determining the consumer's
household income and debt obligations.
On each monthly billing statement, the credit card company must disclose:
the statement on paying only the minimum balance;
the required minimum payment amount represented as a dollar figure; and
the date by which or the period within which the required minimum payment must be made.
Regulations implementing these disclosures are to be effective not earlier than 36 months
following enactment of the legislation.
Teaser Rates
When the consumer first opens an account, credit card issuers would be required to include
disclosures which state:
the time period that teaser rates remain in effect, and
the APR after the teaser rate expires, or if the rate is variable,
the fact that the rate is variable,
the rate at the time of mailing, and
how the rate is determined.
Penalty Rates
When the consumer first opens an account, credit card issuers would be required to include
disclosures which state:
the initial rate and the penalty rate,
if the penalty rate is a variable rate,
the fact that the penalty rate is variable,
the rate at the time of mailing, and
how the rate is determined. and
the events under which the penalty rate is imposed.
At the creditor's option, the creditor may disclose the period for which the penalty rate remains
in effect.
If the penalty rate cannot be determined at the time disclosures are given, the creditor must
disclose the events under which the penalty rate is imposed.
The creditor is not required to disclose the penalty rate when credit privileges are terminated.
Alternatives to Moran Amendment
1. Durbin "lite" amendment on minimum payment, requiring for each billing cycle:
the required minimum payment amount represented as a dollar figure (same as H.R. 833);
the date by which or the period within which the required minimum payment must be made
(same as H.R. 833);
3
the number of months (rounded to the nearest month) it would take to pay the entire amount
of the outstanding balance if only the minimum amount is paid and no further advances are
made (from Durbin), and
total principle and interest cost to the consumer of paying the balance in full if only the
minimum monthly payment is made and no further advances are made (from Durbin).
As a trade-off, drop from the House bill:
the requirement to put in each monthly statement the boilerplate language on minimum
payments;
all the disclosure requirements noted above for at least one billing cycle per year, e.g., the
boilerplate language, the $500 example, and the Fed worksheet; and
when the consumer first opens an account, the examples from the House bill for paying off
balances.
2. During one billing cycle per year, instead of using the $500 figure, use the consumer's average
monthly balance for the year to calculate the estimated period of time it would take to repay the
outstanding balance if the consumer paid only the minimum periodic payment on each monthly
or periodic statement and obtained no additional extensions of credit.
3. During one billing cycle per year, instead of using the $500 figure, use the consumer's actual
balance for that month to calculate the estimated period of time it would take to repay the
outstanding balance if the consumer paid only the minimum periodic payment on each monthly
or periodic statement and obtained no additional extensions of credit.
4. For account balances greater than $1000, add the pay-off information for the credit limit
amount applied to each consumer, and require the information to be supplied again each time
the credit limit is increased.
5. For penalty rates, require creditors to disclose the period for, or the circumstances under, which
the penalty rate remains in effect.
6. For penalty rates, require creditors to disclose the penalty rate when credit privileges are
terminated.
7. For penalty rates, require creditors to disclose in each monthly statement the penalty rate
amount as a dollar figure plus the APR when the penalty rate is included.
8. For teaser rates, require the credit card company to disclose prominently and unambiguously on
the monthly statement for the month prior to the termination of the rate the fact the rate is
expiring and the new APR that will apply to outstanding balances.
9. For the Fed worksheet, require that it start with the outstanding balance and interest rate (unless
a teaser rate, in which case the APR following the teaser rate would be used) and increase at
$500 increments.
May 10, 1999 -- DRAFT
MEMORANDUM FOR THE PRESIDENT
FROM:
GENE SPERLING
LARRY STEIN
MELANNE VERVEER
RE:
BANKRUPTCY REFORM STATUS REPORT
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 3-- - 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 it
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
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)
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 mo
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.
[Leg Affairs - please fill in.]
The poor showing of the Democratic alternative in the House bodes badly for the Senate debate
scheduled for the week of May 17th. 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 [Leg affairs - proper name?]) 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.
In light of our limited leverage, the best possible outcome would be further modest changes to the
2
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
3
Sarah Rosen Wartell
04/30/99 09:22:32 PM
Record Type:
Record
To:
See the distribution list at the bottom of this message
CC:
Sally Katzen/OPD/EOP@EOP, David W. Beier/OVP@OVP
Subject: Bankruptcy -- Major Developments -- House Strategy
We met late this afternoon with Cassandra Butts (Gephardt), Perry Applebaum (Conyers), and David
Lachman (Nadler) to discuss the bankruptcy bill's trip to the floor next week.
Amendments must be filed by 3:00 on Monday. The rules committee meets on Tuesday. The bill should
be on the floor on Wednesday. They expect that they will be asked what their top 5-6 amendments are
and they will pick among the 30 some that will be offered. They expect that list to include: (1) the
Hyde-Conyers amendment on means test (probably exactly as was offered in committee); (2) a
Democratic alternative (was to be the Nadler bill before this conversation); and (3) a women's and
children's amendment (like Nadler offered in Committee).
They expect that Hyde-Conyers will loose although Hyde's staff is less certain.
Nadler asserts that Gephardt told him that if Nadler offered a reasonable alternative, Gephardt would rally
Democrats to vote for the alternative and not vote for final passage of the bill. (Gephardt's staff is not sure
that he made that commitment, but does want to try to work this out for the Democrats and the President.
Broderick is not sure how hard Gephardt would work it, in any case.)
However, everyone agrees that the goal should be to get strong Democratic support for an alternative
and, more importantly, provide adequate cover for enough Democrats to vote against final passage, so
that we do not face a veto-proof majority again this year. When you take the votes against the
Conference Report in the House last year and subtract the members who left and add Gephardt and
subtract Roukema (lost her), the Dems start from about 118. They have to get to about 145 (Broderick
27
please check my math). They have worked the freshmen but they clearly don't have firm vote counts and
won't til Tuesday. They take comfort in the fact that Barney voted "present" at the committee mark-up. At
a recent caucus meeting, a Democrat who voted for the bill last year reportedly told others that they
should look at their vote carefully because it could hurt them with progressive constituencies.
Nonetheless, they reluctantly agreed that they are a far cry from likely success on this vote as of right
now.
I talked about how weak our position appears to be in the Senate. I then argued that the Nadler
alternative, which is to the left of the Senate bill last year, is not a viable alternative. I argued that we
cannot imagine that moderate Dems will feel comfortable not voting for final passage -- changing their
votes from last year -- because they voted for the Nadler bill. David acknowledged that it was a bill
crafted by industry professionals -- but didn't necessarily send a political message.
There was some discussion of the fact that our preferred policy is more centrist than Nadler's bill and, in
fact, there are things in the republican bills that we like better. But we made clear that our concern was
political, not substantive. We didn't think it would be viewed as a credible alternative for the Dems.
We argued that they needed instead a Democratic alternative that started from the Judiciary Committee
bill. The changes should be limited in number and reasonable enough so that Democrats can say that
they were voting for a "real" bankruptcy reform bill that was credible as a political statement. It should
invoke Hyde for the means test, since many will assume that the means test provisions have credibility if
he supports them.
We proposed that the changes include:
(1)
Revised means test -- the Administration proposal -- described as being similar to Hyde in its key
elements.
(2)
A credible reaffirmation proposal -- not full judicial review of each agreement -- but our
streamlined proposal based on disclosure and capacity to repay the debt reaffirmed.
(3)
An alternative to the cram down provisions.
(4)
Something adding balance -- by requiring more of credit card companies.
homestead?
(5)
Revisions to the nondischargeability provisions
(6)
Elimination of the ban on class actions alleging coercive reaffirmations or violations of the
automatic stay.
Regarding (3), we suggested no cram downs for 6 months on most goods, 2 years on cars, but they
argued that the banks hate this provision so we should simply eliminate it and set the banks against the
auto finance folk. I conceded (perhaps too quickly). Need political advice from legislative affairs on that.
Regarding (4), they want to add the LaFalce bill. While we don't like everything in there, we will be saying
very warm things about key parts of it on Tuesday and it is easy to reference. We do worry that some of
its provisions go too far and will drive some Democrats off, but it was too complicated to pick parts and not
others.)
In addition to these, they want to add provisions changing:
(7)
the landlord-tenant lease provisions; (we don't agree but won't die over this) and
(8)
the child support and alimony provisions to make them more favorable to the custodial parent or
former spouse and less preferential for the state agencies collecting refunds of public support paid to
people owed child support or alimony.
They said they also needed to check about other things that would be important to keep together their
members, like something on small business provisions.
We agreed that, if they offered such a Democratic amendment, we thought the Administration would be
strongly supportive of the bill and, if they suggested which members were on the fence, be willing to make
good efforts to press them to vote no on final passage and yes for the alternative.
Lachman said that Nadler might not feel comfortable offering this amendment and that it might be good for
the effort if someone else offered it -- perhaps Meehan. Cassandra praised him for thinking unselfishly.
He acknowledged that the goal always was how to get to a veto-sustaining number so we had room to
negotiate a better (if not good) bill.
We are seeking Gene Sperling, Larry Stein, and John Podesta's concurrence on this strategy over the
weekend. Meanwhile, Treasury and DoJ are sending the Democrats the language they would need for
this amendment.
Lachman went back to check with Nadler. We expect he may call Gene or Podesta this weekend.
Message Sent To:
Broderick Johnson/WHO/EOP@EOP
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected] @ inet
[email protected]@inet
[email protected] @inet
Nicole R. Rabner/WHO/EOP@EOP
Sarah Rosen Wartell/OPD/EOP@EOP
Sonyia Matthews/OPD/EOP@EOP
[email protected]@inet
Joel K. Wiginton/WHO/EOP@EOP
Douglas W. Elmendorf/CEA/EOP@EOP
Ronald E. Jones/OMB/EOP@EOP
Richard E. Green/OMB/EOP@EOP
Joseph J. Minarik/OMB/EOP@EOP
Melissa G. Green/OPD/EOP@EOP
Sandra Yamin/OMB/EOP@EOP
Alice Veenstra/OMB/EOP@EOP
Tom.McGivern @ do.treas.gov
04/15/99 06:22:32 PM
Record Type: Record
To:
See the distribution list at the bottom of this message
CC:
Subject: Today*s Mark-up of S. 625
Date: 04/15/1999 06:18 pm (Thursday)
From: Tom McGivern
To: Dom13.DOPO7.HUFFMANL, Dom13.DOPO7.MCCLELLANM,
ex.mail."[email protected]",
ex.mail."[email protected]".
ex.mail."[email protected]",
ex.mail."[email protected]"
Subject: Today*s Mark-up of S. 625
This repeats some of what Joel sent us and has a
little more of what individual Senators said today.
*****
Today Chris McDaniel from Treasury attended the
Senate Judiciary Committee mark-up of S. 625.
Chairman Hatch and Senators Leahy, Kennedy,
Grassley, Biden, Kyl, Kohl, DeWine, Feinstein,
Feingold, Torricelli, Schumer, Smith, and Sessions
were present. Committee Members confined their
discussion to opening remarks, and no amendments
were introduced. According to Chairman Hatch, 26
amendments have been filed to date. The Committee
likely will meet next week to continue the mark-up.
Highlights
Several Senators expressed concern that many of the
consumer protections that were included in last year*s
Senate bill have been stripped from S. 625, and that
more protections need to be introduced in order to
give greater balance to the bill. Sen. Grassley
attributed the lack of some of the consumer provisions
to Banking Committee Chairman Gramm*s statement
that he would insist on sequential referral if the bill
contains any provisions, such as credit card
disclosure, that fall under the Banking Committee*s
jurisdiction. Grassley stated that certain amendments
thus may need to be introduced on the Senate floor.
In his opening remarks, Sen. Grassley stated that the
current bill takes a fair and balanced approach to
necessary bankruptcy reform. Grassley cited many
factors that favor reform, including: 1) the explosion in
bankruptcy filings; 2) the need to close loopholes in
the existing bankruptcy system; 3) the hidden tax on
all Americans caused by bankruptcy; 4) the $4-5
billion in lost revenue; 5) 70% of Americans support
reform; and 6) the overwhelming bi-partisan support
for reform in the last Congress. He added that he has
been working hard with the two Democratic
co-sponsors, Senators Torricelli and Biden, to craft a
bipartisan bill.
Sen. Torricelli agreed that the increase in bankruptcy
filings was a major concern, but also stated that it
should not be lost on the Committee that many filers
fall on hard times and deserve a fresh start. He stated
that a fresh start will not be assured without a
balanced bill that addresses both debtor and creditor
abuses. Torricelli said that last year*s conference
report abandoned many of the principles contained in
last year*s Senate bill, which passed 97-1. Torricelli
seemed most concerned about: 1) preventing
abusive reaffirmations; 2) preventing abusive filings by
creditors; 3) ensuring that a debtor*s attorney will not
be held financially liable for certain debtor filings; and
4) requiring adequate consumer credit card
disclosure.
Sen. Leahy echoed Sen. Torricelli*s remarks
concerning the need for increased credit card
disclosure, including information about how long it will
take a debtor to pay off total credit card debt if only the
minimum monthly payment is made. Sen. Leahy also
opposes using the IRS income formulas to administer
the proposed means test because they are not flexible
enough, and he doesn*t believe that an agency that
has received so much criticism in the last year should
have their formulas serve as the model for bankruptcy
reform.
Sen. Kennedy expressed his belief that last year*s
Senate bill was truly a product to be proud of, while
this year*s bill lacks many of the crucial consumer
protections that are necessary to balanced reform. He
further stated that the Democrats were denied a voice
in formulating last year*s conference report and that
the special interests have taken over S. 625. He said
that S. 625 *stinks* because the creditors have the
most to gain from its passage.
Sen. Biden stated that with 1.4 million bankruptcy
filings, something is clearly wrong with the system,
and that the legislation needs to address both creditor
and debtor abuses. On the debtor side, he said that
those who file a chapter 7 when they could pay a
portion of their debts in a chapter 13 will cost the
system up to $4 billion over the next five years unless
there is reform. On the creditor side, he argued that
there must be increased disclosure by credit card
companies so that consumers can manage their
debts more effectively. He does not support,
however, any provision that would restrict credit card
solicitation. Biden*s solution for avoiding the
jurisdiction of the Banking Committee is to offer
certain consumer oriented amendments on the
Senate floor, rather than in the Judiciary Committee.
Sen. Feingold expressed reservations about S. 625.
He is especially concerned with the provision that
could require the debtor*s attorney to bear personal
financial responsibility for certain debtor filings. He
also feels that there are too many ambiguities in the
means test, that the proposed use of IRS guidelines is
inappropriate, and that other creditor oriented
provisions will decrease the potential to successfully
complete a chapter 13 plan. Sen. Feingold also
stated that the legislation is moving too quickly and is
concerned that no Senate hearings have been held
during the current Congress. He thinks that in many
ways S. 625 is entirely new when compared to last
year*s conference report, and that the Senate should
not be rushed into considering the bill.
Sen. Schumer found last year*s Senate bill to be the
model upon which to fashion a new bill and he is
disappointed that it was not used as a starting point
for S. 625. His suggestions for balanced reform
include: 1) eliminating the option for states to choose
an unlimited homestead exemption; 2) eliminating the
provisions that require the use of IRS income
standards; and 3) increasing disclosure related to
credit card payments.
Sen. Feinstein agrees with Sen. Feingold that the bill
is moving too fast, and that many of the provisions are
anti-consumer. She also thinks that the means test is
too arbitrary, and that the consumer credit counseling
program provisions in the bill are overly burdensome.
Sen. Kohl expressed his opinion on only one issue,
the homestead exemption. He believes that the
bankruptcy code should place a cap on the
homestead exemption, considering that 43 states
have an exemption of $100,000 or less.
Message Sent To:
Lucy.Huffman @ do.treas.gov
Mark.McClellan @ do.treas.gov
Joel K. Wiginton/WHO/EOP
kenneth.l.chernof @ usdoj.gov
Nicole R. Rabner/WHO/EOP
Sarah Rosen/OPD/EOP
4/26/99 may
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 approposed
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.
1
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.
2
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
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
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.
3
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
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.
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.
4
4/24/99 why
Section 524© is amended--
(1) in subsection (3) , in the material preceding subsection (3)(A), by inserting after "such
agreement has been filed with the court" the following:
"within 45 days after the meeting of creditors under section 341(a)"
(2) in subsection (c)(6)(B), by adding at the end the following:
"or is a debt described in subsection (c)(7)"
(3) by adding at the end of subsection (C) the following:
"(7)
If the consideration for such agreement is based in whole or in part on an
unsecured consumer debt, or is based in whole or in part upon a debt for an item of
personalty the value of which at point of purchase was $500 or less, and in which the
creditor asserts a purchase money security interest, the court approves such agreement as-
(i) in the best interest of the debtor, including that it represents a fully
informed agreement by the debtor
(ii) not imposing an undue hardship on the debtor or a dependent of the
debtor or on the debtor's future ability to pay for the needs of children and other
dependents (including court ordered support)
(iii) not an agreement that the debtor entered into as a result of a threat by
the creditor to take an action that, at the time of the threat, the creditor could not
legally take or did not intend to take."
(4)
In subsection (d)(2)--
(A) by striking "subsection (c)(6)", and inserting "subsections (c)(6) and (c)(7)"
(B) After "of this section," by striking "if the consideration for such agreement is based
in whole or in part on a consumer debt that is not secured by real property of the debtor", and
adding at the end "as applicable"
(5)
After subsection (d)(2)
by inserting --
"(3) if the parties execute an agreement which fully discloses the financial terms
of the reaffirmed debt under the form prescribed by the Judicial Conference of the United States,
and the debtor has sufficient income after expenses to make the payments required by the
agreement, the court may presume--
(A)
that the debtor has been fully informed; and
(B)
that the agreement does not impose an undue hardship on the debtor or a
dependent of the debtor or on the debtor's future ability to pay for the needs of children and other
dependents (including court ordered support).
For purposes of this subsection, the debtor's income and expenses shall be calculated in the same
manner as required by section 707(b) of this title, based on the debtor's filings under section 521
of this title."
"(4)(A) A party at interest shall have standing to object to the filing of a reaffirmation
agreement.
(B)
The court shall award a debtor all reasonable costs and other appropriate
damages in contesting a motion brought by a party in interest under this subsection (including
reasonable attorneys' fees) if, after notice and a hearing, the court does not grant the motion and
the court finds that-
(i) the position of the party that brought the motion was not substantially justified;
or
(ii) the party brought the motion solely for the purpose of coercing a debtor into
waiving a right guaranteed to the debtor under this title."
1
Section 707(b)(2) after Hyde amendments
1
"(2)(A)(i) In considering under paragraph (1) whether the granting of relief
2
would be an abuse of the provisions of this chapter, the court shall presume abuse
3
exists if the debtor's current monthly income less estimated administrative
4 expenses and reasonable attorneys fees and amounts set forth in clauses (ii) for
5 monthly expenses, (iii) for monthly payments on account of secured debts, and
6 (iv) for monthly unsecured priority debt payments, and multiplied by 60 months is
7
not less than $6,000.
8
"(ii) I he debtor's monthly expenses shall be the debtor's monthly expenses
9
reasonably necessary to be expended
10
"(I) for the maintenance or support of the debtor, the dependents of the
11
debtor and in a.joint case the spouse of the debtor if the spouse.is.not
12
otherwise a dependent and
13
"(II) if the debtor is engaged in business, for the payment of
14
expenditures necessary for the continuation. preservation, and operation of
15
such business.
16
Notwithstanding any other provision of this clause, the debtor monthly expenses
17
shall not include any payments for debts described in clauses (iii) and (iv).
18
"(iii) The debtor's average monthly payments on account of secured debts
19
shall be calculated as the total of all amounts scheduled as contractually due to
20
secured creditors in each month of the 60 months following the date of the
21
petition, and dividing that total by 60 months.
22
"(iv) The debtor's monthly unsecured priority debt payments (including
23
payments for priority child support and alimony claims) shall be calculated as the
24 total amount of unsecured debts entitled to priority, and dividing the total by 60
25 months.
26
"(v) For the purposes of this subsection, a family or household shall consist
27
of the debtor, the debtor's spouse, and the debtor's dependents, but not a legally
28
separated spouse unless the spouse files a joint case with the debtor.
29
"(B) In any proceeding brought under this subsection, the presumption of
30
abuse may be rebutted only by demonstrating extraordinary circumstances that
31
require additional expenses or adjustment of current monthly income. In order to
32
establish extraordinary circumstances, the debtor must itemize each additional
33
expense or adjustment of income and provide documentation for such expenses or
34 adjustment of income and a detailed explanation of the extraordinary
35
circumstances which make such expenses or adjustment of income necessary and
36
reasonable. The debtor shall attest under oath to the accuracy of any information
2
1
provided to demonstrate that additional expenses or adjustment to income are
2
required. The presumption of abuse may be rebutted only if such additional
3 expenses or adjustments to income cause the debtor's current monthly income less
4
estimated administrative expenses and reasonable attorneys fees.and the amounts
5
set forth in clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60
6
to be less than $6,000
7
"(C) As part of the schedule of current income and expenditures required
8
under section 521 of this title, the debtor shall include a statement of the debtor's
9
current monthly income, and the calculations which determine whether a
10 presumption arises under subparagraph (A)(i), showing how each amount is
11
calculated. The bankruptcy rules promulgated under section 2075 of title 28,
12 United States Code, shall prescribe a form for such statement and may provide
13 general rules on its content.
14
"(3) In considering under paragraph (1) whether the granting of relief would
15
be an abuse of the provisions of this chapter in a case in which the presumption in
16
paragraph (2)(A)(i) does not apply or has been rebutted, the court shall consider-
17
"(A) whether the debtor filed the petition in bad faith; or
18
"(B) the totality of the circumstances (including whether the debtor
19
seeks to reject a personal services contract and the financial need for such
20
rejection as sought by the debtor) of the debtor's financial situation
21
demonstrates abuse.
22
"(4)(A) If a panel trustee appointed under section 586(a)(1) of title 28 or a
23
bankruptcy administrator brings a motion for dismissal or conversion under this
24 subsection and the court grants that motion and finds that the action of the counsel
25 for the debtor in filing under this chapter violated Rule9011. the court shall assess
26
damages which may include ordering:
27
"(i) the counsel for the debtor to reimburse the trustee for all reasonable
28
costs in prosecuting the motion, including reasonable attorneys' fees;
29
"(ii) the assessment of an appropriate civil penalty against the counsel
30
for the debtor; and
31
"(iii) the payment of the civil penalty to the panel trustee, bankruptcy
32
administrator or the United States trustee.
33
"(B) In the case of a petition filed under sections 301, 302, or 303 of this title
34
and supporting lists, schedules and documents filed under section 521(a)(1) of this
35
title, the signature of an attorney on the petition shall constitute a certificate that
36
the attorney has-
37
"(i) performed a reasonable investigation into the circumstances that
38
gave rise to the petition; and
3
1
"(ii) determined that the petition, lists, schedules, and documents-
2
"(I) are well grounded in fact; and
3
"(II) are warranted by existing law or a good faith argument for the
4
extension, modification, or reversal of existing law and do not constitute
5
an abuse under paragraph (1) of this subsection.
6
"(5)(A) Except as provided in subparagraph (B), the court may award a
7 debtor all reasonable costs in contesting a motion brought by a party in interest
8 (not including a panel trustee, bankruptcy administrator, or United States trustee)
9
under this subsection (including reasonable attorneys' fees) if-
10
"(i) the court does not grant the motion; and
11
"(ii) the court finds that-
12
["(I) the position of the party that brought the motion was not
13
substantially justified; or]
14
"(II) the party brought the motion solely for the purpose of
15
coercing a debtor into waiving a right guaranteed to the debtor under
16
this title.
17
"(B) A party in interest that has a claim of an aggregate amount less than
18
$1,000 shall not be subject to subparagraph (A).
19
"(6) However, only the judge, United States trustee, bankruptcy
20
administrator, or panel trustee may bring a motion to dismiss or convert a case
21
under this subsection if the current monthly income of the debtor and the debtor's
22 spouse combined, as of the date of the order for relief, when multiplied by 12, is
23 less than the highest national median family income last reported by the Bureau of
24 the Census for a family of equal or lesser size, or in the case of a household of 1
25 person, the national median household income for 1 earner. Notwithstanding the
26 foregoing, the national median family income for a family of more than 4
27 individuals shall be the national median family income last reported by the Bureau
28 of the Census for a family of 4 individuals plus $583 for each additional member
29
of the family.
30
"(7) In making a determination whether to dismiss a case under this section,
31
the court may not take into consideration whether a debtor has made, or continues
32 to make, charitable contributions (that meet the definition of 'charitable
33
contribution' under section 548(d)(3)) to any qualified religious or charitable
34
entity or organization (as that term is defined in section 548(d)(4)).
35
"(8) In a proceeding to dismiss or convert under this subsection, the
36
presumption under paragraph (2) shall. not apply if the current monthly income of
37 the debtor and the debtor's spouse combined, as of the date of the order for relief,
38
when multiplied by 12, is less than-
4
1
(A) the highest regional median family income last reported by the
2
Bureau of the Census.for a family of equal or lesser size or in the case of a
3
household of person, the regional median household income for earner or
4
(B) in the case of a debtor whose family consists of more than.4
5
individuals, the regional median household income ast reported by the
6
Bureau of the Census for a family of 4 individuals plus $583 for each
7
additional member of the family.
8
No judge, United States trustee, panel trustee, bankruptcy administrator or other
9
party in interest shall-bring a motion under subsection (b) if the debtor and the
10 debtor spouse combined as of the date of the order for relief, have current
11 monthly total income-equal to or less than the regional median househol monthly
12 income calculated on a semi annual basis for a household of equal size. However,
13 for a household f-more than 4 individuals the medianiincome shall be that of a
14 household of 4 individuals plus $5.83 for each additional member of that
15 household."
16
(b) DEFINITION.-Title 11, United States Code, is amended-
17
(1) in section 101 by inserting after paragraph (10) the following:
18
"(10A) 'current monthly income' means the average monthly income
19
from all sources derived which the debtor, or in a joint case, the debtor and
20
the debtor's spouse, receive without regard to whether it is taxable income, in
21
the 180 days preceding the date of determination, and includes any amount
22
paid by anyone other than the debtor or, in a joint case, the debtor and the
23
debtor's spouse, on a regular basis to the household expenses of the debtor or
24
the debtor's dependents and, in a joint case, the debtor's spouse if not
25
otherwise a dependent;"; and
26
(2) by inserting after paragraph (17) the following:
27
"(17A) estimated administrative expenses means 10 percent of
28
projected payments under a chapter 13 plan;"
29
30
31
Additional Hyde Amendment related to determination of debtor expenses
32
33
SEC 151. GUIDELINES FOR ASSESSING INCOME.
34
35
Section 586 of title 28, United States Code, is amended by adding at the end
36
the following:
37
"(f) Not later than 1 year after the effective date of this subsection, the
38
Director of the Executive Office for the United States Trustee shall issue
5
1
guidelines to assist in making assessments of whether income is no reasonably
2 necessary to be expended by a debtor for the maintenance or support of the debtor
3
the dependents of the debtor, and in a joint case. the spouse.of the debtor if the
4
spouse is not otherwise a dependent."
APR-29-1999 12:57 TO:N RABNER
FROM: JULIA YUILLE
P. 1/5
Total Pages: 5
LRM ID: REJ72
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
Washington, D.C. 20503-0001
Thursday, April 29, 1999
LEGISLATIVE REFERRAL MEMORANDUM
TO:
Legislative Liaison Officer See Distribution below
FROM:
Junil Richard E. Green { Green (for)
Assistant Director for Legislative Reference
OMB CONTACT:
Ronald E. Jones
PHONE: (202)395-3386 FAX: (202)395-3109
SUBJECT:
Report on HR833 Bankruptcy Reform Act of 1999
DEADLINE:
10:00 AM Friday, April 30, 1999
In accordance with OMB Circular A-19, OMB requests the views of your agency on the above subject
before advising on its relationship to the program of the President. Please advise us If this item will
affect direct spending or receipts for purposes of the "Pay-As-You-Go" provisions of Title XIII of
the Omnibus Budget Reconciliation Act of 1990.
COMMENTS: If we do not hear from you by the deadline, we will assume
you have no objection to the proposed letter.
DISTRIBUTION LIST
AGENCIES:
61-JUSTICE- - Jon P. Jennings - (202) 514-2141
62-LABOR - Robert A. Shapiro - (202) 219-8201
118-TREASURY - Richard S. Carro - (202) 622-0650
7-AGRICULTURE Marvin Shapiro (LRMs & EBs) - (202) 720-1516
25-COMMERCE - Michael A. Levitt - (202) 482-3151
30-EDUCATION Jack Kristy (202) 401-8313
35-Farm Credit Administration - Eileen McMahon - (703) 883-4056
34-Export-Import Bank of the United States - David Carter - (202) 565-3203
54-HOUSING & URBAN DEVELOPMENT Allen I. Polsby - (202) 708-1793
107-Small Business Administration Mary Kristine Swedin (202) 205-6700
52-HEALTH & HUMAN SERVICES Sondra S. Wallace (202) 690-7760
59-INTERIOR - Jane Lyder - (202) 208-4371
27-Consumer Product Safety Commission - Robert J. Wager (301) 504-0515
129-VETERANS AFFAIRS - John H. Thompson - (202) 273-6666
80-National Labor Relations Board - John E. Higgins Jr. - (202) 273-2910
EOP:
Sarah Rosen
Paul J. Weinstein Jr.
Douglas W. Elmendorf
Joseph J. Minarik
APR-29-1999 12:57 TO:N RABNER
FROM: JULIA YUILLE
P.2/5
Jennifer M. Luray
Nicole R. Rabner
Cynthia A. Rice
Joel K. Wiginton
Broderick Johnson
David W. Beier
Steven D. Aitken
Sandra Yamin
Edward A. Brigham
Alice Veenstra
Alan B. Rhinesmith
John E. Thompson
Courtney B. Timberlake
Mark A. Weatherly
Wayne Upshaw
Thomas P. Stack
Ellen J. Balis
Pamula L. Simms
Larry R. Matlack
Toni S. Hustead
Janet E. Irwin
Michele Ahern
Michelle A. Enger
Howard Dendurent
Pamula L. Simms
APR-29-1999 12:57 TO:N RABNER
FROM: JULIA YUILLE
P. 3/5
LRM ID: REJ72 SUBJECT: Report on HR833 Bankruptcy Reform Act of 1999
RESPONSE TO
LEGISLATIVE REFERRAL
MEMORANDUM
If your response to this request for views is short (e.g., concurino comment), we prefer that you respond by
e-mail or by faxing us this response sheet. If the response is short and you prefer to call, please call the
branch-wide line shown below (NOT the analyst's line) to leave a message with a legislative assistant.
You may also respond by:
(1) calling the analyst/attorney's direct line (you will be connected to voice mail if the analyst does
not answer); or
(2) sending us a memo or letter
Please Include the LRM number shown above, and the subject shown below.
TO:
Ronald E. Jones Phone: 395-3386 Fax: 395-3109
Office of Management and Budget
Branch-Wide Line (to reach legislative assistant): 395-3454
FROM:
(Date)
(Name)
(Agency)
(Telephone)
The following is the response of our agency to your request for views on the above-captioned subject:
Concur
No Objection
No Comment
See proposed adits on pages
Other:
FAX RETURN of
pages, attached to this response sheet
APR-29-1999 12:57 TO:N RABNER
FROM: JULIA YUILLE
P. 4/5
[addressee?]
I am writing to communicate the Administration's views on the Hyde-Conyers amendment to
H.R. 833, the "Bankruptcy Reform Act of 1999." This amendment incorporates changes initially
proposed in the Judiciary Committee by Chairman Hyde that would substantially improve the bill. Prior
to these changes, the bill did not differ meaningfully from last year's Conference Report, which the
President's advisers recommended that he veto.
The Hyde-Conyers amendment would create effective "means testing" for access to Chapter 7,
to assure that debtors who genuinely have the ability to repay a portion of their debts would remain
responsible for them. The Administration continues to support adoption of such a means test to prevent
abuse of the bankruptcy system by debtors, as part of balanced bankruptcy reform that encourages
both debtors and creditors to act more responsibly.
Some of the changes proposed in Committee by Chairman Hyde have been retained in the bill.
For determining whether debtors should be moved to Chapter 13, the amended bill establishes a
repayment capacity floor of $6000 over 60 months, or $100/month, and allows consideration of
reasonable administrative expenses and attorneys fees in the calculation of repayment ability, so that
debtors who are moved to Chapter 13 are more likely to be able to repay a nontrivial amount of debt.
The amended bill also excludes debtors with below-median incomes from the means test; evidence
shows that virtually none of these debtors have any repayment capacity.
But two of Chairman Hyde's proposals were not retained, and are contained in the Hyde-
Conyers amendment. The Hyde-Conyers amendment proposes the development of standards for
calculating ability to repay that are appropriate for bankruptcy, and provides appropriate, limited
judicial discretion in the application of these standards. These changes are essential for assuring that
debtors who are moved to Chapter 13 are those who genuinely have the some capacity to repay.
First, the Hyde-Conyers amendment recognizes that no specific standards can capture all of the
diverse circumstances that influence the expenses required to support a debtor's household, business,
or ability to work. Limited exceptions to the standards are thus allowed for expenses that are
"reasonably necessary." This limited but appropriate amount of judicial discretion is applied in Chapter
13 debt repayment plans. It is also similar to the discretion that Congress has endorsed when IRS
standards are used to determine the capacity of individuals to repay tax debts. During consideration
last year of the Internal Revenue Service Restructuring and Reform Act, Pub. L. 105-206, the Joint
Committee on Taxation explained the attitude of Congress about the repayment of tax debt in the
following terms:
The IRS is
required to consider the facts and circumstances of a particular
taxpayer's case in determining whether the national and local schedules are adequate for that
particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate
APR-29-1999 12:57 TO:N RABNER
FROM: JULIA YUILLE
P. 5/5
under the circumstances, the taxpayer is not limited by the national or local allowances.
(italics added)
Indeed, the IRS has found that excessively rigid use of standards is not only unfair to debtors with
special circumstances but also may reduce repayment, because repayment plans that do not account for
the individual circumstances of the debtor have higher administrative and legal expenses, and are also
more likely to fail. The Administration agrees that the appropriate, limited discretion in the Hyde-
Conyers amendment for applying standards for determining repayment ability is the most effective
method for assuring repayment of debt that can be discharged in bankruptcy.
Second, the Hyde amendment proposed the use of standards appropriate to bankruptcy in
determining a debtor's capacity to repay. In a letter dated April 21 to Secretary Rubin and Attorney
General Reno, Senators Grassley and Torricelli suggested that the Department of the Treasury and the
Justice Department, through the United States Trustee program, consider modifying the IRS standards
or creating a new set of standards specifically tailored to bankruptcy. The Administration also supports
the development and use of fair and reasonable expense standards for bankruptcy purposes.
The Administration remains concerned about the absence of provisions to address creditor
abuses in the bill. Reform should provide guidance to reduce unwise and coercive reaffirmations of
debts on unfavorable terms, which jeopardize priority payments like child support and alimony. Reform
should also improve credit card disclosures, SO that consumers can get the information they need to
manage their credit card debts effectively. In addition, the Administration believes that reform should
close loopholes that allow wealthy debtors to avoid the responsibilities being imposed on middle-
income debtors.
The Administration remains ready to work with the House to address these concerns, building
on the bipartisan commitment to responsible and balanced reform of the Hyde-Conyers amendment.
Sincerely,
Jacob J. Lew
Director
TOTAL P.05
FAX 202 456 5557
DOMESTIC POLICY COUNCIL
001
THE WHITE HOUSE
WASHINGTON
DOMESTIC POLICY COUNCIL
FACSIMILE FOR: Nicole Rabner
DATE:
4-20-99
TELEPHONE:
FAX:
62878
FACSIMILE FROM: LEANNE SHIMABUKURO
TELEPHONE: (202) 456-5574
FAX: (202) 456-7028
NUMBER OF PAGES (INCLUDING COVER): 8
COMMENTS: My contact at MADD senttnis along
Regarding Their con leins on the lantrupty
mr. I'm not sme that they are asking
us to do anything here buy they wanted
us to we aware of their issue.
let meknow of you have any questions
Ramer
04/20/99 19:32 FAX 202 456 5557
DOMESTIC POLICY COUNCIL
002
NO.232 P002/008
04/20/99
16:50
23
202
456
5557
Mothers Against Drunk Driving
511 E. Jahn Carpenter Frwy., Suite 700 Irving. Texas 75062-8187 Telephone (214) 744-MADD FAX (972) 869-2206/2207 www.madd.org
NATIONAL OFFICE
August 18, 1998
To: Tony Orza
Office of Senator Frank R. Lautenberg
From: Tom Howarth
Re: History of the Bankruptcy Code and Drunk Driving
Prior the passage by Congress in 1984 of the Bankruptcy Amendments and Federal
Judgeship Act of 1984 (P.L. 98-353), it was possible for a drunk driver to escape
paying damages by filing for bankruptcy under Chapter 7. In fact, it was the case of
an Ohio teenager, killed by a drunk driver, which led to the passage of the 1984 law.
The victim's family was awarded damages for wrongful death and survivor's
compensation. The offender filed for bankruptcy under Chapter 7 and never paid a
cent as the full debt was discharged.
On February 24, 1983, Senator John Danforth (R-Missouri) introduced S. 605, a bill
designed to address the Ohio case. The House sponsor was Rep. John Seiberling (D-
Ohio). Because the Seiberling/Danforth amendment, which was added to the
Bankruptcy Amendments and Federal Judgeship Act in conference, addressed a Chapter
7 case, it dealt only with Chapter 7 leaving a loophole for those who might file under
Chapter 13.
Dorothy Mercer is a woman from Michigan who was hit by a drunk driver traveling
over 100 m.p.h. with a blood alcohol content level of .20. She was severely injured.
She filed a personal injury suit against the drunk driver in 1982, before passage of the
Seiberling/Danforth provision. The drunk driver who hit her filed for bankruptcy and
for absolute discharge under Chapter 7. Subsequent to passage of Seiberling/Danforth,
the drunk driver filed under Chapter 13.
On November 20, 1989, Senator Danforth, along with Senators Biden, Thurmond and
Pell, introduced S. 1931, a bill designed to close the loophole in Chapter 13 which was
benefiting drunk drivers at the expense of their victims. The bill was approved by the
Senate Judiciary Committee on June 14, 1990 and ultimately signed into law by
President Bush.
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Historically, the Bankruptcy Code was not to be used to protect people who engaged in
"willful malicious conduct" but a case in Wisconsin in 1983, re Kuepper, cast doubt
on whether drunk driving was to be considered "willful and malicious". It has always
been MADD's view that drunk driving is not an accident but a crime and that those
who drive while drunk are indeed engaging in willful and malicious conduct. The
action by Congress in 1984 and again in 1990 clearly demonstrates that the law of the
land reflects MADD's view.
The changes to the Bankruptcy Code proposed now in 1998 are not a direct attack on
the protections for drunk driving victims established in 1984 and 1990, but they will
have the impact of diluting the ability of victims to receive damages owed to them by
placing drunk driving victims in competition with credit card companies. Innocent
victims of drunk driving should not be placed in this position and should retain their
standing under the Bankruptcy Code to receive damages from those who engaged in
willful and malicious conduct toward them and their loved ones.
I am enclosing some additional material which might be of assistance to you.
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TESTIMONY OF JANICE LORD
MOTHERS AGAINST DRUNK DRIVING
HOUSE JUDICIARY SUBCOMMITTEE ON ECONOMIC AND COMMERCIAL LAW
JUNE 21, 1990
I am Janice Lord, National Director of Victim Services for Mothers
Against Drunk Driving, a non-profit organization of 2.8 million
members and supporters. MADD's mission is to stop drunk driving
and to provide services to victims of drunk driving crashes.
While MADD's most common forum for victim advocacy is the criminal
justice arena, we also advocate for equality and justice in the
treatment of victims of drunk driving crashes as they interface
with all systems which may oppress them.
since MADD was incorporated ten years ago, we have heard victime
cry for justice upon learning that the civil wrongful death or
personal injury judgements against the drunk drivers who killed or
injured their loved ones were meaningless because the offenders
simply filed bankruptcy to avoid payment.
To illustrate the problems victims have with Chapter 13 Bankruptcy
issues, I would like to share the following with you.
Dorothy Mercer's vehicle was rear-ended in 1982 by a drunk driver
traveling over 100 m.p.h. with a blood alcohol content of .20,
twice the legal limit in Michigan. Dorothy, a psychologist just
finishing the dissertation for her doctorate, was severely head-
injured and also suffered numerous broken bones, an injured spine,
contusions and abrasions. Her spine was SO compressed in the crash
that she lost three inches in height. She continues treatment
today for residual effects of the crash. Dorothy filed a personal
injury and dram shop Buic in 1983, prior to the Seiberling/Danforth
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amendment to the Federal Bankruptcy Code which prevented the
discharge of debts arising out of the debtor's operation of a motor
vehicle while legally intoxicated. The drunk driver who hit her
filed bankruptcy for absolute discharge under Chapter 7. Following
the 1984 amendment, he transferred from Chapter 7 to Chapter 13
which was not included in the legislation. The bankruptcy
proceedings delayed Dorothy's ability to pursue the civil case for
one and one half years, during which her attorneys continued out
of town court appearances and filing of documents, all of which
came out of her settlement. All action on the civil suit had to
be approved by the bankruptcy court, and because of losing both
times and money Dorothy ultimately settled her civil suit for the
face value of the insurance policy and the bankruptcy suit was put
in abeyance with no recovery from the drunk driver.
In another case, "Butch" Williamson from Missouri was hit by a
driver with a blood alcohol content of .28 and cocaine and
marijuana in his blood. Butch spent six months in a deep coma and
just over another six months in a semi-coma, helpless and
struggling to survive. He could not eat, SO was fed through a
stomach tube. His bowels could not move on their own. He required
round the clock care from his weary family until he died on the
403rd day after the crash. The offender was ordered to spend one
year in jail with work release and pay one-fourth of his income to
Butch's parents as restitution. Payments averaged $40 to $45 per
week and then tapered off, although an investigation funded by the
family indicated that this 16 far less than one fourth of his
income which was ordered for criminal restitution. He will leave
the criminal justice system in 1992, having paid only a minute
portion of the expenses for Butch's care and funeral. The
documented cost of Butch's care was $400,539.73, not to mention
thousands of dollars of undocumented expenses. Therefore, the
family filed a $6 million suit. on the eve of a pre-trial hearing,
the offender filed bankruptcy and the attorney of Butch's parents
recommended that they drop the suit because the offender would be
able to have his judgement discharged under Chapter 13.
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Prior to the Seiberling/Danforth Amendment, part of the "Bankruptcy
Amendments and Federal Judgeship Act of 1984" (P.L. 98-353),
federal bankruptcy law already contained a provision prohibiting
a debtor from discharging any debt he owed for "willful and
malicious death or injury." It was at that time and still is today
the position of MADD that drunk driving is malicious, intentional,
criminal conduct. However, prior to the 1984 Amendment, there was
debate in the judiciary regarding whether or not drunk driving
death and injury was "willful and malicious."
The 1984 amendment was initiated by the plight of a family in Ohio
whose teenage daughter was killed by a drunk driver. The court
awarded the family damages for wrongful death and survivor's
compensation. However, the offender filed for bankruptcy
protection under Chapter 7 and never paid a cent of the judgment
as the full debt was discharged. Thus, it is understandable that
the amendment focused on Chapter 7. It was a noble, well-
intentioned, and meaningful change which MADD supported. However,
recent victim and public concern over Chapter 13 problems convince
us it is now time to similarly amend that component at the statute.
As the law currently stands, it is still possible for drunk drivers
to pay a small portion of their judgments and then discharge the
remainder. Therefore, the only way their victims might hope to
receive full judgment is to defeat the plans in their entirety as
"bad faith" endeavors, which is difficult and unnecessarily time-
consuming.
Legislative history seems to indicate that the 1984 Amendment to
the Federal Bankruptcy Code was an effort to seal up a loop-hole
which allowed drunk drivers to receive total discharge of their
debts through Chapter 7. The fact that it was not imposed on
Chapter 13 also was most likely a Congressional oversight.
Oversight or not, the problem has been noted with no small amount
of disturbance by some who have labeled it a national disgrace.
In re McMinn, 4 B. R. 150 states:
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the court is of the opinion that the Bankruptcy Code
ought not to be a haven for individuals seeking to
absolve themselves from making whole, persons whom they
have injured If it is the intent of Chapter 13 to
absolve debtors of the liability for such criminal acts,
then the intent is ludicrous and the malaise apparently
affecting our society is indeed understandable.
In re Hudson , 9 B. R. 363 (Bkrtcy Ill. 1981) takes "judicial
notice" that Chapter 13 involves a violation of the interest of
society and public policy in general:
The Court can take judicial notice of the fact that there
are many powerful interests within the country that
believe that Congress went too far in many areas of the
Bankruptcy code, but particularly with respect to the
breadth of discharge under Chapter 13.
MADD believes that it is time to stop the revictimization of
victims of drunk driving crashes by adding to their emotional and
financial stress through inadequate provisions in Chapter 13.
Chapter 13 was historically intended to give the honest,
financially distressed debtor a "fresh start." A consenting person
who has entered into a relationship as a debtor is presumed to have
agreed to the potential risks of non-payment or partial payment.
However, a debt owed to the innocent victim of a drunk driving
crash can never be construed as a mutual agreement between
consenting parties.
Drunk driving is not an accident. It is a willful and malicious
crime in that it involves two very clear choices: (1) to use
alcohol or other drugs and (2) to get behind the wheel of a
vehicle. Although the Bankruptcy Code currently is silent on the
issue of dischargeability of criminal restitution, recent Supreme
Court cases have indicated that it was never the intent of the
legislation to make criminal restitution dischargeable. Justice
Powell's opinion for the Supreme Court in re Robinson was based on
the "deep conviction that Federal Bankruptcy Courts should not
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invalidate the results of state criminal proceedings." Further,
prior to Congressional adoption of the Bankruptcy Code in 1978,
courts had ruled that restitution was non-dischargeable and
Congress did not express any specific attempt to change that
judicial and creative concept. Therefore, MADD supports the "Drunk
Driving Victims' Protection Act, " S. 1931, approved unanimously by
the Senate Judiciary Committee on June 14, not only because it
paves the way for meaningful financial recovery for victims, but
also because it assures victims that their rights and needs are as
important as the rights and needs of drunk drivers.
Dorothy Mercer and "Butch" Williamson will never be able to make
a "fresh start." We now ask Congress, by amending the Bankruptcy
Code, to assure that victims of drunk driving crashes will be able
to recover the financial responsibility owed them by offenders.
LAW OFFICES
GAINSBURGH, BENJAMIN,
DAVID, MEUNIER & WARSHAUER
ROBERT J. DAVID
2800 ENERGY CENTRE
OF COUNSEL
GERALD E. MEUNIER
SAMUEL C. GAINSBURGH
1100 POYDRAS
IRVING J. WARSHAUER
JACK C. BENJAMIN
STEVAN C. DITTMAN
NEW ORLEANS 70163-2800
MADELEINE M. LANDRIEU
TELEPHONE
DARRYL M. PHILLIPS
JEFFREY A. MITCHELL
(504) 522-2304
GARY B. ROTH
TELECOPIER (FAX)
April 15, 1999
(504) 528-9973
E-MAIL
gainsben.com
Ms. Nicole Rabner
Office of the First Lady
The White House
Washington, D.C. 20500
Re:
ATLA's Lawyer's Challenge for Children
Dear Nicole:
Thank you for taking the time to meet with me and Kathleen Strottman last Friday to discuss
the Lawyers' Challenge for Children Program of the American Trial Lawyers Association. Enclosed
is a letter which was sent to he First Lady by our President, Mark Mandell, inviting her to participate
in our annual convention in San Francisco this summer. Any help you can give us would be
appreciated.
Many thanks also for the pictures and for lunch. Please be in touch if I can be of any help
to you.
Sincerely,
Madeleine M. Landrieu
MML/pam
Enclosure
cc:
Senator Mary Landrieu
c/o Kathleen Strottman
Mark S. Mandell
Richard H. Middleton, Jr.
Sarah Rosen
04/20/99 08:54:56 PM
Record Type:
Record
To:
Nicole R. Rabner/WHO/EOP, Broderick Johnson/WHO/EOP
CC:
Subject: revised bankruptcy reform documents
Forwarded by Sarah Rosen/OPD/EOP on 04/20/99 08:54 PM
[email protected]
04/20/99 08:34:21 PM
Record Type:
Record
To:
Joel K. Wiginton/WHO/EOP, Sarah Rosen/OPD/EOP
cc:
See the distribution list at the bottom of this message
Subject: revised bankruptcy reform documents
Date: 04/20/1999 08:24 pm (Tuesday)
From: Mark McClellan
To: ex.mail("[email protected]",
"[email protected]")
CC: ex.mail("[email protected]",
"[email protected]", "lucy.huffman", "mark.mcclellan",
"tom.mcgivern"), tooheyf
Subject: revised bankruptcy reform documents
Attached are revised versions of all of our bankruptcy proposals. The
text below summarizes the status of our active issues; sorry about the
length, but this is a complex topic and I wanted to be sure that we
covered everything in one place. We do not need to give out all of the
attached documents tomorrow; my understanding from Joel is that the
one-page summary of the means test proposal and the accompanying
graph would be enough to discuss means testing.
Means Testing:
1. mnstst8.wpd: This is the "white paper" describing the estimates
underlying the means test proposal. Page 1 summarizes the proposal.
The paper also includes a figure summarizing how the test works that
you have seen before.
2. mnslng2. wpd: Draft legislative language on the means test proposal,
with input from EOUST and DOJ.
There is one potentially important unresolved issue that was mentioned in
our email last week: following EOUST and SEC recommendations (see
below), we have broadened the applicability of the Chapter 7 means test
to include all individual debtors, not just debtors with primarily consumer
debt. This will expand the test to capture debtors with primarily tax and
business debt. The expansion to tax debt is a previously-vetted
Administration position discussed in the DOJ letter. The expansion to
business debt is an important part of closing the "loophole" for wealthy
individuals identified in the SEC Chapter 11 proposal that Grassley has
adoped. If there is a good policy reason for not expanding the means
test to include individuals with primarily business debt, let us know. The
SEC has reviewed this proposed change and supports it, and will say so
to McMickle. The bankruptcy judges we have spoken with also support it.
The draft language preserves a "placeholder" for modifying the IRS
standards. Shumer and others have expressed interest in this, and the
ABI proposal presents a specific alternative.
How does the ABI proposal fit with ours?
*Standards: the good feature of the ABI proposal is that it provides more
specific guidance to judges, trustees, and others about a comprehensive
list of expenses (which could make the test function more smoothly); the
bad feature is that it establishes specific standards for these additional
types of expenses (retirement, education, health care) that vary
enormously across households - this is why IRS does not have
standards for such categories.
*Discretion: ABI supports "burden of proof" language rather than
presumptions, which they claim are not clear enough for judges. We
have not been able to get draft language, but supposedly the burden of
proof will be something like "the preponderance of the evidence" - a
relatively mild standard, we think, but we would appreciate DOJ views.
If this view is correct, it is possible that we could end up adopting their
discretionary language as an alternative to ours, but we obviously need
to see it first.
How does the Shumer proposal fit with ours?
We just got it and havent finished analyzing. Shumer proposes an
alternative to the IRS standards along the lines of the ABI proposal, but
uses a debtor's actual expenses in more cases (medical and child care).
On discretion, Shumer uses the burden of proof formulation for the
debtor to rebut the means test: "the expenses are necessary for the
maintenance or support of the debtor or his dependents" and "the debtor
has no reasonable alternative to incurring the expenses."
This seems to us to be between "special" and "extraordinary". It would
be helpful to get legal guidance asap on whether this formulation or a
similar "burden of proof" formulation (suggestions?) is something we can
live with, especially if we use additional categories of actual expenses
as Shumer does.
Reaffirmations
3. reaff7 wpd: First page summarizes the proposal, and remainder of
document provides details.
Our reaffirmation proposal needs further comment from the group before
final release. As you know, the earlier version was criticized as too
complicated and costly. We have simplified the presentation of the
presumptions on full disclosure and undue hardship, and we have
narrowed new creditor notice and standing to those owed child support
and alimony.
*Presumptions/additional requirements for reaffs that are least likely to be
in the debtor's best interest: Judge Wedoff (ABI) likes the idea of a
specific disclosure requirement of using the means test to provide
guidance for judges on whether the reaff is an undue hardship. All the
judges we spoke to agreed that providing this info as an affidavit with
the reaff would significantly reduce court costs. But Wedoff was
concerned that the presumptions would not provide useful guidance to
courts as to what to do next (paralleling his preference for "burden of
proof" over presumptions in the means test). The ABI proposal requires
court hearing for reaffs of wholly unsecured debt and secured < $3000,
so our proposed hearing requirement is more modest than theirs. Like
ours, the proposal requires judges to assess whether the reaffirmation
would be too burdensome for the debtor. Unfortunately, the proposal is
vagueabout a better way than presumptions to guide judges. We are
waiting for their language.
*Standing: Judge Wedoff (ABI) likes the standing proposal but thought it
could be costly (hence the reason to narrow it to our highest-priority
group). Judge Fenning thought this would create additional burdensome
litigation, but it does highlight our important remaining political concern
about reaffirmations placing high-priority debt payments at risk.
Suggested next steps on reaffirmations: Assuming that we want to keep
stressing this issue as a potential Administration veto threat, we need to
begin engaging on it even if our proposal is not finalized. It seems likely
that any proposal we support would require court hearings for
unsecured and small personalty reaffirmations, and would provide better
guidance for judges and attorneys to use in deciding whether reaffs are
in the best interest of the debtor, to minimize the cost of our proposal.
Thus, we can mention these arguments, and say that we are still
considering the best way to do this and are open to suggestions - eg,
presumptions based on an affidavit, a requirement that an affidavit be
provided with the reaff, etc.
Are there any other reaff issues that need to be addressed in the bill -
for example, elimination of right of class action?
Anti-Cramdown Provisions
Judge Fenning has urged the Administration to address cramdown. ABI
did not take a position on this issue, because of their concern that
anti-cramdown provisions could reduce or jeopardize the ability of
debtors to repay priority unsecured creditors, eg child support and
alimony. We need to decide on a reasonable Administration position on
this issue.
One possible compromise position: 2 year anti-cramdown provision for
vehicles; 6 months for all else.
Loopholes in Chapter 11 and Elsewhere for High-Income Debtors
4. chap wpd: This document outlines a possible Administration
position on closing the loophole that we have discussed with SEC and
bankruptcy judges.
The problem in the current bill is that many wealthy individuals who file
for bankruptcy are likely to escape the means test entirely. As the
attached document describes, they may: (1) be exempt from the current
bill Chap 7 means test because they have primarily personal business
debt, (2) be subject to the test, be referred to Chap 13, but exceed the
Chap 13 debt limit, in which case they are referred to Chap 11, which in
the existing bill does not require that disposable income be dedicated to
repayment as in Chap 13, or (3) file directly in Chap 11, and once again
escape repayment. The SEC "fix" that Grassley now supports is an
incomplete fix these loopholes. The attached short proposal addresses
all three, by making Chapter 11 parallel to Chapter 13 in terms of
dedication of discretionary income to debt repayment. This proposal is
supported by SEC; indeed they may propose it if we don't.
This is important for us to address not only because it is a significant
loophole for the wealthy, but also because closing the loophole requires
a change in our means test legislative language, as noted above.
- MNSTST8.WPD
- MNSLNG2.WPD
- REAFF7.WPD
- CHAP11.WPD
Message Copied To:
[email protected]
[email protected]
[email protected]
[email protected]
[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
1
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 1998,¹ 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
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.
2
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
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. 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
3 Cost Estimate, H.R. 3150, CBO, May, 1998
3
Necessary Expenses allowance.
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 relatively smallershare 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.
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.
4
Costs of Contesting a Finding
Additional administration and litigation expenses are incurred when debtors or creditors
choose to contest a Trustee's conclusion with regard to ability to repay. Casesinvolving 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 informalaction
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.
⁶We 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.
5
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
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
7 Communication from Executive Office of U.S. Trustees.
6
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
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
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.
7
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
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 (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
9 Hon. Arthur Federman, "What Means Testing Really Means--An Empirical Study,"
Consumer Bankruptcy News, April, 1999.
8
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
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 legal
of Ch. 7
of filers
Repayment
adminis-
legal
of Ch 7
of filers
Repayment
adminis-
costs
filers
with
trative
costs
filers
with
trative
subject
repay-
costs
subject to
repayment
costs
to full
ment
screens
potential
test
potential
<75%
54%
all
1.7%
<.09B*
$38-
$86M
income screen:all
0
0
$8-9M
$43M
51M
full test: 0%
75-
36%
all
9.3%
$.7B
$34-41M
$142-
income/formulaic
9.3%
$.7B
$16-19M
$105-
150%
146M
expense screen:all
110M
full test: 11.3%
>150%
10%
all
4.7%
$1.9B
$9-12M
$137-
full test: all
4.7%
$1.9B
$8-11M
$113-
141M
117M
Total
100%
100%
16%
$2.6B
$81-
$356-
21.3%
14%
$2.6B
$32-39M
$257-
104M
364M
266M
*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.
10
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.
11
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
1
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.
2
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 extended¹
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
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.
3
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
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.
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.
4
(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
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.
5
Reforms to Treatment of Individual Debtors in Chapter 11
Background
Bankruptcy reform proposals will channel individuals who file for bankruptcy who can
repay a meaningful portion of their debts into Chapter 13, where they are required to devote their
disposable income to payment plans. The proposals maintain the current debt limits on Chapter
13 filings and continue to provide, appropriately, that debtors with higher debt levels (who
generally have more complex business-related debts) file for Chapter 11. Yet debtors filing for
Chapter 11 are free of the requirement to repay from their own incomes.
Administration Proposal
To restore equity and prevent abuse, the Administration and the SEC's Division of
Enforcement propose closing this loophole. The best way to do so is to make the treatment of
future income of debtors filing for Chapter 11 as parallel as possible with the treatment of future
income of debtors filing for Chapter 13. Hence we propose that: (i) the debtor's income be part
of the estate, (ii) the debtor's disposable income be committed to the plan (and the debtor be
allowed control over remaining income), (iii) disposable income and associated reasonable
expenses defined as provided in the Chapter 7 abuse test, and (iv) debtors with primarily
nonconsumer debts, such as these debtors, be subject to the 707(b) means test before being
allowed to file for Chapter 7, so that they must commit their own disposable incomes to their
reorganization, provided that reorganization yields more value to creditors than liquidation.
Specific Amendments
(1) amend Section 541(a)(6) to provide that the income of an individual Chapter 11 debtor is
property of the estate by inserting:
"(other than an individual debtor who, in accordance with section 301, files a petition to
commence a voluntary case under chapter 11)"
after "individual debtor".
(2) amend Section 303(a) to prevent creditors from being able to file an involuntary Chapter 11
petition against an individual
(3) amend Section 1123(a) to add a new subsection (8)--
the plan shall provide for the submission of all or such portion of future earnings or other
future income of the debtor as necessary for the execution of the plan to the control of the
trustee
(4) amend Section 1129 to add a new subsection (14) requiring that--
(A)
if the debtor is engaged in a business, the projected earnings from the business
less the expenses necessary for its continuation, preservation and operation, including
reasonable expenses incurred by the debtor, as defined in section 1325(b)(2) and by
incorporation, section 707(b), for the period beginning on the date that the first payment
is due, will be applied to make payments under the plan.
(B)
if the debtor is not engaged in a business, then the plan provides that all of the
debtor's projected disposable income over the plan's life is applied to make payments
under the plan. "Disposable income" is defined as in Section 1325 (b)(2) and, by
incorporation, section 707(b)-- as income which is received by the debtor and is not
reasonably necessary to be expended for the maintenance or support of the debtor or
dependent of the debtor. NOTE THAT THE STANDARDS OF REASONABLY
NECESSARY EXPENSES AND DISPOSABLE INCOME SHOULD BE
CONFORMED TO THE 707(B) MEANS TEST AS DOES THE SUBSTITUTE HOUSE
BILL
(5) amend Section 707(b) to delete "whose debts are primarily consumer debts"
(6) add a new section to 1121 to provide a time limit on individual debtors as does Chapter 13
but longer to account for the complexity of affairs of individual debtors filing under this section:
If the debtor is an individual, the debtor shall file a plan within 90 days of the order for
relief under this chapter, except that the court may extend such period if the debtor can
demonstrate that such extension is attributable to circumstances not under his control.
(7) add a reporting requirement to section 1108:
A debtor engaged in a business shall file monthly operating reports of such business. The
U.S. Trustee shall prescribe an appropriate form.