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THE TRUTH ABOUT BANKRUPTCY
The current debate over reform of the bankruptcy system has been long on
rhetoric and short on substance. Unfortunately, isolated anecdotal examples
have been used to mischaracterize who seeks bankruptcy relief today and why.
This document is intended to lay out the facts about bankruptcy and why the
pending reform measures -- H.R. 3150 and S. 1301 -- will adversely impact
honest and hard-working Americans families facing financial crisis.
The consumer credit industry claims that bankruptcies are costing each
American family $400 per year. Is that true?
In a word, no. We are not sure how the credit industry arrived at these figures,
but there is no credible evidence to support them.
Although these claims may have some rhetorical appeal, they have no basis in
fact. It is not the bankruptcy system that causes creditors' losses. Indeed, the
credit industries' own studies concede that a majority of consumers in financial
trouble will not be able to pay their debts, whether or not they file for bankruptcy.
On the other hand, some borrowers who file for Chapter 7 relief pay some of
their debts notwithstanding the discharge. The industry wants you to believe that
it is the bankruptcy system that causes the charge-offs, not their own bad
business decisions.
Equally important, there is no evidence that lenders would reduce rates on
unsecured consumer lending if they could avoid these losses. Between 1980
and 1992, the rate at which banks borrow money fell from 13.4 percent to 3.5
percent. Nevertheless, credit card interest rates actually increased during the
same period. Given this, how likely is it that additional savings realized by
lenders will be passed on to consumers?
The simple truth is that bankruptcy laws do not result in an increase in the cost of
credit for bill-paying consumers. Credit card interest rates have not risen or
fallen due to increases or decreases in bankruptcy filing rates or changes in
bankruptcy laws. The average interest rate on credit cards remained relatively
constant from the mid-1970s through the early 1990s, while bankruptcy rates
fluctuated considerably over the same period. In fact, it may be argued that the
high interest rates and the various and substantial penalties paid by marginal
borrowers on their outstanding balance each month subsidize the cost of credit
for all borrowers who pay their credit card balance in full each month.
Before rushing into bankruptcy, shouldn't debtors be required to undergo
credit counseling to see if they can get their financial affairs in order?
There is nothing wrong with encouraging people to seek credit counseling.
Given the serious consequences associated with bankruptcy, most people
consider it a last resort when all else has failed. Indeed, debtors usually seek
out credit counseling and/or attempt to repay their debts before ultimately filing
for bankruptcy.
However, there is reason for concern with the specific credit counseling
provisions in the pending legislation, which denies access to the bankruptcy
system unless and until a debtor has sought the assistance of a credit
counseling program. Although the legislation seeks to ensure some measure of
creditability with respect to the credit counseling organizations by requiring that
they be approved by the local trustee or bankruptcy court, there is no
authorization of funds for the investigation of these organizations, their fees or
success rates. As a result, there is nothing that will prevent fly-by-night
operators from opening credit counseling programs and getting placed on the
approved list maintained by the courts and trustees.
In addition, this requirement will place debtors with extremely limited funds in the
position of having to use money that otherwise would go to debt repayment to
pay for these counseling sessions, which may or may not be successful.
We know that existing credit counseling organizations are swamped with
customers. Consumer Credit Counseling Services (CCCS) alone received more
than two million requests for assistance last year. Requests for this type of
assistance each year have far outstripped the number of bankruptcy filings over
the same period of time. As a result, some consumers are placed on waiting
lists a month long. It is likely that waiting periods would be further extended if
hundreds of thousands of new customers are added to the counseling workload.
For debtors facing emergency issues, such as utility shut-off or foreclosure sales,
any delay would be disastrous.
Finally, what will happen if one obstinate creditor refuses to go along with the
repayment plan worked out with the assistance of the counseling agency?
Complicated legal proceedings will flood the bankruptcy system. Credit
counselors will find themselves in court constantly, rather than on the job
counseling indebted consumers.
Can't a substantial number of people who file for bankruptcy actually repay
their debts? Isn't the loss of stigma associated with filing for bankruptcy
encouraging more people to walk away from their debts?
Reports advanced by the credit industry ostensibly demonstrating that a
substantial number of bankruptcy filers do so for the sake of convenience have
been criticized by both the Congressional Budget Office (CBO) and the U.S.
General Accounting Office (GAO). There simply is no credible evidence that a
significant number of debtors would be able to pay their bills if they were
prevented from filing for bankruptcy.
Individuals filing for bankruptcy on average earn under $20,000 a year after
taxes. These are not high flyers squirreling way assets in Florida or in unlimited
pension plans. These are people struggling to make a go of it who get in
financial trouble.
Empirical studies offer assurances that the system has not become overrun with
wealthy debtors who use bankruptcy as a mere convenience. Emerging
academic research demonstrates that, as a group, the debtors who file for
bankruptcy in the mid-1990s are worse off than their counterparts who filed in the
early 1980s. Their incomes are lower and their debt loads are higher.
Bankruptcy affects the following groups disproportionately: (1) those who have
experienced a period of unemployment in the previous two years; (2) those who
have experienced a medical crisis (this is leading cause for those in the 50-60
age range); and (3) divorced persons, particularly women.
As is the case with so many other arguments advanced by proponents of the
legislation, there is no objective evidence that there is a loss of stigma
associated with filing for bankruptcy, thereby increasing the number of "casual
filers." A study issued by VISA purporting to show a link to reduced stigma was
criticized on its methodology by the CBO.
There is evidence however, that the annual income of bankruptcy filers has
steadily decreased over the 16 year period from 1981 to 1997, while at the same
time the debt load has increased. If increased bankruptcy filings can be
attributed to a loss in the stigma associated with it, wouldn't you expect to see
more higher income earners, not more lower income earners, file for bankruptcy?
Attorneys who represent consumer debtors report that the stigma remains very
real. Clients are anxious to repay their debts and to keep their financial
difficulties quiet. It is reported that consumers frequently ask their attorney
whether their employer or family have to be notified and whether there is any
kind of notice published in the newspaper for fear that their hardships will be
made public. Finally, attorneys report they have few referrals from former
clients. Most people find their attorney as the result of advertising because they
are too embarrassed to ask family or friends for recommendations
Why shouldn't people be forced to commit to some kind of repayment plan
rather than being able to wipe the slate clean?
This question gets to the difference between Chapter 13 and Chapter 7 filings.
Generally, a family that files for Chapter 7 bankruptcy is relieved only of repaying
its short-term, high-interest unsecured debt, principally credit card and finance
company debt, along with some medical bills. After bankruptcy, however, the
family must continue to make all payments on the family home, including
interest, late charges and penalties or they will lose their home. Any other debt
secured by a home mortgage or home equity loan also must be repaid. These
debtors must continue to make car payments, pay back taxes, and satisfy
educational loans. Those who have outstanding child support or alimony
obligations must also pay those in full. These debts are not eliminated in
bankruptcy. Finally, if a debtor signs what is known as a "reaffirmation
agreement," agreeing to pay any debts otherwise discharged in the bankruptcy,
he or she will be legally obligated to do so. As a result, Chapter 7 is not total
debt relief. Debtors often leave bankruptcy court with heavy financial obligations.
For those debtors who can afford to reorganize and pay their creditors, Chapter
13 provides a well-defined and accessible method to adjust those debts.
Debtors who file for Chapter 13 voluntarily agree to pay some portion of their
debts over a three to five year period. Despite the good faith of those who
choose this approach, the reality is that for over 15 years, two out of every three
debtors who file for Chapter 13 do not make it through the repayment plan.
Many face repeated unemployment and some encounter significant and
unexpected expenses. Before forcing people into Chapter 13, we should find
out first why so many voluntary reorganizations fail.
Why do lenders continue to extend credit to high-risk borrowers, knowing
that they may never be able to repay it? Isn't this costing the industry a lot
of money?
The truth is that high-risk lending is high-profit lending. These profits have
encouraged many institutions to substantially lower their standards when it
comes to consumer credit. More recently, as higher-quality borrowers began
relying less on credit card borrowing and more on lower-interest forms of
borrowing, credit card issuers were left to pursue more marginally qualified
borrowers. Credit card solicitations have jammed mailboxes with more than 2.5
billion such mailings annually. These solicitations targeted those as young as 16
or 17 years old working at their first summer job and senior citizens living on
fixed incomes. No one has been immune from the credit card "come on."
Why creditors pursued such a strategy may be found in the profits associated
with such practices. In 1993-1994, credit card lending was 135 percent more
profitable, as a percentage of assets, than all forms of bank lending combined.
Although these net profits have decreased somewhat, they still are substantially
more than many other forms of bank lending.
The Office of the Comptroller of the Currency (OCC) cautioned national banks
about the risks associated with preapproved solicitations of credit cards in a
September 1996, advisory letter. In that advisory, the OCC encouraged bank
management to "take appropriate action to limit its exposure to unwarranted
risks." Nonetheless, during the first half of 1997, credit card solicitations were at
a record level; the second quarter mailing of 881 million such solicitations was
the highest on record.
Is lawyer advertising responsible for the increase in the number of
bankruptcy filings?
Although proponents of the legislation may have you believe that it is only
because of legal advertisements that the number of bankruptcies has increased,
the facts are quite different. Bankruptcy attorneys are only responding to the
needs of the millions of American families who have debt problems; they are not
creating these needs. We allow aspirin manufacturers to advertise their products
to solve the problem of headaches. Yet, no one suggests that these
advertisements actually cause the headaches.
Consider the experience of the United Auto Workers Legal Services Plan. In
1997, the bankruptcy caseload of the UAW's Legal Services Plan doubled from
two to four percent of total cases handled. In the same year, about 10,000 new
clients called to inquire about bankruptcy procedures. These increases cannot
be explained by advertising. The Plan does not and never has advertised its
services. In most places it is not even listed in the Yellow Pages. And, finally,
the Plan reports that it never has approached bankruptcy as a first option; it
always is considered a last resort when all else has failed.
What are the similarities between the tobacco industry and the consumer
credit industry?
The similarities are considerable. Both industries rely on "hooking" consumers
on a habit that can be dangerous to their well-being (financial or physical). In the
case of tobacco companies, it is smoking cigarettes that is the culprit. In the
case of consumer lending, it is easy credit, with initial low interest rates and low
minimum payments. Those interest rates later go sky high, after considerable
debt has been run up. Both industries have been accused of targeting lower
income and young consumers in their marketing campaigns. Smokers who
develop health problems get medical treatment. Consumers who get in financial
difficulty as a result of getting hooked on easy credit turn to the bankruptcy
system for relief. Now, the credit industry wants to choke off access to the
"hospital." Like people who smoke, some bankruptcy debtors have made unwise
choices. Others are truly blameless, having become disabled or unemployed
after accumulating modest debt. We don't close the cancer ward to people who
smoke; we shouldn't close the courthouse doors to people facing financial
hardship.
FOR MORE INFORMATION, CONTACT:
Mary Rouleau, Consumer Federation of America, 202/387-6121
Maureen Thompson, National Association of Consumer Bankruptcy Attorneys,
703/276-1116
April 1998
MAY-19-98 TUE 12:17 PM CONSUMER FEDERATION
FAX NO. 202 265 7989
P. 01
W
VV4
THE TRUTH ABOUT BANKRUPTCY REFORM,
CHILD SUPPORT, AND SPOUSAL SUPPORT
HR 3150, "The Bankruptcy Reform Act of 1998"
as reported by the House Judiciary Committee May 14, 1998
MYTH #1:
Bankruptcy reform proposals would reverse current protections in
bankruptcy law that prioritize the payment of child support and alimony.
TRUTH:
H.R. 3150 preserves and strengthens the Bankruptcy Code's protections for
ex-spouses and children. In 1994, Congress amended the bankruptcy laws to
make child support and alimony obligations priority debts that must be paid before
general unsecured debts, such as credit card debts. Nothing in H.R. 3150
changes the priority status of children and ex-spouses.
According to the Congressional Research Service: "H.R. 3150 does not
repeal or diminish the protections accorded to child support in the
U.S. Bankruptcy Code" (CRS Memorandum by Robin Jeweler, Impact of
consumer bankruptcy reform proposals on child support obligations at
CRS-4 (May 13, 1998) [hereinafter "CRS Memo"] ).
H.R. 3150 actually broadens protections for ex-spouses under the
Bankruptcy Code by making almost all marital obligations
nondischargeable debts (for example, agreements by an ex-spouse to pay
a mortgage or to provide half of the proceeds from the sale of a house).
MYTH #2: The bill would place all nondischargeable debts on equal footing with child
support and alimony. Ex-spouses with claims for child support or alimony
payments would be "pitted against" credit card companies, "setting up increased
competition for the diminished assets of a postbankruptcy debtor."
TRUTH:
Under HR 3150, as reported by the Judiciary Committee, child support and
alimony take priority over all other postbankruptcy debts. Child support and
alimony get paid first. Under the Bankruptcy Code, priority unsecured creditors
are paid out in the order in which they are listed under the bankruptcy statute.
H.R. 3150 specifically provides that child support obligations (whether
current or in arrears) must be paid before any other debt that survives
bankruptcy (i.e., other nondischargeable debts).
MYTH #3; The legislation disadvantages ex-spouses and children because they lack
the kinds of resources that corporate creditors have to collect debts.
Without inexpensive means of collecting child support and marital debts, ex-
spouses and children will lose.
to Sara Rosan -Apages
MAY-19-98 TUE 12:18 PM CONSUMER FEDERATION
FAX NU, 202 265 7989
P.02
IVE 11:49 ran
-2-
TRUTH:
Present law already requires states to provide inexpensive methods for ex-
spouses to collect marital debts; H.R. 3150 preserves existing-preferences
for collecting child support payments.
Child support payments are directly collectable from any federal tax
refunds an ex-spouse receives.
Federal law requires states to provide low-cost services for collecting
child and spousal support, without the need to hire a lawyer.
MYTH #4: If an ex-spouse uses a credit card check to pay part of their child support or
other marital obligations, the credit card company will have the same
priority as the spouse to whom additional child support or other marital
payments are owed when the debtor files for bankruptcy (when the credit
card check is written within 90 days of the bankruptcy filing).
TRUTH:
H.R. 3150, as reported by the Judiciary Committee, ensures that this cannot
happen. H.R. 3150 specifies that child support and alimony have a higher priority
than credit card debt.
In fact, H.R. 3150 gives credit card debt the lowest priority of any
unsecured debt - child support and alimony have much higher
priority.¹
MYTH #5: Under the proposed legislation, debtors filing for Chapter 13 bankruptcy
could spread debts for child support payments over a five year period.
TRUTH:
H.R. 3150 preserves the courts' full authority, as under current law, to
require child support obligations to be paid before any other debts on an
accelerated schedule.
In fact, according to CRS, under H.R. 3150: "[I]n order to reorganize
successfully, a chapter 13 debtor will have to fulfill priority child
support arrearages, and maintain current payments" (CRS Memo at
CRS-4).
1 CRS reports that: "The 1994 bankruptcy amendments clarified that child support and alimony payments,
in additional to being nondischargeable. are priority payments in bankruptcy. indeed, seventh priority - with no
monetary limits - goes to allowed claims for debts to a spouse, former spouse. or child of the debtor, for alimony
or support, in connection with a separation agreement, divorce decree, or property settlement.
The first six
bankruptcy priorities encompass administrative expenses: involuntary gap creditors: certain employee wages and
benefits; certain claims of grain farmers and fishermen; and certain consumer claims for undelivered or unprovided
goods or services." CRS Memo at CRS-2 and n.7. Under H.R. 3150. credit card debts would have eleventh
priority.
MAY-19-98 TUE 12:19 PM CONSUMER FEDERATION
FAX NO. 202 265 7989
MAY-19-98 TUE 11:12 AM
FAX NO. 00000000000000
P. 04
lashington, DC 20515
May 11. 1998
President William J Clinton
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr President:
During your recent radio address to the nation. you stated that bankruptcy reform
legislation currently under consideration by Congress could require mothers "to compete with
powerful banks and credit card companies for the money they're owed." We are writing co
correct any misinformation and to assure you that this is false.
The existing bankruptcy law gives child support and alimony debt payments
priority over credit card debt. H.R. 3150 does nothing to change that priority. Such
priority means that any money that is available will first go to pay child support and alimony debts
in their entirety before credit card debts are paid. The legislation we have introduced to stop the
abusive use of our nation's bankruptcy laws reinforces that child support and alimony payments
will continue to have priority over other debts. Since our bill is crafted to curb abuse of the
bankruptcy code, it may even improve the current problem with irresponsible individuals failing to
make these important payments.
In addition, the needs-based test which is at the heart of our bipartisan bankruptcy
reform legislation subtracts all of the debtor's priority debt payments, including child
support and alimony, in determining whether there is any income available to repay other
debts. The needs-based system will not affect those who are unable to repay their child support
and alimony debts and also pay their unsecured. non-priority debts. Only those who make more
than 75 percent of the national median family income for a family of equal size and. after
subtracting their secured and priority debt payments and their living expenses, are able to pay at
least $50 per month to repay 20 percent of their unsecured, non-priority debt over five years will
be required to file in Ch. 13 and repay their debt over time. If the debtor does not have sufficient
income to repay all his priority debts in their entirety and repay non-priority debts, the needs-
based test will weed that debtor out and not require them to enter a bankruptcy debt repayment
plan.
Our nation is witnessing an unsustainable epidemic of personal bankruptcies.
Bankruptcies have increased over 400 percent since 1980, with 1 million personal bankruptcies
filed in 1996 and a 19 percent increase in 1997 Last year. there were more than 1.4 million
personal bankruptcies. more than I bankruptcy in every 100 American households This rate of
increase is occurring not in the midst of a recession. but during good economic times. From 1986
to 1996. real per capita annual disposable income grew by over 13 percent but personal
bankruptcies more than doubled
PHINTED
MAY-19-98 TUE 12:20 PM CONSUMER FEDERATION
FAX NO. 202
MAY-19-98 TUE 11:12 AM
FAX NO. 00000000000000
P. 05
Our nation's bankruptcy laws play an important and necessary role in our society but we
must ensure that our bankruptcy system does not encourage those who can take responsibility for
their financial obligations not to do SO. Such an abuse of the bankruptcy system is fundamentally
unfair to those who play by the rules and take responsibility for their personal obligations. There
is по justification for making middle class families bear the burden for irresponsible higher-income
borrowers. Bankruptcy will cost our nation $40 billion in 1997 alone. That translates into over
$400 per household in higher costs for goods, services and credit.
We are confident that Congress will pass bipartisan bankruptcy legislation that will reform
the existing system as well as strengthen the ability of parents to collect child support and alimony
payments. We appreciate your interest in this issue and hope that you join this bipartisan effort to
pass responsible and fair bankruptcy reform legislation and sign the legislation when it reaches
your desk later this year.
Sincerely,
Bill meall
Olaha
Bill McCollum
George W. Gekas
Member of Congress
Member of Congress
Rick Boucher
Member of Congress
Member James P. of Moran Congress
Lisa Fenning @ ce9.uscourts.gov
10/14/98 04:22:45 PM
Record Type: Record
To:
Nicole R. Rabner/WHO/EOP
DETERMINED TO BE AN
CC:
Subject: Bankruptcy Reform legislation
ADMINISTRATIVE MARKING
INITIALS: M DATE: 01/04/13
CONFIDENTIAL DO NOT DISTRIBUTE
It is my understanding from the ABI website that the current trend
appears to be to tack an extension of Chapter 12 onto the Omnibus
Budget Bill, and not press forward with the overall reform package.
If so, you will not need to draw upon the emergency fall-back
suggestions below. I would urge you, if possible, to try to get the
new judgeship portion of the bill (Section 130 of the Conf. bill)
included with the Chapter 12 add-on. The current troublesome economic
situation truly makes the need for these overdue judgeships extremely
urgent. I do not understand that at this point the judgeships are
controversial in their proposed temporary format.
Following up on our telephone conversation this morning, I will set
forth the changes that I would consider absolutely necessary if a
compromise needs to be reached to save the Omnibus Budget Bill. These
changes could form the basis for reconsideration next spring, but I
would hope that the proposed bill could be improved in many respects
if deferred.
CONSUMER PROVISIONS
1. "Means testing" -- Section 102 of Conf. Bill (amending 11 USC
Section 707)
The HR3150 formula continues to be based upon an assertion that, "2 +
2 = 7, and (imaginary) dollars 5, 6, and 7 should be paid through the
plan." Saying so doesn't make it so.
I understand the House activists continue to insist that judical
discretion should be constrained by a formula that establishes a
presumption requiring minimum payments through Chapter 13. Any such
formula needs to be workable, however.
The concept that I suggested as a possible compromise would be to
provide for the creation of a commission charged with responsibility
to develop appropriate consumer formulas by a certain date. The
effective date of the formula would have to be deferred perhaps a year
after the development of the formula so that the necessary forms and
procedures could be finalized.
The concept would be to have a four or five member commission
appointed by the President, Speaker, Majority Leader, and Chief
Justice, etc. They would be responsible for developing an appropriate
"means testing" formula that would probably start with the IRS
budgets, but also take into account the debtor's actual secured debt
obligations, including arrearages to be paid through the plan. The
formula could also establish standards for adjustments that take into
account the infinite variety of individual circumstances, with the
judge given some discretion about upwards or downwards adjustments.
The formula should also specify that chapter 7 cases should not be
dismissed for failure to meet the formula if either: (1) the debtor
was not eligible for chapter 13 relief (due to debt in excess of
statutory limits, for example), or (2) the debtor would be unable to
propose a confirmable plan for some reason.
The formula should be subject to annual review and adjustment by the
Commission. The Commission should also be required to report annually
on the number of cases affected by the formula, their disposition, and
the amount of additional payout to creditors that was achieved in
those cases converted to chapter 13s, so that the effect of "means
testing" requirements can be evaluated and quantified.
2. Cram down of personal property secured debt in Chapter 13 cases
-- Section 124 of Conf. Bill (amending 11 USC Section 506).
The conference's "compromise" on this issue calls for prohibition of
lien-stripping with respect to any secured debt incurred re personal
property within 5 years before the bankruptcy filing. The issue here
is whether the secured portion of the car debt can be reduced to the
collateral value of the car as of the petition. The ability to reduce
payout of the unsecured portion of the car debt is a critical
feasibility question in many Chapter 13 cases. For all practical
purposes, the 5-year limitation is.the same as the unlimited Senate
prohibition -- almost all personal property secured debt involved in
Chapter 13 cases was incurred within 5 years.
This provision should be eliminated as unduly harsh. It provides a
windfall for secured creditors whose debts carry particularly high
interest rates, resulting in outstanding debts much greater that the
value of the car.
3. Adequate protection pending Chapter 13 confirmation -- Section
137 of Conf. bill (adding 11 USC Section 1307A)
This provision will require debtors to make double payments to secured
creditors while awaiting confirmation of their Chapter 13 case. The
plan payments required to be made to the trustee pending confirmation
already include the regular monthly payments due on cars and houses.
If debtors are also required to pay regular monthly payments directly
to the secured creditors, literally no one will be able to survive
economically to confirm a plan. This provision should be amended to
require that either the regular monthly payment shall be paid to the
trustee as part of the plan payment, or paid directly to the secured
creditor, but NOT both.
BUSINESS PROVISIONS
1. Deadline for assumption of leases -- Section 205 of Conf. bill
(amending 11 USC Section 365)
This provision sets an absolute time limit of 180 days to assume or
reject leases, subject only to extension on motion "of the lessor."
Lessors will never want to pay for the filing of such a motion. This
prohibition on extensions will kill retail bankruptcy cases, which
often involve hundreds of leases. This provision would force debtors
to assume leases prematurely, before it can be determined whether the
case is reorganizable and whether the particular lease will be
advantageous in the reorganization. The problem with premature
assumption is that any arrearages have to be cured, and any liability
for a subsequent breach or termination becomes an administrative
priority claim for all consequential damages and amounts due under the
lease, avoiding the statutory cap on the amount of pre-petition lease
claims, and elevating these prepetition claims to a priority above all
other unsecured claims.
This provision would be acceptable only if amended to provide that the
period could be extended upon the consent of the lessor, or because
necessary for a reorganization reasonably in prospect or other good
cause shown. A limit to an additional 180-days period not be
unreasonable, or imposing a requirement that a confirmable plan be on
file.
We can reasonably anticipate some major retail chain filings within
the year. This provision would destroy many of them.
2. Elimination of the automatic stay for Chapter 11 cases -- Section
412 of Conf. bill (amending 11 USC Section 362)
The problem with this section has to be the result of a potentially
disasterous drafting error, rather than intentional. The new
subsection "(j)" would provide that "the filing of a petition under
chapter 11 of this title operates as a stay of the acts described in
subsection (a) only in an involuntary case involving no collusion by
the debtor with creditors and in which the debtor [is a small business
that hasn't recently filed]". As written, no automatic stay would
apply in any voluntary Chapter 11 case.
I assume, given the apparent intent of the section, that the problem
is a misplaced modifier. It would be okay if revised as follows:
"(j)" would provide that "the filing of a INVOLUNTARY petition
under chapter 11 of this title operates as a stay of the acts
described in subsection (a) only IN A CASE involving no collusion by
the debtor with creditors and in which the debtor [is a small business
that hasn't recently filed, etc]".
Many other provisions of the Conf. bill are problematic as a matter of
policy, drafting, etc., but the foregoing are the crucial problems
that should not be allowed to become law.
I hope that these comments provide you with some ideas if truly hard
choices must be made.
Lisa Fenning @ ce9.uscourts.gov
10/13/98 12:21:33 PM
Record Type:
Record
To:
Nicole R. Rabner/WHO/EOP, Sarah Rosen/OPD/EOP
CC:
Subject: Bankruptcy Reform legislation
Over the weekend, I reviewed the Conference Report in greater detail.
In many important respects, it is worse than HR 3150. It threatens to
destroy Chapter 13 as an effective method of rehabilitation, and to
swamp the bankruptcy courts in litigation about budgetary issues that
are likely to require evidentiary hearings.
I realize that the Administration is facing many political tradeoffs
with respect to budget issues. But this last-ditch effort to derail
the bipartisan Senate compromise should not be rewarded. I urge the
Administration to stand firm on its veto threats of last week.
Please call or e-mail me if you have any questions or if I can be of
any assistance.
06/05/98
13:01
213 894 3731
JUDGE FENNING
001
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
STATES
Chambers of the Honorable Lisa Hill Fenning
UNITED DISTRICT CORRI#
United States Bankruptcy Judge
255 East Temple Street, Suite 1682
Los Angeles, CA 90012
OF
Telephone: (213) 894-2553
Facsimile: (213) 894-3731
June 5, 1998
DICTATED BUT NOT READ
Via Facsimile
(202)456-2878
Ms. Nicole Rabner
Associate Director for Domestic Policy
c/o The White House
Washington, D.C.
Re:
Follow-Up Materials
Dear Ms. Rabner:
It was a pleasure meeting you at the White House on May 19th with Ms. Sarah Rosen. Enclosed are
follow-up comments on H.R. 3150 and S. 1301 that I indicated I would send to you.
Please do not hesitate to call me if you should you have any questions regarding the attachments. I can
be reached at my office (213)894-3557 which is my direct line. I am also providing you with my home
telephone number, (949)496-2915,
should you need to reach me after office hours.
Very truly yours,
Lisa Hill Fenning
United States Bankruptcy Judge
Attachments (15 pages)
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TEN KEY ELEMENTS FOR A WORKABLE S. 1301
Submitted by Bankruptcy Judge Lisa Hill Fenning
Ten elements are required to assure that S. 1301 results in effective consumer bankruptcy reform:
1.
No "gateway" eligibility requirement for pre-bankruptcy work-outs should be imposed.
Stress post-filing education and budget management programs instead. Consider adding
a post-filing requirement for good faith work-outs under court-annexed mediation as
well as education for Chapter 7 debtors as well as Chapter 13 debtors.
Proposed change in S. 1301:
Delete proposed Sections 322 (a), (d), and (e) of S. 1301.
Modify proposed Section 322 (c) to apply to all individual
debtors.
2.
Require proof of identity and social security or tax number as prerequisite for filing all
petitions to reduce fraud and identity theft problems.
Proposed change in S. 1301: Add new subsection (h) to 11 U.S.C. § 109:
(h)
The petition must be accompanied by proof of identity (including
all names used by the debtor within the past six years), address, social
security number, and employer's tax identification number (if any), in a
form acceptable to the clerk The clerk may refuse to accept a petition
for filing if such proof is not provided, unless otherwise ordered by the
court.
3.
Use 11 U.S.C. $ 707(b) as the model for testing whether debtors could substantially
repay unsecured debt through a Chapter 13 plan, using a flexible standard based upon
debtor's ability to confirm a Chapter 13 plan that would provide for at least 20%
repayment of general unsecured creditors.
Proposed change in S. 1301: Clarify appropriate standards for debtor's attorney
sanctions in Section 102 as follows:
Delete proposed new subsection 707(b)(3)(B).
Add at the end of $ 707(b)(3): ", if the attorney's filings were
not substantially justified," like the standard set forth in
proposed new § 707(b)(4)(A) to be applied to the award of
sanctions against creditors for making frivolous motions under
this section.
4.
Allow creditors to bring 11 U.S.C. § 707(b) motions in cases involving debtors above a
certain income, but counterbalance that authority with a prohibition on reaffirmations for
all unsecured consumer debt, and secured consumer debt below a specified purchase
amount.
Proposed change in S. 1301: Limit reaffirmation agreements to secured claims
of $500 or more to deter creditors from bringing motions under modified 11
U.S.C. § 707(b) to pressure reaffirmations of unsecured debts. Proposed
modification of 11 U.S.C. § 524(c) by adding a new subsection (7) follows:
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"(7) the claim is a allowed secured claim that is secured by property having a
fair market value of at least $500.00.
"Agreements between an individual debtor and a holder of a claim that is wholly
unsecured, or between a debtor and a holder of a claim that is secured by a lien
on property having a fair market value of less than $500.00, are prohibited, and
shall be deemed void and unenforceable.
5.
Retain the "superdischarge" to encourage debtors to complete Chapter 13 plans and to
avoid competing nondischargeable debt that adversely impacts the ability of child and
spousal support creditors to get paid.
Proposed change to S. 1301: Delete Sections 314 and 316.
6.
Do not use the H.R. 3150 formulas for Chapter 7 eligibility or Chapter 13 plan
confirmations because they are administratively unworkable; they will effectively bar
many financially distressed debtors from any type of discharge; and they will impede the
ability of child support and other nondischargeable priority creditors to collect on their
claims.
Proposed change to S. 1301: None.
7.
Change proposed amendment to 11 U.S.C. § 523(a)(2)(A) to address confused state of
case law regarding dischargeability of credit card debt, using a standard that recognizes
the reasonable repayment expectations of the parties at the time the debt was incurred as
the touchstone for determining whether the debtor intended to obtain credit by false
pretenses or fraud.
Proposed alternative language: Modify 11 U.S.C. § 523(a)(2)(A) as follows:
"actual fraud, or use of a credit or charge card or other device to access a credit
line without a reasonable expectation of having income sufficient to make the
regular payments on such debt as they come due during the next six months."
8.
Eliminate debt refinancing from the proposed presumption of nondischargeability
provision of 11 U.S.C. § 523(a)(2)(C).
Proposed change to S. 1301: Modify Section 317's proposed amendment to 11
U.S.C. § 523(a)(2)(C) to add the following immediately before the close parens:
", except debt incurred in the course of refinancing a pre-existing
dischargeable debt)"
9.
Provide more effective defenses against abuse of the automatic stay by strengthening
proposed in rem relief and related provisions. See attached memorandum for substitute
language for Section 303 of S. 1301.
10.
Keep the streamlined appeals provisions to enhance uniformity of rulings by bankruptcy
judges, who will have more controlling precedents upon which to base their decisions.
Proposed change to S. 1301: None.
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UPDATED COMMENTS ON H.R. 3150 AND S. 1301
AS OF 6/2/98
Submitted individually by Bankruptcy Judge Lisa Hill Fenning
The proposed bankruptcy reform legislation offers a mix of beneficial and harmful provisions
from the standpoint of the administration of the bankruptcy system. As a veteran nearly 13 years on the
bankruptcy bench of the highest volume bankruptcy court in the country, I have examined the proposed
legislation from the perspective of one who would be expected to apply the new statutory provisions in
the real world of the cases that come before me. 1 am deeply concerned that the current version of the
legislation appears likely to impose significant burdens and costs on both the debtors and the courts that
outweigh any monetary benefit for creditors.
The comments here focus on what is likely to happen if the current proposals are enacted. Of
particular concern are provisions that will probably not work properly in the courts, or that will probably
produce unintended consequences for the bankruptcy system. Some of the problems lie in drafting, and
could perhaps be remedied with changes to text. Other problems are more fundamental: as drafted, the
"means-testing" formulas and approach appear to create a burdensome procedure that is likely to cause
substantial numbers of debtors to be disqualified from either Chapter 7 or 13 relief, as well as discourage
attorneys from representing consumers and cause trustees to resign en masse due to the increased duties
and costs of administering Chapter 7 cases. Two of the other most controversial proposals - the
proposed amendments regarding dischargeability standards for credit card debts under 11 U.S.C. §
523(a)(2), and the proposed elimination of the "superdischarge" in Chapter 13 cases -- are highly likely
to generate substantial litigation cost and delay.
Some of the detailed formulas and requirements are apparently intended to restrain perceived
leniency or inconsistency of some judges. For that kind of problem, however, the single, most effective
remedy will probably prove to be the more effective appellate review resulting from the streamlined
appellate process embodied in Section 411 of H.R. 3150, and the parallel Section 603 of S. 1914.
Expedited appellate review should result in quicker development of controlling precedents in case law
that will guide statutory construction and provide defined limits for the bankruptcy judges wrestling with
difficult statutory applications. Indeed, the change in appellate structure, plus the provisions giving
judges more tools to deal with abusive filings -- like in rem relief from stay powers may rein in
abusive filings to a significant degree without the immediate need for some of the controversial
provisions in the current bills.
All participants in the legislative debate appear to agree that debtors who can repay a substantial
portion of their unsecured debt through a Chapter 13 plan should be required to do so. However, for the
reasons set forth below, ability to repay should be determined as a condition of discharge, not as a
condition of eligibility to file.
I.
H.R. 3150, Section 104 - "Gateway" prepetition credit counseling requirement.
Proposed "gateway" eligibility restrictions imposed by Section 104 of H.R. 3150 and Section
322 of S. 1301 will delay - -- and potentially bar -- access to the courts, without offering any proven
benefit to either debtors or creditors. From the standpoint of bankruptcy administration, proof problems
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about "gateway" eligibility requirements will result in costly litigation about issues that have nothing to
do with whether the debtor can afford to repay creditors. Motions to dismiss for failure to attempt a pre-
petition workout will result in litigation in many cases, resulting in additional cost and delay for both
debtors and the court. Any requirement that Chapter 7 panel trustees be required to bring such motions
will impose significant costs in trustee time and attorney fees that will be impossible to recoup from
typical "no-asset" Chapter 7 cases, particularly if the debtor is unrepresented by counsel. Eligibility
criteria set forth in the proposed amendment will require collateral litigation about a variety of factors
that may be difficult to establish, such as how hard the debtor tried to work out the debt problems,
whether the negotiations were carried out in good faith by the debtors and creditors, and whether the
available debt counseling programs met the quality, availability, and effectiveness requirements
contemplated by the proposed amendments.
Alternatives: If the goal is to maximize repayment from those debtors who can repay, then the
focus of any litigation about eligibility should be upon the debtor's actual ability to repay. The bills
should be modified to:
Eliminate the linkage between pre-bankruptcy counseling and eligibility, in favor of
stressing - and funding - effective post-filing debt-management education as a condition
of discharge in any chapter. Requiring completion of a debtor education program during
a bankruptcy case would be a reasonable condition of receiving a discharge under any
chapter. If the court or the U.S. Trustee are to provide or certify providers of education,
sufficient funding should be appropriated for that purpose.
Require court-annexed mediation within 30 days after filing (instead of before) via credit
counselors or others to attempt consensual work-out. Such a program could reward
debtors who enter into work-outs that result in stipulated dismissals, by providing a form
of dismissal order that purges their record of the bankruptcy filings, while rendering
them ineligible for any repeat filing for 180 days.
NOTE re drafting problems: Certain language in proposed new 11 U.S.C. § 109 (i)(1)--
conditioning cligibility upon proof that a debt-workout was attempted pre-petition
"notwithstanding any other provision of this section" is inconsistent with subsection (5) that
permits a court to waive the requirement under certain circumstances.
П.
The "means-testing" formula is too complex, and is likely to cause more problems than it
solves.
A.
Pro se filings are likely to increase because of the additional work required of
counsel, as well as the mandatory penalties if they make a mistake.
Debtors will have more difficulty finding affordable legal representation if H.R. 3150 is adopted,
because consumer attorneys are unlikely to be willing to undertake the time-consuming reporting and
analysis required by the "means-testing" provisions for a price that debtors can afford. In the Central
District of California, already nearly 40% of all cases are filed pro se, without a lawyer. Unrepresented
parties often find compliance with the rules and requirements of bankruptcy to be extremely difficult,
and tend to demand excessive amounts of court and trustee time and assistance. Attorneys' reluctance to
take individual cases is likely to be exacerbated by the potentially expensive sanctions mandated under
proposed Section 103 of H.R. 3150 if the judge disagrees with the attorney's analysis of eligibility for
Chapter 7 relief.
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B.
H.R. 3150's formulas will deny discharge in Chapter 7 to debtors who cannot
confirm a Chapter 13 plan.
1.
Definition of "projected monthly net income" in proposed section 11 U.S.C.
§ 109(h), fails to include many expenses and required payments in
determining eligibility for Chapter 7 relief:
The definition of "projected monthly net income" to be incorporated in new 11 U.S.C. § 109 (h)
[per section 101 of II.R. 3150] omits from its calculation the accumulated prepetition arrearages owed
on both secured debt and priority debt that would have to be repaid through a Chapter 13 plan, as well as
Chapter 13 administrative priority claims.
Secured debt arrearages, interest and fees are omitted. The amount of secured debt to be
factored into "monthly nel income" under new § 109(h)(3)(B) does NOT include either the arrearage that
would have to be repaid under a Chapter 13 plan, or any interest or fees (such as attorney fees,
foreclosure fees, or other charges) that would be included in the secured claim in Chapter 13. As
currently drafted, subsection (3)(B) only factors in the "amounts scheduled as contractually payable to
secured creditors in each month of the 60 months following the date of the petition." The amounts
"contractually payable in each month" would ordinarily be the regular monthly payment according to
the contract, not the claim for arrearages to be repaid through the Chapter 13 plan.
Current family support orders are omitted. The determination of the amount of priority debt
under proposed new § 109(h)(3)(C), by contrast, only includes the amounts due and payable "as of the
date of the petition", NOT the monthly amounts that come due post-petition on regular child and spousal
support obligations. Moreover, the language of (3)(A) does not indicate whether recipients of current
child and spousal support qualify as dependents for purposes of determining the total dependents under
the applicable expense allowance formulas, nor does the applicable formula provide for the full amounts
set by the family court order.
Chapter 13 administrative expenses and trustee fees are omitted. Proposed § 109 (h) does
not include the cost of Chapter 13 administrative priority expenses and trustee percentage fees -- in the
formula to test whether Chapter 13 would generate returns for general unsecured creditors. It also omits
any provision for tithing as allowed by the pending bill now before Congress.
2.
The definition of "monthly net income" in proposed 11 U.S.C. § 101 (39A)
for confirming Chapter 13 plans omits regular monthly secured and
priority payments due outside the plan.
This new formula is to bc used to determine the amounts to be paid in Chapter 13 plans per new
Section 111. This definition differs materially from the "projected monthly net income" formula used to
determine eligibility for Chapter 7. Like that formula, however, the "monthly net income" definition
omits various regular expenses from its calculations.
Secured debt determination omits regular monthly payments due outside the plan. The
average monthly payment amount is determined for purposes of proposed Subsection § 101 (39A)(B) on
the basis of the "total of all amounts to be paid on account of secured claims pursuant to the plan." This
means the arrearage amounts, including interest and fees portions of the secured claim, to be paid
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through the plan. It would NOT, however, ordinarily include the regular monthly payment to be paid
outside the plan. In other words, it is the obverse of the definition under 109 (h): it excludes the very
amounts that are included in the calculation under that section. Because regular debt service is also
excluded from the regular living expenses set forth in § 101 (39A)(A), the amounts required to be paid
to general unsecured creditors will not permit debtors to make all of the required payments to their
secured creditors.
Current family support orders also appear to be omitted from this formula. The
determination of the amount of priority debt under proposed new § 101(39A)(C), like that for proposed
new § 109 (b)(3)(C), only includes the amounts due and payable "as of the date of the petition", NOT the
monthly amounts that come due post-petition on regular child and spousal support obligations.
Moreover, it is not at all clear from the language of § 101(39A)(A), whether recipients of current child
and spousal support would qualify as dependents for purposes of determining the total dependents under
the applicable expense allowance formulas, nor is it clear that the applicable formula would provide for
the full court-ordered amounts.
Conclusion: Despite the formula's failure to provide for the actual secured and priority
payments owed by debtors, the proposed amendment to §1325(b)(1)(B) would require that "the total
amount of monthly net income received by the debtor shall be paid to unsecured nonpriority creditors
under the plan." The amounts required to be paid to unsecured creditors under this provision will be
impossible for many debtors to pay -- they just will not have sufficient income. This formula will also
effectively eliminate the right to tithe set forth in S. 1244. The effort to craft such a detailed formula
should either be abandoned, or a full-scale revision should be undertaken that carefully works out the
details of these proposals in real-life scenarios.
3.
The proposed "means test" formulas completely ignore the fact that at least
3% of the individual Chapter 13 cases, and an unknown number of the
individual Chapter 7 cases involve the operation of small businesses.
The "means test" formulas are impossible to apply in cases involving individual debtors
operating small businesses, as they only relate to personal income and expenses, not business income and
expenses. Determining "disposable income" in business Chapter 13s under current law is often
complicated and uncertain. The proposed new standards are totally inapplicable to business cases.
III.
As provided by S. 1301, 11 U.S.C. § 707 (b) should be used as the mechanism to prevent
Chapter 7 discharges if debtors can in fact repay a substantial portion of their general
unsecured debts. However, any "means test" should only be used to bar a Chapter 7
discharge if the debtors would be able to confirm a Chapter 13 plan resulting in meaningful
repayment to general unsecured creditors.
Using a broader, flexible formula tied to the amounts that the individual debtors could repay to
general unsecured creditors in a Chapter 13 plan is a more appropriate basis to deny Chapter 7 relief.
The trustees and the U.S. Trustee are in a better position to perform any required calculations than an
unrepresented debtor, and can be required to do so, once the case is in the bankruptcy system.
Thus, a more effective approach is likely to be to strengthen 11 U.S.C. § 707 (b) by establishing
a benchmark like the 20% repayment standard set forth in Section 102 of S. 1301, which incorporates
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by reference the standards of 11 U.S.C. § 1325(b), thus avoiding any inconsistencies. A specific
obligation could be imposed upon the Chapter 7 panel trustees or the United States Trustee to conduct a
computerized analysis of either all Chapter 7 cases or a sample to verify whether such a Chapter 13 plan
could be proposed in individual cases.
Like those of the comparable section of H.R. 3150, the sanctions provisions of Section 102 of S.
1301 also appear to require attorneys to guarantee results: that is, if the judge disagrees with their
analysis of whether Chapter 7 is an appropriate remedy, then the court is required to assess a civil
penalty against the attorney. Yet many cases fall in factual gray areas, about which reasonable people
may disagree. Just because the evidence presented at the hearing is sufficient to justify a determination
that the debtor can repay sufficient debts to justify dismissal or conversion, it does not necessarily follow
that the attorney should have been able to predict that result with certainty. Fed. R. Bankr. Proc. Rule
9011 already authorizes the court to sanction parties and counsel for frivolous filings. This proposal
would be a significant deterrent to any attorney accepting representation of any individual debtors, with
the result that debtors will be deprived of representation.
Alternatives:
Delete proposed new subsection 707(b)(3)(B).
Add at the end of $ 707(b)(3): ", if the attorney's filings were not substantially justified,"
like the standard set forth in proposed new § 707(b)(4)(A) to be applied to the award of
sanctions against creditors for making frivolous motions under this section.
IV.
The proposed amendments to § 523(a)(2)(A) and (C) relating to credit card debt are overly
broad.
These provisions represent a major change in the traditional philosophy that financially
distressed debtors can generally obtain a discharge of all but two types of unsecured debts: obligations
that should be paid as a matter of public policy (like taxes, federally-insured student loans, family
support), and debts arising from intentionally wrongful conduct (like damages from the debtor's fraud or
willfully malicious injuries). By contrast, the proposed changes will make credit card debts
nondischargeable without any intentional wrongful conduct by the debtor. All the creditor would have to
prove about the debtor's conduct under the proposed change, is that the credit card debt was incurred by
a debtor who could not afford to repay it, applying an objective, hindsight standard for affordability. It
would not matter whether debtors understood that their debt was already too high, and that objectively
they should not have taken on more debt. It would not matter whether the debtors genuinely thought
they could meet the required, minimum monthly payments as they came due. It would not matter if the
debtors reasonably believed that their financial condition would improve shortly, thus providing the
ability to repay. None of these factors would support a defense of a nondischargeability complaint under
the proposed change, although they are defenses under current prevailing standards.
Proponents of the current legislation are correct, however, that § 523 needs to be amended to
specify more clearly when credit card debt should be nondischargeable due to debtor's fraud or false
pretenses. Proving wrongful intent is hard: debtors rarely admit it on the stand. Intent is inferred from
various factors, not an easy or predictable process in many cases. The proposed amendment does not,
however, provide assistance in refining the circumstances supporting a finding of wrongful intent; rather
it eliminates the need for any proof of specific intent by substituting an objective standard of actual
ability to repay. As drafted, Section 145 of H.R. 3150 effectively makes all credit card debt
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nondischargeable if debtors have negligently used credit cards to live beyond their means - in effect,
imposing an effectively "no-fault" standard for nondischargeability of this category of voluntary debt
alone. No other debts under the Code become nondischargeable merely because the debtor was negligent
or reckless. No justification has been offered for this departure from the existing standards and
principles.
Moreover, the amended version of § 523(a)(2)(A) set forth in Section 145 of H.R. 3150 is
ambiguous and will foster litigation. The amendment requires that the credit must have been extended
"without an application therefor and reasonable evaluation of the debtor's ability to repay." But who has
the burden of proof on this issue? It is not clear whether this requirement is in the nature of an
affirmative defense that must be proven by the debtor, or an element of the proof that must be provided
by the creditor pursing a § 523 complaint. An "application" for a credit card could be simply a signature
on a form requesting the card, or it could be the equivalent of a financial statement, listing other cards
held, the outstanding balances on them, as well as other income and expense information. Perhaps the
application should require the same information as required to file a bankruptcy, SO that both the
prospective borrower and the credit card issuer can see the full profile of the applicant's financial
condition. Similarly, the proposed reasonable reliance language does not provide sufficient direction to
the courts: is a credit check required when the card is issued? If so, then the language should so specify.
Perhaps the issuer should also be required to show that the information upon which it relies has been
updated at reasonable intervals, for example, by requiring annual updates of the original financial
information before the card is renewed.
Conclusion: If credit card issuers do not take reasonable steps to reduce their lending risk,
debtors who find themselves overextended should not be penalized by imposing "no-fault"
nondischargeability determinations. If it is uneconomic for issuers to take such simple precautions to
prevent overextension risk, it is even harder to justify the litigation cost of § 523 actions after a
bankruptcy filing.. Of course, if the debtors lie on their applications, traditional nondischargeability
rules would apply.
Alternative: Establish clearer, but flexible statutory criteria that would provide statutory
standards to determine when credit card debt should be found to have been wrongfully incurred without
intent to repay. Possible language to implement this concept would modify 11 U.S.C. § 523(a)(2)(A) as
follows:
"actual fraud, or use of a credit or charge card or other device to access a credit line
without a reasonable expectation of having income sufficient to make the regular
payments on such debt as they come due during the next six months."
Such a standard would recognize and honor the expectations of the borrower and the credit card
issuer at the inception of the debt. The issuer does not usually expect or intend that the debt be repaid in
full in the near term. Rather, the nature of the bargain is the implied promise of the debtor to make
regular monthly payments of at least the minimum specified in the regular monthly invoices, essentially
in perpetuity, since the monthly minimums for many of these debts would amortize over as much as 20
to 30 years. Thus, if the debtor reasonably believed that the minimum monthly payments could be paid
out of future income in the relatively short term, then no fraud has been committed.
It should be noted that, even if the H.R. 3150 version is adopted, it should be clarified to define
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"repay" to refer to ability to make required installment payments over the contemplated period for the
debt. Neither a balance sheet insolvency standard nor an arbitrary short-term amortized repayment
schedule should be used to test whether the debtor's belief is reasonable, because neither the borrower
nor the issuer entered into the transaction upon the assumption that immediate repayment would be
required. The issuer looks to future income for repayment, not to assets. If, on the other hand, the issuer
really expects repayment within a specific period of time, then the billing statements should so specify
and the borrower should be informed before the borrowing occurs.
B.
H.R. 3150's Section 142 proposed 90-day conclusive presumption of
nondischargeability is overbroad.
This new provision should not apply to refinancing of existing debt, where the new credit is used
solely to pay existing dischargeable debt. This commonly occurs when the debtor responds to a
solicitation to refinance existing debt by transferring balances to a lower-interest credit card. In these
transactions, the debt repayment is direct to the other creditor. Assuming that the debtor did not
misrepresent his or her financial condition in connection with the new credit, the credit card issuer
should not be immunized from risky lending practices by the fortuity that the repayment of debt occurred
within 90 days. The new credit issuer can protect itself by evaluating its risk; the debtor does not pocket
any money - it is merely being used to repay other debt.
Alternative: Invited balance transfers from one credit card to another should not be treated as
fraudulent so long as they do not increase the overall amount of debt, and the
debtor reasonably believes that the new minimum monthly payments can be
made out of expected future income.
Proposed change to S. 1301: Modify Section 317's proposed amendment to 11 U.S.C. §
523(a)(2)(C) to add the following immediately before the close parens:
", except debt incurred in the course of refinancing a pre-existing
dischargeable debt)"
V.
The Chapter 13 "superdischarge" should bc preserved as an incentive for completing a
Chapter 13 plan.
Elimination of the "superdischarge" will require litigation of § 523 nondischargeability cases in
Chapter 13, with attendant cost and delay. Attorney fees incurred for defense of such complaints may
sink otherwise feasible plans, and will certainly delay confirmation in many cases. Currently, only about
one-third of all Chapter 13 plans are consummated; most debtors find themselves unable to maintain
payments because of interruption of income, or underestimating of expenses. Adding expensive
litigation to the Chapter 13 process will undoubtedly cause more plans to fail. Moreover, attorney fees
and other administrative expenses are not included in the formula for testing eligibility for Chapter 7
under proposed § 109(h), thus increasing the risk that neither a Chapter 7 or 13 discharge will be
available under H.R. 3150 if it is enacted.
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VI.
Benefits from bankruptey-- including both the automatic stay and discharge - should be
dependent upon full disclosure by debtors. Disclosure requirements, however, should not
expose the debtors or the system to new kinds of fraud.
A.
Tax returns and account numbers should not be part of the public record on file
with the court. Otherwise, debtors may be victimized by identity theft.
Requiring tax information and other documentation to be provided to the trustee as a condition
for discharge is essential to the integrity of the overall bankruptcy process. However, Section 301 of S.
1301 requires the tax returns to be filed with the court, and H.R. 3150 requires them to be filed with the
U.S. Trustee, where they will be part of the public record, downloadable, and subject to copying.
However, making tax returns part of the public record and thus available to "data miners" and con
artists -- is dangerous. Court records are already available electronically on-line in some jurisdictions,
and will soon be in most, if not all, courts. If tax returns can be downloaded or photocopied, then they
can be misused. If debtors' credit account numbers also become part of the public record as also
proposed by Section 405 of H.R. 3150, and payroll stubs are attached to the petition as required by
Section 407 of H.R. 3150, then anyone would have access to sufficient information about debtors to
assume their credit identities. This kind of detailed information should be furnished by debtors to the
trustees, but should not be in the public records of the court.
B.
The "automatic dismissal" required by Section 407 of H.R. 3150 and Section 301 of
S. 1301, if the debtor fails to provide tax returns or other documents, penalizes
inexperienced pro se debtors, and cannot readily be implemented given the present
terms of the bill.
The court will not be able to tell from its own records whether all required documentation has
been supplied to the correct party, because some documents are required to be provided to the standing
or panel trustee, or the United States Trustee, instead of being filed with the court. However, if all of the
documentation were to be required to be provided to the panel or standing trustee, then the trustee could
include a statement as to compliance as part of the report to the court upon completion of the § 341(a)
meeting. The Bankruptcy Court for the Central District of California already has in place an automated
dismissal process that dismisses cases for failure to appear at the § 341(a) meetings, upon report of the
trustce. Failure to provide specified documents could be added as another ground for automated
dismissal based upon a trustee's report.
Additional documentation of income is especially important to a ready determination as to
ability to repay debt. At a minimum, current Schedule I must be revised to require disclosure of all
household income that is available to meet the household expenses that arc itemized in Schedule J. The
omission of such income often gives a seriously misleading impression of an individual's actual
disposable income.
Alternative: Clarify by statute the debtor's duty to provide more information and documentation
to the panel and standing trustees, with greater assurance of availability to creditors. Changes
that might accomplish this goal should:
1.
Mandate more comprehensive disclosures on revised schedules to be formulated
by the Administrative Office.
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2.
Require copies of paystubs, tax returns, and similar documentation of income
and expenses to be provided to the case trustees, where it will not be available to
the public.
3.
Permit scheduled creditors to copies of such documentation to scheduled
creditors upon request of the trustees. Privacy concerns justify limiting such
administrative requests to those of scheduled creditors to avoid blanket requests
being made by "data miners" or other third parties without a stake in the case in
question. Unscheduled parties should have to obtain a court order for an
examination of the debtor, in accordance with current rules.
4.
Require trustees to respond to requests for copies of such documentation within
reasonable times and subject to a reasonable per-page charge to be determined
by a schedule of fees to be promulgated by the U.S. Trustee's Office. Failure of
trustees to respond to requests for such copies in accordance with the rules or
guidelines should bc grounds for sanctions, including monetary sanctions or
possible removal from the trustee panel.
5.
Consider increasing the statutory fee for Chapter 7 panel trustees and Chapter 13
standing trustees if these documentation requirements prove unduly burdensome.
C.
Proof of identity, social security or tax identification number, and address should
be required as a condition for filing a bankruptcy petition.
Currently, more ID is required to cash a $10 check than file bankruptcy and obtain the most
powerful federal injunction under the law. The only effective way to stop serial filings is to be able to
verify whether a particular debtor has filed before. Section 109 should be amended to require such proof
be presented to debtor's counsel, who should be required to certify that the identification information has
been verified, with copies of the documentation maintained in the attorney's records, or by the clerk for
filings by unrepresented debtors, though not inscrted into the publicly available files for the reasons set
forth above.
^ national registry of bankruptcy cases is currently being developed by the Administrative
Office of the United States Courts for on-line access to listings of all filings in the country. Such a
national registry, however, will be useful only if it is reliable. It will be reliable only if the identity of the
debtors is verified. The identification information currently being provided to the bankruptcy courts,
however, is not reliable, and has not been verified. For example, in a recent study, the United States
Attorneys Office in the Central District of California reported that it receives hundreds of complaints
each year about bankruptcy petitions containing forged signatures, phony social security numbers, and
other false identifying information. Similarly, efforts to bar refiling of cases by ineligible debtors will
only be effective if the ineligilibity is determinable at the petition window.
The answer is to require debtors to present identification sufficient to verify the essential
information on the face of their petition, and permit the bankruptcy courts to have access to the Social
Security database to verify the social security numbers of filers. Such identification requirements are
used in an increasing number of commercial transactions, SO debtors should not find them unduly
intrusive, but rather typical and commonplace.
9
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Proposed amendment to 11 U.S.C. § 109: [add new text at end]
(h)
The petition must be accompanied by proof of identity (including
all names used by the debtor within the past six years), address, social
security number, and employer's tax identification number (if any), in a
form acceptable to the clerk The clerk may refuse to accept a petition
for filing if such proof is not provided, unless otherwise ordered by the
court.
A corollary amendment to the Social Security Act should authorize the bankruptcy clerks to have
online access to the social security database to verify the information provided by the debtor.
D.
The benefit of the automatic stay should be limited to scheduled property,
particularly real property.
For a variety of fraudulent reasons, real property is being omitted from schedules. Sometimes
the debtor is hiding the property to prevent it from being sold for the benefit of creditors. Sometimes, the
entire bankruptcy casc is a front for a foreclosure scam, in which multiple properties are transferred into
a bankruptcy case to delay foreclosure. If the debtor has a reasonable explanation for inadvertent
omission, then a motion to amend the schedules to add property and obtain protection of the automatic
stay could cure the problem. Section 362 should be amended accordingly, as set forth in the attached
proposals from the Bankruptcy Foreclosure Scam Task Force of the Central District of California
Bankruptcy Court.
E.
Preventing serial filings by ineligible debtors: Proposed amendment to 11 U.S.C. §
109(g)
Ineligible debtors should not be rewarded for filing another bankruptcy case. A parallel
amendment to § 109(g) would clarify that the stay does not arise for an ineligible filing. The proposed
new language is italicized:
Proposed addition to S. 1301:
[add at end of 11 U.S.C. § 109(g) subsection, following subparagraph (2)]
During the 180-day period, the automatic stay shall not arise in any new case filed by or
against a debtor who is ineligible to be a debtor under this subsection.
VII.
S. 1301's proposal to strengthen 11 U.S.C. § 707(b) by permitting creditors to move to
dismiss Chapter 7 cases on the grounds of abuse might be workable, with certain changes.
Section 707(b) has not allowed for creditors to bring motions to dismiss because of concerns that
such motions might be used solely for the purpose of extracting unwarranted reaffirmation agreements,
or for other improper advantage. That concern was well-founded, as the Sears reaffirmation debacle of
the spring of 1997 demonstrated.
Yet no one has more information or more incentive to ask the court to make the debtors pay what
they can afford to pay than the creditors of the estate. So, the proposed broadening of movants under
10
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Section 707(b) to include creditors makes sense. However, such misuse could be substantially avoided if
this broadening of Section 707(b) were counterbalanced by adding to S. 1301 a provision to prohibit
reaffirmation of unsecured debts and of consumer purchase money security interests below a specified
value. Such an amendment would also substantially prevent the abusive reaffirmation tactics used by
Sears and others.
Proposed amendment to prevent abusive creditor motions under 11 U.S.C. § 707(b):
Modify 11 U.S.C. § 524(c) by adding a new subsection (7) as follows:
"(7) the claim is a allowed secured claim that is secured by property having a fair
market value of at least $500.00.
"Agreements between an individual debtor and a holder of a claim that is wholly
unsecured, or between a debtor and a holder of a claim that is secured by a lien on
property having a fair market value of less than $500.00, are prohibited, and shall be
deemed void and unenforceable.
VIII. Proposed amendments to 11 U.S.C. § 362 to address serial filing problems should be
revised.
The Central District of California has been plagued in recent years by thousands of bankruptcy
petitions filed solely to delay residential evictions or foreclosures for a few weeks or months, without any
intention to complete the bankruptcy case. The problems with abusive filings have been sufficiently
severe that the Bankruptcy Court created a Bankruptcy Foreclosure Scam Task Force to investigate the
problems, examine the issues, and recommend solutions. Local remedies have to some extent
ameliorated the adverse impact of these kinds of abusive filings in recent years. However, the Task
Force concluded that the ultimate answer is to change 11 U.S.C. § 362 to stop the automatic stay from
going into effect in subsequent cases affecting the particular property filed after a bankruptcy judge has
made a finding of abuse, and has issued an "in rem" order or an order dismissing the case with a
prohibition on the refiling of another case for the 180-day period specified in 11 U.S.C. § 109(g). This
change would prevent relitigation of issues already determined by court order.
The purpose of this proposal is essentially similar to that of the repeat filing provisions of H.R.
3150 (section 121) and S. 1301 (section 303), but would improve upon those provisions in several ways.
First, it would withhold automatic stay protections in a second filing, if the bankruptcy court has
determined that abusive conduct occurred in the prior case. By relying upon an actual determination by
the court, it avoids unduly burdensome or complicated presumptions while providing direction to the
court as to the kinds of conduct that would justify the "in rem" bar. Second, it would assure access to the
court for an initial determination of the propriety of the prior filing, as well as an opportunity to show
that the new filing should not be tainted by the misconduct in the prior casc. Third, it is consistent with
the limitations for eligibility for relief set forth in 11 U.S.C. § 109(g).
Under proposed § 362(b)(19), the filing of a bankruptcy petition would not operate as a stay of
any foreclosure proceeding affecting property governed by the entry of an in rem order under § 362(d)(4)
in a prior bankruptcy case for a period of two years, which should be ample time to complete any
foreclosure proceedings. Proposed new text is italicized.
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Proposed substitute amendment to 11 U.S.C. § 362(d): [to replace Section 303 of S. 1301]
(d) On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay -
***
(4) with respect to a stay of an act against real property under subsection (a) of
this section, by a creditor whose claim is secured by an interest in such real estate, if the
court finds that the filing of the bankruptcy petition was part of a scheme to delay,
hinder and defraud creditors that involved either
(A) transfer of all or part ownership of, or other interest in, the real property
without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting the real property; or
(C) omission of the real property from the schedules filed with the court.
If recorded in compliance with applicable state laws governing notices of interests or
liens in real property, an order entered pursuant to this subsection shall be binding in
any other bankruptcy case purporting to affect the real property filed within two years,
except that a debtor in a subsequent case may move for relief from such order based
upon changed circumstances or for good cause shown, after notice and a hearing.
Proposed amendment to 11 U.S.C. § 362(b)
(b) The filing of the petition under section 301, 302, or 303 of this title or of an
application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not
operate as a stay -
(19) under subsection (a) of this section, of any act 10 enforce any lien against or
security interest in real property following the entry of an order under section 362(d)(4)
as to that property in any prior bankruptcy case for a period of two years after entry of
such an order. The debtor in a subsequent case, however, may move the court for relief
from such order based upon changed circumstances or for other good cause shown, after
notice and a hearing.
(20) under subsection (a) of this section, of any act to enforce any lien against or
security interest in real property
(A) if the debtor is ineligible under section 109(g) to be a debtor in a bankruptcy
case, or
(B) if the bankruptcy case was filed in violation of a bankruptcy court order in a
prior bankruptcy case prohibiting the debtor from being a debtor in another
bankruptcy case, or
(C) if the real property was not listed on the debtor's schedules as filed with the
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Chambers of Honorable Lisa Hill Fenning
U.S. Bankruptcy Judge
255 East Temple Street, Suite 1682.
Los Angeles, CA 9012
(213) 894-2553
(2130 894-3731
FAX COVER SHEET
FAX NUMBER TRANSMITTED TO:(202) 456-1605
To:
Sally Katzen, Deputy Assistant to the President
and Deputy Director of NEC
Attn: Shannon Mason, Assistant
From:
I.B. Pierce, Judicial Assistant to Judge Lisa Hill Fenning
Date:
May 19, 1998
DOC
NUMBER OF AGES
Comments on Proposed HR 3150 & S.1301
4
Proposed Corrective Amendments to the Bkcy Code
5
COMMENTS: Judge Fenning would like 15-20 minutes of Ms. Katzen's time on May 20th after
10:30am to discuss the impact on the court and consumer debtor that the pending bankruptcy
legislation will have. Attached is a short position paper and suggested corrective amendments to
the Bankruptcy Code for your review.
Please confirm whether Judge Fenning will be able to see Ms. Katzen so that I may advise her as
quickly as possible.
****
This message is intended only for the use of the individual(s) or entity to whom it is
addressed, and may contain information that is privileged and confidential under federal law.
If the reader of this message is not the intended recipient or the employee or agent responsible
for delivering the message to the intended recipient, you are hereby notified that any
dissemination, distribution or copying of this communication is prohibited. If you have
received this communication in error, please notify the sender immediately by telephone and
return the original message to the sender at the above address via the United States Postal
Service.
* NOT COUNTING COVER SHEET. IF YOU DO NOT RECEIVE ALL PAGES, PLEASE TELEPHONE OS
IMMEDIATELY AT (213) 894-2553.
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COMMENTS ON PROPOSED HR 3150 AND S. 1301 (as of 5/15/98)
Submitted Individually by Bankruptcy Judge Lisa Hill Fenning
The current rush to enact bankruptcy reform legislation appears likely to produce a bill
with far-reaching, unintended consequences, as well as numerous technical glitches. While I
agree that reform is necessary and support many of the specific provisions of S. 1301, some of
the key provisions of the current are likely to cause problems for the courts, impair the ability of
family support creditors among others to collect on their claims, as well as imposing serious
hardship on many debtors who will be denied effective bankruptcy relief. The current dratts are
based upon some flawed assumptions about how the bankruptcy system currently operates, and
about how the proposed changes would work
The text of the bills changes almost daily, as the legislative process accelerates, so it is
difficult to provide detailed commentary on the wording of the various provisions. In this letter,
I address only some of the conceptual and systemic problems likely to cause difficulty if the bills
are enacted in their present general form. The problems fall into four general categories:
1.
SECURED AND PRIORITY CREDITORS - ESPECIALLY FAMILY SUPPORT
CLAIMANTS - WILL EFFECTIVELY LOSE THEIR PRIORITY STATUS.
Nondischargeability of credit card debt will compete for the same
post-petition dollars available for payment.
Debtors will be far less likely to obtain any discharge.
On the surface, HR 3150 and S. 1301 do not expressly alter the statutory priority
requirements set forth in 11 U.S.C. § 507 which give payment priority to family support, tax, and
student loan debts, by contrast to general unsecured creditors. These statutory priorities have
long been embodied in bankruptcy and state collection laws as a matter of public policy. The
proposed bills, however, will significantly interfere de facto with the ability of such creditors to
obtain payment from the debtor's available post-petition income. This results from two major
aspects of the proposed bills; together they will make it much harder for debtors to discharge
general unsecured debt by either completing Chapter 13 plans or qualifying for a Chapter 7
discharge.
First, both bills will make nondischargeable significant portions of commonly
occurring credit card debt - that incurred over time by debtors living consistently
somewhat beyond their means - as opposed to limiting nondischargeability to
intentionally wrongful conduct.
Second, the specifics of the "means-testing" provisions, coupled with minimum
unsecured payment amounts and a lengthening of Chapter 13 plans from three
years to five, will simultaneously make it harder to confirm a feasible plan, and to
complete the repayments over such a long time.
By making it more difficult for many debtors to obtain any discharge at all, these bills
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will mean that less of the debtor's post-petition income will be available to pay family support
and other secured and priority creditors. If such a transfer from one type of creditor to another is
intended by the drafters, then the priorities should be expressly reordered to avoid difficult
statutory interpretation problems for the courts.
Currently, Chapter 13 plans may use all of the debtor's disposable income to repay
mortgage and support arrearages, and can confirm a three-year plan even if no funds are available
to pay unsecured creditors. These so-called "zero percent" plans are common, and genuinely
appear to represent the debtor's best efforts in many cases. Indeed, the question is often whether
the budgets are too lean in a desperate effort to save the house, not whether the debtors are
padding their expenses for an extravagant lifestyle. In California, the housing costs are so high
that many debtors are paying an unusually high percentage of their income for housing,
especially if their income has dropped due TO downsizing efforts over the past few years (as has
happened for aerospace or financial industry workers who have been unable to find new
employment at the same income level). Selling their homes to reduce living expenses has not
been an option for most of our debtors during the past six years, because most of them have
owed more on their homes than the current value, due to the precipitous drop in regional real
estate values. Under HR 3150's formula, these debtors would be required to pay at least $50
monthly to general unsecured creditors, litigate the dischargeability of credit card debt
accumulated during a period of unemployment, and stretch out their mortgage arrearage for
whatever period is required to pay it, in light of the mandatory unsecured creditor payments.
They will still face the balance of nondischargeable debt at the end of their plan.
Moreover, under the caselaw in some circuits, including the Ninth, holders of
nondischargeable debts have the right to pursue a Chapter 13 debtor's current income, thereby
disrupting any payment plan. See In re Pacana, 125 B. R 19 (9th Cir. BAP 1991) (child
support creditor holding nondischargeable debt is not barred by the automatic stay from
enforcing state law wage garnishments against Chapter 13 debtor's post-petition income).
Currently, as a practical matter, if the nondischargeable support debt is provided for in full for
payment through the Chapter 13 plan, the child support creditors do not object to Chapter 13
plans over a three-year maximum period By contrast, support creditors are unlikely to be
willing to wait for five years under the proposed legislation while part of the debtor's income is
diverted to payment of unsecured debts or nondischargeable credit card debt rather than being
devoted to child support payments. Moreover, under this caselaw, nondischargeable credit card
debt could also be collected by state law remedies, unprotected by the automatic stay. If Chapter
13 thereby becomes ineffective for support debtors, then they are likely to lose their houses and
cars duc to inability to cure arrearage amounts through Chapter 13 plans.
Other likely consequences of the proposed changes relating to stricter "means-testing"
under the proposed, complex formulas are the following:
Secured creditors will have to wait five to seven years for full repayment of their
arrearages, instead of the standard three years under current law.
The expansion of nondischargeable debt categories in Chapter 13 cases effectively
eliminates the "superdischarge" that was intended to encourage filings under
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Chapter 13, and means that more claimants will be seeking payment out of the
debtor's post-petition income, in competition with support and tax priority
creditors.
Significantly increased dischargeability litigation in Chapter 13 will increase
attorney fees and administrative priority claims, and delay confirmation of plans,
thereby delaying payment to secured and priority creditors.
The requirement of mandatory minimum payments to general unsecured creditors
in Chapter 13 will force longer plans, stretching out payments of arrearages on
home mortgages and cars, and diluting and delaying payments to priority tax and
family support creditors.
Most debtors do not have sufficient job stability and longevity to sustain a five-
year plan, based upon their job histories coming into Chapter 13, thus
substantially increasing the probability that the plan will fail. Since the bill
precludes any other bankruptcy relief, debtors are likely to lose their houses and,
because of the lack of a discharge of their general unsecured debt, be unable to
make support payments.
Strongly preferable alternatives to the HR 3150 approach:
Preserve Chapter 13 "superdischarge," subject to a stricter "good faith"
standard to restrict confirmation of Chapter 13 plans where minimal or no
payments are proposed for debts that would be nondischargeable in a
Chapter 7 case.
Amend 11 U.S.C. § 707(b) simply by allowing creditors to bring motions
under the current, or slightly clarified standards, and allow courts to decide
such motions on an individualized, "totality of the circumstances" basis.
Crucial modifications if the HR 3150 approach is used:
Modify HR 3150 to clarify that the "means test" properly accounts for
payment of all secured debt arrearages and Chapter 13 administrative
expenses in evaluating whether unsecured creditors would benefit from
forcing the debtor into Chapter 13.
Modify HR 3150 to eliminate the $50 minimum payment to unsecured
creditors, if secured or priority debt require all disposable income for
repayment to be achieved in a three-year period
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2.
THE REQUIREMENTS FOR FINANCIAL AND TAX RETURN INFORMATION REQUIRE SIGNIFICANT
REVISION. IN THEIR PRESENT FORM, THEY WILL LIKELY CAUSE:
UNWARRANTED DISMISSALS OF CASES
UNDUE INVASION DEBTORS' PRIVACY
EXPOSURE OF DEBTORS TO IDENTITY THEFT FRAUD
ADMINISTRATIVE PROBLEMS DUE TO DOCUMENTS BEING FILED WITH
INAPPROPRIATE ENTITIES
Debtors should be required to provide case trustees and their creditors, with all necessary
information about their financial condition for the processing of their cases. For example, the it
is already the practice in the Central District of California to required filing of all tax returns as a
condition of confirmation of Chapter 13 plans. The specific provisions of Sections 406 and 407
of HR 3150, however, need to be revised for the following reasons:
Debtors frequently are disorganized in their record-keeping, and may not have
three years' worth of tax returns readily available. The 45-day deadline before
"automatic dismissal" is unreasonably short: in fact, it usually takes more than 45
days to receive copies of missing Tax returns from the IRS
Filing the detailed financial information required by these sections with either the
US Trustee or the court raises concerns of invasion of privacy concerns especially
in light of expanded electronic access to court files. Of particular concern is the
requirement for filing of a pay stub and tax returns. Under current tax law, parties
cannot routinely obtain tax returns in civil litigation in discovery, absent a
showing of good cause, and even if obtained in discovery, returns would not be
routinely filed with the court in civil litigation.
Public availability of copies of pay stubs, tax returns, exact account numbers and
similar information will give rise to serious identity theft fraud. While the
trustees should (and currently do) receive and review this information, it should
NOT be part of the public record.
Requiring all of these documents to be filed will cause record-keeping and record-
storing problems for both the U.S. Trustee and the clerk's offices.
The proposed "automatic" dismissal requirement cannot be implemented: the
documentation is required to be filed with the U.S. Trustee and is therefore not
part of the court record from which compliance could be routinely determined.
If, despite these serious concerns, these public filing requirements are to be implemented,
an alternative to "antomatic" dismissal would be:
A noticed motion or declaration of noncompliance from the case trustee, based upon a
review of the debtor's file, would appear to be a more appropriate mechanism to implement this
provision, which would work best if the documents were required to be furnished to the case
trustee, and not to the U.S. Trustee.
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PROPOSED CORRECTIVE AMENDMENTS TO THE BANKRUPTCY CODE
Submitted individually by Bankruptcy Judge Lisa Hill Fenning
INTRODUCTION: PREVENTING BANKRUPTCY ABUSE AND SERIAL FILINGS
The Central District of California has been plagued in recent years by thousands of bankruptcy
petitions filed solely to delay residential evictions or foreclosures for a few weeks or months, without any
intention to complete the bankruptcy case.
For purposes of this analysis, a bankruptcy case is considered to be "abusive" if is was
filed to delay or defraud creditors, without any intention of complying with the
requirements to obtain a discharge or complete a plan.
This definition of "abuse" thus differs sharply from another usage that has recently become
relatively commonplace: lenders and others debating consumer bankruptcy policy sometimes use the
term "abusive bankruptcies" to refer to cases in which debtors seek to discharge substantial credit card
and other unsecured debt that possibly could be partially repaid via Chapter 13. By contrast to those
arguments over the appropriate scope of consumer discharges, the cases of concern here do not seek
any discharge, because they are never intended to be completed. All they seek is the automatic stay for
purposes of delay.
Local remedies have to some extent ameliorated the adverse impact of these kinds of abusive
filings in recent years. However, the ultimate answer is to change 11 U.S.C. § 362 in two ways:
to stop the automatic stay from going into effect in subsequent cases affecting the
particular property filed after a bankruptcy judge has issued an "in rem" order based
upon evidence of abuse
to except from the automatic stay the enforcement of state court judgments for eviction
from residential tenancies, to permit landlords to recover possession of the premises
without having to obtain bankrupicy orders for relief from the automatic stay
Both of these changes would prevent relitigation of issues already determined by court order. Neither
would impair a debior's ability to obtain a discharge of debt. Both would reinforce the principle that
the availability of bankruptcy relief should not constitute an open invitation to undermine the finality of
prior orders of bankruptcy courts or state courts.
I.
Preventing serial filings to prevent foreclosures: "In Rem" Amendments to 11 U.S.C. §362
Under proposed § 362(d)(4), the bankruptcy court would be authorized to issue "in rem" relief
based upon a showing of intentional fraud. The resulting in rem order would bind all parties with notice
and opportunity to be heard. If recorded, it would also constitute binding notice to third parties.
Moreover, the filing of future bankruptcies involving the property would not give rise to an automatic
stay if an in rem order has been entered. The debtor in the subsequent case or any other party to that
case, however, would have the right to seek the imposition of a stay for cause shown.
The purpose of this proposal is essentially similar to that of the repeat filing provisions of H.R.
3150 (section 121) and S. 1301 (section 303), but would improve upon those provisions in several ways.
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First, it would withhold automatic stay protections in a second filing, if the bankruptcy court has
determined that abusive conduct occurred in the prior case. By relying upon an actual determination by
the court, it avoids unduly burdensome or complicated presumptions while providing direction to the
court as to the kinds of conduct that would justify the "in rem" bar. Second, it would assure access to the
court for an initial determination of the propriety of the prior filing, as well as an opportunity to show
that the new filing should not be tainted by the misconduct in the prior case. Third, it is consistent with
the limitations for eligibility for relief set forth in 11 U.S.C. § 109(g).
Other recurring fact patterns involved in abusive bankruptcies are the omission of the real
property from the schedules, or the post-petition transfer of the interest into the estate after the schedules
were filed. Full and accurate disclosure of the debtor's assets is required by 11 U.S.C. § 521 as part of
the basic duries owed by the debtors for the privilege of the automatic stay and potential discharge of
debts. Debtors filing in good faith would have no reason to omit real property from their schedules. The
automatic stay should only protect real property disclosed to the court as an asset of the estate; it should
not protect concealed property or property transferred into the estate post-petition without court
authorization. Section 362 should be amended to except unscheduled real property from the scope of
the automatic stay.
Under proposed § 362(b)(19), the filing of a bankruptcy petition would not operate as a stay of
any foreclosure proceeding affecting property governed by the entry of an in rem order under § 362(d)(4)
in a prior bankruptcy case for a period of two years, which should be ample time to complete any
foreclosure proceedings. Proposed new text is italicized.
Proposed amendment to 11 U.S.C. § 362(d)
(d) On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay -
***
(4) with respect to a stay of an act against real property under subsection (a) of
this section, by a creditor whose claim is secured by an interest in such real estate, if the
court finds that the filing of the hankruptcy petition was part of a scheme to delay,
hinder and defraud creditors that involved either
(A) transfer of all or pan ownership of, or other interest in, the real property
without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting the real property; or
(C) omission of the real property from the schedules filed with the court.
If recorded in compliance with applicable state laws governing notices of interests or
liens in real property, an order entered pursuant to this subsection shall be binding in
any other bankruptcy case purporting to affect the real property filed within two years,
except that a debtor in a subsequent case may move for relief from such order based
upon changed circumstances or for good cause shown, after notice and a hearing.
Proposed amendment to 11 U.S.C. § 362(b)
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(b) The filing of the petition under section 301, 302, or 303 of this title or of an
application under section S(a)(3) of the Securities Investor Protection Act of 1970, does not
operate as a stay - -
(19) under subsection (a) of this section, of any act to enforce any lien against or
security interest in real property following the entry of on order under section 362(d)(4)
as to that property in any prior bankruptcy case for a period of two years after entry of
such an order. The debtor in a subsequent case, however, may move the court for relief
from such order based upon changed circumstances or for other good cause shown, after
notice and Q hearing.
(20) under subsection (a) of this section, of any OCL 10 enforce any Hen against or
security interest in real property
(A) if the debtor is ineligible under section 109(g) to be a debtor in a bankruptcy
case, or
(B) if the bankruptcy case was filed in violation of a bankruptcy court order in a
prior hankruptcy care prohibiting the debtor from being a debtor in another
bankruptcy case, or
(C) if the real property was not listed on the debtor's schedules as filed with the
court, provided that the debtor may move the court for protection of real
property that is proposed to be added 10 the schedules, based upon a showing of
good cause as to why the property was not originally included in the schedules.
II.
Preventing serial filings by ineligible debtors: Proposed amendment to 11 U.S.C. § 109(g)
Ineligible debtors should not be rewarded for filing another bankruptcy case. A parallel
amendment to § 109(g) would clarify that the stay does not arise for an ineligible filing. The proposed
new language is italicized:
[add at end of subsection, following subparagraph (2)]
During the 180-day period, the automatic stay shall not arise in any new case filed by or
against a debtor who is ineligible to be a debtor under this subsection.
III.
Reducing the number of consumer bankruptcy cases filed solely to delay residential
evictions: Proposed amendment to 11 U.S.C. § 362(b)
The most recent study in the Central District of California shows that approximately 20% of the
motions for relief from stay involve requests to complete residential evictions following an unlawful
detainer judgment in state court. The court hears thousands of such motions each year. In effect, the
bankruptcy courts are being asked to second-guess the state courts that have already heard and decided
the matter, and have entered judgment awarding possession of the residential unit to the landlord.
Conservative estimates indicate that cases filed solely to stop eviction constitute about 2% of the
117,000 cases filed in the Central District last year based upon the court's most recent figures. If the
incentive to delay eviction were eliminated, then presumably at least 2,500 fewer cases would be filed in
the district, thereby eliminating 20% of the relief from stay motions. It is important to note that these
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cases are usually not completed after the relief from stay motion is decided. In most bankruptcy cases
filed to stop an eviction, the debtors fail to file their schedules or fail to appear at the first meeting of
creditors, causing their bankruptcy cases to be dismissed for lack of prosecution.
No bankruptcy purpose is served by requiring landlords to seek relief from the automatic stay to
complete the eviction process. If the tenants have a defense to eviction, or if entitlement to subsidized
public housing is at issue, the debtor/tenants' remedy should be to make their case in the state court
proceeding, or obtain a stay of that proceeding before judgment by filing a bankruptcy petition before the
state court trial. Once the state court judgment has been entered, principles of state/federal comity
preclude the bankruptcy courts from acting as appellate courts reviewing the judgment. The only
purpose in filing a bankruptcy case after an unlawful detainer judgment has already been entered is to
delay eviction without just cause. The solution is simple: the stay should not bar eviction pursuant to a
prepetition judgment.
The provisions of H.R. 3150 and S. 1301 address this issue as well.
Proposed amendment to 11 U.S.C. § 362(b):
[add new text]
(19) under subsection (a)(2) of this section, of the enforcement of a
judgment, other than a money judgment, obtained in an unlawful
detainer action or proceeding to conduct an eviction or otherwise obtain
possession of residential property;
IV.
Preventing bankruptcy fraud by requiring identification: Proposed amendment to 11
U.S.C. § 109
Several of the pending proposals include recommendations for creation of a national bankruptcy
registry to maintain unified records of the individuals and entities who have filed bankruptcy cases.
Such a registry serves many informational purposes, but it also is a key tool in the effort to prevent
bankruptcy abuse and serial filings. Such a registry would include the debtor's name, social security
number or other taxpayer identification number, as well as address and other identifying information.
The court system is currently implementing a prototype of such a registry.
A national registry, however, will be useful only if it is reliable. It will be reliable only if the
identity of the debtors is verified. The identification information currently being provided to the
bankruptcy courts, however, is not reliable, and has not been verified. For example, in a recent study, the
United States Attorneys Office in the Central District of California reported that it receives hundreds of
complaints each year about bankruptcy petitions containing forged signatures, phony social security
numbers, and other false identifying information. Similarly, efforts to bar refiling of cases by ineligible
debtors will only be effective if the ineligilibity is determinable at the petition window.
The answer is to require debtors to present identification sufficient to verify the essential
information on the face of their petition, and permit the bankruptcy courts to have access to the Social
Security database to verify the social security numbers of filers. Such identification requirements are
used in an increasing number of commercial transactions, so debtors should not find them unduly
intrusive, but rather typical and commonplace.
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Proposed amendment to 11 U.S.C. § 109:
[add new text at end]
(h)
The petition must be accompanied by proof of identity (including
all names used by the debtor within the past six years), address, social
security number, and employer's tax identification number (if any), in a
form acceptable to the clerk. The clerk may refuse to accept a petition
for filing if such proof is not provided, unless otherwise ordered by the
court.
A corollary amendment to the Social Security Act should authorize the bankruptcy clerks to have
online access to the social security database to verify the information provided by the debtor.
COMMENTS ON PROPOSED HR 3150 AND S. 1301 (as of 5/19/98)
Submitted Individually by Bankruptcy Judge Lisa Hill Fenning
Unless significant revisions are made, the current rush to enact bankruptcy reform
legislation may produce a bill with far-reaching, unintended consequences, as well as numerous
technical glitches. I agree that reform is necessary and do not object to most of the provisions of
S. 1301, but H.R. 3150 is seriously flawed, particularly with respect to the complex "means-
testing" formula to be applied in determining eligibility for Chapter 7 relief, and confirmability
for Chapter 13 plans. In particular, H.R. 3150's inconsistent and incomplete formulas may mean
that debtors are found ineligible for Chapter 7, but lack sufficient income, in light of their
secured debt, to confirm a Chapter 13 plan. Such debtors would be entirely denied access to a
bankruptcy discharge. Other key provisions of the current bills are likely to invade debtors'
privacy, impose arduous administrative burdens on the courts and trustees without much benefit
to any creditors, and impair the ability of family support creditors among others to collect on
their claims. The current drafts are based upon some flawed assumptions about how the
bankruptcy system currently operates, and about how the proposed changes would work.
The text of the bills changes almost daily, as the legislative process accelerates, so it is
difficult to provide detailed commentary on the wording of the various provisions. In this letter,
I address only some of the conceptual and systemic problems likely to cause difficulty if the bills
are enacted in their present general form. The problems fall into four general categories:
1.
H.R. 3150's formulas for eligibility will result in some debtors barred from a
discharge under either Chapter 7 or Chapter 13.
It is difficult to assess exactly how the formulas set forth in Sections 101 and 102 of H.R.
3150 will work in the real world. Neither formula takes into account Chapter 13 trustee fees or
attorney fees and administrative expenses in a Chapter 13. Moreover, it appears that the formula
in Section 101 governing eligibility for Chapter 7 relief omits accrued arrearages, foreclosure
fees, attorney fees and similar additional elements of the secured amount due, and does not
provide for interest during the repayment period. Conversely, Section 102 bases the monthly
expense calculation of proposed section 101 (39A)(A) on a national formula without reference to
the actual monthly obligations of a particular debtor for secured debt, while omitting from (B)
any amounts attributable for current monthly mortgage and car payments that are not going
through the plan. These poorly drafted and overly detailed provisions will undoubtedly produce
costly and unnecessary litigation, and will deny any bankruptcy discharge to those unfortunate
debtors falling between the two standards. These provisions would be a nightmare to implement.
By contrast, S. 1301 addresses this issue by an appropriate method: modifying Section
707(b), which already embodies a "means test." The proposed standard is workable, requiring
debtors who can do so, to repay 20% of their unsecured debt via a Chapter 13 plan under the
relevant legal and cost of living standards. Judges can evaluate each case in light of the
strengthened standard, on an appropriate case-by-case analysis. No debtors should end up
without a remedy under this approach.
Finally, under both bills, the debtors' attorneys bear a significant risk if they misanalyze a
case and it is found to be ineligible for Chapter 7 relief: they will have to reimburse all attorney
fees for the successful movant. Asking debtors' attorneys to guarantee the outcome of any case
is unfair and unreasonable. Already nearly 40% of the debtors in the Central District of
California are unrepresented. The additional costs and risks under these draconian mandatory
sanction provisions will discourage attorneys from representing consumer debtors - a result that
is not in the best interests of the bankruptcy system. The sanctions should be discretionary;
judges will impose them if true abuse is found.
2.
Secured and priority creditors - especially family support claimants - will
effectively lose their priority status.
Nondischargeability of credit card debt will compete for the same
post-petition dollars available for payment.
Debtors will be far less likely to obtain any discharge.
On the surface, HR 3150 and S. 1301 do not expressly alter the statutory priority
requirements set forth in 11 U.S.C. $ 507 which give payment priority to family support, tax, and
student loan debts, by contrast to general unsecured creditors. These statutory priorities have
long been embodied in bankruptcy and state collection laws as a matter of public policy. The
proposed bills, however, will significantly interfere de facto with the ability of such creditors to
obtain payment from the debtor's available post-petition income. This results from two major
aspects of the proposed bills; together they will make it much harder for debtors to discharge
general unsecured debt by either completing Chapter 13 plans or qualifying for a Chapter 7
discharge.
First, many debts will become nondischargeable in Chapter 13 cases as well as
Chapter 7 cases. These creditors would have the same right to compete for
payment out of debtors' post-petition income as support creditors, thereby diluting
the effectiveness of the priority.
Second, imposing a minimum unsecured payment amount as H.R. 3150 does,
means that a Chapter 13 plan cannot commit all of the available income to prompt
payment of secured and priority creditors. The limited amount of post-petition net
monthly income will have to be shared with nonpriority unsecured creditors.
Lengthening of Chapter 13 plans from three years to five will make it harder to
complete a Chapter 13 plan, as many debtors lack a sufficiently stable job and
income to maintain repayment plans for such a long period. More such cases will
be dismissed. If the unsecured debt is thus not discharged, the support creditors
will have to compete post-bankruptcy with such creditors for repayment.
Finally, significantly increased dischargeability litigation in Chapter 13 will
increase attorney fees and administrative priority claims, and delay confirmation
of plans, thereby delaying payment to secured and priority creditors.
This inability to complete a case and obtain a discharge is exacerbated by the formula
problems created by H.R.3150, which make it more difficult for many debtors to obtain any
discharge at all. Thus, both of these bills, but especially H.R. 3150, will mean that less of the
debtor's post-petition income will be available to pay family support obligations. If such a
transfer from one type of creditor to another is intended by the drafters, then the priorities should
be expressly reordered to avoid difficult statutory interpretation problems for the courts.
Examples: Currently, Chapter 13 plans may use all of the debtor's disposable income to
repay mortgage and support arrearages. and can confirm a three-year plan even if no funds are
available to pay unsecured creditors. These so-called "zero percent" plans are common, and
genuinely appear to represent the debtor's best efforts in many cases. Indeed, the question is
often whether the budgets are too lean in a desperate effort to save the house, not whether the
debtors are padding their expenses for an extravagant lifestyle. In California, the housing costs
are so high that many debtors are paying an unusually high percentage of their income for
housing, especially if their income has dropped due to downsizing efforts over the past few years
(as has happened for aerospace or financial industry workers who have been unable to find new
employment at the same income level). Selling their homes to reduce living expenses has not
been an option for most of our debtors during the past six years, because most of them have
owed more on their homes than the current value, due to the precipitous drop in regional real
estate values. Under HR 3150's formula, these debtors would be required to pay at least $50
monthly to general unsecured creditors, litigate the dischargeability of credit card debt
accumulated during a period of unemployment, and stretch out their mortgage arrearage for
whatever period is required to pay it, in light of the mandatory unsecured creditor payments.
They will still face the balance of nondischargeable debt at the end of their plan.
Moreover, under the case law in some circuits, holders of nondischargeable debts may
have the right to pursue a Chapter 13 debtor's current income, thereby disrupting any payment
plan. See In re Pacana, 125 B. R. 19 (9th Cir. BAP 1991) (child support creditor holding
nondischargeable debt is not barred by the automatic stay from enforcing state law wage
garnishments against Chapter 13 debtor's post-petition income). Currently, as a practical matter,
if the nondischargeable support debt is provided for in full for payment through the Chapter 13
plan, the child support creditors do not object to Chapter 13 plans over a three-year maximum
period. By contrast, support creditors are unlikely to be willing to wait for five years under the
proposed legislation while part of the debtor's income is diverted to payment of unsecured debts
or nondischargeable credit card debt rather than being devoted to child support payments.
Moreover, under this caselaw, nondischargeable credit card debt could also be collected by state
law remedies, unprotected by the automatic stay. If Chapter 13 thereby becomes ineffective for
support debtors, then they are likely to lose their houses and cars due to inability to cure
arrearage amounts through Chapter 13 plans.
Strongly preferable alternatives to the HR 3150 approach:
Preserve Chapter 13 "superdischarge," subject to a stricter "good faith"
standard to restrict confirmation of Chapter 13 plans where minimal or no
payments are proposed for debts that would be nondischargeable in a
Chapter 7 case.
Adopt the S. 1301 approach to amend 11 U.S.C. § 707(b) simply by
allowing creditors to bring motions under the current, or slightly clarified
standards, and allow courts to decide such motions on an individualized,
"totality of the circumstances" basis.
Crucial modifications if the HR 3150 approach is used:
Modify HR 3150 to clarify that the "means test" properly accounts for
payment of all secured debt arrearages and Chapter 13 administrative
expenses in evaluating whether unsecured creditors would benefit from
forcing the debtor into Chapter 13.
Modify HR 3150 to eliminate the $50 minimum payment to unsecured
creditors, if secured or priority debt require all disposable income for
repayment to be achieved in a three-year period.
3.
The requirements in both bills for filing financial and tax return information require
significant revision. In their present form, they will likely cause:
unwarranted dismissals of cases
undue invasion debtors' privacy
exposure of debtors to identity theft fraud
administrative problems due to documents being filed with inappropriate
entities
Debtors should be required to provide case trustees and their creditors, with all necessary
information about their financial condition for the processing of their cases. For example, the it
is already the practice in the Central District of California to required filing of all tax returns as a
condition of confirmation of Chapter 13 plans. The specific provisions of Sections 406 and 407
of HR 3150, however, need to be revised for the following reasons:
Debtors frequently are disorganized in their record-keeping, and may not have
three years' worth of tax returns readily available. The 45-day deadline before
"automatic dismissal" is unreasonably short: in fact, it usually takes more than 45
days to receive copies of missing tax returns from the IRS
Filing the detailed financial information required by these sections with either the
US Trustee or the court raises concerns of invasion of privacy concerns especially
in light of expanded electronic access to court files. Of particular concern is the
requirement for filing of a pay stub and tax returns. Under current tax law, parties
cannot routinely obtain tax returns in civil litigation in discovery, absent a
showing of good cause, and even if obtained in discovery, returns would not be
routinely filed with the court in civil litigation.
Public availability of copies of pay stubs, tax returns, exact account numbers and
similar information will give rise to serious identity theft fraud. While the
trustees should (and currently do) receive and review this information, it should
NOT be part of the public record.
Requiring all of these documents to be filed will cause record-keeping and record-
storing problems for both the U.S. Trustee and the clerk's offices.
The proposed "automatic" dismissal requirement cannot be implemented: the
documentation is required to be filed with the U.S. Trustee and is therefore not
part of the court record from which compliance could be routinely determined.
By requiring the tax returns to be filed as part of the public court record, S.1301 in some ways
creates more risks of identity theft and administrative problems than H.R. 3150. The court files
are by definition public records. Moreover, they will be available in electronic form in the near
future, searchable and subject to being copied via the Internet.
Alternative to public filing:
Require the pay stubs and tax returns to be filed with the case trustee, available upon
request by any party in interest in the case.
Alternative to automatic dismissal:
The case trustee could follow current procedures and submit a report of the
meeting or confirmation hearing indicating that the debtor has failed to comply with the
reporting requirements. In most districts, a report of nonappearance or noncompliance
results in the issuance of a dismissal order. It should be the action of the trustee that
triggers the dismissal. Alternatively, a noticed motion or declaration of noncompliance
from the case trustee could be the vehicle to prompt dismissal. Either way, this proposal
can only be readily implemented if the documents were required to be furnished to the
case trustee, and not to the court or the U.S. Trustee.
4.
Serial filings can only be effectively prevented if debtors are required to provide
adequate identification and proof of social security or tax numbers as a condition of
filing.
Both bills seek to prevent bankruptcy abuse in the form of serial filings. The measures
proposed will give the courts many of the tools needed to address these issues effectively.
However, all of these effort will fail if debtors are not required to provide identification as a
condition for filing a petition.
The court system is currently implementing a national bankruptcy registry or index to maintain
unified records of the individuals and entities who have filed bankruptcy cases. Such a registry serves
many informational purposes, but it also is a key tool in the effort to prevent bankruptcy abuse and serial
filings. Such a registry would include the debtor's name, social security number or other taxpayer
identification number, as well as address and other identifying information.
A national registry, however, will be useful only if it is reliable. It will be reliable only if the
identity of the debtors is verified. The identification information currently being provided to the
bankruptcy courts, however, is not reliable, and has not been verified. For example, in a recent study, the
United States Attorneys Office in the Central District of California reported that it receives hundreds of
complaints each year about bankruptcy petitions containing forged signatures, phony social security
numbers, and other false identifying information. Similarly, efforts to bar refiling of cases by ineligible
debtors will only be effective if the ineligilibity is determinable at the petition window.
The answer is to require debtors to present identification sufficient to verify the essential
information on the face of their petition, and permit the bankruptcy courts to have access to the Social
Security database to verify the social security numbers of filers. Such identification requirements are
used in an increasing number of commercial transactions, so debtors should not find them unduly
intrusive, but rather typical and commonplace.
Proposed amendment to 11 U.S.C. § 109:
[add new text at end]
(h)
The petition must be accompanied by proof of identity (including
all names used by the debtor within the past six years), address, social
security number, and employer's tax identification number (if any), in a
form acceptable to the clerk. The clerk may refuse to accept a petition
for filing if such proof is not provided, unless otherwise ordered by the
court.
Only with such verification will a system intended to limit the number of bankruptcy filings by
individuals or entities be truly effective.
PROPOSED CORRECTIVE AMENDMENTS TO THE BANKRUPTCY CODE
Submitted individually by Bankruptcy Judge Lisa Hill Fenning
INTRODUCTION:
PREVENTING BANKRUPTCY ABUSE AND SERIAL FILINGS
The Central District of California has been plagued in recent years by thousands of bankruptcy
petitions filed solely to delay residential evictions or foreclosures for a few weeks or months, without any
intention to complete the bankruptcy case.
For purposes of this analysis, a bankruptcy case is considered to be "abusive" if it was
filed to delay or defraud creditors, without any intention of complying with the
requirements to obtain a discharge or complete a plan.
This definition of "abuse" thus differs sharply from another usage that has recently become
relatively commonplace: lenders and others debating consumer bankruptcy policy sometimes use the
term "abusive bankruptcies" to refer to cases in which debtors seek to discharge substantial credit card
and other unsecured debt that possibly could be partially repaid via Chapter 13. By contrast to those
arguments over the appropriate scope of consumer discharges, the cases of concern here do not seek
any discharge, because they are never intended to be completed. All they seek is the automatic stay for
purposes of delay.
Local remedies have to some extent ameliorated the adverse impact of these kinds of abusive
filings in recent years. However. the ultimate answer is to change 11 U.S.C. § 362 in two ways:
to stop the automatic stay from going into effect in subsequent cases affecting the
particular property filed after a bankruptcy judge has issued an "in rem" order based
upon evidence of abuse
to except from the automatic stay the enforcement of state court judgments for eviction
from residential tenancies, to permit landlords to recover possession of the premises
without having to obtain bankruptcy orders for relief from the automatic stay
Both of these changes would prevent relitigation of issues already determined by court order. Neither
would impair a debtor's ability to obtain a discharge of debt. Both would reinforce the principle that
the availability of bankruptcy relief should not constitute an open invitation to undermine the finality of
prior orders of bankruptcy courts or state courts.
I.
Preventing serial filings to prevent foreclosures: "In Rem" Amendments to 11 U.S.C. §362
Under proposed § 362(d)(4). the bankruptcy court would be authorized to issue "in rem" relief
based upon a showing of intentional fraud. The resulting in rem order would bind all parties with notice
and opportunity to be heard. If recorded, it would also constitute binding notice to third parties.
Moreover, the filing of future bankruptcies involving the property would not give rise to an automatic
stay if an in rem order has been entered. The debtor in the subsequent case or any other party to that
case, however, would have the right to seek the imposition of a stay for cause shown.
The purpose of this proposal is essentially similar to that of the repeat filing provisions of H.R.
3150 (section 121) and S. 1301 (section 303), but would improve upon those provisions in several ways.
First, it would withhold automatic stay protections in a second filing, if the bankruptcy court has
determined that abusive conduct occurred in the prior case. By relying upon an actual determination by
the court, it avoids unduly burdensome or complicated presumptions while providing direction to the
court as to the kinds of conduct that would justify the "in rem" bar. Second, it would assure access to the
court for an initial determination of the propriety of the prior filing, as well as an opportunity to show
that the new filing should not be tainted by the misconduct in the prior case. Third, it is consistent with
the limitations for eligibility for relief set forth in 11 U.S.C. § 109(g).
Other recurring fact patterns involved in abusive bankruptcies are the omission of the real
property from the schedules, or the post-petition transfer of the interest into the estate after the schedules
were filed. Full and accurate disclosure of the debtor's assets is required by 11 U.S.C. § 521 as part of
the basic duties owed by the debtors for the privilege of the automatic stay and potential discharge of
debts. Debtors filing in good faith would have no reason to omit real property from their schedules. The
automatic stay should only protect real property disclosed to the court as an asset of the estate; it should
not protect concealed property or property transferred into the estate post-petition without court
authorization. Section 362 should be amended to except unscheduled real property from the scope of
the automatic stay.
Under proposed § 362(b)(19), the filing of a bankruptcy petition would not operate as a stay of
any foreclosure proceeding affecting property governed by the entry of an in rem order under § 362(d)(4)
in a prior bankruptcy case for a period of two years, which should be ample time to complete any
foreclosure proceedings. Proposed new text is italicized.
Proposed amendment to 11 U.S.C. § 362(d)
(d) On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay -
(4) with respect to a stay of an act against real property under subsection (a) of
this section, by a creditor whose claim is secured by an interest in such real estate, if the
court finds that the filing of the bankruptcy petition was part of a scheme to delay,
hinder and defraud creditors that involved either
(A) transfer of all or part ownership of, or other interest in, the real property
without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting the real property; or
(C) omission of the real property from the schedules filed with the court.
If recorded in compliance with applicable state laws governing notices of interests or
liens in real property, an order entered pursuant to this subsection shall be binding in
any other bankruptcy case purporting to affect the real property filed within two years,
except that a debtor in a subsequent case may move for relief from such order based
upon changed circumstances or for good cause shown, after notice and a hearing.
Proposed amendment to 11 U.S.C. § 362(b)
(b) The filing of the petition under section 301, 302, or 303 of this title or of an
application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not
operate as a stay -
(19) under subsection (a) of this section, of any act to enforce any lien against or
security interest in real property following the entry of an order under section 362(d)(4)
as to that property in any prior bankruptcy case for a period of two years after entry. of
such an order. The debtor in a subsequent case, however, may move the court for relief
from such order based upon changed circumstances or for other good cause shown, after
notice and a hearing.
(20) under subsection (a) of this section, of any act to enforce any lien against or
security interest in real property
(A) if the debtor is ineligible under section 109(g) to be a debtor in a bankruptcy
case, or
(B) if the bankruptcy case was filed in violation of a bankruptcy court order in a
prior bankruptcy case prohibiting the debtor from being a debtor in another
bankruptcy case, or
(C) if the real property was not listed on the debtor's schedules as filed with the
court, provided that the debtor may move the court for protection of real
property that is proposed to be added to the schedules, based upon a showing of
good cause as to why the property was not originally included in the schedules.
II.
Preventing serial filings by ineligible debtors: Proposed amendment to 11 U.S.C. § 109(g)
Ineligible debtors should not be rewarded for filing another bankruptcy case. A parallel
amendment to § 109(g) would clarify that the stay does not arise for an ineligible filing. The proposed
new language is italicized:
[add at end of subsection, following subparagraph (2)]
During the 180-day period, the automatic stay shall not arise in any new case filed by or
against a debtor who is ineligible to be a debtor under this subsection.
III.
Reducing the number of consumer bankruptcy cases filed solely to delay residential
evictions: Proposed amendment to 11 U.S.C. § 362(b)
The most recent study in the Central District of California shows that approximately 20% of the
motions for relief from stay involve requests to complete residential evictions following an unlawful
detainer judgment in state court. The court hears thousands of such motions each year. In effect, the
bankruptcy courts are being asked to second-guess the state courts that have already heard and decided
the matter, and have entered judgment awarding possession of the residential unit to the landlord.
Conservative estimates indicate that cases filed solely to stop eviction constitute about 2% of the
117,000 cases filed in the Central District last year based upon the court's most recent figures. If the
incentive to delay eviction were eliminated, then presumably at least 2,500 fewer cases would be filed in
the district, thereby eliminating 20% of the relief from stay motions. It is important to note that these
cases are usually not completed after the relief from stay motion is decided. In most bankruptcy cases
filed to stop an eviction, the debtors fail to file their schedules or fail to appear at the first meeting of
creditors, causing their bankruptcy cases to be dismissed for lack of prosecution.
No bankruptcy purpose is served by requiring landlords to seek relief from the automatic stay to
complete the eviction process. If the tenants have a defense to eviction, or if entitlement to subsidized
public housing is at issue, the debtor/tenants' remedy should be to make their case in the state court
proceeding, or obtain a stay of that proceeding before judgment by filing a bankruptcy petition before the
state court trial. Once the state court judgment has been entered, principles of state/federal comity
preclude the bankruptcy courts from acting as appellate courts reviewing the judgment. The only
purpose in filing a bankruptcy case after an unlawful detainer judgment has already been entered is to
delay eviction without just cause. The solution is simple: the stay should not bar eviction pursuant to a
prepetition judgment.
The provisions of H.R. 3150 and S. 1301 address this issue as well.
Proposed amendment to 11 U.S.C. § 362(b):
[add new text]
(19)
under subsection (a)(2) of this section, of the enforcement of a
judgment, other than a money judgment, obtained in an unlawful
detainer action or proceeding to conduct an eviction or otherwise obtain
possession of residential property:
IV.
Preventing bankruptcy fraud by requiring identification: Proposed amendment to 11
U.S.C. § 109
Several of the pending proposals include recommendations for creation of a national bankruptcy
registry to maintain unified records of the individuals and entities who have filed bankruptcy cases.
Such a registry serves many informational purposes, but it also is a key tool in the effort to prevent
bankruptcy abuse and serial filings. Such a registry would include the debtor's name, social security
number or other taxpayer identification number, as well as address and other identifying information.
The court system is currently implementing a prototype of such a registry.
A national registry, however, will be useful only if it is reliable. It will be reliable only if the
identity of the debtors is verified. The identification information currently being provided to the
bankruptcy courts, however, is not reliable, and has not been verified. For example, in a recent study, the
United States Attorneys Office in the Central District of California reported that it receives hundreds of
complaints each year about bankruptcy petitions containing forged signatures, phony social security
numbers, and other false identifying information. Similarly, efforts to bar refiling of cases by ineligible
debtors will only be effective if the ineligilibity is determinable at the petition window.
The answer is to require debtors to present identification sufficient to verify the essential
information on the face of their petition, and permit the bankruptcy courts to have access to the Social
Security database to verify the social security numbers of filers. Such identification requirements are
used in an increasing number of commercial transactions, so debtors should not find them unduly
intrusive, but rather typical and commonplace.
Proposed amendment to 11 U.S.C. § 109:
[add new text at end]
(h)
The petition must be accompanied by proof of identity (including
all names used by the debtor within the past six years), address, social
security number, and employer's tax identification number (if any), in a
form acceptable to the clerk. The clerk may refuse to accept a petition
for filing if such proof is not provided, unless otherwise ordered by the
court.
A corollary amendment to the Social Security Act should authorize the bankruptcy clerks to have
online access to the social security database to verify the information provided by the debtor.
002
09/28/98 MON 17:05 FAX 202 224 9516
US SEN JUD CMTE
A Credit Card is Not a Toy, and Bankruptcy is Not Cool.
But With Toys Like "Cool Shoppin' Barbie," How Are Kids To Know?
By U.S. Sen. Dick Durbin
At a time when more Americans than ever before are going into serious credit card debt
and facing financial crisis, one of the world's most recognized toy doll icons, Barbie, is priming
children to go on unlimited shopping sprees with credit cards. Believe it or not, Barbic now has
her very own MasterCard.
Introduced by Mattel and MasterCard International in 1997. "Cool Shoppin' Barbie"
doesn't rollerblade, swim. or hold plastic hands with boyfriend Ken doll. She shops. And
shops. And shops. All on credit. And, with no apparent credit limit, and no spccified A.P.R.,
there's nothing she can't buy. Want a sporty pink convertible? Furnishings for that dream
house? More beauty and fashion accessories? In Cool Shoppin' Barbie's world, she can visit the
boutique ( included as part of the Cool Shoppin' Barbie set) and charge all the neat stuff she
wants. Because in this Barbie financial dream world. it's always - "Credit Approved!"
Designed for children ages three and older, Cool Shoppin' Barbie is equipped with
batteries. a purse, an oversized shopping bag, and, of course. her MasterCard. After the
completion of a sale, the doll's talking cash register thanks Barbie for shopping and says "credit
approved" when her MasterCard is swiped. Barbie's credit never expires. and she can never go
over her credit limit. More importantly. she doesn't have to worry about the monthly bills to
pay off her debts.
I think any American who has ever used a credit card or experienced the financial
hardships of consumer debt would agrec that Cool Shoppin' Barbic's world doesn't come close
to resembling the real world. Mattel officials have claimed that Cool Shoppin' Barbie is
designed to give young Barbie fans a greater scnse of realism as they play shop. However, if
Barbie's financial picture matched that of many Americans she'd more likely be called "Goin"
Bankrupt Barbic."
What's more. Mattel and MasterCard fail to provide Barbie with some of the important
supporting cast associated with real-life credit card financing. If they had. she'd probably be
having a few conversations with "Collection Ken" and be living in fear of a visit from "Repo G.I.
Joe."
The credit card company wouldn't charge Barbie late fees if her payments arrived just
one day late. Or charge her interest on interest, or extract interest on her late fees. Or raise her
stated interest rates. Her credit issuer would not tease her to spend beyond her income with low
introductory rates or "instant cash" checks. No, that sounds too much like the real world, not
Barbie's dream world.
I am concerned that Cool Shoppin' Barbie may leave children with the impression that
credit cards are toys. Barbie is a role model for many children and shouldn't be a symbol for
irresponsible consumerism and an undesirable introduction for them into the consumer culture.
09/28/98 MON 17:05 FAX 202 224 9516
US SEN JUD CMTE
003
What the kids who play with Cool Shoppin' Barbie are not made aware of is that credit
card debt is a major crisis for many American families today. This year, about 1.4 million
families will file for consumer bankruptcy. In addition, credit card debt has doubled in just four
years. At the end of 1997, the amount of credit card loans outstanding was $422 billion, twice as
much as the amount in 1993. Women, especially those who are divorced and raising families,
often are hit the hardest. Divorced women file for bankruptcy in greater proportions than
divorced men. and frequently use the bankruptcy courts to eliminate credit card and other debts
to concentrate their incomes on paying for current expenses. Should Barbie and Ken ever decide
to "tie the knot." Mattel and MasterCard might want to remember this sad reality.
While MasterCard has targeted young Barbic fans as the future generation of MasterCard
users, credit issuers also have set their sights on another young, vulnerable and under-informed
group to get hooked on credit - college students.
Credit card issuers have been especially aggressive in luring college students to join the
masses of plastic users. Cards are available on almost any campus to almost any student - no
income. no credit history, and no parental consent required. I'm not surprised to hear reports that
the typical college freshman receives more than 50 solicitations in his or her first few months in
school. Vendors have staked out campuses all over the country. wooing students to sign up for
new cards by hawking free gifts with their applications.
Go to any "Big Ten" football game this autumn and walk into the stadium. What you will
probably find, in addition to the concession and souvenir stands. is a booth giving away t-shirts
or frisbees to people who sign up for a credit card. Kids fresh out of high school are signing up
for credit cards when they are 18 to get a free t-shirt. A recent report released by the Public
Interest Research Group (PIRG) confirmed that most students responsible for their own bills
(about 61 percent) obtained their cards at campus tables.
While credit cards have become a resource for extra income during college years, credit
companies' predatory and misleading marketing activities on campuses has contributed
significantly to the growing financial nightmares of many students. One Indiana University
administrator recently remarked that the school "loses more students to credit card debt than
academic failure." (Chicago Tribune, August 16, 1998) According to Elizabeth Warren, a
bankruptcy expert at Harvard University, the number of bankruptcies among those under 25,
particularly students, has doubled in the last six years. from 250,000 to 500,000.
But as consumer bankruptcy levels have risen to frightening levels, the credit card issuers
have gotten even richer. Credit card lending is now twice as profitable as all other lending
activities.
Bankruptcy is not cool, and credit cards are not toys. Cool Shoppin' Barbie's financial
world may be make-believe, but in the real world, it's credit card companies that are toying with
American families. Just ask college students.
09/28/98 MON 17:03 FAX 202 224 9516
US SEN JUD CMTE
002
A reaffirmation is a private agreement between a debtor and a creditor to
continue paying a debt - even though that debt could be discharged through
bankruptcy. It sounds like a good idea, but just listen to Francis Latanowich's story
about reaffirmations.
Mr. Lantanowich declared bankruptcy in 1995. But when Sears came to him
and told him that his television and car battery would be repossessed unless he
reaffirmed his debt, he signed the papers they gave him. Mr. Latanowich wanted to
keep the television for his children. Less than a year later after he filed for
bankruptcy, this father of
wrote a Boston federal bankruptcy judge a desperate,
hand scrawled note: "I receive 518 dollars a month on social security for a disability I
have. I have tried to meet the payment every month but it is keeping food off the
table for my kids. 1 would like to know if you could reopen my case so I could get rid
of all my debt forever."
When the judge looked at the note and Mr. Latanowich's case, she was
appalled. Sears ignored almost every law on the books about how to obtain a
reaffirmation. Moreover, although Mr. Latanowich was making regular payments that
should have reduced his debt, because of interest he actually owed Sears more than
when he initially filed for bankruptcy.
Sadly Mr. Latanowich's story is not unique. Since his case came to light,
bankruptcy judges throughout the country have started looking at creditor practices
more carefully. And 40 state attorneys general launched investigations. So far the
practices of Sears, Bloomingdale's, Macy's, Sterns, Montgomery Wards, Mays
Department Stores, the Discover Card, and AT&T credit have under serutiny
and the reaffirmation agreements of more than 300,000 people have been affected.
been shown to
Unlike the House bill,
be susprcious,
the Senate bill actually attempts
to address this problem by requiring
that a judge review these realfirmations obtained
unfairly or would affect the debtor's ability
and determine if They are were
to feed his family.
09/29/98 TUE 01:57 FAX
5
002
from John Yurowsky
Bankruptey Talking Points
1) Balance
Since the first Bankruptcy Act was passed 100 years ago, "balance" has been the
hallmark of every attempt by Congress to strike the right policy that would be fair
to creditors and debtors alike.
There is obviously no magic "bright" line that suddenly appears before
Congressional policymakers, but common sense and understanding the real-life
consequences of bankruptcy on individuals and families have always gone a long
way in helping Congress to shape a wise policy that does not reward the few "bad
actors" but also does not unduly punish hard-working citizens who have tried
everything to avoid bankruptcy and still want to pay their bills as best they can.
The key then is to make sure that both consumers and credit card companies act
responsibly in the extension and use of credit before problems with debt become
overwhelming.
II) Disclosure
The Senate-passed bill is notable because for the first time, it requires the credit
card industry to act responsibly in soliciting and extending credit.
During the Senate debate last week, an amendment offered by Senators Dodd,
Durbin and Sarbanes was adopted that required all credit card statements to show,
among other things, how long it would take to pay off one's outstanding balance
using only the minimum payment requested.
Because increasing numbers of consumers do not look past enticing "introductory
rates" or unbelievably low "minimum" payments each month to see when they will
actually be paying in 6 months or 6 years, it is essential that this provision stay in
the bill.
It is not a coincidence that the rise in consumer bankruptcy filings has occurred
during a period of unprecedented marketing efforts by credit card companies.
Today there are well over a billion credit cards in circulation - a dozen
credit cards for every American household. (Estimates from 1996 Statistical
Abstract, Table 793 and Table 66)
In 1997, credit card issuers mailed more than three billion card
solicitations to consumers. The solicitation rate so far in 1998 is even
003
09/29/98 TUE 01:58 FAX
higher. Based on industry estimates, such mail offers add up to about
$243,000 of credit per household per year, At this rate, in a little over four
years, the credit card companies have offered about a million dollars of
credit to each household in the United States. Salem & Clark, GMK Banking
Industry Report, Jun 11, 1996, p. 5)
With this barrage of easy credit opportunities, Americans often do not consider the
long-term implications of simply paying the minimum payment each month.
Industry analysts estimate that, using a typical minimum monthly payment rate
on a credit card, it would take 34 years to pay off a $2,500 loan, and total
payments would exceed 300% of the loan principal. (Salem & Clark, GMK
Banking Industry Report, Jun 11, 1996, p. 5)
Nonetheless, credit card statements -- unlike mortgage loans and car loans --
do not disclose the amortization rates or the total interest that will be paid if
the cardholder makes only the minimum monthly payment.
III) Solicitation of Minors
Another amendment offered by Senator Dodd would have placed some restrictions
on the currently unfettered solicitation of minors by the credit card industry. The
Dodd amendment would have required a parental signature before a credit card
account could be opened for a minor without an independent source of income.
This amendment did not carry, but the subject is one that deserves more attention
from Congress in the future. We cannot afford to have young Americans so deeply
into debt before they even graduate high school or college, before they can secure
their first full-time job, before they can start a family.
Direct solicitation of both college and high school students has intensified in
the past two years. Credit cards are available at many colleges to almost any
student -- no income, no credit history and no parental signature required.
(Report of the National Bankruptcy Review Commission 93, October 20, 1997)
Last year an estimated 250,000 Americans filed for bankruptcy before they
reached their 25th birthdays. (Sullivan, Warren and Westbrook, "From Golden
Years to Bankrupt Years," 7 Norton Bankruptcy Law Adviser, 1, July 1998)
The proportion of bankrupt debtors aged 18-24 doubled between 1991 and
1997. (Sullivan, Warren and Westbrook, "From Golden Years to Bankrupt
Years," 7 Norton Bankruptcy Law Adviser, 1, July 1998.
09/29/98 TUE 01:58 FAX
005
VII) THE LEGISLATION WRITTEN BY THE CREDIT CARD
COMPANIES IS UNFAIR TO SINGLE MOTHERS AND THEIR
CHILDREN
The legislation written by the credit card companies would
give many credit card bills the same legal status as child
support and alimony payments. If the credit card
lobbyists succeed, credit card debts could survive
bankruptcy proceedings. As a result, single mothers
seeking child support payments from bankrupt ex-
husbands will be competing with well-funded lawyers from
the credit card companies.
If the credit card companies persuade Congress to promote
credit card debt to the same status as child support and
alimony payments, millions of children would be
threatened.
In the past five years alone, more than one million
men owing alimony and child support filed for
bankruptcy. (Department of Health and Human
Services support data and Sullivan, Warren and
Westbrook, "Bankruptcy and the Family," 21
Marriage and Family Review 193, 1995)
Over the past five years, more than one million
women have collected alimony and child support
after their ex-husbands filed for bankruptcy.
Under the current law, the women's debts survived
the bankruptcy filing, often leaving them as the
only creditor collecting from the ex-husbands.
(Department of Health and Human Services
support data and Sullivan, Warren and Westbrook,
"Bankruptcy and the Family," 21 Marriage and
Family Review 193, 1995)
During 1997, an estimated 300,000 bankruptcy
cases involved child support and alimony orders.
09/29/98 TUE 01:59 FAX
006
In about half of these cases, women were creditors
trying to collect alimony and child support from
their bankrupt ex-husbands. In about half, women
who rely on support payments filed for bankruptcy
themselves as they tried to stabilize their post-
divorce economic condition. (Department of Health
and Human Services support data and Sullivan,
Warren and Westbrook, "Bankruptcy and the
Family," 21 Marriage and Family Review 193, 1995)
About 650,000 homeowners filed for bankruptcy
during 1997. Many of them were trying to save
their homes from foreclosure. (Calculated from
data in Sullivan, Warren and Westbrook, As We
Forgive Our Debtors, 1989)
The credit card industry's claim that the child support
problem has been fixed is false.
The House bill would require that credit card
debt be paid in preference to family support and
taxes in Chapter 13 bankruptcies.
Both House and Senate bills would still allow
much credit card debt to survive bankruptcy.
This surviving credit card debt would compete
with family support obligations for repayment
by the debtor after bankruptcy.
"[U]nsecured credit card debt would be
reclassified as a non-dischargeable debt, in the
same category as child support, alimony and
taxes. Women could have a harder time
collecting child support if their ex-husbands
had to decide between meeting family obligations
or fending off aggressive collection agents." (Los
Angeles Times, Jun 8, 1998) (emphasis added)
National Conference of Bankruptcy Judges: "It is
very likely that some of the changes being
09/29/98 TUE 01:59 FAX
5
007
considered by Congress would cause consumers,
both within and outside the bankruptcy system,
to be unable to pay such basic obligations as
mortgages, alimony, child support, and student
loans." (April 2, 1998 letter to Speaker Newt
Gingrich) (emphasis added)
"In a bow to the banks, the House bill elevates a
significant portion of credit card debt to equal
status with unpaid taxes, student loans and
child support - debt that cannot be canceled.
Kids and MasterCard would end up fighting for
the same slice of the pie, attaching the same
wages. Last year, the independent,
congressionally-appointed National Bankruptcy
Review Commission overwhelmingly rejected
such a radical reshuffling of priorities." (San
Jose Mercury News, June 18, 1998)
004
09/29/98 TUE 01:58 FAX
IV) We must Reinforce not Discourage - the Responsible Use of Credit.
If responsibility and accountability are to be reinforced for consumers and credit
card companies alike, it makes no sense whatsoever for credit card companies to
penalize consumers who responsibly use their cards. But that is precisely what
has started to happen. The Senate bill would prohibit the emerging practice of
some credit card companies that actually terminate customers who pay their bills
on time!
Credit card companies often cancel the credit cards of consumers who pay
their bills on time. Credit card companies terminate people who pay their
balances in full because they are not profitable. The most profitable customers
are the ones who make only the minimum payments; these are also the
customers who are most likely to have financial problems.
"In October, Beneficial National Bank cut off 12,000 MasterCard holders
because they paid their credit card bills in full every month, running up no
interest. Too good a credit risk, no credit." (Fort Worth Star-Telegram,
June 21, 1998)
V) The Senate Means-Test Provides Needed Elexibility
The rigid House means-test would prevent many financially-distressed debtors
from obtaining needed bankruptcy relief by failing to account for differing needs of
families and regional variations in living expenses.
By using such a rigid test, the House bill would likely prevent many debtors
from getting any bankruptcy relief and, in many cases, lose the ability to keep
their homes, to pay child support and to keep their very jobs.
The Senate means-test is preferable because it provides the bankruptcy judge
more flexibility in reviewing the needs and expenses of the debtor, and because it
requires less administrative cost to implement for all parties - the courts, trustees,
debtors, and creditors.
VI) Reaffirmations Should be Limited in Chapter 7
In the last few years, certain major creditors have been found to have coerced
lower income debtors into agreeing to repay debts which were actually discharged
in bankruptcy. The courts should supervise reaffirmations to make sure that
debtors are aware of their rights and that creditors are not overreaching.
09/29/98 TUE 02:00 FAX
008
VIII) THE CREDIT CARD INDUSTRY'S PROPOSED LEGISLATION
IS UNFAIR TO OLDER AMERICANS TRYING TO PROTECT
THEIR HOMES
More than a quarter million Americans over the age of 50
filed for bankruptcy last year.
More than one-half of all older Americans who file for
bankruptcy have lost their jobs.
Nearly a third of all older Americans who filed for
bankruptcy have medical debts they cannot pay.
Older Americans are disproportionately the victims of
credit scams and abuses. More than one in ten of those
who file for bankruptcy say they did so to deal with a
creditor scams or aggressive creditor collection efforts.
One in ten older Americans who file for bankruptcy have
been thrown into financial crisis by a family problem - a
son on drugs, a divorced daughter and her family they are
attempting to house and feed.
The safety net provided by Social Security and Medicare is
fraying: More than a third of the debtors over age 65
explained that they filed for bankruptcy because they lost
the part-time jobs they had to supplement their Social
Security payments. Another one-third said they had
medical expenses not covered by Medicare.
The legislation proposed by the credit card companies
would make it much easier to creditors to foreclose on the
homes of older Americans. About 650,000 homeowners
filed for bankruptcy during 1997. Many of them were trying
to save their homes from foreclosure. (Calculated from data
in Sullivan, Warren and Westbrook, As We Forgive Our
Debtors, 1989)
1.6
1.3 Million
1.2
0.8
700,000
0.4
0.0
1987
1997
BANKRUPTCY FILINGS PER YEAR
1997 GRADUATES: 1.18 MILLION
Source- U.S. Administrative Office of the Courts
Source- National Center for Education Statistics. Based on projected number of
1997 college graduates with Bachelor's degrees.
More people declared BANKRUPTCY
than graduated from college last year.
I
N TODAY'S CULTURE, it's easier to declare bankruptcy
than to graduate from college. Skyrocketing personal
bankruptcies have doubled in the past decade, at a time
when economic growth and disposable personal income
have risen steadily.
Our Federal bankruptcy laws discourage personal responsi-
bility. More and more people who can pay down their debt
are using bankruptcy as a financial planning tool, sheltering
substantial wealth while sticking other consumers with the
cost of their "bankruptcies of convenience."
Personal bankruptcies now cost consumers over $400 per
household, and it takes 33 Americans to pay for one
bankruptcy of convenience.* Maybe that's why 76% in a
recent nationwide poll said "individuals should not be
allowed to erase all their debt in bankruptcy if they are
able to repay a portion of what they owe."
It's time to reform our flawed bankruptcy laws.
Support the Bankruptcy Reform Act of 1998, the Gekas-Moran Bill
Don't let people who can afford to pay down their debt stick others with the tab.
Paid for by the American Financial Services Association
*Analysis by SMR Research Corporation
1
National Journal's CongressDaily/A.M.
Wednesday, April 29, 1998
Politica Roundup
In Conn., A Boost For Koskoff
the polls, Democratic Rep. Bar-
fel," Newman declared in referring
FORESHADOWING A THIRD matchup be-
bara Kennelly continues to trail
to the likely Democratic nominee -
tween Rep. Nancy Johnson, R-
GOP Gov. John Rowland by a wide
who lost to Fox by 84 votes in 1996.
Conn., and Democrat Charlotte
margin in the race for Connecticut
Fox accused Newman of engag-
Koskoff, state Rep. Demetrios Gian-
governor, according to a new pub-
ing in "character assassination,"
naros Monday abandoned his bid
lic opinion survey.
but also declared, "I'll give the
for the House and endorsed Koskoff,
The latest Hartford Courant poll
money back," the Philadelphia In-
the Hartford Courant reported.
gives Rowland a 50-28 point lead
quirer reported.
" It's good news for the Democ-
over Kennelly. The survey of 500
The other major contender in
rats and me, because now we can
state residents, conducted April 14-
the May 19 GOP primary, ophthal-
concentrate our energies on the elec-
22, has a 5 point error margin, and
mologist Melissa Brown, steered
tion and beating Nancy Johnson,"
was conducted after Kennelly be-
clear of the back-and-forth over the
said Koskoff, a retired education pro-
gan her first round of TV advertis-
loan and sought to focus voters on
fessor and attorney - who came
ing April 3.
her call to reform the nation's man-
within 1,600 votes of toppling John-
Notwithstanding that exposure,
aged care system.
son in 1996 after losing to the incum-
Kennelly's numbers were virtually
bent by nearly 2-1 two years earlier.
unchanged from March, when the
In Ohio, Dueling Senate Polls
Koskoff still faces a battle for
previous Courant poll showed Row-
IN THE LATEST ENTRY in the dueling
the Democratic nomination against
land up by 52-31.
polls department, the Toledo Blade
James Griffin, a defense consultant
Nearly two-thirds of those
Tuesday published a Senate race
whom she handily defeated in intra-
polled approved of the way Row-
survey that is significantly at odds
party competition two years ago.
land is handling his job. Perhaps
with a poll published just a day ear-
The 6th District takes in the north-
the one silver lining for Kennelly is
lier by another major Ohio newspa-
western portion of the state.
that 44 percent of those surveyed
per, the Akron Beacon Journal.
This year, Griffin has tossed
said they did not know enough
Both polls show GOP Gov.
about $400,000 of his own money
about her to form an opinion, indi-
George Voinovich leading in the
into the effort. But he was embar-
cating she may have an opportu-
race for the seat of retiring Democ-
rassed last week when the Courant
nity to pick up support among
ratic Sen. John Glenn. And both
reported that, in FEC reports filed
those voters.
show the likely Democratic candi-
in January, he had signed the name
date, former Cuyahoga County
of his campaign treasurer -who, it
Challengers Fire $25,000 Question
Commissioner Mary Boyle, running
turned out, had been dead for
At Fox
closer to Voinovich than had been
about three months at the time.
TWO-TERM REP. JON Fox, R-Pa.,
widely expected.
Giannaros, who plans to seek re-
came under fire Monday from two
So what is the discrepancy? The
election to the state legislature, said
GOP primary foes over a $25,000
Blade poll of 685 likely voters, con-
he had quit the congressional race
loan that is the subject of a com-
ducted April 17-24, shows only 5
because "it was pretty clear that for
plaint filed with the FEC by a con-
percent of the electorate to be unde-
us to continue, we would have a di-
servative organization.
cided. But the Beacon Journal sur-
visive primary in September."
During a debate in the Philadel-
vey of 800 registered voters, taken
However, Griffin charged Gian-
phia suburban district, attorney
April 6-23, shows a whopping 40 per-
naros had been "bludgeoned" out
Jonathan Newman and anti-abortion
cent in the undecided column.
of the race, declaring, "Apparently
activist Michael McMonagle repeat-
The horserace numbers: The
the party leaders are looking to be
edly questioned Fox over the 1992
Blade has Voinovich up by 53-42
simple rather than correct." Gian-
loan from a developer - which Fox
percent, while the Beacon Journal
naros acknowledged having discus-
says was for personal rather than
puts Voinovich in the lead by 36-23.
sions with party leaders and
campaign expenses, and thus ex-
The Blade survey, conducted by
Koskoff's campaign, but said there
empt from campaign finance rules.
Louis Harris & Associates, has a 4
had been no "bludgeoning."
"If we don't get to the bottom of
point error margin, while the Bea-
this problem with this illegal loan
con Journal poll - by the Univer-
As Kennelly Gets More Bad News
scenario with Jon Fox, this election
sity of Akron - has a 3.5 point er-
SEVEN MONTHS BEFORE voters go to
is going to be handed to Joe Hoef-
ror margin.
April 30, 1998
MEMORANDUM FOR HILLARY RODHAM CLINTON
FROM:
NICOLE RABNER
SUBJECT:
Meeting with Harvard Professor Elizabeth Warren
Tomorrow, you are scheduled to meet with Harvard Law Professor Elizabeth Warren,
who has been a leading opponent of proposed bankruptcy reform legislation.
Recently, Warren has been effective in highlighting the adverse impact of this proposed
legislation on child support and alimony collection for single parents. Today, alimony and child
support, past taxes and educational loans survive a Chapter 7 bankruptcy. Recipients of child
support and alimony benefit when their financially troubled ex-spouses can discharge their other
debts and get their finances in order so that they can make the payments on their non-
dischargeable debts, including their alimony and child support. The proposed legislation would
increase the amount of potentially non-dischargeable debt (including some credit card debt),
thereby putting child support collection in direct competition with credit card and other
commercial lenders for the limited resources of the ex-husband.
The Administration plans to send a letter to the Congress next week outlining our
position on this proposed legislation. As currently drafted, the letter concludes that we cannot
support the pending legislation in its present form, but expresses our openness to responsible
bankruptcy reform consistent with a range of principles -- including careful protections for child
support and alimony payments.
While the Administration agrees with Warren on the important point of protecting
alimony and child support payments, there are many within the Administration who, unlike
Warren, believe that bankruptcy reform that meets our principles is good policy. Warren
believes that the rise in Chapter 7 bankruptcies over the past year reflects in large measure the
predatory activities of credit card companies, providing untempered and irresponsible access to
credit; Warren therefore opposes even narrow changes to our bankruptcy laws that would provide
credit card companies with any protections. There are many in the Administration, however,
who believe that this is only in part true -- that there is also abuse in the system, i.e. those who
are able to pay their debts (after they have met their child support and alimony obligations), and
that these debts can be too easily discharged through bankruptcy. They believe that we can and
should achieve responsible bankruptcy reform legislation that protects single parents.
Some in the Administration have advised that Warren is effective and persuasive, but has
a broader agenda of opposition to any bankruptcy reform legislation.
04/06/98
MON 11:50 FAX 16174966118
HARVARD LAW
Academics Letter To Congress On Bankruptcy Reform
wyswyg:/http://www.law.indiam.edu/-bmartell/slovdov.hil
To see the press release related to this letter, click here.
This letter is constantly being updated to reflect additional signatures.
This document last modified on 04/03/98
March 31, 1998
Bruce A. Markell
Professor of Law
211 South Indiana Avenue
Bloomington, IN 47405
[email protected]
To all members of the House and Senate Judiciary Committees:
We are fifty-eight (58) academics who are deeply concerned about proposed legislation seeking to reform
the federal bankruptcy law affecting consumers. We teach and study bankruptcy, and together have over
889 years of experience with bankruptcy matters. We come from different political, academic and
economic perspectives, and from every region of this country.
We do not write to support or oppose any particular piece of legislation. Rather, we write to urge
Congress to consider more carefully the pending reform proposals. If enacted, any of the current drafts of
legislation would bring about dramatic and far-reaching changes. Yet the pace related to the examination
of this legislation has been fast, and the study of its consequences superficial. In less than a year, at least
three bills proposing radical changes to the consumer provisions of the bankruptcy code are on the verge
of floor consideration by both houses of Congress. Combined, there have been fewer than five hearings
on all bills. In contrast, the 1978 revision of the federal bankruptcy laws consumed more than five years,
and over 60 days of hearings in both houses.
We are also concerned about the quality of information presented at the few hearings which have been
held. The studies that have been the driving force behind many proposed reforms appear to have been
inadequate, and to have emphasized the interests of institutional creditors. To date, virtually no one has
spoken for those Americans who have declared bankruptcy or who may one day be forced into that
position.
Aside from the tax code and the Social Security laws, no other federal law affects more Americans. Most
individuals who file bankruptcy are average, middle class Americans. Focusing on one interest -- that of
creditors (and in particular creditors who hold credit card debt) - tends to mute the voices of the millions
of other Americans affected by bankruptcy law. This imbalance affects more than debtors; when debt
institutions hold the stage and suggest the changes, non-institutional creditors - such as former spouses
with support claims -- stand to lose.
In conclusion, we believe that the current debate is ill-considered, rushed and unbalanced. Before
undertaking changes affecting all Americans whose lives are touched by bankruptcy, we urge you to
pause, to hold full hearings on the issues, and to seek out a balanced, reasoned approach.
Very truly yours,
1 of 5
4/6/98 11:50 AM
April 9, 1998
To All Members of the United States Congress:
Dear Senator or Representative:
We are a group of 110 United States bankruptcy judges. Most of
us have been bankruptcy judges for more than ten years, and we have
applied the complex provisions of the Bankruptcy Code to thousands of
bankruptcy cases filed by individual debtors. Although we come from
different political, intellectual and economic perspectives, and represent
districts from every federal judicial circuit, we share a single, deep
concern that legislation presently before Congress would make
fundamental changes in bankruptcy for individual debtors that have not
been sufficiently considered.
The proposed bills H.R. 2500, H.R. 3146, H.R. 3150, and
S.1301 all impose new limits on the availability of bankruptcy relief.
Since 1898, an individual S debts have been discharged upon surrender
of the individual S nonexempt property, and the property has been
liquidated to pay the individual S creditors. The proposed legislation
would deny this basis for discharge in many cases, requiring instead
that individuals make payment out of their future earnings, for as much
as seven years. The bills also propose major changes in what debt may
be discharged, in the relative amounts paid to secured and unsecured
creditors, and in the extent to which documentation must be filed and
processed in connection with a bankruptcy case.
We do not take any position on the merits of these bills.
However, we strongly believe that these bills are too important and their
proposed changes too sweeping to be acted upon without thorough
consideration. We are alarmed by how little study appears to have been
given to the pending bills. Although we understand that these bills are on
the verge of floor consideration, fewer than a dozen hearings have been
held on all of the bills combined. The oldest of the bills, H.R. 2500, was
introduced little more than six months ago. The haste with which these
bills are being processed can be seen by a comparison with the
changes made by the Bankruptcy Code of 1978. That legislation was
enacted only after sixty days of hearings during a five-year period of
consideration.
Without sufficient study and consideration. it is likely that the
proposed bills will (1) fail to fully accomplish their intended purpose, (2)
generate unnecessary litigation over unclear terms, and (3) impose
excessive costs on all of the participants in the bankruptcy system. As
those charged with responsibility for applying the bankruptcy laws, we
urge that the pending bills be given the full attention that they require,
including additional hearings, held after sufficient time has been
accorded for thorough study by all interested organizations, legal
scholars, and participants in the bankruptcy process.
Respectfully,
The Honorable Louise D. Adler
Southern District of California The Honorable Frank R. Alley
District of Oregoni The Honorable J. Vincent Aug
Southern District of Ohio The Honorable Ronald S. Barliant
Northern District of Illinois The Honorable Redfield T. Baum
District of Arizona The Honorable Joyce Bihary
Northern District of Georgia The Honorable William T. Bodoh
Northern District of Ohio The Honorable Richard L. Bohanon
Western District of Oklahoma The Honorable Henry J. Boroff
District of Massachusetts The Honorable Peter W. Bowie
Southern District of California The Honorable Philip H. Brandt
Western District of Washington The Honorable Jerry A. Brown
Eastern District of Louisiana The Honorable Samuel L. Bufford
Central District of California The Honorable Charles M. Caldwell
Southern District of Ohio The Honorable Donald E. Calhoun
Southern District of Ohio The Honorable Ellen Carroll
Central District of California The Honorable Catherine Carruthers
Middle District of North Carolina The Honorable Charles G. Case
District of Arizona The Honorable Leif M. Clark
Western District of Texas The Honorable Tom R. Cornish
Eastern District of Oklahoma The Honorable A. Jay Cristol
Southern District of Florida The Honorable Sarah Sharer Curley
District of Arizona The Honorable Sara E. deJesus
District of Puerto Rico The Honorable Henry H. Dickinson
Western District of Kentucky The Honorable Russell A. Eisenberg
Eastern District of Wisconsin The Honorable Joan N. Feeney
District of Massachusetts The Honorable Jerome Feller
Eastern District of New York The Honorable Lisa Hill Fenning
Central District of California The Honorable Gerald D. Fines
Central District of Illinois The Honorable Judith K. Fitzgerald
Western District of Pennsylvania The Honorable John T. Flannagan
District of Kansas The Honorable Steven H. Friedman
Southern District of Florida The Honorable Robert F. Fussell
Eastern and Western District of Arkansas The Honorable Stephen D.
Gerling
Northern District of New York The Honorable William H. Gindin
District of New Jersey The Honorable James A. Goodman
Lisa Fenning @ ce9.uscourts.gov
04/13/99 03:23:55 PM
Record Type:
Record
To:
Nicole R. Rabner/WHO/EOP
CC:
Subject: Re[2]:meeting in April
Nicole --
I have been swamped here, and have not written up the business issues.
Let me just give you a brief notes on a couple of points.
1. Patent and copyright problems:
The Ninth Circuit recently held that a nonexclusive patent license
agreement cannot be assumed by a debtor in possession. In re
Catapult, 165 F.3d 747 (9th Cir. 1999). The logic of its reasoning
probably applies to copyrights also, though that is not yet the
subject of any case law. Inability to assume such contracts, even
where the license was fully paid for by the debtor before the
bankruptcy, may effectively prevent reorganization in Chapter 11. The
issue is the scope of the exception to assumability that has
traditionally be interpreted to apply to personal services agreements.
Catapult builds on several recent cases in extending this principle to
restrict the ability of a debtor to assume executory contracts
relating to intellectual property, especially license agreements.
This issue has extremely broad ramifications for computer software
licenses, patent licenses, etc. I will bring you some materials
related to these issues.
2. Partnership bankruptcies.
Partnership issues are not fully addressed in Chapter 11. This defect
has been obvious for a long time. A consortium of ABA and National
Bankruptcy Conference representatives have developed a set of
thoroughly analyzed proposals to address the current deficiencies in
the Code. The partnership package was endorsed by the National
Bankruptcy Review Commission, and has been included in some of the
bills introduced in Congress. Increasingly, partnerships and joint
ventures are major vehicles for business enterprises. The next wave
of bankruptcies will undoubtedly include many such entities. The
Administration should insist that this relatively noncontroversial
package be included in any reform bill.
3. International bankruptcies.
International bankruptcies have also been inadequately addressed in
the Code. Again, a thoroughly vetted set of proposed amendments have
already been developed, and were included in some of the bills last
session. These provisions are crucial. I have handled many Chapter
11 cases with parallel proceedings pending in other countries. It
will be increasingly common in the future. The US should lead on this
issue, not trail other developed countries. THe Administration should
insist that this noncontroversial package be included in any reform
bill.
4. Tax issues.
The Administration should consider supporting the set of tax proposals
adopted by the special tax "blue ribbon" committee organized by the
National Bankruptcy Review Commission. While I recognize that DOJ
does not like some of the proposals (I disagree with some also), the
set as a whole improves that balance and functioning of the Code
significantly. Representatives from DOJ participated in the tax
group, and although they obviously were not there in their official
capacities and could not bind the department, they supported the
resulting set.
Please let me know today if possible, or tomorrow morning, if a
meeting can be arranged. I will be leaving my office tomorrow (Wed.)
around 2:30 p.m., and will arrive in DC around midnight.
I look forward to seeing you -- and hopefully the First Lady.
Reply Separator
Subject: Re:meeting in April
Author: [email protected]
Date:
3/25/99 7:41 PM
I look forward to meeting with you, and will get back in touch
with a
proposed date and time once I have a better sense of the First
Lady's
schedule (for your convenience, I'd rather schedule the
meetings around
her, so you don't have to come here more than once).
Would you mind sending some material to me about the business
bankruptcy
issues that you noted in your last e-mail? This way, I can
make sure that
we have done our homework and that the appropriate
Admininstration
officials are with us. You can feel free to send by e-mail,
fax
(202-456-2878) or mail (2nd floor, West Wing, The White House,
Washington,
D.C. 20502). Thanks.
(Embedded
image moved Lisa_Fenning @ ce9.uscourts.gov
to file:
03/25/99 12:25:38 PM
PIC18881.PCX)
Record Type: Record
To: Nicole R. Rabner/WHO/EOP
CC:
Subject: Re:meeting in April
Thanks for your message. I am scheduled to arrive late at
night on
Wednesday, April 14, and will be staying at the JW
Marriott Hotel. I
have meetings scheduled for Thursday mid-afternoon, but am
otherwise
available to meet with you at your convenience on Thursday
morning or
Friday.
As you know, I think that the bankruptcy laws would
benefit from
reform in a number of areas, including anti-fraud measures
endorsed by
my court. Since last year, however, I have become
increasingly
concerned about recent trends in case law at the appellate
level that
are likely to severely impact businesses in the next wave
of
bankruptcy filings, particularly those involving
technology companies.
I would hope to discuss those issues as well.
I look forward to seeing you again, and would be delighted
to see the
First Lady too, if her schedule permits.
Reply Separator
Subject: meeting in April
Author: [email protected]
Date:
3/24/99 8:02 PM
Mrs. Clinton forwarded to me your recent letter, in
which you
note that you
are planning a trip to Washington in mid April. She
suggested
that you and
I meet to discuss the rapid activity on bankruptcy
reform and
hopes to see
you herself, as well. Please let me know as your plans
unfold,
and I'll
continue to monitor her *hectic* schedule, as well.
I look forward to seeing you again.
Nicole
(See attached file: PIC18881.PCX)
- PIC18881.PCX
What.Db Bank
EXHOUT
worth
of
agears
diape
Diapers
$400! That's what every American household will pay in higher prices and higher
interest rates this year because of personal bankruptcies.
Last year, a record 1.3 million Americans declared personal bankruptcy, erasing
more than $40 billion in debt. But not everyone who obtained bankruptcy relief
actually needed it. Thirty-three percent had the ability to repay a significant portion
of what they owed Ten percent could pay back everything. Yet our bankruptcy
laws make it possible for them to avoid paying their bills. Bankruptcy laws should
protect those who legitimately need financial relief, but require those who can pay
back their debts to do so. It's time to end the financial burden that bankruptcies
place on America's families. Call your member of Congress and voice your
support for H.R. 3150.
To learn more, visit www.digitalrelease com and enter "bankruptcy" in the search engine.
AMERICAN BANKERS ASSOCIATION
AMERICAN FINANCIAL SERVICES ASSOCIATION
AMERICA'S COMMUNITY BANKERS
BANKRUPTCY ISSUES COUNCIL
CONSUMER BANKERS ASSOCIATION
CREDIT UNION NATIONAL ASSOCIATION
INDEPENDENT BANKERS ASSOCIATION OF AMERICA
NATIONAL RETAIL FEDERATION
U.S. CHAMBER OF COMMERCE
Nonbusiness Bankruptcy Cases and Debt
Cases per million adults
Debt, percent of income. previous year
6000
85
80
5000
75
4000
70
3000
65
2000
60
1000
55
0
50
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
Year ending June 30, 1962 to 1996
I
Cases per capita - Debt-to-income ratio
Dotted areas are recessions as defined by the NBER.
Source: Kim Kowalewski, Congressional Budget Office
Median Income in 1997 Dollars of Ch. 7 Debtors
$50,000
$40,000
$30,000
$20,000
$10,000
$42,769
$23,254
$18,807
$17,958
$17,652
$0
1981
1991
1995
1997
US Median Family Income
Source: Data to be published in Elizabeth Warren, "The Bankruptcy Crisis", Indiana Law Journal
(forthcoming Spring 1998)
Median Nonmortgage Debt-to-income Ratios for Ch. 7 Debtors
2
1.5
1
0.5
0.87
1.25
1.55
1.64
0
1981
1991
1995
1997
Source: Data to be published in Elizabeth Warren, "The Bankruptcy Crisis", Indiana Law Journal,
(forthcoming Spring 1998)
CFA
Consumer Federation of America
"NEEDS-BASED BANKRUPTCY" IS A CAMPAIGN MANUFACTURED AND PAID FOR BY
THE CREDIT CARD INDUSTRY IN AN ATTEMPT TO MAKE THE BANKRUPTCY SYSTEM
THE SCAPEGOAT FOR THE INDUSTRY'S RISKY AND PREDATORY LENDING PRACTICES-
AT THE SAME TIME, CREDIT CARDS HAVE BEEN A VERY PROFITABLE LINE OF
BUSINESS.
CREDIT CARD DEBT PRESENTS SERIOUS RISK FOR MANY HOUSEHOLDS
As of late 1997:
*$1.6T in credit lines approved-about $20K for each household with at least one credit card
*$450B in revolving debt-double what it was in 1990-is carried by 55-60M households that
revolve debt
*the average debt per "revolving" household is $7000, and those households paid more than
$1000 in interest and fees during the past year
*lower middle income households are especially burdened by credit card debt--their consumer
debt-to-income ratios are far higher than those of other income groups
*based on research numbers generated by Georgetown's Credit Research Center, Chapter 7
bankrupts studied in 1996 had after-tax incomes averaging $19,800 and credit card debts
averaging $17,544
*In June 1997, the Opinion Research Corp. asked, on behalf of CFA, a sample of 1006
persons: 'How concerned are you about meeting your credit card monthly payments?" 36% of all
households said "very concerned" and among lower income households [$15-25,000] that
number was 42%
[See "Expanding Credit Card Debt: The Role of Creditors and the Impact on Consumers, CFA,
December 16, 1997]
*Under the facade of "democratization of credit"; credit card companies have preyed upon low
income persons. "What the poor do not understand, and what helps keep them poor, is that
credit cards and other forms of consumer credit do not provide additional income but rather place
a mortgage-an expensive one- on future income". [Easy Credit: A Wall Around the Poor", The
New York Times, February, 1998]
*This behavior was also noted in the Wall Street Journal in an article describing new marketing
plans aimed at wealthy consumers. "After years of earning fat profits from the least creditworthy
customers-those who rack up big debts and pay them off over long periods at steep interest
rates-MasterCard International and Visa U.S.A. are going after the nation's affluent". [Burned by
the Masses, Cards Court the Elite, WSJ 11/5/97]
CREDIT CARD COMPANIES CONTINUED TO AGGRESSIVELY MARKET, DESPITE
WARNINGS OF RISK AND RISING CHARGE-OFF RATES
*In September 1996, the Office of the Comptroller of the Currency issued an Advisory Letter to
alert national banks to risks associated with preapproved solicitations of credit cards". The OCC
encouraged management to "take appropriate action to limit its exposure to unwarranted risks".
[OCC Advisory Letter 9/25/96]
1424 16th Street. N.W., Suite 604
Washington. D.C. 20036
202) 387-6121
*During the first half of 1997, credit card solicitations were at a record level; the second quarter
mailing of 881M was the highest on record [CFA, 12/16/97]
*From 1995 to 1996, credit card telemarketing expenses rose 30% [CFA 12/16/97]
*From 1995 to 1996, credit card ad expense rose 14% [CFA 12/16/97]
*Credit card lenders "shot themselves in the foot by using some of the weakest and most pitiful
loan underwriting techniques [he had] ever witnessed," according to a securities analyst in
testimony to the House Banking and Financial Services Committee in the fall of 1996 [Over the
Edge, National Journal, 5/3/97]
*"The Principal factor in the increase in bankruptcies has been the dramatic lowering of loan
standards throughout the recent five years,' said Mark Zandi, chief economist for the
Pennsylvania-based Regional Financial Associates, a consulting firm with credit-card companies
as clients Zandi sees the Gekas bill as adding fuel to the crisis. 'What it will do is induce the
lenders to lower their standards even further,' he said." [Congress might make debt harder to
escape, The Boston Globe, March 10, 1998]
THE PROFITABILITY OF CREDIT CARDS HAS BEEN HIGH & NOW THAT LENDERS ARE
EXPERIENCING SOME DECLINE, THEY ARE BECOMING MORE AGGRESSIVE IN
COLLECTIONS AND IMPOSING PENALTIES
*Credit card banks [defined as those which engage primarily in consumer lending; more than
90% of their loans involve credit cards] attain a return on assets that is double the return on
assets of commercial banks [Credit Card Charge-Offs, Subprime Lending and High-LTV Loans,
Beverly Burden, 1998]
*The difference between the roughly 14-16% yield on credit cards and the 3-5% cost of funds is
much larger than that on other kinds of consumer credit [The Consumer Impacts of Expanding
Credit Card Debt, CFA, February 1997]
*Banks are also able to securitize and sell credit card debt and may now receive more favorable
tax treatment [Burden]
*But, the present rate of charge-offs, about 5%, is the highest rate recorded [CFA 2/97, Burden]
And profit levels on credit cards have fallen [CFA, Burden, WSJ 11/5/97]
*According to an industry researcher, the cost of credit has been rising in 1997. Average interest
rates and charges have risen and issuers have become less tolerant when it comes to late
payments and exceeding credit limits. Some banks are also for the first time imposing punitive
interest rates on top of the penalty charges, rates that can last for a year or more before returning
to standard level [Now, Time to Dig Out From 1997 Debt, Wall Street Journal 1/2/98]
*Credit card companies are also imposing fees, or reserving the right to, on customers who don't
use their account for a while, pay off the monthly balance or close the account [Are New Fees for
Canceling an Account in the Cards? WSJ, 6/11/97]
*There are about 6,000 collection agencies nationally. Bad debt placed with agencies rose 39%
to $117B in 1995 from $84B in 1994. During that period debt collected by agencies rose 40% to
$31B [As Many People Sink Into Debt, One Group Prospers, WSJ 11/20/97] CFA 4/20/98
National
18 Tremont St., Suite 400
Boston, MA 02108
Consumer
(617) 523-8010
Fax: (617) 523-7398
Law Center
Washington Office:
Inc.
1629 K St., N.W.
Washington, DC 20006
(202) 986-6060
April 23, 1998
SUMMARY CRITIQUE OF S. 1301:
A BILL WHICH WOULD DEVASTATE
AMERICA'S CONSUMER BANKRUPTCY SYSTEM
In 1997, more than 1.3 million American families turned to the consumer bankruptcy
system for help in managing overwhelming financial problems including foreclosure,
repossession, utility termination, wage garnishment and debt collection harassment. The vast
majority of these debtors were low-income working class American families earning less than
$50,000 per year.
American families file bankruptcy out of necessity. The typical bankruptcy debtor is
facing income reductions due to transition to a lower paying job, illness, death of a
breadwinner, loss of overtime, divorce, or retirement. As credit card debt has doubled in five
years, more families carry more debt, without a corresponding increase in income. Uninsured
medical expenses, doubling of the average student loan debt burden, and a tripling of home
equity credit compound the problem.
Carefully crafted legislation to reform the bankruptcy laws is necessary to avoid
penalizing the many American families who legitimately need help. Most debtors in the
bankruptcy system are struggling with massive credit card debts which carry interest rates
ranging from 16 to 20%. It is irresponsible for the banks that have earned record profits by
encouraging families to borrow at high rates to place full blame on consumers for the rise in
bankruptcies.
S. 1301 is unbalanced Senate legislation which was voted out of subcommittee in haste
on April 2, 1998. It contains numerous pitfalls for American consumers without a
corresponding effort to reign in irresponsible practices of lenders. The bill would:
Create new eligibility barriers, filing requirements and procedural hurdles which
would be expensive for debtors to meet. These new impediments would preclude
effective debt relief for those at the bottom of the economic spectrum. If S. 1301 is
passed, many working class families will be too poor to afford bankruptcy.
Increase the cost of the bankruptcy system to taxpayers by generating hundreds of
thousands of new litigated disputes in bankruptcy each year. These would require new
Judges trustees and courtroom personnel.
Institutionalize unresolvable conflicts of interest between lawyers and their clients by
creating automatic personal liability for lawyers who represent debtors in cases which
fail.
Encourage fraudulent debt counseling operations by giving government imprimatur
to any counseling organization without oversight and review.
Allow creditors to take children's toys, VCR's and heirlooms of minimal value by
changing the longstanding definition of household goods. These items have no
economic value to creditors because they cannot be cost-effectively resold. However,
they have high replacement cost or sentimental value to debtors.
Encourage continued reckless lending practices and abusive lawsuits by allowing
creditors to claim fraud against borrowers without having to prove it.
Undermine debtors' attempts to save their homes from foreclosure by redirecting
money to legal fees and credit card debts which could otherwise be used to get caught
get up on mortgage payments.
Eliminate the right of many debtors to use the bankruptcy system to pay back rent
and prevent eviction. The bill will increase homelessness with corresponding social
costs.
Invade the privacy of American families and facilitate theft of identity fraud by
making debtor's tax returns publicly available.
Punish debtors who make mistakes in filing their voluminous bankruptcy papers by
eliminating existing mechanisms to correct errors and by denying debtors a fair
opportunity to refile.
Undermine collection of child support and alimony by redirecting income to a
debtor's less urgent debts.
2
S. 1301 is radical anti-consumer legislation. Both the UAW and the AFL-CIO
have expressed concern about the impact of this bill on American consumers and have urged
the Senate to come up with more balanced proposals. Bankruptcy Judges and law professors
have encouraged Congress to slow down, because the existing proposals are not well thought
out. Passage of the bill in it current form would be disastrous to American families who are
mired in the quicksand of overwhelming debt.
A more complete critique of S.1301 is available from the National Consumer Law
Center, the Consumer Federation of America, or the National Association of Consumer
Bankruptcy Attorneys.
For more information, please contact:
Gary Klein, National Consumer Law Center -- (617) 523-8010
Mary Rouleau, Consumer Federation of America -- (202) 387-6121
Henry Sommer, National Association of Consumer Bankruptcy Attorneys -- (215) 242-8639
Ike Shulman, National Association of Consumer Bankruptcy Attorneys -- (408) 971-3233
3
National
18 Tremont St., Suite 400
Boston, MA 02108
Consumer
(617) 523-8010
Fax: (617) 523-7398
Law Center
Washington Office:
Inc.
1629 K St., N.W.
Washington, DC 20006
(202) 986-6060
April 23, 1998
CRITIQUE OF S.1301
"CONSUMER BANKRUPTCY REFORM ACT OF 1998"
A BILL THAT WOULD DEVASTATE AMERICA'S
CONSUMER BANKRUPTCY SYSTEM
S. 1301 would undermine the effective and efficient operation of the existing consumer
bankruptcy system. The bill would raise the cost of bankruptcy for all debtors and require that
taxpayers fund an expanded bureaucracy to collect small amounts of money from families
facing overwhelming financial problems.¹ If it is passed, a significant American judicial
system would be undermined in order to provide a marginal enhancement to the already
record-breaking profit margins of banks and other lenders.
Raising the costs and burdens of bankruptcy ultimately hurts the poorest debtors --
those that can't afford to pay a lawyer to navigate complicated new legal hurdles -- rather than
the high-income debtors who some believe commit abuses. More narrowly targeted provisions
can be drafted to get at the perceived abuses without hurting the financially strapped American
families who urgently need debt relief to avoid financial catastrophe.
S. 1301 was voted out of subcommittee on April 2, 1998 in great haste. The
subcommittee added numerous amendments which had never been addressed at a hearing.
Several of these amendments would cause the bankruptcy system to grind to a virtual halt and
cause great additional hardship to families already suffering under the burdens of
1
There are numerous provisions of the bill which would be impracticable or which would
create creditor bankruptcy abuses. Because the bill is extensive, only the most important
problems are discussed here. Another critique of this bill is available on the American
Bankruptcy Institute website: www.abiworld.org. That critique is particularly thorough in its
discussion of how these amendments would undermine effective administration of our nation's
bankruptcy laws.
overwhelming financial problems. Further study is needed before such radical new provisions
are adopted in a large-scale judicial system affecting millions of American families.
I. NEEDS BASED BANKRUPTCY (TITLE I)
These provisions would establish new hurdles for consumers seeking bankruptcy relief
by forcing them to meet an arbitrary test concerning ability to repay. Any consumer's filing
under chapter 7 could be challenged by any creditor who believed that consumer could pay
more than 20% of his or her debts in five years without interest. The provision would also
create personal liability for bankruptcy lawyers who zealously represent their clients, if a
client's case is dismissed after court review.
PROBLEMS WITH THESE PROVISIONS:
The bill does not protect consumers who have no ability to pay their creditors.
The bill would allow creditors to file litigation concerning a debtor's eligibility for
bankruptcy against debtors of extremely limited financial means. Even unfounded
motions would serve as leverage for creditors, because low-income debtors are least
able to pay an attorney to represent them in this potentially complex litigation.
A bright line 20% repayment capacity test to establish ability to pay will
reward debtors who run up more debt or who reduce their income.
The bill would create irremediable conflicts of interest between attorneys and
their clients. Attorneys' exposure to potential liability will prevent them from taking
on meritorious cases. Attorneys should never have personal liability simply because
their client's cases are politically unpopular.
The bill would create a substantial federal bureaucracy to collect money for
creditors even though there is no evidence that the new expenditures would
capture significant new funds for creditors. Evidence shows that better off debtors
are already choosing to enter repayment plans in chapter 13 or chapter 11 voluntarily.
Creditors' evidence purporting to show substantial ability to repay in chapter 7 has been
discredited by the General Accounting Office and the Congressional Budget Office. It
makes little sense to force people into repayment plans which are likely to raise less
than four cents per dollar per year for creditors at an estimated cost of ten cents per
dollar per year for taxpayers.
2
Two thirds of repayment plan cases already fail. Involuntary plans based on
unrealistic expectations concerning future income would fail at an even higher
rate.
HOW TO FIX THE PROBLEMS:
Include an effective "safe harbor" which would preclude unwarranted attacks on
debtor's eligibility if the debtor has less than average income. These debtors are highly
unlikely to have income available to make significant payments to creditors and they
should be protected from the leverage created by an attack which forces them to spend
money on a legal defense. The "safe harbor" provision currently in the bill is
insufficient to do the job.
Provide an effective fee shifting provision for all other creditor motions. Creditors
with small claims cannot be excepted from fee shifting since most chapter 7 creditors
do not file proofs of claim at all. Moreover, raising a motion based on a small claim
can create inappropriate leverage against a debtor who would have to pay more to an
attorney to defend than the total amount of the creditor's claim.
Provide some discretion to Judges to determine when a debtor is abusing the system.
Any bright line test is subject to abuse by those who would manipulate the system by
incurring more prebankruptcy debt or by reducing their ability to pay.
Delete the provision for attorney's personal liability for handling cases.
II. ENHANCED PROCEDURAL PROTECTION FOR CONSUMERS (TITLE II)
Consumers need effective remedies against creditors that violate their obligations in the
bankruptcy system. The hundreds of thousands of debtors who were hurt by the recent
bankruptcy related misconduct of Sears and other retailers were inadequately protected until
the Federal Trade Commission, the Attorneys General and others stepped in. In the original
version of S. 1301, enhanced protections for consumers were effective and enforceable. These
provisions were watered down in the subcommittee mark-up at the insistence of creditors who
would prefer not to be held accountable when they violate the Bankruptcy Code. The original
version of these provisions should be restored.
III. NOTICE OF ALTERNATIVES AND NEW FILING REQUIREMENTS (Section
301)
3
This section would give government imprimatur to credit counseling agencies that
register with the court. It would also substantially expand filing requirements for debtors,
beyond the existing twenty pages of certified official forms. Of particular concern, debtors
would be required to make many years of tax returns available as part of the public record.
PROBLEMS WITH THESE PROVISIONS:
Although not all credit counseling agencies are fraudulent, there are numerous
fly by night operations which charge debtors substantial sums of money for very
little service. For example, a court found in Fleet VS. United States Consumer
Council that the fee charged to hundreds of consumers by a credit counseling
organization was "an unconscionable price and a fraud". The bill does not provide
oversight funding or a mechanism to prevent unqualified organizations from registering
with the court. Nevertheless, the court will have no choice other than to recommend all
registering agencies to consumer in financial trouble. (N.B. Another provision of the
bill, added by a split vote of the subcommittee, would actually require that consumers
use credit counseling programs prior to filing bankruptcy. This provision would
dissipate a debtor's scarce resources, further encourage fraud, and prevent many
debtors from filing when they need emergency relief. It is discussed in more detail
below.)
Additional filing requirements are traps for the unwary. If bankruptcy needs to
be filed on an emergency basis, necessary information is unlikely to be quickly
available. The IRS takes approximately six months, for example, to provide copies of
tax returns. If a debtor is missing even one document, the bill provides that the case
must be dismissed (sec. 312). That debtor would then have to litigate their right to get
bankruptcy relief when the missing document is secured. (sec. 303).
Bankruptcy courts have no room to store the millions of new documents which
would have to be filed if this provision becomes law.
Tax returns filed by the debtor would become part of the public record --
available for inspection by any member of the public. This would invade the
privacy of the many American families who legitimately need bankruptcy and
would facilitate theft of identity fraud. Theft of identity is a common crime which
is conducted, often by organized rings, to obtain fraudulent credit or public benefits,
and as a cover for illegal immigration.
2 95 B.R. 334 (E.D.Pa 1989).
4
HOW TO FIX THE PROBLEMS:
The bankruptcy system can develop a form which describes alternatives to
bankruptcy without providing specific names of service providers. The court should no
more be in the business of recommending particular credit counselors than it would be
willing to recommend particular attorneys.
Allow trustees to obtain additional documentation when further investigation of a
debtor's circumstances in warranted. Continue to allow creditors to initiate a process
to investigate the debtor by holding an examination pursuant to Bankruptcy Rule 2004.
Allow trustees to request tax returns in any case upon a reasonable suspicion of fraud
without making the returns a part of the public record. This would serve as a necessary
filter to prevent unwarranted documentation requirements affecting all debtors, but
nevertheless allow fraudulent filers to be caught.
IV. DISCOURAGING REPEAT FILINGS (Section 303)
The section eliminates the automatic stay after 30 days whenever a debtor has had a
case dismissed and refiles within the following one-year period. The debtor would have to
bring an immediate motion to obtain an additional stay, at considerable additional expense.
PROBLEMS WITH THESE PROVISIONS:
Many bankruptcy debtors file a second bankruptcy case after their first case
fails for entirely legitimate reasons. The most common reason for refiling is that a
debtor, generally unrepresented, inadvertently fails to meet one of the complicated
filing requirements of the Bankruptcy Code. The second case becomes necessary to fix
the problem. The next most common reason is a legitimate change in circumstances
which would allow debtors to complete a chapter 13 plan and pay their creditors. If S.
1301 is passed, these debtors would be required to incur substantial litigation costs in
the second case even if they did not do anything wrong in the first case. These
litigation expenses would take money away from what is available to pay creditors.
The bill would create a common new type of emergency motion to be resolved
within 30 days by already overburdened courts.
This provision would work in concert with new provisions requiring dismissals
of cases for technical reasons. If a case is dismissed for technical reasons under
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section 312, debtors without resources to pay for litigation, i.e. the poorest debtors,
could not get back into court.
HOW TO FIX THE PROBLEMS:
The American Bankruptcy Institute and National Bankruptcy Review Commission have
recommended limits on refilings which prevent abusive refilings without precluding legitimate
cases. These provisions would make it hard for debtors to refile when their goal is to hinder
creditors, but allow refiling when the goal is to pay creditors.
V. LIMITATIONS ON THE CODEBTOR STAY (SECTION 305)
The codebtor stay applies only in chapter 13 (11 U.S.C. § 1301). If a consumer files
bankruptcy and proposes to pay a creditor, this stay prohibits the creditor from pursuing a
codebtor who is not in bankruptcy -- to the extent the debt will be paid in the bankruptcy
process. S.1301 would allow creditors to ignore the stay if they believe that the debtor did not
receive consideration upon incurring the debt or if the property securing the debt is not in the
possession of the debtor.
Thus, for example if a husband-debtor is separated from his non-debtor wife, a
creditor could simply repossess a car from the wife even though the husband was
making payments on the car in chapter 13. The current statute properly places such
decisions in the hands of the court, not creditors, and should not be changed.
VI. AUDIT PROCEDURES (SECTION 307)
This provision gives power to the Attorney General to establish audit procedures to
verify information given by bankruptcy debtors. One audit in every 50 cases will be required.
PROBLEMS WITH THESE PROVISIONS:
This provision is unnecessary. The United States trustee already has the
power and responsibility to audit cases. By adding the costs of paying accountants
to perform these audits, the creditors are again seeking to drive up the costs of
bankruptcy paid by debtors and taxpayers.
One audit in 50 cases will require more than 25,000 audits in the bankruptcy
system. Even the IRS, which has responsibility to the public fisc, audits less than one
case in one thousand.
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Large numbers of audits would drive up the costs of bankruptcy for all
debtors. Since audits would require significant attorney time, bankruptcy attorneys
would need to raise fees to cover the cost of a potential audit. Since debtors to be
audited are unlikely to be able to afford additional attorney fees at the time of the audit,
attorneys are likely to raise their fees generally and spread the risk of new costs. This
would drive up the cost of bankruptcy and make it unaffordable for additional low and
moderate income debtors.
HOW TO FIX THE PROBLEMS:
Rewrite the provision for audits to make them available as an additional tool for
trustees and the United States trustee. Create a provision which would require audits in a
limited number of cases based on reasonable suspicion that the debtor is engaged in fraud upon
creditors.
VII. NOTICE TO CREDITORS (Section 309).
This provision would strike the language in the Bankruptcy Code (11 U.S.C. § 342(c))
which currently protects a debtor for minor deficiencies in notices to creditors which do not
effect the ability of a creditor to understand its rights. Creditors would be allowed to ignore
notices they receive which are not sent to a preferred address. (Most often the only address
information in the possession of a debtor is the address on the billing statement.)
This amendment thus provides opportunities to creditors to claim that their debts were
not discharged, and to violate the automatic stay with impunity, based upon minor
irregularities in giving notice of the bankruptcy, even if the creditor received actual notice.
A better solution would be to require creditors that want notice sent to a particular
address to provide that information to a central registry which would be available, perhaps on
the internet, to all debtors and their lawyers. However, creditors like any other participant in
an American legal system, should not be allowed to avoid responsibility for transmitting
information through internal processes. Creditors must take responsibility so that notice which
is actually delivered is redirected intraoffice to the appropriate personnel.
VIII. DISMISSALS FOR FAILING TO MEET TECHNICAL FILING
REQUIREMENTS (Section 312)
This section would provide for automatic dismissal for failure to file required
documents, including many which the debtor would not be able to obtain quickly as described
above (Sec. 301). This provision would work in tandem with section 303 of the bill which
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would eliminate the automatic stay if the debtor then attempted to refile because of the
presumption that such a dismissal is always in bad faith.
Judicial discretion on this issue, as under current law, is necessary to prevent hardship.
The amendment, other than giving debtors the right to request an additional 20 days to file
documents, eliminates all judicial discretion.
IX. DEBTS INCURRED TO PAY NONDISCHARGEABLE DEBTS (Section 316)
This section would give a creditor the right to claim that its debt is a priority debt or a
nondischargeable debt if its debt was incurred to pay a priority or nondischargeable debt.
Many credit card lenders will use this provision to argue that because the debtor
incurred debt from that lender, the debtor had other funds available to pay child support,
taxes, or other types of non-dischargeable debts. Extensive litigation will undoubtedly be
necessary to trace borrowed funds. This litigation would give enormous leverage to creditors
since bankruptcy debtors are typically poor and cannot fund litigation costs in the bankruptcy
process. Many default judgements would result.
This provision should be deleted from the bill.
X. RESTRICTIVE DEFINITION OF HOUSEHOLD GOODS (Section 318)
This proposed amendment revives the creditors' attempts to import the restrictive
Federal Trade Commission definition of household goods into the Bankruptcy Code. Current
law already protects creditors by limiting a debtors exemption in any particular household
good to $400 (11 U.S.C. § 523(d)(3)). Valuable household goods are thus already available to
creditors.
This provision would allow creditors to threaten repossession of items that have minimal
resale value, but high sentimental or replacement value to the debtor. Based on the FTC
definition, creditors in the past have claimed the right to repossess children's swing
sets, lawn mowers, children's toys, sleeping bags, family heirlooms worth less than
$400, and other similar items. Because there is no market for profitable resale of these
items, the right to threaten repossession is the only value which these items have to the creditor
-- the value of this threat should not be institutionalized as federal policy. These claims have
been repeatedly rejected by Congress and the courts in the past.
The context of the FTC rule is important. The FTC rule applies whether or not a
debtor is having financial problems. Bankruptcy debtors, almost by definition, are in default
and unlikely to be able to afford substitute property. The leverage associated with a threat of
repossession thus goes up substantially.
Because the FTC definition of household good is so restrictive, there has been
substantial litigation over many years concerning what property qualifies for exemption under
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the rules. There are many open issues. All of this litigation would be imported into the
bankruptcy process in place of the present plain language definition adopted by the Courts.
This provision should be deleted from the bill.
ADDITIONAL AMENDMENTS MADE IN THE SUBCOMMITTEE
A. CAP ON HOMESTEADS
This provision would limit homestead exemption in all states to $100,000. This
provision restricts states right to protect their citizens as they see fit with safeguards for their
homes.
A provision in the bill to provide additional protections for family farms would not
work as intended. The residence of the farmer would be protected, but not the farmland.
A better and more expansive provision would preclude transfers of property into any
exemptible form if the transfer exceeds $100,000. See H.R. 3146, section 7 (1997). This
provision would preclude debtors from moving to a state solely to claim an unlimited
homestead. It would also protect against debtors transferring substantial property into
exemption pension funds. In addition, any ceiling on state exemptions should be balanced by a
modest state floor.
B. PROVISION REQURING PRE-BANKRUPTCY DEBT REPAYMENT PLANS
This provision overlaps and conflicts with section 301. It requires all debtors to make a
good faith pre-bankruptcy attempt to create a debt repayment plan through approved credit
counseling program.
PROBLEMS WITH THESE PROVISIONS:
The bill provides no funds or procedures for courts or trustees to investigate
credit counseling organizations, their fees, or the success rate of the plans they
set up. As discussed above (section 301), the availability of fees for credit counseling
business will induce fraudulent operations to claim to provide these services.
Debtors will be forced to use funds which might be available to pay creditors
on unsuccessful credit counseling plans.
Existing credit counseling organizations are swamped with customers. CCCS
alone received more than two million requests for assistance in 1997. Requests for this
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assistance has increased far faster than bankruptcy filings. Consumers may have to
wait more than a month for an appointment.
Some debtors have emergency problems, such as utility shut-off, which
prevent them from taking advantage of credit counseling.
One obstinate creditor can prevent a credit counseling plan from going
forward. If a family has six creditors, five may agree to the plan but the sixth one will
not. If bankruptcy is necessary to deal with the sixth creditor, the other five can use
this provision to litigate the consumer's eligibility for bankruptcy even if the consumer
was not at fault.
Hundreds of thousands of disputes about the debtor's good faith will flood the
courts. Complicated trials will be necessary. Credit counselor testimony
concerning the extent of the debtor's efforts to arrange a repayment agreement will be
necessary at these hearings. This testimony will take away from counselors' ability to
do their jobs.
HOW TO FIX THE PROBLEMS:
This provision should be deleted from the bill. As discussed above under section 301,
the bankruptcy system can provide better educational materials and programs for debtors
including information on alternatives to bankruptcy.
C. EVISCERATION OF THE AUTOMATIC STAY FOR TENANTS
This provision would allow landlords to continue eviction proceedings against their
tenants when they file bankruptcy without regard to the automatic stay.
PROBLEMS WITH THIS PROVISION:
Debtors cannot make their best efforts to participate in the bankruptcy
process, if immediately after they file, they lose their homes. Landlords can
already proceed against tenants after a brief breathing spell, if the tenant fails to make
payments.
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A significant number of tenants wish to use the bankruptcy process to cure
their back rent obligations by full payment. This provision will contribute to
homelessness by preventing debtors from using the bankruptcy system to get caught up
on their obligations to their landlords.
Upon eviction, those tenants who are not homeless most often have their
housing costs go up. This reduces the money which can be committed to creditors in
the bankruptcy system.
HOW TO FIX THE PROBLEMS:
Rewrite the provision so that landlords can obtain expedited relief from stay, if the
debtor fails to resume making monthly payments within 30 days.
D. PRESUMING FRAUD FOR CREDIT EXTENSIONS ON THE EVE OF
BANKRUPTCY
This provision creates a presumption that any use of credit no matter how necessary or
minor, if incurred within 90 days of bankruptcy is fraudulent. The Bankruptcy Code already
contains a provision creating a presumption that purchases of luxury items or cash advances or
cash advances within 60 days before bankruptcy were fraudulent. 11 U.S.C. § 523(a)(2)(C).
This prevents debtors from loading up on luxury goods on the eve of bankruptcy.
PROBLEMS WITH THIS PROVISION:
Creditors want to be able to assert fraud against honest debtors who have done
nothing wrong. Fraud is a serious offense. If words are to have any relation to their
true meanings, Congress should not so casually classify millions of American
consumers as dishonest and fraudulent. Honest people ought not to have their good
name and reputation besmirched by having fraud established based on a set of
circumstances which have nothing to do with fraud.
The credit industry is constantly claiming that consumers commit fraud, but in
real life rarely can convince a court that this is true -- generally because the
American consumer is, by and large, honest. The industry has apparently decided
to dispense with the nuisance of having to show any fraud by creating a presumption
based on the temporal relationship between use of credit and bankruptcy. In the vast
majority of cases, the presumption would be false, but debtors would nevertheless have
to expend litigation costs to overcome it.
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The only debtors that would be hurt by such a presumption would be those
who were innocent of fraud. Any debtor who actually did seek to run up debts and
then avoid them in bankruptcy would simply wait out the 90 days, or whatever period
was necessary. Only those debtors who were compelled to file due to an emergency,
or were too unsophisticated to even know about the 90 day rule would be ensnared.
The provision would enhance the leverage of creditors who retain a
nondischargeable claim. The poorest debtors would be threatened with draconian
collection action on the nondischargeable portion of their claim. Debtors would have
little choice other than to agree to pay a larger amount than is legitimately
nondischargeable in order to obtain manageable payment terms.
HOW TO FIX THE PROBLEMS:
Delete this provision from the bill. Current law and the presumption of fraud for use
of credit for luxury goods are sufficient to prevent dishonesty and protect creditors.
F. DEBTS INCURRED BY FRAUD IN CHAPTER 13
This provision makes debts incurred by fraud nondischargeable in chapter 13.
PROBLEMS WITH THE REVISION:
While this proposal has some facial appeal, it is unworkable due to the
structure of chapter 13. As the proliferation of creditor claims of fraud in chapter 7
has shown, fraud litigation is time-intensive and expensive. In chapter 13, all of a
debtors income is devoted to payments for necessities or payments to creditors. 11
U.S.C. § 1325(b). A chapter 13 debtor thus has no ability to pay for the litigation
necessary to oppose a creditor claim of fraud.
Because debtors would have no allowable funds to pay for the litigation, they
would typically lose by default. Creditor leverage would go up accordingly,
including leverage for unfounded claims.
If the law is changed to create a mechanism to allow debtors to pay attorneys
for this work those payments come from available income and would reduce the
money available to pay all other creditors. One creditor could effectively prevent
other creditors from being paid.
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HOW TO FIX THE PROBLEMS:
Define a very narrow class of fraud claims which would be nondischargeable in chapter
13 in order to prevent the truly dishonest debtor from gaming the system. Marginal claims of
fraud based on use of credit within the creditor's extended limits should not be actionable.
Provide heavy sanctions for creditors who raise fraud in chapter 13, but cannot prove it. This
would help to prevent unfounded claims.
CONCLUSION
The bankruptcy laws are complex. Radical change has the potential to
undermine the economy by making the risk of borrowing too great for many American
consumers. Banks are continuing to report record profits. There is no reason to take
action that jeopardizes the safety net for working class American families.
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