Beyond the Bankruptcy Bill Transparency in the Bankruptcy System

As this article is being written, the bankruptcy reform bill is working its way
through Congress. It appears that a bankruptcy bill could become law by April or
May, and consequently the bankruptcy community is focusing upon how to prepare for
legislative implementation. Debtors' attorneys wonder what forms will be used for
means testing. Credit counseling agencies seek information on the qualifications for
approval as a provider of pre-filing credit counseling. Trustees question how their
business operations will be affected. Bankruptcy clerks prepare to carry out new
noticing and record-keeping duties.

All of this preparation for the immediate impact of the legislation is crucial,
because the legislation will bring about major changes in the manner in which virtually
all bankruptcy cases are conducted. Indeed, the U.S. Trustee Program (USTP)
established working groups a year ago to examine issues pertaining to means testing,
credit counseling, debtor education, debtor audits and chapter 11 small-business
cases, and to develop preliminary plans for implementing the legislative mandates in
those areas.

Yet, it is also worthwhile to momentarily look beyond the immediate effects of
the legislation to contemplate the extraordinary amount of information about the bankruptcy
system that will be collected pursuant to the legislation. The pending legislation
requires a tremendous amount of new data to be collected and reported upon; in
addition, the bill calls for a number of one-time studies on a variety of topics.
Whatever one's view of the substantive changes brought by the bill, it is hard to
disagree with the fact that the massive amount of new reporting it mandates could bring
a new level of transparency to the system. Overlaying all of these new
information-collecting requirements is the bankruptcy courts' move to electronic case
filing, which will make much more information easily accessible to the public.

To fulfill all of the new responsibilities for reporting and collecting information,
and to do so while moving to a total electronic environment, will require a
significant change in business practices within the bankruptcy community. However, we
will all benefit from the availability of increased information upon which to analyze
and base our decisions.

Information Required

Consider the following studies and informational requirements in H.R. 333 and
S. 420:

• Section 103 requires the director of the Executive Office for U.S. Trustees
  (EOUST) to report on the use of the Internal Revenue Service standards for
  determining expenses and the impact that the application of the standards has on debtors
  and the courts.
• Section 105 requires the EOUST to conduct a pilot project for debtor
  education, evaluating the effectiveness of various personal financial management programs.
• Section 107 requires the EOUST to issue schedules of reasonable and necessary
  administrative expenses relating to the administration of a chapter 13 plan for each
  judicial district.
• Section 230 requires the comptroller of the United States to study and report
  on the feasibility, efficacy and cost of requiring a trustee to supply specified
  information about a debtor's bankruptcy case to the Office of Child Support
  Enforcement.
• Section 313(b) requires the EOUST to prepare a report on the use of the
  Federal Trade Commission's definition of "household goods" for the purpose of avoiding
  non-possessory, non-purchase money liens.
• Sections 419, 434 and 435 relate to the requirement that small business
  debtors file periodic financial reports and other documents. This replicates existing
  practice in most districts as well as the requirements of §602, as described below.
• Section 443 requires the Small Business Administration, in consultation with
  the Attorney General, EOUST and AOUSC, to study the factors that cause small
  businesses to seek bankruptcy relief and to successfully complete their chapter 11
  cases, and how the bankruptcy laws may be amended to help small businesses remain
  viable.
• Section 601 requires the bankruptcy clerk to collect certain statistics and the
  AOUSC to report on the information collected. Required information includes scheduled
  total assets and liabilities by category; debtors' current monthly income, average income
  and average expenses; aggregate amount of debts discharged; average case duration;
  specified information on cases in which reaffirmation agreements were filed; specified
  information on chapter 13 cases; the number of cases in which creditors were fined
  for misconduct and the amount of punitive damages awarded; and the number of cases
  in which Bankruptcy Rule 9011 sanctions were imposed against debtors' counsel and
  the amount of damages awarded.
• Section 602 requires the Attorney General to promulgate rules mandating the
  establishment of uniform forms for final reports in cases under chapters 7, 12 and
  13, and periodic reports in chapter 11 cases. Final reports in chapters 7, 12
  and 13 must include case duration, assets abandoned, assets exempted, receipts and
  disbursements, administrative expenses, claims asserted, claims allowed, disbursements
  to claimants and claims discharged without payment. Periodic reports in chapter 11
  cases must include the standard industry classification for the debtor's business; case
  duration; number of full-time employees; cash receipts, cash disbursements and
  profitability; compliance with the Bankruptcy Code, filing of tax returns and
  payment of taxes; professional fees approved; and plans filed and confirmed, including
  aggregate recoveries by class.
• Section 603 requires the U.S. Trustee to submit reports as directed by the
  Attorney General on the results of random debtor audits, including the percentage of
  cases by district in which a material misstatement of income or expenditures is
  reported.
• Section 1230 requires the Federal Reserve Board to study certain consumer
  credit industry solicitation and credit-granting practices, as well as the effect of
  those practices on consumer debt and insolvency.
• Section 1307 permits the Federal Reserve Board to study the laws regarding
  consumer liability for unauthorized use of a debit card.
• Section 1308 requires the Federal Reserve Board to study the impact of the
  extension of credit to college students on the bankruptcy filing rate.

Other informational needs are embedded in the text of the bill. Consider, for
example, §603, which calls for two types of debtor audits—a random audit and an
audit targeting debtors whose income or expenses "reflect greater-than-average variances
from the statistical norm of the district." Because statistical norms do not exist
today, income and expense information will have to be collected to implement these
audits.

Conclusion

Over the next few years, what we all do, how we do it and what we produce
will be the subject of far greater scrutiny than ever before. This could have a
tremendous impact on debtors' counsel, creditors and trustees, as well as on
government entities such as the courts and the USTP. The extent to which all of
the newly mandated information will be publicly available is not yet determined, but
the rudimentary structure will certainly be in place to extract data.

How different entities use this information will vary. For the USTP, however,
it presents an opportunity to be able to identify problem cases more readily, and to
perform our responsibilities and target our resources in a more efficient manner.