To amend title 11 of the United States Code, and for other purposes.
An Analysis of the Consumer Bankruptcy Provisions of H.R. 3150
Proposed Bankruptcy Reform Legislation
Written by:
Hon. Eugene R. Wedoff
United States Bankruptcy Court
Northern District of Illinois
Chicago, Illinois
Prepared for the American Bankruptcy Institute
Web posted and Copyright © July 16,
1998, American Bankruptcy Institute.
H.R. 3150, passed on June 10, 1998 by the House of Representatives, proposes major
changes to the consumer provisions of the Bankruptcy Code (Title 11, U.S.C.). An analysis of the consumer provisions of the
bill, as originally proposed in February, 1998, has previously been published by ABI.
On May 18, 1998, the bill was amended by the House Judiciary Committee, and, as amended,
favorably reported. The bill was further amended prior to its passage by the House. In
order to allow an understanding of the bill as passed, the original analysis has been
completely revised. However, the current analysis continues to follow the format of the
original paper: first, identifying each of the changes that the bill would make in
the current consumer law; second, assessing the impact that these changes would
have in the operation of the law; and third, suggesting alternative approaches,
where appropriate, to achieving the goals of the legislation.
A similar bill, S. 1301, has been favorably reported by the Senate Judiciary Committee.
Where a section of H.R. 3150 covers the same subject matter as a section of S. 1301, a
reference to S. 1301 is included in the current analysis.
Introduction to current consumer bankruptcy law.
A description of the operation of current consumer bankruptcy law—which may be
helpful in understanding the changes proposed in H.R. 3150—is available through the
following link: Introduction to
Proposed Bankruptcy Reform.
Summary: major effects of the consumer bankruptcy provisions of H.R. 3150.
As discussed in the section-by-section analysis that follows, H.R. 3150 appears
designed to reduce bankruptcy filings and increase payments to creditors in bankruptcy.
However, the bill contains a number of provisions that may impair the overall
effectiveness of the consumer bankruptcy system. The major changes in consumer bankruptcy
law that would be effected by H.R. 3150 include the following:
1. Debts for family support obligations would be accorded the first priority in
distribution, ahead of the administrative expenses of the bankruptcy case. In Chapter 13,
each plan would have to provide for the payment of family support obligations before all
other unsecured claims, including expenses of administration. §145. Property settlements
not required for support would be made nondischargeable debts in both Chapter 7 and
Chapter 13 cases. §146.
2. Debtors would generally be ineligible for bankruptcy relief until they had first
attempted to negotiate a voluntary repayment plan through a consumer credit counseling
service approved by the United States trustee for the district in which the bankruptcy
case would be filed. §104. After a debtor received a bankruptcy discharge, the debtor
would be ineligible for any bankruptcy relief for a period of five years, and ineligible
for Chapter 7 relief for a period of 10 years, without consideration of good faith or
economic situation. §171.
3. Chapter 7 relief would be denied to a class of debtors, based on ability to pay a
specified portion of their debt. Debtors with relatively large debt would remain eligible
for Chapter 7 relief, while those with smaller debt would be ineligible. Testing for
eligibility—incorporating IRS collection standards of difficult
applicability—would be required for all debtors whose household income was at least
equal to a national median, and Chapter 7 trustees would be required to investigate and
file a report on eligibility in each case. §101. Charitable contributions would be
allowed to offset income available to pay debts, and trustees would generally not be able
to recover charitable contributions as fraudulent conveyances. §118. Any party in
interest would be allowed to challenge the debtor’s eligibility. §103.
4. For debtors whose household income was at least equal to a national median, Chapter
13 would be changed by increasing the minimum plan term to 5 years. The superdischarge in
Chapter 13 would largely be eliminated. §§102, 146, 409, 508. Debtors in Chapter 13
would be allowed during their bankruptcy cases to pay up to 15% of their gross annual
income to charities. §118.
5. Debtors would be notified about alternatives to bankruptcy, and of their obligations
in filing bankruptcy. These obligations would include submission of tax returns to the
United States trustee (with mandatory disclosure to any interested party), and filing of
detailed information regarding income, expenses, and assets, subject to formal audit.
Failure to file this information would result in automatic dismissal. §§111, 404, 406,
407.
6. In both Chapter 7 and Chapter 13 cases, secured creditors would receive secured
claims in an amount no less than the retail value of the collateral that secures the
claim, and, in some circumstances, the full amount of the claim, regardless of collateral
value. §§ 128, 129, 130, 162. Relief from stay would be granted in circumstances of
repeated bankruptcy filings without regard to equity available for distribution to
creditors generally. § 121. Condominium associations would be given a nondischargeable
debt for fees that accrue after bankruptcy regardless of whether the debtor was occupying
the premises. §148.
7. All debts incurred by a debtor within 90 days of the bankruptcy filing would be
presumed to have been incurred by fraud, and all fraudulently incurred debts would be
nondischargeable in both Chapter 7 and Chapter 13 cases. §§142, 143.
8. Bankruptcy court decisions would be appealable directly to the circuit courts of
appeals. §412.
9. Detailed provisions are set out regarding centralized collection and dissemination
of bankruptcy data. §§441-43.
10. An unlimited exemption would be provided for tax-exempt retirement funds. §119.
Debtors who changed their state of domicile within one year of bankruptcy would apparently
be required to employ federal exemptions, rather than the exemptions of either state of
domicile, and certain prepetition exchanges of nonexempt for exempt property would be
disallowed. §§181, 182.
The consumer bankruptcy provisions of H.R. 3150: specific proposals.
More than fifty of the sections of H.R. 3150 affect consumer bankruptcy cases. These
provisions are included in three of the bill’s titles. Title I ("Consumer
Bankruptcy Provisions"), Title IV ("Bankruptcy Administration"), and Title
V ("Tax Provisions"). This analysis deals with each of these sections in the
order of presentation; cross-references indicate areas in which one proposal affects
another. An indication is also given where the substance of the proposal is similar to a
provision of S. 1301. Sections that have been added, or substantially changed from the
original version of the bill, are marked by an asterisk.
Title I ("Consumer bankruptcy provisions")
Subtitle A ("Needs-Based Bankruptcy")
*§101 ("Needs based bankruptcy") (see S. 1301, §102)
Changes. This section of the bill would institute "means-testing" for
Chapter 7 relief, eliminating the choice of Chapter 7 bankruptcy for debtors who can pay a
defined portion of their future income to general unsecured creditors. Subsection 101(3)
of the bill would add a new provision to §109(b) of the Code. The new provision would
prohibit an individual from being a debtor under Chapter 7 if the individual had
"income available to pay creditors." The remainder of §101 sets up a procedure
for determining "income available to pay creditors" and a mechanism for
implementing the denial of Chapter 7 relief to debtors who have such income.
Means-testing. Whether a debtor has "income available to pay
creditors," and thus is ineligible for Chapter 7 relief, involves a three-step
determination. The first step is to compute the debtor’s "current monthly total
income." This consists of the debtor’s pretax (gross) income, from all sources,
averaged over the six months preceding the bankruptcy filing. It is to include "any
amount paid by anyone other than the debtor . . . on a regular basis to the household
expenses of the debtor and the debtor’s dependents."
In the second step, the debtor’s total monthly income is reduced by three
"automatic" categories of payments to obtain "projected monthly net
income," i.e., the amount available to pay general unsecured claims. The three
payment categories are: (1) general living expenses for the debtor and the debtor’s
dependents—excluding repayment of debt—according to standards established by the
Internal Revenue Service for purposes of collecting unpaid tax obligations; (2) all of the
payments on secured debt that will come due during the five years after filing, divided by
60 (to obtain a monthly average); and (3) all of the priority debt owed by the debtor,
again divided by 60.
Finally, in the third step, projected monthly net income may be further reduced by a
"personalized" category of "extraordinary circumstances," involving
either loss of income or additional expenses exceeding the "automatic"
categories. Such extraordinary circumstances must be itemized in a detailed sworn
statement, attested to by the debtor and the debtor’s counsel.
A debtor will be found to have "income available to pay creditors"—and
hence be ineligible for Chapter 7 relief— if three tests are met. First, the
debtor’s "current monthly total income" must be at least as much as the
national median for a household of the same size as the debtor’s household and any
smaller household, as established by the Census Bureau. Second, the debtor’s
"projected monthly net income" must be greater than $50. Third, the projected
monthly net income must be "sufficient to repay twenty per cent or more of unsecured
non-priority claims during a five-year repayment plan."
Implementation. Section 101 of the bill contains two mechanisms for implementing
means testing. First, Chapter 7 trustees are given the additional duty of investigating
and verifying the debtor’s projected monthly net income and filing a report with the
court as to whether the debtor is disqualified for Chapter 7 relief under the "income
available" standard. If the report finds that the debtor is not eligible for relief,
the trustee is required "to provide a copy of such report to the parties in
interest."
Second, if the debtor asserts extraordinary expenses, any party may object to the
statement within 60 days after the debtor makes the disclosures required by § 521 of the
Code (as expanded by §407 of the bill, discussed below), and if such an objection is
made, the bankruptcy court is to determine the matter, with the debtor having the burden
of proof.
A third implementation of means-testing is contained in §103 of H.R. 3150. As
discussed below, this provision would amend §707(b) of the Code to allow creditors to
seek dismissal or conversion of Chapter 7 cases that they believe fail the means test.
Chapter 13. Finally, §101(6) of H.R. 3150 sets out a provision unrelated to
means-testing. This final change would impose on Chapter 13 trustees the additional
responsibility of investigating and verifying the debtor’s monthly net income, and
filing annual reports with the court as to whether the amounts paid under the
debtor’s plan should be modified because of changes in the debtor’s net income.
Impact. Means-testing in general.The means-testing incorporated in §101
of H.R. 3150 would effect a major change in bankruptcy policy. That policy has
traditionally allowed debtors in financial difficulty to obtain an immediate fresh start
in exchange for surrendering their nonexempt assets. Accordingly, current § 707(b) denies
Chapter 7 relief only where this relief would be a "substantial abuse" of the
provisions of Chapter 7, and it provides that there is a presumption in favor of granting
the relief sought by the debtor. The means-testing provisions of H.R. 3150 would change
this, denying an immediate fresh start to a category of debtors in genuine financial
difficulty—unable to pay their current bills from available income—because their
future income is sufficient to pay 20 percent of their debt over five years. Thus, at a
given income level, those who have accumulated relatively small amounts of debt would be
denied Chapter 7 relief, while those who have accumulated relatively large amounts would
remain eligible. It can be anticipated that this change would decrease the number of
Chapter 7 bankruptcies, with a corresponding increase in cases under Chapters 11 or 13 or
in nonbankruptcy resolutions of consumer debts. In this way, means-testing may lead to
greater payments to creditors. But it may also have unintended consequences. For example,
at the present time, many debtors are able to avoid bankruptcy by working out voluntary
arrangements with creditors through credit counseling services. The willingness of
creditors to cooperate in such voluntary arrangements may be influenced by the fact that
the debtors otherwise have the option of Chapter 7 bankruptcy. If that option is removed,
the creditors may be less willing to enter into the voluntary arrangements. Means-testing
may also increase home foreclosure rates, since debtors now able to remove other debt in
Chapter 7 would be denied that option, and may be ineligible for Chapter 13 or unable to
complete a Chapter 13 plan.
However, regardless of the general desirability of means testing for Chapter 7 relief,
the means testing prescribed in §101 of H.R. 3150 presents substantial difficulties, both
in terms of reasonableness and practicality. Indeed, some of the practical
difficulties—involving the application of the IRS collection standards—would
make this testing difficult, if not impossible, to apply in many situations.
Determining "current monthly total income." The formula established by
H.R. 3150 for determining a debtor’s "current monthly total income" would
present substantial difficulty whenever income is earned by another member of the
debtor’s household, such as a nondebtor spouse or an adult child. The bill states
that any amount "paid by anyone other than the debtor . . . on a regular basis to the
household expenses of the debtor or the debtor’s dependents" should be counted
as part of the debtor’s income. Under this standard, it might be thought that all of
the income of a nondebtor household member should be counted, since all of that
person’s income, in some sense, supports the household. However, if the nondebtor
does not make "regular payments," attributable to identifiable expenses, it may
be that the standard does not apply. For example, a spouse’s payments into a savings
account or investment plan might well be found not to be amounts "paid to household
expenses." Interpreted in this way, the means test would require a detailed analysis
of the income and expenditures of each member of the debtor’s household.
The threshold for means-testing.Median household income, varying with size of
the household, is used in the proposal to establish a threshold below which there is no
need to examine income on an individualized basis: an individual whose total household
income is less than the median income, as determined by the Census Bureau, for a household
of the same or smaller size, would not be disqualified from Chapter 7 relief regardless of
the household expenses. However, there are two difficulties with the use of Census Bureau
medians. First, the information may be outdated. For any given year, the proposal states
that household income is based on the most recent Census Bureau figures available as of
January 1. As of January 1 of any year, the Census Bureau only has information available
for the second year before that date. Thus, 1996 income figures are presently the most
recent. In this way, the threshold under the proposal compares a debtor’s current
income to the median income that existed up to two years earlier. In times of high
inflation, this would substantially increase the number of cases subject to individual
scrutiny. (Similarly, the six-month average used to determine the debtor’s current
income will result in an artificially high income figure whenever the debtor’s income
has declined shortly before the bankruptcy filing.)
The second problem has to do with household size. The proposal employs median household
income, varying with the size of the household, with the apparent intent of allowing a
higher threshold income for larger households. In reality, however, median household
income changes erratically with household size. The median income for a single individual
(in 1996, the last year for which Census Bureau figures are currently available) was
$18,426, less than twice the federal poverty level of $9,260. But median income for a
household of two was $39,039, more than three times the poverty level of $12,480. The
median income continues to increase with household size for households of three and four
persons, but household income decreases for families of five and six persons. The
median family income for a household of seven persons was $45,241 in 1996—less than
the median income for a family of three, and again less than twice the poverty
level—and there are no increases in median income for households greater than seven.
The bill attempts to address this anomalous situation by setting the threshold for means
testing at the highest median income for households equal to or smaller than the
debtor’s household. Even under this standard, however, the threshold does not
increase as family size increases above four. Thus, for single individuals and individuals
in large households, the bill is much more likely to require individualized scrutiny than
for individuals in households of two to four persons, and the threshold has no consistent
relationship to the economic need of the individuals filing for bankruptcy relief. (Income
figures are drawn from U.S. Bureau of the Census, P60-197, Money Income in the United
States: 1996, Table 1 (1997). Poverty figures are from the Annual Update of the HHS
Poverty Guidelines, 63 Fed.Reg. 9235, 9236 (1998).)
The means-testing process—IRS collection standards. For those debtors whose
income is above the threshold, §101 of H.R. 3150 prescribes a two-part means test for
determining how much of the debtors’ projected monthly income during the five-year
period after the bankruptcy filing is "net income," available to pay general
unsecured debt. In the first part of the means-testing process, a debtor’s projected
total monthly income is reduced by a set of "automatic" deductions: (1) monthly
expenses allowances defined by Internal Revenue Service collection standards, (2) monthly
payments on secured debt, and (3) monthly payments on priority debt. To avoid double
deductions, §101 specifies that payment of debt should be excluded from the IRS
allowances. In the second part of the process, further deductions are allowed where the
debtor can establish extraordinary expenses. The balance that remains after the two sets
of deductions is the "projected monthly net income" available to pay general
unsecured debt.
There are several problems with this process—resulting primarily from the
incorporation of the IRS standards—that render it unworkable or inequitable. The IRS
collection standards are set out in Volume 2 of the Internal Revenue Manual
("Manual") §5323 (CCH 1995), and incorporate a number of exhibits also set out
in the Manual (Exhibits 5300-45 to 5300-51). More recent versions of some of the exhibits
may be found at the IRS website. As reflected in §101, the expense allowances under the
IRS collection standards fall into three categories: national standards, covering
food, housekeeping supplies, clothing, services, personal care products, and miscellaneous
expenses (Manual §5323.432); local standards, covering housing and transportation
(Manual §5323.433); and other necessary expenses, covering taxes, health care,
court-ordered payments, involuntary wage deductions, accounting and legal fees, and
secured debt, with provision for other necessary expenses (Manual, §5323.434).
The difficulties in applying the IRS standards within the procedures of §101 include
the following:
•The IRS standards are not automatic. The Manual defines the "other
necessary expenses" category as including any expense necessary to "provide for
a taxpayer’s and his or her family’s health and welfare and/or the production of
income." Manual § 5323.12. The "other necessary expense" category thus
includes all necessary expenses (such as costs of health care) that do not fall within the
national and local standards. Id.For all such expenses, the Manual requires a
discretionary determination of reasonable amounts for the expense: "Since there are
no nationally or locally established standards for determining reasonable amounts, the
[Internal Revenue] Service employee responsible for the case must determine whether the
expense is necessary and the amount is reasonable." Id.Thus, review of a
debtor’s schedules—presumably by the Chapter 7 trustee—will be necessary
whenever a debtor lists "other necessary expenses" under the IRS standards.
•There is no way to distinguish between the"other necessary expenses"
category of the IRS standards and the category of "extraordinary circumstances that
require allowance for additional expenses" established by §101 of H.R. 3150. Section
101 makes a substantial distinction between expenses covered by the IRS standards and
those arising from "extraordinary circumstances." If an expense is within the
IRS category, §101 simply provides for its deduction from the debtor’s income. But
if an expense arises from "extraordinary circumstances," then the debtor must
provide detailed explanations of the expense, subscribed to by counsel, and subject to
challenge by the trustee and creditors. However, as noted above, the IRS category includes
any necessary expense not otherwise treated by the Manual, specifically including health
care, and hence would appear to cover many expenses that could be considered
"extraordinary."
•There is no way to determine what portion of the IRS allowances reflect
payment of secured debt.The means-testing proposed in §101 deducts from the
debtor’s household income all monthly payments made on account of secured and
priority claims, and so, to the extent that the IRS standards allow deduction for debt
payments, §101 provides that payments for debt should be excluded from the IRS
allowances. In many situations, however, this exclusion will be impossible. The IRS local
standards specify a single monthly allowance for all housing expenses, including mortgage
or rent, property taxes, interest, parking, maintenance and repair, insurance, condominium
fees and all utilities—including heating and cooking fuel, electricity, and
telephone. Manual, Exhibit 5300-46. Thus, for example, the current IRS local standard for
the District of Columbia allows total monthly housing expenses, for a family of four or
more, in the amount of $1397, while a household of two in rural Illinois is allowed less
than $500. (See web listings at
<www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-dc.html> and
<www.irs.ustreas.gov/prod/ind_ info/col _stds/cfs-il.html >.) This single housing
allowance is intended to include any mortgage and property tax payments—which would
be payments of secured claims—but there is no way to separate an allowance for those
claims from the total housing allowance.
Similarly, the IRS’s local standard provides a single monthly allowance covering
all transportation expenses, including payment for vehicles (either by purchase or lease),
insurance, maintenance, fuel, registration, vehicle inspection, parking fees, tolls,
drivers’ licenses, and public transportation costs. The current monthly
transportation expense allowed for the District of Columbia, for a debtor with two cars,
is $357, while a debtor with one car in Buffalo is allowed $179. (See website listings at
<www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-trans.html>.) Again, for a debtor
with auto loans, some part of these totals would be attributable to payments on the loan,
but it is not possible to determine what part.
For both housing and transportation expenses, it might be thought that there could
simply be an exclusion from the IRS standard in the amount of whatever mortgage or car
loan payments are actually being made by the debtor. That approach, however, cannot be
used in any situation where the debtor’s secured debt payments approach or exceed the
IRS allowance, since excluding the secured debt payment would leave insufficient allowance
for the other expenses included in the category.
•The means-testing process would impose burdens disproportionately on debtors
without secured debt.The means-testing of §101 excludes secured debt payment from
projected monthly net income, and so mortgage and auto loan payments are automatically
deducted from income available to pay creditors, even if they are much higher than average
for the community in which the debtor resides. However, rental payments are not secured
debt, and so would only be excluded to the extent that they were part of the standard
levels of expense established by the IRS. Housing expenses in particular vary widely from
community to community within a metropolitan area, yet the IRS allowances are based on
county wide figures. Thus, the proposal would require all debtors in higher than average
rental communities to declare and prove "extraordinary" expenses, with the
potential for litigation concerning the extent to which bankruptcy courts should allow as
"extraordinary expenses" rental payments at a level higher than that determined
by the IRS.
Similarly, a debtor could buy a new car on credit without affecting the means-testing
of §101, but if the debtor leased a car with payments that caused the IRS transportation
allowance to be exceeded, there would again be a need to declare an extraordinary expense
in order to retain the car.
Finally, costs of rental housing may rise very quickly in a given area, but, as with
Census Bureau data, the IRS standards will necessarily lag. Thus, debtors in rental
housing may be required to establish "extraordinary circumstances" simply to
continue to rent an average apartment for their area.
• The means-test leaves unresolved recurring questions regarding the
appropriateness of various categories of expense.Currently, questions about the
reasonableness and necessity of expenses claimed by a debtor arise under §1325(b) of the
Code, which requires that Chapter 13 debtors contribute to their repayment plans any
income not "reasonably necessary" for their support and the support of their
dependents. In applying this standard, the courts have struggled to determine whether
debtors should be allowed to claim expenses for private school tuition, religious and
other charitable contributions, and care of elderly relatives or others whom the debtor
may not be legally obligated to support. See 2 Keith M. Lundin, Chapter 13
Bankruptcy §§5.36-5.37 (1994 & Supp. 1997). The IRS collection standards make clear
that private school tuition and charitable contributions are generally not allowed
as "other necessary expenses," and that care for the elderly, invalid, or
handicapped only "is necessary if there is no recourse except for a taxpayer to pay
the expense." Manual, Exhibit 5300-46. Section 118 of H.R. 3150, discussed below,
deals with the issue of charitable contributions, and generally provides that tax
deductible contributions that the debtor "has made, or continues to make" cannot
be used by the court as a factor in dismissing a Chapter 7 case under §707(b) of the
Code. Nevertheless, the debtor would presumably have to list all planned charitable
contributions as extraordinary expenses, and whether the expense should be allowed might
depend on whether the proposed contributions were a "continuation" of the
debtor’s prior practice. Questions regarding private school tuition and the costs of
caring for relatives would continue to be open. Thus, a debtor seeking to make any of
these payments would be required to list them as extraordinary expenses, with the
potential for litigation.
Costs of the proposed means-testing.Largely because of the difficulties outlined
above, the means-testing proposed by §101 can be expected to generate substantial
additional cost:
(1) A substantial burden would be placed on the Internal Revenue Service to maintain
current expense standards, for each distinct economic area in the country. These
determinations by the IRS may well require formal rulemaking procedures. While the
Internal Revenue Manual, under current law, is simply an intra-agency document giving
direction to IRS employees, §101 would transform the collection standards into an
administrative rule. (The definition of "rule" in the Administrative Procedure
Act, 5 U.S.C. § 551(5), includes "an agency statement of general . . . applicability
and future effect designed to implement . . . law or policy.")
(2) An increased burden would be placed on bankruptcy professionals.
• The proposal requires Chapter 7 trustees to investigate and report on the
debtor’s net income in each Chapter 7 case. The vast majority of Chapter 7 cases
involve no assets for distribution to creditors, and hence only a nominal fee for the
trustee. The new investigation and report will substantially add to the work required of
trustees in no-asset cases, with no provision for additional compensation. The trustees
will also have to review the appropriateness of any expenses claimed by the debtor under
the IRS’s "other necessary expenses" category.
• The investigation and reporting requirements for Chapter 13 would increase the
costs of the Chapter 13 trustee, reducing the portion of plan contributions available to
creditors.
• The bill would require debtors’ counsel to swear to the accuracy of any
extraordinary expenses claimed by a Chapter 7 debtor. Unless this oath is simply based on
the statement of the debtor (in which case it would add nothing to the debtor’s
oath), this requirement would impose on debtors’ counsel the obligation of
independently verifying all of the extraordinary expenses claimed by the debtor, thus
increasing the cost of the bankruptcy and the time required to file the case.
(3) The proposal would lead to increased "bankruptcy planning." The formula
employed for determining net monthly income is subject to manipulation by debtors. Most
obviously, because secured debt is excluded from projected monthly net income, a debtor
can reduce the income available to pay debts simply by taking on additional secured debt.
For example, assume that a debtor with $30,000 in unsecured, nonpriority debt owns a
three-year old car with no outstanding car loan, and that the debtor has $300 in monthly
net income as defined in the proposed bill. Over five years, that income would total
$18,000, well over 20% of the unsecured debt. However, if the debtor trades in the
three-year old car for a new one, and finances $12,000 for three years at 5% interest, the
debtor will need to make payments on the secured car loan of about $13,000, reducing the
total "net income" over the five years after filing to about $5000, less than
20% of the unsecured debt. Similarly, a debtor with projected income that is slightly over
20% of outstanding unsecured debt could increase the amount of that debt to arrive at a
point where disposable income is less than 20%. Debtors may be able to manipulate income,
by terminating second jobs, reducing hours, or changing employment. Finally, debtors may
be able to eliminate "excess" income by proposing to make substantial charitable
contributions.
(4) The proposal would lead to greater court involvement in Chapter 7 cases. The court
will be required to hear any disputes regarding "other necessary expenses," or
extraordinary income, as well as any questions of good faith arising out of the kind of
bankruptcy planning discussed above. These hearings will generate additional expense for
the courts and the parties involved in them.
Alternative.(1) The Bankruptcy Code has limited the availability of Chapter 7
relief in situations of improperly incurred debt by creating exceptions to discharge in
Chapter 7. To obtain relief from the improperly incurred debt, the debtor is then required
to complete a Chapter 13 plan. Rather than making Chapter 7 relief unavailable to a large
class of debtors (many of whom will have incurred their debt in good faith), it may be
preferable to define the type of debt (such as excessive credit card debt) that is
improper, and make that debt nondischargeable in Chapter 7, regardless of the disposable
income currently available to the debtor.
(2) Alternatively, if there are to be thresholds for denial of Chapter 7 relief based
on household income, those thresholds should be based on some formula (such as a multiple
of poverty level) that is not tied to median household income.
(3) Any denial of relief in Chapter 7 should be based on the presence of substantial
income that is not needed to meet current expenses, regardless of the level of debt to be
repaid, thus eliminating the incentive for manipulation of indebtedness.
§102 ("Adequate income shall be committed to a plan that pays unsecured
creditors")
Changes. Section 102 of H.R. 3150 proposes essentially two major changes in the
operation of Chapter 13.
Plan length. First, §102 imposes an increased minimum plan length for many
debtors. Instead of the current three-year minimum, §102 imposes a five-year minimum plan
length on all debtors whose "current total monthly income" exceeds the threshold
established in §101—that is, monthly income equal to or greater than the highest
national median for a household of the same size as the debtor’s household or any
smaller household, as established by the Census Bureau. If the debtor’s total income
is less than the applicable national median, the three year minimum is retained. (These
provisions are elaborated in §409 of the bill, which sets out maximum plan lengths of two
years in addition to the minimum plan length set forth here.)
Minimum payments to unsecured creditors. The second major change proposed by
§102 replaces the current "disposable income test" of Chapter 13 with a
two-part formula requiring minimum payments on unsecured nonpriority debt. Under the first
part of the formula, the plan must provide for payments of at least $50 per month to
unsecured nonpriority creditors who are not insiders. The second part of the formula
defines "monthly net income" for purposes of a Chapter 13 plan, and creates a
mechanism for requiring that "the total amount of monthly net income" is paid to
unsecured nonpriority creditors during the minimum plan period, less only expenses of
administering the case.
The definition of "monthly net income" created by §102 is similar to
"projected monthly net income" established under §101—it starts with
"current total monthly income" and deducts expense allowances pursuant to
Internal Revenue Service collection standards, with the potential for adjustment if the
debtor has extraordinary expenses or loss of income.
To assure that all monthly net income is paid through a plan to unsecured nonpriority
creditors (and administrative claimants), §102 requires that the debtor itemize
extraordinary expenses or loss of income in a statement sworn to by the debtor and the
debtor’s attorney. The debtor’s statement of extraordinary expenses would be
subject to objection by the trustee or any party in interest, and the prevailing party in
a hearing on the objection could be awarded fees and costs. If the debtor files such a
statement, the statement would have to be refiled, to reflect current conditions, no less
than annually during the duration of the plan. All Chapter 13 plans would also be required
to provide that future net monthly income will be paid as reasonably determined by the
Chapter 13 trustee, with at least annual reviews to determine whether net income has
increased or decreased.
Impact. Three substantial impacts that can be anticipated as a result of the
changes made in §102 of the bill:
Plan length. The new five-year minimum plan length would be arbitrarily imposed,
depending on household size. As discussed above, in connection with §101, median income
varies erratically with the number of persons in the household. Single individuals would
be required, using currently available census figures, to propose a five-year minimum plan
whenever their gross annual income was at least $18,426, but the trigger point for a
married couple would be $39,039. Individuals in a household of four would not face the
five-year minimum until their household income reached $53,704; but that threshold would
continue to apply to all households of greater size. For example, a five-year minimum plan
would be required of a couple with three children of their own and four foster children,
even though their income exceeded the $53,704 threshold only because of payments received
on account of the foster children.
Where the five-year minimum plan length is imposed, it may increase payments to general
unsecured creditors; however, the longer length can be expected to increase the number of
cases that fail for default in payment. A five-year minimum term may also have the effect
of discouraging any Chapter 13 filing, giving debtors additional incentive for
prebankruptcy planning to meet the proposed new filing requirements for Chapter 7. As
discussed above in connection with §101, these limitations may be met by increasing debt
and decreasing income prior to filing, and by proposing to make large charitable
contributions.
The substitution of "net income" for "disposable" income.Current
law requires Chapter 13 debtors to contribute all of their disposable income to the
Chapter 13 plan, and, after payment of secured and priority claims, this income would be
used to pay general unsecured creditors. Disposable income is defined very generally in
the Code (§1325(b)(2)), and courts have varied in their interpretation of the term. The
proposed change would require that all of a debtor’s "net" income be used
to pay general unsecured creditors. Because secured priority claims are deducted from the
calculation of net income, the principal difference introduced by the proposed legislation
is that standard expense allowances would be determined, in the first instance, by the
IRS—rather than by the courts—subject to individualized exceptions, reviewed
annually. This process could reduce the arbitrariness associated with the disposable
income test; for this reason, some use of general guidelines for determining appropriate
levels of Chapter 13 plan contributions has been recommended by the National Bankruptcy
Review Commission. National Bankr. Review Comm’n, Bankruptcy: The Next Twenty Years
262-73 (1997) ("Final Report"). However, the application of the IRS standards is
very uncertain (if not impossible) in many situations, for the reasons listed in the
discussion of §101, above, and can be expected to generate substantial cost and
litigation.
Minimum monthly payments of $50 to general unsecured claims of noninsiders. The
$50 minimum payment to general unsecured creditors, proposed by §102, applies to all
Chapter 13 debtors, even those who have no net income, or less than $50 in net income.
This minimum payment may make Chapter 13 unavailable, or at least discourage its use, by
lower income debtors.
The situation of low or nonexistent net income is common in Chapter 13—for
example, debtors emerging from a divorce may have very great difficulty in making both
required support payments and mortgage payments. In order to save their homes or
automobiles, Chapter 13 debtors are often willing to attempt to live on substantially less
than what would be considered an appropriate level of expense for necessities. Plans
proposing food budgets of $100 for a family of four are not uncommon, with all or almost
all of the plan payments going to secured or priority creditors. The $50 minimum for
unsecured debt may render such marginal plans completely impossible.
A second problem exists for lower income debtors who owe unsecured debts both to family
members and others. Section 102 would require that the first $50 of every monthly payment
go to the nonfamily members (since family members are insiders). The $50 minimum thus
provides substantial incentive for debtors with low net income to choose Chapter 7, where
all of their debts will be discharged, so that they can repay debts owing to family
members voluntarily.
Alternative. As suggested by the National Bankruptcy Review Commission, the
objective of obtaining payment for general unsecured creditors might be advanced by
requiring that payments proposed for general unsecured claims in a Chapter 13 plan be made
in equal installments throughout the plan, rather than paid only after secured and
priority claims. See Final Report at 262.
*§103 ("Definition of inappropriate use") (see S. 1301, §102)
Changes. This section makes seven changes to §707(b) of the Bankruptcy Code.
Section 707(b) currently provides for dismissal of Chapter 7 cases that constitute a
"substantial abuse" of the provisions of Chapter 7, only on motion of the court
or the United States trustee. Section 103 of H.R. 3150 would—
(1) change the operative term from "substantial abuse" to "inappropriate
use";
(2) require a finding of "inappropriate use" if the debtor is disqualified
from Chapter 7 filing by the "ability to pay" provisions of §101, discussed
above, or if "the totality of circumstances of the debtor’s financial situation
demonstrates such inappropriate use";
(3) allow creditors and Chapter 7 trustees to bring motions to dismiss Chapter 7 cases
based on substantial abuse;
(4) allow conversion to Chapter 13, with the debtor’s consent, as an alternative
to dismissal of the bankruptcy case;
(5) require the court to award fees and costs against a creditor who brought a motion
seeking dismissal for inappropriate use, if the court found that the allegations of the
motion were not substantially justified, unless special circumstances would make the award
unjust;
(6) require the court to award fees and costs against the debtor if the United States
trustee or the Chapter 7 trustee prevailed in a §707(b) motion, unless awarding such fees
and costs would impose an unreasonable hardship on the debtor;
(7) restate, in the Bankruptcy Code itself, the requirement of reasonable
investigation, currently contained in Fed.R.Bankr.P. 9011, applying to court filings
signed by an attorney; the statutory restatement would apply only to debtors’
attorneys and would be extended to cover schedules and statements of financial affairs; if
the court found a violation of the requirement, the court would be required to impose a
civil penalty on the debtor’s counsel, payable to the Chapter 7 trustee or the United
States trustee.
Impact. Most of the proposed changes simply provide a means of enforcing the
limitation on Chapter 7 relief proposed in §101 of the proposed bill. Current law limits
the right to bring §707(b) motions, based on the understanding that debtors should
generally be able to choose to obtain an immediate fresh start when they are in financial
difficulty, and this understanding would be changed by §101, as discussed above. If
creditors are allowed to bring motions for substantial abuse, the fee shifting provision
may help to reduce creditor motions brought merely to exert leverage on debtors. Just as
current law does not define "substantial abuse," the proposed change would
retain a large degree of discretion by allowing courts to grant relief based on the
"totality of circumstances." The option of conversion to Chapter 13 would
usually exist under present law, pursuant to §706(a), which generally gives a Chapter 7
debtor the option of converting the case to Chapter 13 "at any time" (however,
it is not clear why an option of conversion to Chapter 11 is not also noted).
The remaining provisions of §103, however, would create unbalanced burdens on debtors
and their counsel. In any "inappropriate use" motion brought by a trustee (or
the United States trustee) there would be a presumptive award of fees to the movant if the
motion was granted, but no award of fees to the debtor if the motion was denied. This
would create a powerful incentive on the debtor not to litigate any trustee motion, an
impact aggravated by the provision of §116, discussed below, that would deny fees to the
debtor’s attorney in any case in which a §707(b) motion was granted. Similarly,
mandatory penalties are imposed only on debtor’s counsel in connection with court
filings that are not properly investigated. If there is to be such a statutory "Rule
11" provision, there is no apparent reason why it should not apply to creditors’
counsel as well as to counsel for debtors. The impact of the proposal is to require
debtors’ counsel to verify all of the financial information submitted by their
clients, which can be expected to increase the cost of bankruptcy filings. See §410,
below, which suggests (contrary to the statutory amendment made here) that Fed.R. 9011 be
amended to impose additional duties on debtors’ counsel).
Alternative. Any fee shifting provisions in connection with trustee motions
under this section should apply equally to both parties; any statutory enactment of the
investigation requirements of Rule 9011 should apply to all parties. The option of
conversion to Chapter 11 should be specified in connection with successful motions for
inappropriate use. (See §105, below, indicating that debtors ineligible for Chapter 7
under the means-testing of § 101 should be allowed to file Chapter 11 cases.)
*§104 ("Debtor participation in credit counseling program") (see S. 1301,
§321)
Changes.This section would impose a new eligibility requirement, under §109 of
the Bankruptcy Code, on all individual debtors—as a condition of eligibility for
bankruptcy, the debtor would have to make a good-faith attempt to create a debt repayment
plan through a credit counseling service. The service would have to be registered with the
district court (as provided for in §111 of the bill, discussed below), and would have to
be approved by the United States trustee for the district in which the petition is filed,
with approval withheld from any service that did not offer its program either without
charge or at reduced charges in situations of hardship. The requirement of a good-faith
attempt to create a debt repayment plan would be inapplicable (1) if the United States
trustee found that there was no suitable credit counseling service available in the
debtor’s geographical area, or (2) if the debtor was made subject to a debt
collection proceeding, involving a potential loss of property, "before the debtor
could complete" the good-faith attempt. The debtor would be required to file with the
court a certificate of the credit counseling service which the debtor contacted, or a
verified statement as to why the debtor was not required to attempt to create a debt
repayment plan through such a service. If the debtor entered into a debt repayment plan,
the plan would also have to be filed. If the debtor filed the bankruptcy without an effort
at repayment because of pending debt collection activity, the debtor would be required to
attempt to negotiate a voluntary repayment, after the bankruptcy filing, outside of the
judicial process. Only the United States trustee would be allowed to bring a motion for
dismissal of the bankruptcy case on the ground that the debtor failed to meet these new
eligibility and filing requirements.
Impact. To understand the effect of the changes proposed in this section, it is
necessary to understand how consumer credit counseling service (CCCS) interacts with
bankruptcy under the existing law. There is currently a network of 1,300 local non-profit
CCCS organizations, joined under the National Foundation for Consumer Credit (NFCC). As
described in the NFCC’s website, these
organizations are funded by creditors, and generally attempt to negotiate 100% repayment
plans with creditors. The benefit to the debtors under these plans is a voluntary
reduction or elimination of finance charges during the repayment term, coupled with the
potential for reinstatement of credit. The organizations generally charge no fee or a
small fee to the debtors. Under existing law, NFCC members have been successful in
attracting debtor interest; according to the "In Trouble?" page of its website,
NFCC members received inquiries from over 1.8 million consumers in 1997 (a substantially
greater number than the filings of consumer bankruptcy cases). However, NFCC members are
not the only CCCS providers. In any given area, there may be a substantial number of debt
consolidators, financial advisors, and "credit repairers," providing a variety
of services with a range of charges. (The 1998-99 Ameritech Chicago Consumer Yellow Pages
lists over 30 such organizations under the heading "Credit & Debt
Counseling," including "Emma’s Accounting & Credit Counseling
Services" and "Lawyers United for Debt Relief.")
The impact of the change in law proposed by this section would fall first on the United
States trustees. They would be required to engage in a program of approving debt
counsellors from a list maintained by the clerk’s office. Apart from requiring that
the organization be "nonprofit" (pursuant to §111 of the bill) and that its
charges are limited, the bill provides no standards for trustee approval. Thus, the United
States trustee would be required to engage in rule making to set such standards, and then
engage in an ongoing approval process. Finally, the United States trustee would bear the
entire responsibility for enforcing the new debtor’s obligations, including
monitoring of files, investigations of good faith, and presentation of motions in
appropriate circumstances. The cost of such a multi-level program on the United States
trustees would be very large.
The second impact of the change would be on debtors and the CCCS industry. Debtors
would be required to consult with a CCCS organization in many circumstances, and to submit
additional court filings verifying their compliance. This would impose additional costs on
debtors (at least in terms of time expended), but might result in the completion of a
larger number of 100% debt repayment plans effected through NFCC members or similar CCCS
organizations—the apparent intent of the legislation. However, there may be a number
of other, unintended consequences. First, NFCC members could have many debtors consult
with them, on advice of counsel, even though the debtors had no ability to effect
repayment plans of the sort administered by these organizations. This could substantially
increase the operating expenses of NFCC members. Second, it can be expected that new
nonprofit CCCS organizations would be formed that were allied with providers of bankruptcy
services. These organizations would propose repayment plans of less than 100%, and if
creditors did not accept the proposed terms, the organizations would provide the
certificate of good faith required by the statute.
The third impact would be on the courts, which would be required to adjudicate any
disputes regarding (1) the approval of a CCCS organization, (2) the availability of a
suitable CCCS organization to a particular debtor, (3) the good faith of a debtor in
proposing a repayment plan, (4) the existence of debt collection activity excusing
prebankruptcy attempts at voluntary repayment, and (5) the sufficiency of any postpetition
attempts at voluntary repayment.
Alternative. Instead of mandating CCCS as a condition for bankruptcy filing,
incentives might be given to the debtor to voluntarily consult with CCCS providers. For
example, §202 of S. 1301 provides debtors with a defense to certain nondischargeability
complaints based on the plaintiff’s refusal to negotiate a voluntary repayment plan.
*§105 ("Who may be a debtor under Chapter 11")
Changes. This section would amend the eligibility requirements for Chapter 11.
Currently, Chapter 11 is only available to individuals who meet the requirements for a
Chapter 7 filing. As amended, the eligibility requirements for Chapter 11 would extend to
individuals who are disqualified from Chapter 7 by reason of the means-testing proposed in
§101, discussed above.
Impact. This section would accomplish its apparent intent—debtors whose
income and debt level disqualified them from Chapter 7 under the means-testing of §101
would remain eligible to file a Chapter 11 case.
Subtitle B ("Adequate Protections for Consumers")
§111 ("Notice of alternatives") (see S. 1301, §301)
Changes. The major change involved in §111 is to assure that each consumer
bankruptcy debtor is given a written notice that both discusses the option of consumer
credit counseling and lists credit counseling services with offices in the district in
which the bankruptcy is filed or with toll-free telephone numbers serving the district.
The list would be prescribed by the United States trustee and questions about whether a
particular counseling service should be included in the list would be determined by the
court.
Impact. This proposal can result in relevant information being made available to
debtors, although it is likely that debtors consulting an attorney will place more weight
on the attorney’s advice than on the information in a form given to them by the
attorney. The proposal would probably have the greatest impact on pro se filers.
Difficulties may exist in describing the services available from credit counselors, at
least if the description includes any comparison of credit counseling and bankruptcy in
satisfying debt or in maintaining or reestablishing credit. The need to administer the
list of credit counselors will involve additional cost to the United States trustee, as
discussed in connection with §104, above.
§112 ("Debtor Financial Management Training Test Program") (see S. 1301,
§321)
Changes. This section of H.R. 3150 would require the Executive Office of the
United States Trustee (1) to develop a program to educate debtors on the management of
their finances, (2) to test the program for one year in three judicial districts, (3) to
evaluate the effectiveness of the program during that period, and (4) to submit a report
of the evaluation to Congress within three months of the conclusion of the evaluation. The
test program is to be made available, on request, to both Chapter 7 and 13 debtors, and,
in the test districts, bankruptcy courts could require financial management training as a
condition to discharge.
Impact. Debtor financial education was a recommendation of the National
Bankruptcy Review Commission, but the Commission did not recommend any methodology for
implementing it. See Final Report at 114-16. There are two potential problems with
the methodology suggested here. First, one year may not be a long enough time to assess
the effectiveness of any program. Success in financial management would be indicated by
such factors as completion of a Chapter 13 plan, ability to reestablish high quality
credit, and (most importantly) avoidance of further financial overspending. None of these
bench marks can be assessed after one year. Second, the power to compel debtor education
as a condition for discharge is accorded without specifying the circumstances in which it
should be exercised, with the potential for widely varying application. Some judges might
require debtor education in all consumer cases, while others never require it. Compulsory
education in pilot districts also would be subject to constitutional challenge, as
nonuniform bankruptcy legislation. See Railway Labor Executives' Assn. v. Gibbons,
455 U.S. 457, 469-71 (1982) (invalidating bankruptcy legislation that applied to a single
railroad).
Alternative. A study could be conducted of the effectiveness of the existing
debtor education programs, based on their past experience. Compulsory education should be
imposed only after an education program is available nationwide, and should be imposed
only in situations defined by law.
§113 ("Definitions")
§114 ("Disclosures")
§115 ("Debtor’s Bill of Rights")
§116 ("Enforcement")
Changes. These four sections of H.R. 3150 set up a new system for regulating the
providers of consumer bankruptcy services. Section 113 defines the term "debt relief
counseling agency" to include both lawyers and non-lawyer providers of consumer
bankruptcy goods or services, and the remaining sections establish regulations bearing on
these providers. Section 114 would place a new §526 in the Bankruptcy Code, imposing a
set of disclosure obligations on consumer bankruptcy providers. The disclosure would
include (1) the availability of consumer credit counseling services, (2) the need for a
truthful listing of assets and income in bankruptcy, subject to audit and criminal
sanctions, (3) the obligation of the provider to issue a contract specifying the services
that will be provided and their cost, together with a specification of the services that
might be needed, and (4) directions on how to complete bankruptcy schedules. Copies of the
first two of these notices would be required to be maintained by the provider for two
years after the notice is given. [Note: originally the bill provided that the notice would
have to be maintained for two years after a discharge is received whenever that was longer
than the time from which the notice was given. The current version of §114 is garbled in
this respect, containing the phrase "after the later of the date on which the
notice is given," but no longer containing the discharge date as a point from which
the two year retention period should be measured.]
Section 115 would add a new §527 to the Code, with further regulation of consumer
bankruptcy providers. It would require a written contract for bankruptcy-related services,
with a copy for the client, and specify that the advertising of consumer bankruptcy
providers include a conspicuous disclosure that they are engaged in bankruptcy filing.
Finally the section would prohibit consumer bankruptcy providers from (1) failing to
perform promised services, (2) negligently making or counseling to be made any false
statement in a bankruptcy filing, (3) misrepresenting the services to be provided, or the
benefits or detriments of bankruptcy, and (4) advising the incurring of debt to pay for
bankruptcy related services.
Section 116 would enforce the new regulations on consumer bankruptcy providers. It
provides debtors may not waive the provisions of new §§ 526 and 527. The section would
further impose sanctions on consumer bankruptcy providers who engage in prohibited
conduct. There is a mandatory sanction of loss of all fees previously paid by the debtor,
and a potential sanction of being required to continue the representation of the debtor
without further fees. The prohibited activities include intentional or negligent failure
to comply with any applicable requirement of the Code or the Federal Rules of Bankruptcy
Procedure applicable to consumer bankruptcy providers, and providing assistance to a
debtor whose case is dismissed or converted under §707(b), or dismissed for failure to
file bankruptcy papers. The section would allow enforcement of the provisions of §526
both by (1) officials of state government, in either federal or state court, with actual
damages awarded to the debtors affected, and with the consumer bankruptcy provider
required to pay the costs and fees of any successful enforcement action and (2) by the
bankruptcy court, on its own motion or the motion of the United States trustee, with
potential injunctive relief and civil penalties. Finally, the section specifies that its
provisions do not supersede any state regulation of consumer bankruptcy services except to
the extent of any inconsistency.
Impact. It is questionable whether the proposed regulation would have any
significant positive impact on the provision of bankruptcy services. The likely impact of
the new regulations imposed by H.R. 3150 on the providers of consumer bankruptcy services
can be divided into three classes.
First, some of the requirements merely reiterate existing obligations or good
practices. In this category are the obligations (1) to provide written contracts
specifying the services to be performed and their cost and (2) to perform the promised
services. (Fees and services of petition preparers and attorneys are presently regulated
by §§ 110, 329, and 330 of the Code.)
Second, some of the requirements appear to impose unnecessary costs on the providers.
For example, the requirement to retain copies of each notice provided to a client or
prospective client for at least two years involves substantial cost with no apparent
benefit. Similarly, the requirement of "conspicuous notices" in all
advertisements would impose unnecessary costs in connection with classified advertisements
and telephone directories.
Third, some of the regulations may have a chilling effect on the provision of consumer
bankruptcy services. For example, the automatic denial of fees in any case dismissed under
§707(b) can be expected to discourage attorneys from filing Chapter 7 cases in situations
where eligibility for Chapter 7 relief was questionable, particularly since, in any
successful motion brought by a trustee under §707(b) there is a presumptive award of
costs and fees to the trustee (see the discussion of §103, above). Similarly, automatic
denial of fees in cases dismissed for failure to file documents may discourage attorneys
from filing cases whenever the debtor’s obligation or ability to produce documents is
doubtful. Finally, the provision that a provider may never counsel borrowing to pay for
bankruptcy fees is overbroad, prohibiting appropriate advice necessary to permit a
bankruptcy filing. While a debtor should never be counseled to borrow money fraudulently,
with the intent of discharging the debt, it may be entirely appropriate to enter into a
secured loan for the purposes of financing a bankruptcy filing, and a loan from a friend
or relative (intended to be repaid despite the discharge) may also be proper.
Alternative. Where it is found that providers of consumer bankruptcy services
are engaged in specific misconduct that is not adequately addressed by existing law, the
current provisions of the Code can be amended to sanction that misconduct. For example, if
it is found that bankruptcy providers are misrepresenting their services as not involving
bankruptcy, that misconduct could be specified as a ground for refund of fees under §329
of the Code (with punitive damages, if appropriate).
*§117 ("Sense of the Congress") (see S. 1301, §321)
Changes. None. The section simply expresses the sense of Congress that the
states should develop courses in personal finance for grade school and high school. No
action is required.
*§118 ("Charitable contributions") (see S. 1244,
The Religious Liberty and Charitable Donation Protection Act of 1997, signed into law on
June 19, 1998)
Changes. This section, in substantially the same language as S. 1244, would make
three changes in bankruptcy law as it affects charitable contributions (for each of the
changes, "charitable contributions" are defined as cash or financial instrument
contributions to tax exempt organizations):
(1) Fraudulent transfer law. The section would amend §§548 and 544 of the
Bankruptcy Code so as to preclude avoidance of certain charitable contributions as
fraudulent transfers. Fraudulent transfer law generally operates against two distinct
types of transfers—those which the debtor makes with an "actual intent" to
hinder, delay or defraud creditors, and those which are found "constructively"
fraudulent because they are made without a return of reasonably equivalent value at a time
when the debtor was in defined financial difficulty. Section 548 of the Code gives the
trustee the power to avoid either type of transfer made within one year of the bankruptcy
filing. Section 118 of H.R. 3150 would continue to allow avoidance of charitable
contributions under §548 of the Code if the contribution was made with actual intent to
hinder, delay or defraud, but would prohibit recovery of constructively fraudulent
charitable contributions whenever the questioned contribution (1) together with the
debtor’s other charitable contributions did not exceed 15% of the debtor’s gross
annual income for the year in which the transfer was made, or (2) was "consistent
with the debtor’s practices in making charitable contributions."
Section 544 of the Code allows a trustee to pursue any remedy for fraudulent transfers
that a creditor of the estate would have under state law, and hence allows recovery of
transfers made prior to the one-year cut off of §548. Section 118 of H.R. 3150 would make
§544 inapplicable to any charitable contribution that would be excluded from the
constructive fraud provisions of §548.
(2) Section 707(b).As amended by §103 of H.R. 3150, §707(b) of the Code would
provide dismissal (or at the debtor’s option, conversion to Chapter 13) of any
Chapter 7 case found to be an "inappropriate use" of Chapter 7. In determining
inappropriate use, the court would be directed to consider whether the debtor was
disqualified by an ability to pay creditors—as defined under §101 of H.R.
3150—and to consider "the totality of the circumstances." However, § 118
would prohibit the court from considering, in any determination of inappropriate use, any
charitable contribution (as generally defined), without limitation as to amount or prior
practice of the debtor, that the debtor "has made or continues to make."
(3) "Monthly net income" in Chapter 13. Section 102 of H.R. 3150,
discussed above, would require Chapter 13 debtors to contribute all of their "monthly
net income," for the duration of their plans, to the payment of unsecured,
nonpriority claims. Monthly net income, in turn, would be determined according to Internal
Revenue Service collection standards, modified by a debtor’s showing of extraordinary
circumstances resulting in loss of income or additional expenses. Section 119 of H.R. 3150
would provide that charitable contributions not exceeding 15% of a debtor’s gross
income for the year of the contributions, would be considered "additional expenses of
the debtor required by extraordinary circumstances," and hence excluded from monthly
net income, irrespective of the debtor’s prior practice in charitable contributions.
Impact. The apparent intent of Section 118 is to protect good faith charitable
contributions from attack as fraudulent transfers, and to allow such contributions to be
made without affecting the application the debtor’s entitlement to relief under
either Chapter 7 or Chapter 13. The section would accomplish that intent, but would also
allow charitable contributions to be made in bad faith, simply as an alternative to paying
creditors. Specifically:
(1) A charitable contribution made by a debtor with actual intent to defraud creditors
would apparently be protected against avoidance by a trustee under §544 of the Code.
Although intentionally fraudulent as to creditors, such a transfer would still be excluded
from the constructive fraud provision of §548, and §544 would be made
inapplicable to all transfers so excluded. This appears to be a drafting error.
(2) Debtors anticipating a Chapter 7 filing would be able to liquidate nonexempt assets
and donate the proceeds to charities of their choice, rather than allow a Chapter 7
trustee to liquidate the assets for the benefit of creditors, without that conduct being a
basis for dismissal under §707(b) of the Code. Moreover, a debtor could commence a
practice of making large charitable contributions shortly before filing a Chapter 7 case,
and then announce an intent to "continue" making these contributions after the
filing. The contributions so declared could not be considered in determining that the
debtor had the ability to pay creditors or that the totality of circumstances merited
dismissal under §707(b). Accordingly, debtors with substantial income otherwise available
to pay creditors, and thus ineligible for Chapter 7 relief under the means-test of §101,
could render themselves eligible by declaring an intent to continue making large
charitable contributions. After obtaining a discharge in Chapter 7, such debtors would be
under no enforceable obligation to actually make the declared contributions.
(3) Chapter 13 debtors, regardless of their prior practice in charitable contributions,
would be given the option of donating up to 15% of their gross income to charities of
their choice, excluding that income from the monthly net income that would be payable to
creditors. Since monthly net income excludes payments on secured and priority debt (see
the discussion of §102, above), monthly net income for many Chapter 13 debtors would be
less than 15% of their gross annual income. Such debtors would be required to contribute
only $50 per month to creditors (the minimum payment under §102), with the balance of
their otherwise net income paid to charity. For example, a debtor with an annual income of
$120,000 ($10,000 per month), might have monthly tax, mortgage and car loan payments of
$6,000, other living expenses of $1000 (the IRS national standards allow $958), and
alimony payments of $1500—a total of $8500 in monthly expenses. Such a debtor would
be expected under §102 to contribute the remaining $1500 to payment of general unsecured
creditors for a five year period, allowing repayment of $90,000. However, the debtor would
be able to exclude $1500 per month from monthly net income under the 15% charitable
contribution allowance. Thus, the debtor would have the option of contributing all but $50
per month to any tax exempt charity, so that the amount of unsecured, nonpriority debt
repaid would be $3000.
Alternative. Charitable contributions made with actual intent to defraud
creditors should remain avoidable under § 544. Both prepetition and postpetition
charitable contributions should be considered under §707(b) if they are not in keeping
with a practice established by the debtor before the bankruptcy filing and not in
anticipation of the filing. Similarly, in Chapter 13, charitable contributions should be
deducted from "monthly net income" (or "disposable income" as defined
under current law) only where the contributions are in keeping with such a prebankruptcy
practice of the debtor.
*§119 ("Reinforce the fresh start") (see S. 1301, §414)
Changes. Section 119 makes three unrelated changes to the Bankruptcy Code:
(1) Section 523(a)(17).Section 523(a)(17) was added to the Code by the Prison
Litigation Reform Act of 1995, and creates an exception to discharge for "fees
imposed by a court for the filing of a case, motion, complaint, or appeal . . . regardless
of an assertion of poverty . . . or the debtor’s status as a prisoner." Section
119 of H.R. 3150 would limit the application of the exception to fees imposed on
prisoners.
(2) Exemption of retirement funds.Section 119 would provide a separate ground
for exemption, applicable in bankruptcy regardless of whether a state opted out of federal
exemptions, for all "retirement funds to the extent exempt from taxation under
section 401, 403, 408, 414, 457, or 501(a) of the Internal Revenue Code of 1986."
(3) Definition of utility under §366.Section 119 would define utility, for
purposes of §366 of the Code, as including "any provider of gas, electric,
telephone, telecommunication, cable television, satellite communication, water, or sewer
service," regardless of whether the service was a regulated monopoly.
Impact. (1) Section 523(a)(17), despite its origin in the Prison Litigation
Reform Act, was so broadly worded that it could arguably apply to any award of costs
imposed by a court. It appears that the few decisions considering the issue have given a
limited construction to the provision. See South Bend Community School Corp v.
Eggleston, 215 B.R. 1012, 1016-18 (N.D.Ind. 1997) (limiting the provision to awards
against prisoners). Nevertheless, the clarification proposed in this section of the bill
would be helpful in effectuating the original intent of the exception.
(2) Funds in retirement accounts may be excluded from distributions in a bankruptcy
case on several grounds. First, the funds may be excluded from the bankruptcy estate,
pursuant to §541(c)(2), which deals with restrictive trusts. In Patterson v. Shumate,
504 U.S. 753, 112 S.Ct. 2242 (1992), the Supreme Court applied §541(c)(2) to exclude
ERISA pension plans from the estate. Second, retirement funds might be exempted under
state law, applicable under §522(b)(2). Third, the funds might be exempted under the
federal exemption set forth in §522(d)(10)(E). However, as to all of these theories,
questions have been raised in the courts, particularly with respect to Individual
Retirement Accounts. See Andrew M. Campbell, Annotation, Individual Retirement Accounts
as Exempt Property in Bankruptcy, 133 A.L.R. Fed. 1 (1996). The apparent intent of
Section 119 is to generally render all IRAs and employer retirement plans fully
exemptible. However, there may be ambiguities in the language employed in the statute that
would limit its effectiveness. The phrase "to the extent exempt from taxation"
could mean (1) that the contributions were not taxable when made, (2) that current
earnings of the account are not subject to taxation, or (3) that distributions from the
account are not subject to taxation. An IRA, for example, may contain pretax contributions
that would be subject to taxation if withdrawn.
An unlimited exemption for tax-exempt retirement funds may provide an incentive for
debtors to transfer nonexempt assets into retirement accounts in preparation for
bankruptcy filing, preventing those funds from being paid to creditors. See the discussion
of such prebankruptcy exchanges of nonexempt for exempt property in connection with §182,
below.
(3) Section 366 of the Code requires utilities to provide service to debtors who have
filed bankruptcy, as long as the debtors provide adequate assurance of payment for the
postbankruptcy services. Part of the reason for the enactment of this section was that
utilities were usually monopolies in any given area, so that a debtor would not easily be
able to obtain an alternate source of service. (This is in contrast to other suppliers of
goods and services to whom the debtor might owe money, such as doctors or furniture
stores. These suppliers would not be required to do business with the debtor
postbankruptcy, because the debtor would be able to find other suppliers of the same goods
and services.) With the deregulation of many utilities, there is frequently the
possibility that more than one utility operates in a given area. In such circumstances, a
utility may argue that it should not be bound by §366—that it should be allowed to
cease doing business with the debtor, with the debtor obligated to deal with a competing
utility. Section 119 would preclude this argument, by expressly making §366 applicable to
traditional utilities regardless of their monopoly status.
*§119A ("Discharge of debts arising from tobacco-related debts")
Changes. Section 119A would provide that an exception to discharge in Chapter 11
cases for debts arising from legal proceedings related to a consumer’s purchase or
consumption of tobacco products, based on allegations of false pretenses, a false
representation or actual fraud.
Impact. This section has no application to consumer bankruptcy cases. Rather, it
would prevent tobacco companies from using Chapter 11 to deal with mass torts arising from
purchase and consumption of their products, since any liability arising from a legal
proceeding in which fraud was alleged could not be discharged as part of any plan.
(Chapter 11 has been used for similar product liability torts, notably by manufacturers of
asbestos, for which the Code now contains special provisions effectuating Chapter 11
discharges. See 11 U.S.C. §524(g) and (h).)
Subtitle C ("Adequate Protections for Secured Lenders").
*§121 ("Discouraging bad faith repeat filings") (see S. 1301,
§303).
Changes. This section provides:
(1) that the automatic stay would terminate after 30 days in situations where a
bankruptcy case is filed within one year of the closing of an earlier case filed by or
against the same debtor, which case was dismissed;
(2) that the automatic stay would never go into effect in situations where a bankruptcy
case is filed within one year of the closing of two or more cases filed by or against the
same debtor, which cases were dismissed, again, unless a party in interest demonstrates
that the filing of the last case was in good faith; and
(3) that bankruptcy courts would have discretion to enter orders granting relief from
the stay "in rem," providing that the automatic stay will not apply in
subsequent cases filed by the same debtor or in cases filed by other parties with
specified knowledge of the order, including constructive notice of orders recorded in the
applicable real property records.
Impact. The role of the automatic stay differs substantially in Chapter 7 and in
Chapter 13. In Chapter 7, the stay has the effect of allowing a trustee to determine
whether property of the debtor should be liquidated for the benefit of creditors. For
example, a home that is about to be sold in a foreclosure sale, might, in the
trustee’s judgment, be able to be sold by a broker for a higher price, sufficient to
pay the mortgage and have a surplus for distribution to unsecured creditors. The automatic
stay prevents a foreclosure from taking place in a situation like this, while allowing the
mortgagee to seek relief from the stay by showing that there is in fact no equity in the
property. In Chapter 13, the automatic stay has the effect of allowing a debtor to propose
and carry out a plan that deals with secured claims in such a way that the debtor is
allowed to retain the collateral, even if there is no equity. A debtor who has no ability
to deal with a secured claim properly in Chapter 13 may nevertheless file repeated
bankruptcy cases in order to prevent a foreclosure or repossession from going forward, by
invoking the automatic stay repeatedly. The proposal seeks to limit debtors’ ability
to use this tactic, and many of its features would be helpful. However, the proposed
changes do not reflect the different roles that the automatic stay plays in Chapter 7 and
Chapter 13, and thus may have unintended consequences.
In Chapter 7 cases, regardless of whether there were prior dismissed cases, the issue
involved in application of the automatic stay should be limited to the question of equity.
To allow the automatic stay to remain in effect, a Chapter 7 trustee should simply be
required to show that there is equity in the property at issue; the good faith of the
debtor in filing the case is not relevant. To see the problem with the proposal in this
connection, consider the following example: a debtor with limited income has taken out a
home equity loan on the family home, and cannot keep up with the payments. The lender
files a foreclosure action, and the debtor seeks to save the home in Chapter 13, but fails
to make plan payments, so that the bankruptcy case is dismissed and the foreclosure action
is recommenced. This time, again to stop the foreclosure, the debtor files a Chapter 7
case. There is considerable equity in the home. Under the proposal, there is a presumption
(since the debtor failed to make plan payments) that the second case is filed in bad
faith, and if the Chapter 7 trustee wants to keep the automatic stay in effect beyond 30
days, the proposal would require the trustee to establish, by clear and convincing
evidence, that the case was filed in good faith. If the trustee is unable to do so, the
foreclosure will go forward, and the estate will lose the higher value that could have
been obtained in a brokered sale.
On the other hand, the good faith standards set out in the proposal are reasonably
applicable to Chapter 13 cases, requiring that any party in interest establish the
debtor’s good faith for repeatedly invoking the automatic stay in Chapter 13.
The impact of the "in rem" provision is difficult to determine, because no
standards are set out for the entry of in rem orders. These orders would be most
appropriate as applied to property in which there was no equity, and as to which there had
been a pattern of bankruptcy filings. In such situations, the orders could help to prevent
debtor abuse. In other situations, the orders might again prevent sales by Chapter 7
trustees to the benefit of unsecured creditors. Also, the proposal does not state whether
the court would be authorized to vacate an in rem order in a subsequent case upon a
showing that the case was filed in good faith. Absent such specification, there may
substantial litigation to determine the issue.
Alternative. The automatic stay should remain in effect in Chapter 7 cases upon
a request by the trustee, within a reasonable time after the filing of the case, for a
hearing on the question of equity. In rem orders for relief from stay should be limited to
situations in which there is no equity in the property and in which the property has been
the subject of more than one bankruptcy filing.
*§122 ("Definition of household goods and antiques") (see S. 1301, §317)
Changes. Section 122 of H.R. 3150 would add a definition for "household
goods" to the definitions of §101 of the Code. "Household goods" are a
category of debtors’ assets that may be exempted under §522(d), and as to which
certain liens may be avoided under § 522(f). The proposal would define "household
goods" by incorporating the definition that appears in 16 C.F.R. §444.1(i). That
regulation of the Federal Trade Commission defines "household goods" as:
Clothing, furniture, appliances, one radio and one television, linens, china, crockery,
kitchenware, and personal effects (including wedding rings) of the consumer and his or her
dependents, provided that the following are not included within the scope of the term
"household goods": (1) Works of art; (2) Electronic entertainment equipment
(except one television and one radio); (3) Items acquired as antiques; and (4) Jewelry
(except wedding rings).
The definition would also include "any tangible personal property reasonably
necessary for the maintenance and support of a dependent child."
Impact. Section 522(f) allows the avoidance of nonpurchase money, nonpossessory
liens on certain items of exempt household property. The idea underlying this provision is
that when a lender extends credit on the basis of used household goods in the possession
of the debtor, it is unlikely that there would be any substantial resale value in the
collateral, and that the lender is primarily relying on the difficulty that the debtor
would face in replacing the items. The Bankruptcy Code made the determination that such
liens should not be enforced. Section 122 of H.R. 3150 apparently intends to limit the
type of household property as to which nonpossessory, nonpurchase money security interests
may be avoided. The Trade Commission definition of household goods would exclude such
common items as home computers, CD players, speaker systems, earrings, and framed prints.
If so, it would be unduly restrictive. To some extent, the limitations of the FTC
definition would not restrict § 522(f), because "household goods" is only one
of the categories of personal property as to which liens may be avoided under that
subsection. Other categories include "household furnishings," and
"jewelry." A major impact of the change may be to give rise to new litigation as
to whether particular items not within the FTC definition of "household goods"
constitute "household furnishings." It would similarly require litigation to
determine whether particular items of property (for example, a home computer) are
"reasonably necessary" for the support of a dependent child. Debtors in
bankruptcy are unlikely to have the resources to engage in such litigation, and there are
no provisions in H.R. 3150 for fee shifting in the event that the debtor prevails in a
dispute over the definition of household goods. Thus, creditors with nonpurchase money
security interests in personal property of the debtor would have substantial leverage if
they chose to object to a lien avoidance motion on the ground that the collateral was not
"household goods."
Alternative. In order to protect nonpurchase money lenders who genuinely rely on
the value of the debtor’s personal property in extending credit, Section 522(f) could
be amended to exclude from lien avoidance any items of personal property not within the
FTC definition whose resale value exceeds a specified amount (for example, $1000).
*§ 123 ("Debtor retention of personal property security")
Changes. Some courts have held that debtors in Chapter 7 may redeem personal
property in installments. The proposed change would require that redemption take place by
payment in full at the time of redemption. In addition, this section proposes that if the
debtor does not either redeem personal property that is collateral for a claim, or enter
into a reaffirmation agreement with respect to the property, then the property will be
deemed abandoned by the Chapter 7 trustee, so that the creditor may repossess the property
or take other action allowed by nonbankruptcy law. This abandonment would not take place
if the court determined, on motion of the trustee, and after notice and hearing, that the
property in question was of consequential value or benefit to the estate.
Impact. For property in which there is no equity for the estate, the impact of
the proposal would be to create an appropriate incentive in favor of Chapter 13 filings
whenever a debtor wished to retain property that could not be redeemed, and as to which a
reaffirmation agreement could not be negotiated. For property in which there is equity,
the proposal allows the trustee an opportunity to retain the property, so that it can be
sold for the benefit of the estate.
*§124 ("Relief from stay when the debtor does not complete intended surrender
of consumer debt collateral") (see S. 1301, §318)
Changes. Section 521(2) of the Bankruptcy Code currently requires Chapter 7
debtors to make an election as to their property which serves as collateral for consumer
debts: they must indicate that they intend to retain or surrender the property, and
"if applicable" state that the property is claimed exempt, that the debtor
intends to redeem the property, or that the debtor intends to reaffirm the debts secured
by the property. The law further indicates that the debtor is obligated to carry out the
specified choice within 45 days of filing its notice of the election as to the property
involved. Section 124 of H.R. 3150 would make a number of changes in the operation of this
provision:
(1) The section would be made applicable to all collateral, not merely collateral
securing consumer debts.
(2) The time for performing the election would be changed from 45 days after the filing
of the notice to 30 days after the first date set for the meeting of creditors under
section 341(a).
(3) The option for retaining the property and claiming it as exempt is eliminated, so
that the only options given the debtor for collateral are: (1) surrender, (2) redemption,
and (3) reaffirmation or lease assumption.
(4) A failure by the debtor to timely perform its election would result in termination
of the automatic stay as to the property involved unless (1) the debtor chose
reaffirmation and the creditor refused to reaffirm on the original contract terms, or (2)
the court determined, on motion of the trustee, and after notice and hearing, that the
property in question was of consequential value or benefit to the estate.
(5) If the automatic stay terminates pursuant to the above provisions, it is specified
that the creditor should be allowed to proceed with any state law remedies for default
based on the filing of the bankruptcy. Thus, the fact that the debtor was current in
payments would not be grounds to prohibit repossession or foreclosure if state law allowed
these remedies based on the filing of a bankruptcy. This provision would not be applicable
as to property for which a lien was avoided in the bankruptcy case.
Impact. Current law has no enforcement mechanism for § 521(2), and §124 of
H.R. 3150 provides the most reasonable enforcement mechanism—relief from the
automatic stay. Similarly, expressly allowing repossession based on the bankruptcy filing
(if permitted by state law) addresses the creditor’s concern that the collateral will
not be maintained once the debtor is no longer personally liable for any deficiency.
Moreover, the section allows a trustee to retain for the estate property that has equity
above the creditor’s lien.
However, the proposal would interfere with the debtor’s option to retain exempt
property without reaffirmation or redemption. Debtors are allowed by § 522(f) of the Code
to avoid liens on certain exempt personal property secured by nonpossessory, nonpurchase
money security interests. A requirement that the debtor surrender such property, redeem
it, or reaffirm debt as to the property would contradict this lien avoidance provision.
Under the proposal, the automatic stay would terminate as to property exempted under
§522(f) when the debtor failed to redeem the property or reaffirm the debt, even though
no discharge had yet been granted the debtor. The debtor would presumably have a defense
of lien avoidance if the creditor pursued state law remedies as to the property in
question, but there is no reason why the automatic stay should not remain in effect so as
to prohibit such actions from being brought.
Alternative. Debtors should retain the option of keeping property subject to
lien avoidance under § 522(f).
§125 ("Giving secured creditors fair treatment in Chapter 13") (see S.
1301, §302)
Changes. Current case law interpreting Chapter 13 is in disagreement about the
time at which a lien should be deemed released under a plan. This provision would resolve
the dispute by amending §1325 of the Code to state that a lien can only be released at
the time the debtor is discharged under section 1328, or until the claim secured by the
lien is fully paid, whichever is earlier. The provision also states that, in the event of
conversion or dismissal of a Chapter 13 case, the lien would remain to the extent
recognized under nonbankruptcy law.
Impact. This change would primarily affect automobile loans. Frequently an auto
loan in a Chapter 13 case is in an amount greater than the value of the automobile. In
such a case, the debtor is allowed to pay the value of the car in satisfaction of the
secured claim, with the balance of the claim treated as unsecured. The plan may provide
that as soon as the secured portion of the claim is satisfied, the creditor is required to
release its lien. Thereafter, the debtor may fail to complete the plan, so that the
creditor does not receive full payment of the unsecured portion of its claim. This
provision would allow the creditor to retain its lien to secure payment of that unsecured
portion.
The provision contradicts the bankruptcy policy requiring equal treatment of creditors.
To the extent that a secured creditor has a claim not supported by collateral value, the
Bankruptcy Code treats the creditor’s claim as unsecured, and entitled to the same
treatment as other unsecured claims. This provision would allow the unsecured portion of a
secured claim a preferential position—even though the value of its secured claim was
paid, the creditor would be able to take action against property of the debtor to enforce
its unsecured claim, a right that no other unsecured creditor would have.
The effect of conversion or dismissal of a Chapter 13 case is treated in separate
provisions of the Bankruptcy Code, §§348 and 349. See §127 of H.R. 3150, discussed
below. If changes are made regarding the effect of conversion or dismissal and not placed
in those sections, there will be a question as to which section controls.
Alternative. Payments on account of unsecured claims could be required to be
made in equal installments throughout a plan, so that the unsecured portion of a
bifurcated claim is paid during the same time that the secured portion is paid, and all
unsecured claims are treated in the same way. Changes in the effect of conversion or
dismissal should be made in §§348 and 349 of the Code.
§126 ("Prompt relief from stay in individual cases") (see S. 1301, §311)
Changes. This section would provide that in individual bankruptcy cases under
Chapters 7, 11, or 13, the automatic stay would terminate 60 days after a request for
relief from the stay, unless (1) the court denies the motion, or (2) all parties in
interest agree to a continuance of the stay beyond that time, or (3) the court makes a
finding that continuance of the stay is required by compelling circumstances.
Impact. This provision does not substantially change existing law, which
requires that all motions for relief from stay be heard initially within 30 days, and that
if the initial hearing is not final, the final hearing must commence within 30 days after
the conclusion of the preliminary hearing. This section would only apply in cases of
hearings lasting more than one day, which are very unusual in consumer cases. Both present
law and the proposal allow extensions by the court for compelling circumstances.
§127 ("Stopping abusive conversions from Chapter 13") (see S. 1301,
§310)
Changes. This section of the proposed legislation has two parts. First, under
§348(f) of the Bankruptcy Code, when a debtor converts a Chapter 13 case to a case under
Chapter 7, the valuation of allowed secured claims is carried over from the Chapter 13
case to Chapter 7, with the amount of the secured claim reduced by whatever payments were
made on account of that claim to the secured creditor. Section 127 of H.R. 3150 would
change this result, providing that to the extent any amount remains owing to the secured
creditor at the time of the conversion, the entire amount owed will be secured by the
collateral. Second, the section provides that, to the extent that any default in payments
is not fully cured, the default "shall have the effect given under applicable
nonbankruptcy law." [Note: This section of H.R. 3150 contains a drafting error.
Section 348(f) of the Bankruptcy Code applies to all cases converted from Chapter
13 to other chapters of the Code. Section 127 of H.R. 3150 is intended to leave the terms
of §348(f) in place as they apply to Chapter 13 cases converted to Chapter 11 or 12, and
then set out new terms, in a new subsection 348(f)(C), for cases converted from Chapter 13
to Chapter 7. Thus, the new subsection should have been introduced by the phrase
"with respect to cases converted to Chapter 7." Instead, the new subsection is
introduced by the redundant and confusing phrase "with respect to cases converted
from Chapter 13." There is also a typographical error in the enrolled text of the
bill, referring to the valuation of the claim made for purposes of the case "under
chapter of this title" instead of "under chapter 13 of this title."]
Impact. The first proposed change has a very narrow impact. In Chapter 7,
pursuant to the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410
(1992), a debtor cannot simply pay the secured portion of any secured creditor’s
claim and retain the collateral. Rather, a Chapter 7 debtor can only exercise this right
in the context of a redemption, pursuant to §722 of the Code. Section 722 allows a debtor
to pay the amount of the "allowed secured claim" in order to redeem
"tangible personal property intended primarily for personal, family or household use,
from a lien securing a dischargeable consumer debt, if the property is exempted . . . or
has been abandoned." When a case is converted from Chapter 13 to Chapter 7, a
question may arise as to how much is required to be paid by the debtor in order to redeem
tangible personal property, such as an automobile. Current law provides that the amount of
the secured claim, fixed during the Chapter 13 case at the value of the collateral,
continues to be the amount of the secured claim for purposes of the case on conversion to
Chapter 7, and that any payments made on account of the secured claim during the Chapter
13 case reduce the claim on conversion. For example, if the debtor owed $10,000 on a car
loan at the outset of a Chapter 13 case, and the car was valued by the court at $7,000,
the lender would have had a secured claim of $7,000 in the Chapter 13 case and an
unsecured claim of $3,000. If the debtor paid $2,000 on the secured claim through the
Chapter 13 plan, and then converted the case, current law would provide that, on
conversion, the lender had a secured claim of $5,000 (the original $7,000 claim reduced by
the $2,000 payment). Thus, if the debtor wished to redeem the automobile in Chapter 7, the
price for redemption would be $5,000, even if the car was worth more than that amount at
the time of redemption. Under the proposed change, the intent appears to be that the
creditor would have an $8,000 claim secured by the automobile (the total claim of $10,000
less the $2,000 paid during the Chapter 13 plan). In order to redeem, the debtor would
then have to pay the entire value of the automobile, up to $8,000. In this way, the
secured creditor could receive, as a price for redemption, a total compensation greater
than the value of the collateral at the time of the filing of the case.
The second provision of the section, dealing with the cure of default, is unclear.
Under nonbankruptcy law, a default gives secured creditors certain rights to the
collateral, which may include immediate repossession or commencement of a foreclosure
action. In a Chapter 7 bankruptcy, those rights are automatically stayed, subject to the
creditor’s right to seek relief from the stay. It may be that this provision is
intended to terminate the automatic stay in a case converted from Chapter 13 to Chapter 7
whenever there is an uncured default. If so, the provision would violate the principle
that the Chapter 7 trustees are allowed to sell property in which there is equity, for the
benefit of all creditors. This would not appear to be a reasonable provision, but no other
meaning is apparent.
Alternative. Bad faith conversion from Chapter 13 is currently penalized by
§348(f)(2), which provides that the Chapter 7 trustee in the converted case may liquidate
all of the nonexempt property in the possession of the debtor at the time of conversion.
This penalty could be made more effective by uniform exemption laws. Another alternative
would be to allow denial of conversion in situations of bad faith.
§128 ("Restraining abusive purchases on secured credit") (see S. 1301,
§302)
Changes. This section of the proposed bill would change the bifurcation of any
secured claim resulting from the debtor’s incurring secured credit within 180 days of
the bankruptcy filing. Instead of the secured creditor having a secured claim only to the
extent of the value of its collateral, with an unsecured claim for the difference, the
secured creditor would be given a secured claim in the amount of the entire indebtedness
outstanding at the time the bankruptcy was filed. If the creditor is also secured by other
property, purchased more than 180 days prior to the bankruptcy, the claim would be
bifurcated, but the resulting secured claim could not be less than the debt outstanding as
a result of the purchase made within the 180 day period.
Impact. The section is not limited to situations of bad faith purchases—it
applies in any case in which the debtor files bankruptcy after making a credit purchase.
For example, if a debtor purchased an automobile in January, was laid off in February, and
filed bankruptcy in May, this provision would result in a change in the operation of the
Bankruptcy Code with respect to the claim secured by the automobile. In Chapter 7, one
impact of this provision is to increase the cost of redemption. Instead of paying the
value of the collateral at the time of redemption, the debtor would be required to pay the
entire outstanding indebtedness. Another impact is to reduce the recovery of the secured
creditor in any Chapter 7 case where there is a distribution. Under existing law, any
secured creditor would be viewed as having a secured claim to the extent of the value of
the collateral, and an unsecured claim for the difference between the value of the
collateral and the total claim. Thus, in the example given above, if $25,000 was the
outstanding loan balance, and the car valued at $20,000, current law would allow the
creditor both to repossess the car and have a $5000 unsecured claim, payable through sale
of the debtor’s other assets. Under the proposal, the creditor’s claim would be
treated as fully secured, and repossession would be the sole recovery.
In Chapter 13 cases, the impact of this provision would be to prevent "strip
down" of the affected secured claim. As a result, a greater portion of the
debtors’ contributions to the Chapter 13 plan would go to pay the secured claim, and
a smaller amount would be paid to unsecured creditors. For example, an automobile
purchased six months before a bankruptcy may have substantially depreciated. If the
automobile was purchased at a high interest rate with a long amortization, the amount
owing on the car at the time of the bankruptcy may be close to the original purchase
price. If the debtor missed one or more payments, the debt may exceed the original
purchase price. The proposal would require that the debtor, in order to retain the
automobile, pay the total amount due, rather than what the car was worth. Assuming that
the debtor’s plan makes less than full payment of all claims, the effect is to
increase the amount paid on the auto loan and reduce the amount paid to other creditors.
Alternative. Current law allows both Chapter 7 and Chapter 13 cases to be
dismissed for lack of good faith. The Code could be amended to provide that a case shall
be dismissed for lack of good faith where a debtor is shown to have made a purchase on
secured credit with the intent of filing bankruptcy shortly thereafter.
§129 ("Fair valuation of collateral") (see S. 1301, §302)
Changes. This provision of the proposed bill would amend the claim bifurcation
provision of the Bankruptcy Code (§ 506(a)) to provide that collateral in Chapter 7 and
13 cases is always valued at the cost to replace the property, without deducting the costs
of sale or marketing, and that this replacement cost, for property "acquired for
personal, family, or household purpose" is "the price a retail merchant would
charge for property of that kind."
Impact. The impact of this proposal differs, depending on whether it is applied
in Chapter 7 or in Chapter 13. In Chapter 7, the most common reason for bifurcating a
claim is in redemption: a debtor is allowed, in Chapter 7, to retain personal property
that cannot be sold for the benefit of unsecured creditors (because there is no equity in
the property, or because it is exempt), by paying any creditors secured by the property
the amount of their allowed secured claims. In this way, instead of obtaining the
property, as they would by repossession, the secured creditors receive the value of the
property, which may be less than the total amount owed. To the extent that the creditors
receive less than the total amount they are owed, they are given an unsecured claim for
the difference. Under current law, there is no explicit direction as to how to value the
collateral being retained by the debtor. However, since redemption is a substitution for
return of the collateral, there is no apparent reason why secured creditors should
receive, in a redemption, any more than they would receive if they did repossess the
collateral. Valuing the collateral at the price it would cost the debtor to replace it
gives an arbitrary increase in collateral value to the secured creditor, with the amount
of the increase depending on how expensive it would be for the debtor to replace the
property involved. Using retail price as the measure for replacement cost exacerbates this
problem, since, as the Supreme Court noted in its recent Rash decision, retail
price may include "items such as warranties, inventory storage, and
reconditioning," that are in no sense part of the collateral that secures a
creditor’s claim. Associates Commercial Corp. v. Rash, 117 S.Ct. 1879, 1886
n.6 (1997). Finally, in the context of redemption, the creditor has no risk of nonpayment,
and so there is no reason for any increase in the amount of the secured claim to
compensate for risk of nonpayment.
In Chapter 13, the principal reason for bifurcation is in "stripping down"
liens to the value of the collateral and paying the reduced secured claim over the course
of the plan. Here, the impact of bifurcation is to divide the plan payments between
secured and unsecured creditors. The debtor must either pay all claims in full (including
the unsecured portion of a secured claim) or else must pay all disposable or
"net" income into the plan. To the extent that a secured claim is valued at a
higher level, less of the plan payments will go to unsecured creditors. So, in this
context, "fairness" requires a balancing of the rights of secured and unsecured
creditors. Again, the value of collateral to a secured creditor is best measured in terms
of what that creditor could get for the collateral. To the extent that the creditor could
only obtain part of what is owed from the collateral, the creditor is best seen as
unsecured, just like the other unsecured creditors, regardless of how much it might cost
the debtor to replace the property. In contrast to redemption, however, the secured
creditor in Chapter 13 does not receive immediate payment of its claim, and so the
creditor does have a risk of nonpayment. This can be addressed by amending the Code to
provide that payments of secured claims in Chapter 13 plans should carry an interest rate
sufficient to offset the risk of nonpayment.
In either Chapter 7 or Chapter 13, the interests of secured creditors would be harmed
by a requirement of retail valuation whenever the collateral is repossessed. In such
situations, where the value of the collateral is less than the amount of the
creditor’s claim, the creditor is given an unsecured claim for the deficiency. By
requiring retail valuation of collateral, even where the creditor cannot obtain retail
price, §129 of H.R. 3150 would artificially lower the creditor’s unsecured
deficiency claim.
A final difficulty with the proposal is that many items of collateral (unlike
automobiles) do not have an established retail market for used items. For example, a
creditor may be secured by a five year old washing machine. There are unlikely to be
readily ascertainable retail markets for such machines. The proposal would leave no
guidance as to the proper valuation method in this situation.
Alternative. To create a fair valuation of collateral, the Code could be amended
to provide that a secured creditor receive a secured claim in the amount that the creditor
could establish that it would receive using any method of sale available to the creditor.
If the claim is not paid immediately, the creditor should receive an interest rate on the
secured claim sufficient to offset the risk of nonpayment. A similar standard of valuation
has been proposed by the National Bankruptcy Review Commission. Final Report at 243-58.
§130 ("Protection of holders of claims secured by debtor’s principal
residence")
Changes. Section 130 of H.R. 3150 would (1) provide that a claim is not subject
to modification if it is secured "primarily" (rather than "only") by a
lien on property used as the debtor’s principal residence at any time during the 180
days prior to the bankruptcy, (2) define "debtor’s principal residence,"
and (3) exclude continuances of mortgage foreclosures from the operation of the automatic
stay.
Impact. These changes largely resolve conflicts in the case law respecting the
treatment of home mortgages in Chapter 13. Section 1322(b)(2) provides that, generally,
secured claims can be modified in Chapter 13. This allows the plan to pay, as a secured
claim, only the value of the collateral. To protect lenders of home mortgages, the right
to modify is denied when the lender is secured only by a mortgage on the debtor’s
principal residence. Some decisions have held that a multi-unit building would constitute
security other than the debtor’s principal residence, or that a mobile home would not
be a residence. The proposed change would include loans on such property within the scope
of the protection. Similarly, there have been reports of situations in which debtors have
vacated their homes shortly before filing Chapter 13 cases, so as to remove the protection
given to the mortgage lender. The proposal negates such a tactic by applying the
protection to homes used as the debtor’s principal residence during a 180 day period
prior to the bankruptcy.
A final issue regarding the application of the non-modification provision has to do
with other security issued in connection with a home mortgage. Current law applies
nonmodifiability where the claim is secured "only" by a lien on the
debtor’s principal residence. Questions have arisen as to whether security incident
to a mortgage (such as an assignment of rents) result in the loss of nonmodifiability. The
proposal deals with these questions by requiring only that the claim be primarily secured
by a homestead mortgage. This change may be overbroad. Debtors may give home mortgages as
additional security in connection with a business loan—clearly not the kind of loan
for which the special protection was found necessary—and the business lenders could
argue (particularly if the business fails) that the home mortgage was their
"primary" security.
The remaining change made by this section involves the automatic stay. Some decisions
have held that, in order to avoid violation of the automatic stay, a lender with a
foreclosure pending at the time of a bankruptcy filing would have to dismiss the
proceeding. Then, if the automatic stay were terminated, the lender would be required to
serve all required notices and otherwise recommence the proceeding. The proposal would
allow, instead, a simple continuance of the proceeding as of the time of the bankruptcy
filing, so as to allow immediate recommencement in the event of termination of the stay.
Alternative. Instead of providing for nonmodifiability whenever a homestead is
the "primary" security for a loan, the needs of mortgage lenders could be
addressed by a provision applying nonmodifiability to any loan secured only by a mortgage
and by interests associated with the mortgage.
*§131 ("Aircraft equipment and vessels")
Changes. This section deals with the application of the automatic stay to
certain aircraft equipment in Chapter 11 cases. It has no application to consumer cases,
and there is no apparent reason why the section was placed in Title I ("Consumer
Bankruptcy Provisions") of H.R. 3150.
Subtitle D ("Adequate Protections for Unsecured Lenders")
*§141 ("Debts incurred to pay nondischargeable debt") (see S. 1301,
§315)
Changes. Current § 523(a)(14) provides that debts incurred to pay
nondischargeable tax obligations are nondischargeable. Section 141 of H.R. 3150 would
create a new exception to discharge—523(a)(19)—applying the concept of §
523(a)(14) to all nondischargeable debt, with one exception: if the debtor was
either a "single custodial parent" at the time of the bankruptcy filing, or if
the debtor owed child support or alimony payments at the time of the bankruptcy filing,
then the debt incurred to pay a nondischargeable debt would remain dischargeable unless
the creditor was able "to demonstrate that the debtor intentionally incurred the debt
to pay the debt which is nondischargeable." Section 141 would further provide for a
new class of priority claims, consisting of the following: "remaining allowed
unsecured claims for debts that are nondischargeable under section 523(a)(19), but which
shall be payable under this paragraph in the higher order of priority (if any) as the
respective claims paid by incurring such debt."
Impact. The primary impact of this proposal would be an arbitrary imposition of
nondischargeability. The provision is not limited to debts incurred fraudulently, which
are already nondischargeable under § 523(a)(2). Thus, this proposal would apply to debts
incurred in good faith, and would render them nondischargeable based simply on how the
debtor chose to use the borrowed funds. For example, if the debtor used borrowed funds to
pay rent, and other funds to repay a student loan, the debtor would have no
nondischargeable debt. But if the debtor used the same borrowed funds to pay the student
loan, and the other funds to pay rent, the debt for the borrowed funds would be
nondischargeable.
The exception to the new ground for nondischargeability is highly ambiguous, and,
depending on its interpretation, will either be very broad or largely inapplicable. Single
parents, and any debtor owing support payments at the time of bankruptcy filing, would
only be liable under the new exception if the creditor could show that they
"intentionally incurred" the debt to pay the otherwise nondischargeable debt.
This intent requirement could be interpreted to mean simply that the debtor intended to
borrow the money used to pay the nondischargeable debt—that is, that the debt was not
incurred inadvertently, such as by automatic payment of a checking account overdraft.
Under this reading, the exception would rarely apply, since most debtors intend the
borrowing that they engage in. Another possible reading of the intent requirement would be
that the debtor was aware that the debt being paid was nondischargeable in bankruptcy.
Creditors would rarely be able to make such a showing. Regardless of the interpretation,
however, there appears to be little rationale for the exception. There is no apparent
reason why a single parent—as opposed to a married parent—should be accorded
special protection in repaying student loans. Nor should the status of owing support
payments at the time of bankruptcy be relevant. Indeed, a debtor with support obligations
is given an incentive to withhold those payments prior to filing bankruptcy in order to
take advantage of the exception.
Moreover, the provision presents substantial tracing problems. Section 523(a)(14) has
had little impact thus far, perhaps because of the difficulty in tracing the source of
cash used to pay taxes. It would similarly be difficult to trace the source of cash used
by a debtor to pay nondischargeable obligations, such as child support, whenever these
obligations were paid from an account into which the debtor deposited both borrowed funds
and funds received from other sources.
Finally, the new class of priority claims presents two distinct difficulties. First,
the language describing the new priority, as quoted above, is very difficult to
understand. The intent may be to allow a priority, at the lowest level, for claims
nondischargeable under the new §523(a)(19), but only if the claim satisfied through the
nondischargeable debt was itself a priority claim, and with multiple nondischargeable
priority claims arising under §523(a)(19) paid in the order of the priority of the
satisfied claims. However, the section is also capable of being read to apply to all
claims nondischargeable under §523(a)(19). Second, under either reading, the effect of
the new priority provision may be to make completion of Chapter 13 cases involving alimony
and support much more difficult. In Chapter 13, all priority debt must be paid, in full,
through the plan. Debts incurred to pay support obligations may well be nondischargeable
under the proposed §523(a)(19)—either because the debtor was current with support
obligations at the time of the bankruptcy filing, or because the debtor
"intended" to borrow the funds needed to make the support payments. If so, the
nondischargeable debt would be a priority claim, that the debtor would have to pay in
full, together with current support payments, during the pendency of the Chapter 13 case.
*§142 ("Credit extensions on the eve of bankruptcy presumed
nondischargeable") (see S. 1301, §316)
Changes. Current § 523(a)(2)(C) provides that if a debtor borrows more than
$1000 from a single creditor for items that are not needed for the support of the debtor
or the debtor’s dependents, or takes cash advances of more than $1000, within 60 days
of the filing of a bankruptcy, the debt is presumed to have been obtained by fraud. In
keeping with the consensus reflected in In re Anastas, 94 F.3d 1280, 1285 (9th Cir.
1996), this would mean that the debtor is presumed to have incurred the debt without
intending to repay it. The proposed change would expand this presumption to all consumer
debts incurred within 90 days preceding the bankruptcy, except for "debts incurred
for necessaries that do not exceed $250 in the aggregate" to a single creditor.
Impact. The impact of the presumption is to require debtors to carry the burden
of establishing, in a creditor complaint alleging fraud, that they did intend to repay
each debt incurred by them within three months of the bankruptcy filing. The expanded
presumption would have an impact far beyond the credit card matters to which the
presumption now applies, applying, for example to medical debts, grocery bills, and rent
obligations. The exception would result in arbitrary application of the presumption: if
the debtor used a single credit card to pay for "necessaries," the $250
aggregate would be quickly exceeded. On the other hand, the use of multiple credit cards
could extend the exception substantially.
The impact of the presumption of nondischargeability would be increased by §143, which
makes debts arising from fraud nondischargeable in Chapter 13.
Alternative. The present law could be amended to make clear that the misconduct
leading to nondischargeability is incurring debt with an intent not to repay the debt.
With this understanding, other circumstances might be set out in which debt incurred
shortly before bankruptcy is presumed to be nondischargeable: for example, debt incurred
to finance casino gambling, or debt incurred in excess of some percentage of the
debtor’s ordinary expenses.
*§143 ("Fraudulent debts are nondischargeable in Chapter 13 cases") (see
S. 1301, §314)
Changes. This section would limit the superdischarge available in Chapter 13,
excluding from the Chapter 13 discharge debts incurred (1) by fraud (as defined by §
523(a)(2) of the Code); (2) by fraud or defalcation while acting as a fiduciary,
embezzlement, or larceny (as defined by § 523(a)(4)); and (3) by willful and malicious
injury (as defined by §523(a)(6)). Also excluded from discharge in Chapter 13 would be
debts covered by § 523(a)(3)(B), which applies to debts nondischargeable under
§523(a)(2), (4), and (6), as to which notice was not given to the creditor in time to
file a timely complaint to determine dischargeability.
Impact. This provision would increase the recovery of certain creditors after
the completion of a Chapter 13 case. However, the provision would also largely eliminate
the superdischarge of Chapter 13, thus removing a major incentive for filing Chapter 13
cases, and would increase the need for court hearings.
The largest number of nondischargeability complaints brought before bankruptcy courts
in recent years has been on account of alleged fraud by debtors in the use of credit
cards. The courts have struggled with the application of the fraud provisions of §
523(a)(2) of the Code to credit card debt, but a consensus is emerging that the use of a
credit card is fraudulent if the debtor had an actual intent not to repay the credit card
charge at the time the card was used. See In re Anastas, 94 F.3d 1280, 1285 (9th
Cir. 1996). This, in turn, presents a question of fact that can require a trial. Rather
than incur the expense of such a trial, a debtor may, under current law, seek relief under
Chapter 13, and, if the plan is successfully completed, the debtor will be discharged from
the credit card debt regardless of the circumstances under which it was obtained. Under
the proposal, the question of the debtor’s intent (and the dischargeability of the
debt) would remain in Chapter 13, thus providing no incentive for the debtor to choose
that chapter, and presenting the courts with the potential for more hearings on the
dischargeability of credit card debt. Similar incentives to file Chapter 13 exist when the
debtor has engaged in conduct that might give rise to claims for breach of fiduciary duty
or intentional torts. All of these incentives to file Chapter 13 are removed by this
provision. It can thus be expected to increase the incentives to file Chapter
7—discharging all other debts without payment—leaving only the questionable debt
to be dealt with outside of bankruptcy.
*§144 ("Applying the codebtor stay only when it protects the debtor")
(see S. 1301, § 305).
Changes. Under present law, if a Chapter 13 debtor is liable with another party
on a particular debt, the creditor is automatically stayed from taking action against the
other party, but the creditor may obtain relief from this codebtor stay if the codebtor
received the consideration for the claim. Section 144 of H.R. 3150 would change this
situation by providing that the codebtor stay would never go into effect if the debtor did
not receive the consideration, so that the creditor, in that circumstance, could take
action against the codebtor or property not in the possession of the debtor. An exception
would be made for joint obligations arising out of a "separation agreement, divorce
decree, or other order of a court of record." For such obligations, when the debtor
is primarily liable, the creditor would still need to obtain relief from the codebtor stay
before proceeding against the codebtor. The section also provides for termination of the
codebtor stay as to any rented property that the debtor’s plan proposes to abandon or
surrender.
Impact. Contrary to the title of this section of the proposed bill, the codebtor
stay in Chapter 13 never protects the debtor. Actions against the debtor are stopped by
the automatic stay invoked in all chapters of the Code. Rather, the codebtor stay allows
the Chapter 13 debtors to pay, through the plan, debts for which they are primarily
responsible, and protects codebtors who did not receive the benefit of the debt (that is,
true accommodation parties) from collection actions. Under current law, if the creditor
believes that the nondebtor obligor was the one who really obtained the benefit of the
debt, the creditor may seek relief from the codebtor stay to allow action to be brought
against the codebtor (and property owned by the codebtor). The proposed change states that
the codebtor stay never goes into effect when the codebtor received the benefit of the
transaction. When the debtor and another party jointly incur a liability (like a joint
loan, or a cosigned loan), it may not be clear which of the parties received the benefit
of the transaction. Current law protects true accommodation parties by requiring that the
creditor seek court permission before acting against them on the belief that they were the
ones receiving the benefit of the transaction. The change would allow creditors to take
action without court permission, and require that debtors seek sanctions for violation of
the stay if the debtor was the actual beneficiary. The issue is not a common one, but
given the limited resources of debtors in Chapter 13, current law, requiring that
creditors move for relief from stay, is probably more efficient, since it allows a court
determination of any dispute prior to enforcement action.
The exception for debts affected by divorce decrees does not remove the right of the
creditor to pursue a nondebtor spouse on a joint obligation for which the spouse received
the original consideration. It merely requires that the creditor seek relief from the
codebtor stay on that basis, as under current law.
There is no apparent reason why a surrender of leased property should eliminate the
need for the codebtor stay. Where a nondebtor signed a personal property lease as an
accommodation to the debtor, the debtor would—under current law—retain the right
to pay whatever obligations arose from the lease in full through the plan, regardless of
whether the debtor kept the leased property. In such a situation, the party who signed the
lease as an accommodation should continue to be protected from collection actions while
the debtor was making plan payments.
*§145 ("Debts for alimony, maintenance, and support") (see S. 1301,
§§323-26)
Changes. Section 145 of H.R. 3150 would make nine distinct changes in bankruptcy
law as it bears on family support obligations:
(1) Section 523(a)(18) of the Code currently makes nondischargeable in Chapter 7
certain debts owed to states and municipalities on account of support obligations. This
ground for dischargeability would be broadened by making interest on the covered debts
nondischargeable and by allowing the states or municipalities to collect support
obligations that are not governed by federal law. Finally, the broadened
nondischargeability would apply in Chapter 13 as well as in Chapter 7.
(2) The automatic stay would be made inapplicable to (a) wage deduction orders entered
by a state, pursuant to federal law, to enforce debtors’ support obligations, and (b)
a state’s withholding, suspension, or restriction of debtors’ driver’s
licenses, professional and occupational licenses, or recreational and sporting licenses,
pursuant to federal law, to enforce overdue support. [Note: in connection with license
suspension, the bill makes reference to "section 466(a)(15) of the Social Security
Act," rather than the applicable §466(a)(16).]
(3) Exempt property of the debtor would continue to be liable for the debts to state
and local municipalities for support obligations that are nondischargeable under §
523(a)(18).
(4) A first priority in payment—ahead of administrative claims—would be
accorded to support obligations, as defined under current law, and renumbered by §151 of
H.R. 3150, discussed below.
(5) Debts nondischargeable under §523(a)(18) (support obligations owing to states and
municipalities) would be accorded priority status, at a lower (eighth) level of priority.
(6) Chapter 13 plans would be allowed to provide for the payment of support obligations
prior to the payment of any other priority claim. [Note: this provision apparently may be
intended to amend §1322(a)(1), which deals with mandatory plan provisions. However, the
provision, as it appears in §145(e) of H.R. 3150, states that it is amending §1322(b)(1)
of the Code, which deals with permissive plan provisions.]
(7) In order for any plan to be confirmed in Chapters 11, 12, and 13, a debtor
obligated to make support payments would be required to have paid all support obligations
that became due after the bankruptcy filing.
(8) A standard (nonhardship) discharge in Chapters 12 and 13 would only be granted to a
debtor obligated to make support payments if, at the time the debtor was otherwise
entitled to a discharge, the debtor certified that all support obligations that became due
after the bankruptcy filing had been paid.
(9) A provision of the Social Security Act dealing with the nondischargeability of
support obligations to states and municipalities would be amended to conform to the
amended version of §523(a)(18).
Impact. The provisions of this section would have a major impact on the
bankruptcies of debtors who owe support obligations, with the apparent intent of providing
greater assurance that obligations will be paid. Several of the provisions, however, may
impede payment of support obligations.
(1) By changing the scope of §523(a)(18) to include interest, the bill increases the
payments that a debtor is required to make to a party other than the supported spouse or
child. More significantly, by making these obligations to pay the government
nondischargeable in Chapter 13, this section extends the overall policy of H.R. 3150 in
eliminating the Chapter 13 superdischarge. As discussed above, in connection with §143,
this can be expected to create additional incentives for debtors to choose Chapter 7
instead of Chapter 13, and increase litigation regarding the debtor’s qualifications
for Chapter 7.
(2) In order to make payments to a Chapter 13 plan, debtors generally need to receive
their full paychecks, and be able to use their automobiles. By making the automatic stay
inapplicable to the enforcement of support obligations through wage deduction and license
suspension, H.R. 3150 would deprive certain debtors whose wages or licenses have been
withheld from obtaining automatic relief at the beginning of a bankruptcy case. Where a
state has withheld wages or suspended a license to enforce support obligations, the debtor
would have to file an adversary proceeding for injunctive relief in order to stop the
enforcement activity. Such a procedural requirement would add substantially to the cost of
Chapter 13 for the parties and the court, and provide little additional protection for the
debtor’s dependents, since the state can, under current law, seek relief from the
stay if it appeared that the bankruptcy was filed in bad faith.
(3) The provision regarding exemption would only apply in situations where federal law
provided a more extensive set of exemptions than the state law would provide to a debtor
who owed support obligations. In such situations, the impact of the change in exemption
law would be to substitute state exemption law for federal law whenever the state was
attempting to collect support obligations nondischargeable under §523(a)(18). Although
this situation is unlikely to be common, the change would have the effect of increasing
support collections where it did arise. (Note that states can accomplish the same result
under current law by opting out of the federal exemptions.)
(4) The reordering of support obligations to the first priority in bankruptcy violates
a core bankruptcy concept—that the costs of administration must be paid first. If
this is not done, there would be a powerful disincentive for any party to work in the
bankruptcy process. The change in priorities would apply most directly in Chapter 7 cases,
where a trustee is required to review the debtor’s filings (including, under H.R.
3150, an assessment of the debtor’s eligibility for Chapter 7 relief), conduct an
examination of the debtor, and reduce the debtor’s assets to cash for the benefit of
creditors. In any case involving unpaid support obligations, the trustee would face the
prospect of performing all of this work without compensation. Other professionals, such as
appraisers, brokers, and auctioneers, would be affected in the same way. The likely
result, if this provision were enacted, is that Chapter 7 cases involving support
obligations would not be properly administered, with the result that all
creditors—including support creditors—are paid less, rather than more, from the
debtors’ available assets.
(5) In Chapter 13, all priority debt must be paid, in full, during the term of the
Chapter 13 plan. Therefore, the greater the amount of priority debt, the more difficult it
is for a Chapter 13 debtor to complete a plan successfully. Section 145 of H.R. 3150
creates a new class of priority debt—support obligations to states and municipalities
that are nondischargeable under §523(a)(18)—and so requires that these governmental
obligations be repaid in full through any Chapter 13 plan. To the extent that this makes
it difficult for debtors to complete Chapter 13 successfully, it will result in increased
incentives for debtors to choose Chapter 7, with the potential for lower payments to
creditors as a whole.
(6) The provision that support obligations in Chapter 13 may be paid before any other
priority claims would have no substantial effect on current law. Section 1322(a)(2) of the
Code requires that a Chapter 13 plan "provide for the full payment, in deferred cash
payments" of all priority claims, unless the holder agrees to different treatment,
but there is no requirement that priority claims be paid in any particular order, or at
any particular time. See In re Ferguson, 134 B.R. 689, 696 (Bankr.S.D.Fla. 1991)
(the deferred payments required by Section 1322(a)(2) are not required to be equal monthly
payments over the life of the plan, but "may be paid in periodic intervals over the
life of the plan as determined by the individual debtor"). Thus, it appears current
law would allow a Chapter 13 plan to pay support obligations ahead of other unsecured
claims. It is possible that another priority creditor could assert that such a plan
involved unfair discrimination under §1322(b)(1), although there appear to be no reported
cases applying unfair discrimination analysis to competing priority claims. However, since
§145 of H.R. 3150 already provides that support payments should be given higher priority
(see point (4) above), discrimination in favor of support payments would plainly be
permissible. Thus, permissive payment of support obligations before other priority
claims would not require special authorization.
Any real impact would only occur, if, as suggested above, the priority payment of
support obligations was made mandatory. However, a requirement that support obligations in
Chapter 13 be paid before any other priority claims would have the effect of subordinating
administrative claims. This would contradict the general policy of paying administrative
claims first. The greatest impact of such a provision would be on debtors’ attorneys.
Under current law, these attorneys frequently agree to provide legal services without
advance payment to Chapter 13 debtors, looking to be paid their fees as an administrative
expense in the Chapter 13 case itself. If they are not allowed to be paid until after all
past due support payments are made, attorneys will likely be unwilling to represent
Chapter 13 debtors without full advance payment. This would cause Chapter 13 debtors with
support obligations to be delayed in filing their bankruptcy cases, and such delays can
have serious consequences, such as the loss of a home to foreclosure. Moreover, such a
provision might often delay prebankruptcy support payments, as debtors withhold their
support payments in order to accumulate legal fees for their attorneys.
(7) It is reasonable to require that debtors be current in their postpetition support
payments as a condition for confirmation of a plan. Support obligations are simply one of
a number of current payments (such as mortgage and utility bills) that a debtor must be
able to maintain while making plan payments. If a debtor falls behind in current support
obligations after filing the bankruptcy case, it is unlikely that the debtor would be able
to complete a plan.
(8) Withholding a discharge in Chapter 12 and 13 from a debtor who has fallen behind in
current support obligations will likely have the positive effect of discouraging debtors
from withholding support obligations in order to make plan payments. If a debtor is
unable, because of unanticipated difficulties to make both plan payments and support
obligations, it would be more appropriate for the debtor to seek to amend the plan to
provide for lower payments or to seek a hardship discharge than to fail to make the
current support payments.
(9) Federal law should certainly avoid having inconsistent statutes dealing with the
same subject matter, and so it is appropriate for any provision of the Social Security Act
dealing with dischargeability in bankruptcy to be consistent with the terms of the
Bankruptcy Code. However, rather than have identical provisions in the two statutes, it
would be preferable to place all of the exceptions to discharge in the Code itself,
avoiding the potential for inconsistency.
Alternative. The changes proposed by this section should be limited to (1)
requiring payment of postbankruptcy support payments as a condition of plan confirmation
and discharge, and (2) changing the dischargeability provision of the Social Security Act
to merely incorporate by reference, rather than restate, any applicable provision of the
Bankruptcy Code.
*§146 ("Nondischargeability of certain debts for alimony, maintenance, and
support") (see S. 1301, §327)
Changes. Current bankruptcy law makes a distinction between two types of awards
arising in cases of divorce and separation: support obligations—that is,
payments that are intended for the support of the debtor’s dependents—are always
nondischargeable, in both Chapter 7 and Chapter 13, pursuant to § 523(a)(5), regardless
of the manner in which the payments are described in a divorce or separation decree; on
the other hand, property settlements—that is, payments made to divide the
commonly owned assets of the parties to the divorce or separation, when these payments are
not intended as support—are nondischargeable only in Chapter 7 cases, pursuant to
§523(a)(15), and only if the relative financial positions of the parties make the payment
equitable (that is, where it would be more of a burden on the nondebtor spouse to be
deprived of the property settlement payment than it would be a burden on the debtor to
make the payment). Section 146 of H.R. 3150 would erase this distinction, making all
property settlements, as well as support payments, completely nondischargeable in Chapter
7 and Chapter 13, by including property settlements within the scope of §523(a)(5).
Impact. The proposal has the potential for requiring larger payments to
nondebtor spouses, but it would also create substantial unfairness to other creditors, and
further erode the superdischarge of Chapter 13.
Where a payment in a divorce or separation decree is not intended for support, the
nondebtor spouse who is entitled to the payment has no greater equitable claim than any
other creditor. Suppose that a debtor and the debtor’s former spouse jointly owned a
piece of investment property worth $50,000, which the debtor is allowed to keep in
exchange for a promise to pay $25,000 to the nondebtor spouse. At the same time, the
debtor is liable for negligently injuring a pedestrian in an auto accident, again owing
$25,000. There is no reason why the claim of the nondebtor spouse should be accorded any
greater right to payment in bankruptcy than the claim of the pedestrian. Only if the
property settlement is needed for support is the greater right to payment appropriate, but
current bankruptcy law recognizes the nondischargeability of nominal property settlements
actually needed for support.
Moreover, as discussed in connection with §151, below, the priority accorded support
obligations under H.R. 3150, is a continuation of present law—limited to actual
support, not including property settlements. Thus, it is quite possible that a Chapter 13
debtor would be precluded from paying property settlements in a Chapter 13 case at a
higher rate than other unsecured, nonpriority debt, pursuant to the unfair discrimination
provision of §1322(b)(1). See McCullough v. Brown, 162 B.R. 506 (N.D.Ill.
1993). This would result in a Chapter 13 debtor completing the plan and still owing
substantial amounts in nondischargeable property settlement obligations.
The impact of making genuine property settlements completely nondischargeable in
Chapter 13 is thus, once again, to provide a strong incentive for debtors to choose
Chapter 7 over Chapter 13, and, in this way, reduce the overall payments made to
creditors, and increase the likelihood of litigation over the debtor’s eligibility
for Chapter 7.
*§147 ("Other exceptions to discharge") (see S. 1301, §327)
Changes. Section 147 would eliminate from the Code current § 523(a)(15), which
deals with property settlements in divorce and separation proceedings. This elimination is
consistent with the placement of property settlements in §523(a)(5), as provided in §146
of H.R. 3150, discussed above.
One other change is made in § 147 of H.R. 3150—an expansion of the exception from
discharge set out in §523(a)(7). Currently, this exception applies to debts for "a
fine, penalty, or forfeiture" payable to a governmental entity, and not as
compensation for actual loss. This list would be supplemented by adding "an order of
disgorgement or restitution obtained by a governmental unit" to the other categories
of awards.
Impact. The impact of the proposed change in the dischargeability of property
settlements is discussed above, in connection with §146.
The proposed change to §523(a)(7) is somewhat problematic. Section 523(a)(7)
distinguishes between situations in which a governmental entity receives an award from the
debtor that is basically punitive—a fine or penalty for some misconduct—from
situations in which there is an award of compensation. To the extent that a governmental
body is simply owed money by a debtor (for example, the debt resulting from a
contractor’s negligent construction work), there is no reason why the debt should be
treated differently than debts owing to other creditors. "Disgorgement " and,
more particularly, "restitution" may imply some sort of compensation, and, to
that extent, should not be included in §523(a)(7). However, the proposed language retains
the limitation presently included in § 523(a)(7) that the debt in question must not be
"compensation for actual pecuniary loss." Accordingly, with the change limited
to noncompensatory "disgorgement" and "restitution" awards, the
proposal would be an appropriate extension of the present law.
*§148 ("Fees arising from certain ownership interests")
Changes. Section 523(a)(16) provides for the nondischargeability of certain
debts arising from postbankruptcy condominium assessments and similar charges. Section 148
of H.R. 3150 would expand the scope of § 523(a)(16) by removing two of its limitations.
First, the section would no longer be restricted to dwelling units, but would also apply
to fees arising from shares in a cooperative corporation or a "lot in a homeowners
association." Second, fees would be nondischargeable not only for the postbankruptcy
periods in which the debtor or a renter occupied the property, but for any postpetition
period during which the debtor or trustee had any interest in the dwelling unit, corporate
share, or lot. Finally, §148 would amend §365 of the Code to provide that the debts made
nondischargeable under §523(a)(16) could not be considered executory contracts.
Impact. The impact of § 148 of H.R. 3150 is to increase the recovery of fees
that become due to condominiums, cooperatives, or similar membership associations after
the filing of a bankruptcy petition in Chapter 7. Current law limits the
nondischargeability of such fees to those incurred while a dwelling unit is occupied by
the debtor or a renter of the debtor, on the theory that the debtors should pay for the
use of the property that provides them with a benefit. The proposed change would create a
nondischargeable debt for all postbankruptcy fees incurred until the membership
association gained full control and ownership of the property involved, regardless of
whether it was occupied by the debtor or a renter of the debtor, and would assure that
payment of the postbankruptcy fees could not be limited by rejecting the contract giving
rise to the fees as an executory contract. The argument in favor of this change is that
membership associations incur costs (for insurance and maintenance) regardless of the
debtor’s use of the property, and that the debtor should be responsible for these
costs. On the other hand, mortgage holders also incur costs for insurance and maintenance
of property securing their claims in bankruptcy, but they are generally required to look
to the property to satisfy their costs. The current law is a compromise between the view
that condominium fees are a fully dischargeable prepetition debt (like personal liability
on a mortgage) and the position advanced by the current bill, which fully advances the
position of membership associations. To the extent that the associations are able to
assert claims against a debtor after discharge in Chapter 7, they will be competing with
other nondischargeable debt, including support obligations.
*§149 ("Protection of child support and alimony")
Changes. Section 149 of H.R. 3150 would add a new §529 to the Code, directing
the manner in which state law should provide for collection of debts that are excepted
from discharge in bankruptcy, and imposing obligations on the holders of certain
nondischargeable claims to transfer to others any funds that they collect on account of
these claims. The section appears to contain a drafting error. The specific changes are as
follows:
(1) Priority claims for support, as defined by current law, would be given a priority
in state collection proceedings over claims that were excepted from a debtor’s
discharge under paragraphs (2), (4) or (19) of §523.
(2) This priority would not apply to security interests supporting the creditor’s
nondischargeable claim unless the interest arose after the date of the filing of the
petition.
(3) If, despite the required priority of state collection proceedings, a creditor
holding a claim excepted from discharge under paragraphs (2), (4), or (19) nevertheless
receives some payment on account of its claim prior to payment of the debtor’s
outstanding support obligations, the creditor must "not later than 20 days after
receiving such payment . . . distribute such payment . . . ratably to individuals who then
hold debts [for support] entitled to priority." [Note: there is an apparent drafting
error in the text at this point, referring to § 523(a)(14) instead of (19). It is
presumably the new nondischargeability provisions of §523(a)(19)—discussed in
connection with §141, above—that this section intends to subordinate to support
obligations, rather than the existing provisions of §523(a)(14).]
(4) In an apparent contradiction of the twenty day limit previously stated, the new
section would also provide that "[n]ot later than 2 years after receiving such
payment. . . such creditor shall make the distribution required by this section to all
individuals whose identity is known to such creditor at the time of the
distribution."
Impact. This new section is likely to be ineffective in assuring collection of
support obligations prior to other nondischargeable debt following a debtor’s
discharge, for several reasons.
First, only formal state collection proceedings would be regulated. Informal collection
procedures—such as letters and telephone calls from collection agencies—would
not be regulated, and can be expected to continue.
Second, even in formal state collection proceedings only certain types of
nondischargeable debt would be subordinated to a debtor’s support obligations. Tax
liabilities (§523(a)(1)), debts arising from failure to provide notice (§523(a)(3)(B)),
debts from willful and malicious injury (§523(a)(6)), student loan debts (§523(a)(8)),
and the expanded set of debts arising from condominium ownership (§523(a)(16), see §148,
above), would all be allowed to have whatever priority of collection a state wished to
accord them, and if creditors holding these claims obtained payment through informal
means, they would have no obligation under the new section to transfer that payment to
support claimants.
Third, even those creditors who would be bound by the new section might be able to
receive payment ahead of support claimants, as long as the support claimants were not owed
money at the time of the payment to the creditor, although the statute is ambiguous on
this point. An alternative reading might be that the creditor would be required to turn
over any funds collected from the debtor, for a period of up to two years after the
collection, to support claimants who, at any point during that two year period, were owed
support payments from the debtor. But even under this reading, the support claimants would
(1) have to discover the payment to the creditor on account of the nondischargeable debt
(and distinguish it from payments on debts incurred after the discharge), (2) be aware of
the right that would be accorded by the new law, (3) make demand upon the creditor
obligated to turn over the collected proceeds, and (4) pursue the creditor in state
court—with no right to collect fees in the event of a successful recovery. Few
support claimants can be expected to engage in this process.
. *§150 ("Adequate protection for investors")
Changes. This section would modify the provisions of the automatic stay to allow
for regulatory activity by self-regulatory bodies of stock exchanges to continue after the
commencement of a bankruptcy case. This section would have no application in consumer
cases, and would generally apply in the bankruptcies of members of stock exchanges whose
activities were under investigation.
*§151 ("Higher priority for debts for alimony, maintenance, and support")
Changes. This section would merely renumber the existing provision for priority
of support obligations from §507(a)(7) to §507(a)(3). The actual change in priority
effected by H.R. 3150 is set forth in §145, discussed above. That change—to first
priority—could have been accomplished with no change in numbering, making §151
unnecessary.
Subtitle E ("Adequate Protections for Lessors")
§161 ("Giving debtors the ability to keep leased personal property by
assumption")
Changes. This section would make two principal changes to the Bankruptcy Code.
First, it would remove from the estate (i.e., abandon) all leased personal property as to
which the lease is not assumed. In Chapter 7, this abandonment would occur when the lease
is rejected by the trustee (which occurs automatically, under existing law, if the trustee
does not assume the lease within 60 days of the filing of a voluntary case). [Note: the
section states that "the leased property is no longer property of the estate and the
stay under section 362(a) of this title is automatically terminated." This language
is redundant, since § 362(c)(1) already provides that the stay terminates as to property
of the estate when the property is no longer property of the estate. By including the
extra language terminating the stay, this provision might lead to confusion, for example,
the erroneous belief that the stay was terminated as to personal actions against the
debtor arising out of the lease.] In Chapters 11 and 13, the rejection and abandonment
would occur if the lease was not assumed in the plan, and in Chapter 13 the codebtor stay
would terminate.
The second effect of the section is to permit the equivalent of reaffirmations with
respect to leased property through assumption of the leases, and to eliminate the
automatic stay as it would apply to discussions regarding such assumptions. Under the
procedure set out by the section, the debtor would have to initiate discussions regarding
assumption of a lease through a written notification.
Impact. The provisions regarding abandonment of leased property make explicit
the implication that leased property as to which the lease is rejected is no longer part
of the bankruptcy estate.
The provisions regarding assumption of leases by the debtor in Chapter 7 may require
additional safeguards. Reaffirmations of debt have been a sensitive subject under the
Bankruptcy Code, since they involve debtors repaying debts that otherwise would be
discharged. To prevent overreaching by creditors in this regard, the Code presently
contains a number of safeguards applicable to reaffirmation, including information that
must be given to the debtor, determinations by debtor’s counsel that the
reaffirmation is in the debtor’s best interest, and court authorization of
reaffirmations for unrepresented debtors. Unless similar protections were enacted in
connection with assumed leases (with cure of past due indebtedness), creditor overreaching
could be a similar problem.
§162 ("Adequate protection of lessors and purchase money secured
lenders") (see S. 1301, §319)
Changes. This section of the proposed bill would create a new provision in
Chapter 13, requiring payments to secured creditors and lessors of personal property.
These payments would be in the amounts and frequency specified by the applicable contract
unless the debtor sought a court order reducing the amounts and frequency. However, the
court would be required to order payments no less than monthly in an amount no less than
the depreciation of the property involved. These payments would be required to continue
until the creditor began receiving "actual payments" under the Chapter 13 plan.
The section would also clarify the right of creditors to retain possession of the
debtor’s property, if it was properly obtained before the bankruptcy was filed, until
the creditor receives the first adequate protection payment required by the section.
Finally, the section requires that debtors in Chapter 13 must provide proof of
insurance of leased property and collateral within 60 days of the filing of the
bankruptcy.
Impact. Secured creditors are entitled to seek adequate protection, pending plan
confirmation, under existing law, and are entitled to relief from the automatic stay if
adequate protection is not provided. This provision would give secured creditors a
presumptive right to more than adequate protection payments, because the underlying
contract (for example, a mortgage or an auto note or lease) generally provides for
payments at a level greater than necessary to offset depreciation. The debtor would be
required to present a motion to reduce the presumptive payments to the actual level of
depreciation (if any). That will involve significant additional cost in most Chapter 13
cases.
Under existing law, it may be unclear whether a creditor in rightful possession of a
debtor’s property at the outset of a bankruptcy case must return the property in the
absence of adequate protection. The proposal would make it clear that adequate protection
is required.
The requirement for periodic proof of insurance is an unnecessary burden on debtors,
since creditors are generally informed by insurers as to any lapse in coverage. Moreover,
if the creditor does not receive this information, the creditor would have to take action
to ascertain the status of the insurance within the first 60 days of the bankruptcy case.
Proof of insurance by the debtor at the conclusion of the 60-day period would add no
protection to the creditor.
§163 ("Adequate Protection for Lessors") (see S. 1301, § 409)
Changes. Despite its caption, this section deals with an exception to the
automatic stay. Under current law, lessors of nonresidential real estate (for example,
shopping center lessors) may proceed with eviction proceedings after the lessee files a
bankruptcy case, without violating the automatic stay, once the lease has terminated by
expiration of its stated term. Section 163 of H.R. 3150 would expand the exception to
cover all rented real estate. Thus, landlords would be allowed to evict Chapter 13 debtors
from their apartments, without obtaining relief from the automatic stay, as soon as the
leases terminate.
Impact. There is no reason for the automatic stay to apply to an residential
lease that has genuinely expired according to its stated term. A lease can only be assumed
by a debtor in Chapter 13 if it is unexpired, pursuant to §§ 365(a) and 1322(b)(7).
However, a debtor and landlord may well be in dispute about whether a lease has expired.
Many leases have automatic renewal terms, contingent on notice being given or the lease
not being in default. If there is a dispute about lease expiration, then, under current
law, the landlord would be required to obtain relief from the automatic stay before going
forward with an eviction proceeding in state court. See, e.g., Robinson v.
Chicago Housing Authority, 54 F.3d 316 (7th Cir. 1995) (affirming an order granting
relief from the stay to pursue eviction). Under the proposed change, the landlord, in the
event of such a dispute, would be able to go forward with the eviction, requiring the
Chapter 13 debtor—believing that the lease was still in effect—both to defend
the eviction proceeding and to bring a proceeding in bankruptcy court to have the landlord
found in violation of the automatic stay. If the debtor prevailed, fees and costs would be
awarded, pursuant to §362(h), but the problem for the debtor is in obtaining the funds to
pursue proceedings in both courts. Although this situation may not arise frequently, it
may be preferable to continue to require that evictions in situations of residential
leases be subject to the automatic stay.
On the other hand, the proposed exception could be applied in Chapter 7 cases without
harm to the rights of the debtor, since Chapter 7 debtors have no right to assume
defaulted leases.
Alternative. The expanded exception could be applied in Chapter 7 cases only.
Subtitle F ("Bankruptcy Relief Less Frequently Available for Repeat
Filers")
§171 ("Extended period between bankruptcy discharge")
Changes. Current law allows a Chapter 7 discharge to be entered only once in six
years. The proposal would change this to a 10 year interval. Current law imposes no limit
on Chapter 13 discharges, although the discharge can only be entered at the completion of
a plan, and most plans require a three to five year period to complete under current law.
The proposal would require that a Chapter 13 discharge not be granted if the debtor
received any bankruptcy discharge within the five-year period prior to filing the Chapter
13 case.
Impact. These proposals would render large numbers of debtors unable to obtain
any bankruptcy relief for an extended period of time, and would substantially reduce the
incentives for using Chapter 13.
It is entirely possible for individuals to require bankruptcy relief on more than one
occasion within a span of a few years. Job loss, medical problems, and divorce can each
cause financial difficulties that an individual cannot overcome. Under current law, the
individual can obtain a Chapter 7 discharge to address these problems only once in six
years, but could submit to a Chapter 13 repayment plan and obtain relief within the six
year period. The availability of such a discharge is one of the major incentives for the
use of Chapter 13. That possibility is removed under present law, leaving the individual
with no means of requiring creditors to accept pro rata payment of the debtor’s
available funds. The result would be the "race to the courthouse" that
bankruptcy was intended to avoid, with the more aggressive creditors getting the larger
share of wage garnishments and judgment lien foreclosures. The incentive for creditors to
cooperate with consumer counseling services in these situations would also be greatly
reduced, since the debtor would not have the option of bankruptcy in the event of
noncooperation, and other noncooperating creditors will have an advantage over those who
did cooperate.
Alternative. The required period between Chapter 7 discharges could be extended
without imposing limits on Chapter 13 discharges.
Subtitle G ("Exemptions")
*§181 ("Exemptions")
Changes. This section impacts the perceived problem of debtors changing their
residence in order to obtain more favorable homestead exemptions. Current law applies the
homestead exemption law of the place where the debtor’s domicile was located for the
"longer portion" of the 180 days preceding the bankruptcy. Thus, a debtor could
obtain a homestead exemption by establishing a domicile in a new state 91 days prior to
filing a bankruptcy. The change would increase the 180 day period to 365 days, and remove
the provision regarding the "longer portion."
Impact. The problem dealt with by this section is a minor one—only a few,
wealthy debtors are likely to change state of domicile in order to obtain larger
exemptions. Nevertheless, it is ironic that the impact of the new section may be to
encourage changes of domicile to obtain larger exemptions. Under the proposed law, if a
debtor changes his or her state of domicile during the year before the bankruptcy filing,
no state would have been the debtor’s domicile for that 365-day period, and hence,
apparently, the debtor would be required to use the federal exemptions. Since federal
exemptions are higher than those of many states, and since a change of domicile only
shortly before the bankruptcy would be effective to avoid state exemption law, debtors in
low-exemption states would be encouraged to move to a neighboring state just prior to
filing bankruptcy, so as to obtain the higher federal exemptions.
Alternative. The fundamental issue regarding exemptions is whether they should
be more uniform, so that debtors do not receive significantly differing treatment in
bankruptcy depending on their state of domicile. Greater uniformity would reduce the
incentive for debtors to change domicile before filing bankruptcy petitions, and such a
change in exemption law has been proposed by the National Bankruptcy Review Commission.
Final Report at 117-44. H.R. 2500 proposes a new commission to study the question.
*§182 ("Limitation")
Changes. This section addresses another potential abuse of exemptions—the
conversion of nonexempt property to exempt property prior to filing bankruptcy. The
section provides, in effect, that if the debtor uses the proceeds of any disposition of
nonexempt property to obtain value in an exempt residence or burial plot, within one year
of the bankruptcy, then that portion of the value of the residence or burial plot
attributable to the disposition of the nonexempt property may not be exempted. This
limitation on the value of residence and burial plot exemptions is only made applicable to
state exemption law, not to the federal exemptions.
Impact. This section would likely affect only those ignorant of its terms, and
may have a negative effect in undoing conversions of nonexempt property into exempt
property. Debtors who wish to engage in such conversions will not likely be deterred by
the new section, because of the many forms of exempt property that are not affected,
including insurance policies, and, most significantly, the unlimited exemption for
retirement accounts created by §119, discussed above. On the other hand, debtors ignorant
of this provision might engage in home improvements in complete good faith, and have the
value of the improvements deducted from their homestead exemptions. Finally, by specifying
limited circumstances in which conversions from nonexempt to exempt property will be
disallowed, this section may imply that all other such conversions are permissible.
Alternative. If the issue is to be addressed, there should be a generally
applicable rule distinguishing permissible from impermissible "bankruptcy
planning." Such a rule might be based on activity outside the debtor’s usual
practice (such as a large, lump sum contribution to a retirement account) within a year of
the bankruptcy filing.
Title II ("Business Bankruptcy Provisions")
Title III ("Municipal Bankruptcy Provisions")
These titles do not involve consumer bankruptcy issues and are therefore not treated in
this analysis.
Title IV ("Bankruptcy Administration")
Subtitle A ("General Provisions")
§401 ("Adequate preparation time for creditors before the first meeting of
creditors in individual cases")
Changes. This section would amend the Bankruptcy Code to provide that first
meetings of creditors must take place between 60 and 90 days after the filing of voluntary
individual bankruptcy cases, unless the court orders an earlier meeting.
Impact. Under current law, set out in Fed.R.Bankr.P. 2003(a), the first meeting
of creditors must take place between 20 and 40 days after case filing in voluntary Chapter
7 and 11 cases, and between 20 and 50 days in a Chapter 13 case. The proposal would delay
these times by more than a month. This may allow greater creditor involvement in consumer
bankruptcy cases, but it would have the drawback, particularly in Chapter 13 cases, of
delaying payouts to creditors.
§402 ("Creditor representation at first meeting of creditors") (see S.
1301, §308)
Changes. This provision would allow nonattorneys to represent creditors at
creditor meetings.
Impact. This proposal would have the potential for increasing creditor
involvement in any jurisdictions where appearances by nonattorneys are currently
prohibited.
§403 ("Filing proofs of claim")
Changes. This section changes the law that currently requires the filing of a
proof of claim in order for a creditor to share in the distribution of payments in Chapter
7 and 13 cases. Under this provision, a proof of claim would be deemed filed as to all
debts scheduled by the debtor as other than disputed, contingent, or unliquidated.
Impact. Frequently, consumer debtors have poor records of what they owe.
Accordingly, the debtors often schedule debts that either are not owed, or are owed in
smaller amounts than scheduled. The requirement of a proof of claim by the creditor
assures that an actual debt is paid in an appropriate amount. Treating all scheduled debts
as proofs of claim may result in overpayments of claims, or payment of claims that are not
owing, reducing the payments to creditors with actual, accurate claims.
The requirements for filing proofs of claims, as well as the results of untimely
filing, were extensively treated in the 1994 Bankruptcy Reform Act. This provision would
undo what has only recently become settled law.
*§404 ("Audit procedures") (see S. 1301, §307)
Changes. This section of the proposed bill would establish a system for random
audits of the accuracy and completeness of schedules and other information required to be
provided by debtors in bankruptcy. The proposal would require that at least 1% of all
cases be audited "in accordance with generally accepted auditing standards . . . by
independent certified public accountants or independent licensed public accountants."
The proposal requires the Attorney General to establish procedures for fully funding the
audits, but does not specify a source of funding. The report of each audit is to be filed
with the court, the Attorney General, and the United States Attorney, and if the audit
report discloses any material misstatement of income, expenses, or assets, notice of the
misstatement is required to be given to creditors and to the United States Attorney for
possible criminal investigation. [Note: the sentence of the proposal dealing with material
misstatements requires rewriting to correct syntactical errors.]
Impact. This proposal reflects a recommendation of the National Bankruptcy
Review Commission (Final Report at 107-110), and would provide an incentive for debtors
and their counsel to provide accurate and complete information. However, formal audits by
licensed accountants would also generate substantial costs. With bankruptcy filings
exceeding 1 million per annum, an audit cost of only $500 per case would impose an
additional cost of at least $5 million per annum; at $1000 per case, a more likely figure
given the poor record-keeping of many consumer debtors, the 1.4 million bankruptcies filed
last year would generate an audit cost of $14 million. Since the proposal does not
identify a source for funding the audits, the impact of the cost is uncertain. If the cost
were treated as an administrative expense, creditors would pay for the audits in the form
of reduced payments on their claims. A fairer way to pay for audits would be through the
fees currently collected from debtors (at the time of filing) and creditors (seeking
relief from the automatic stay), but in order to allow payment from these current fees,
the cost of the audits would have to be restrained.
Additionally, the requirement that audit reports be filed will impose additional costs
for document retention on clerk’s offices, and, depending on the detail of the
reports, involve unnecessary intrusions on the debtors’ privacy.
Alternative. In order to reduce costs, audits could be conducted by trained
employees of the United States trustees, rather than by licensed accountants, according to
regulations established by the Executive Office of the United States Trustee, rather than
generally accepted auditing standards. With costs controlled, the source of funding for
the audits can be specified as the existing fees collected in bankruptcy cases, without an
increase in those fees.
§405 ("Giving creditors fair notice in Chapter 7 and 13 cases") (see S.
1301, §309)
Changes. The primary change made by this section is a requirement that creditors
be given notice of a bankruptcy filing at their preferred addresses. Under current law,
creditors who actually receive notice of a bankruptcy case may be liable for sanctions for
willful violation of the automatic stay if they thereafter take action to enforce their
rights against collateral or otherwise attempt to collect a debt owed by the debtor. This
provision would eliminate sanctions for violation of the stay (or failure to turn over
property of the estate) in situations where notice of the bankruptcy was sent to an
address of a creditor other than the last address the creditor provided to the debtor for
correspondence regarding the debtor’s account. This elimination of liability would
only apply if (1) the creditor had a designated person or department for receiving
bankruptcy notices, (2) the creditor had a reasonable procedure for directing bankruptcy
notices to that person or department, and (3) despite the reasonable procedures, the
creditor’s designated person or department did not receive the notice in time to
prevent the collection activity from taking place.
Impact. This proposal would eliminate sanctions for violation of the automatic
stay in situations where notice of a bankruptcy was received by personnel of the creditor
who were unable to prevent subsequent collection action. However, it would also greatly
complicate litigation regarding violations of the automatic stay. If a creditor took
collection action after the bankruptcy case was filed, there would be questions subject to
litigation concerning (1) the last address specified by the creditor in a communication,
(2) whether the creditor had reasonable procedures in place for directing the
communication to a particular person or department, and (3) whether that person or
department received the notice in time to prevent the collection activity from taking
place. Most of the information relating to these matters would be exclusively in the
possession of the creditor, making it difficult for debtor’s counsel to determine
whether an intentional violation of the automatic stay had occurred without substantial
discovery. Lacking the resources to pursue such discovery, debtors might be unableo pursue
enforcement action.
§406 ("Debtor to provide tax returns and other information") (see S.
1301, §301)
Changes. This section would add several items to the information that individual
Chapter 7 and 13 debtors are required to provide in connection with a bankruptcy case,
unless ordered otherwise by the court. These items include (but are not limited to) the
following: (1) copies of any federal tax returns, including schedules and attachments,
filed by the debtor during the three years prior to the bankruptcy filing; (2) copies of
any tax returns and schedules filed during the pendency of the bankruptcy case, either for
current tax years, or for the three years preceding the bankrutpcy filing; (3) any
amendments of the returns set out above; (4) evidence of payments made by any employer of
the debtor during the 60 days prior to the filing of the case; and (5) a certificate
regarding the debtor’s receipt of the proposed required notice regarding consumer
counseling services. In addition, a Chapter 13 debtor would be required to file annually a
statement of the debtor’s income and expenditures in the preceding year and the
debtor’s monthly net income during that year, showing the method of calculation,
disclosing the amount and sources of income, the identity of the persons responsible with
the debtor for the support of any dependents, and any persons who contributed (and the
amounts contributed) to the debtor’s household. Also, debtors would have the
obligation to provide copies of their petition, schedules, statement of affairs, and any
plan and plan amendments to any creditor on request of the creditor, and any copies of
such filings made subsequent to the request. Tax returns would be filed with the United
States trustee; the other information would be filed with the court. All of these filings,
including the tax returns and amendments, would be available to any party in interest for
inspection and copying, subject to court order.
Impact. This section has the potential for making information available to
trustees and creditors that may be significant in the administration of the debtor’s
case. However, Fed.R.Bankr.P. 2004 currently allows information regarding the
debtor’s financial condition—including tax returns—to be obtained, as
required, with disclosure limited to the parties who need the information, and with the
potential for court orders limiting further disclosure. The general disclosures required
by the changes proposed here would impose two significant burdens not part of current law:
(1) There would be a potentially difficult and expensive provision of information in
every case, regardless of the need for the information. Since debtors in financial
distress often fail to retain financial documentation, it is likely that they will not
have ready access to their tax returns for the three years preceding the bankruptcy, or to
their pay stubs for two months preceding bankruptcy. Similarly, during a bankruptcy,
debtors are likely to have difficulty maintaining detailed records regarding their
expenditures and sources of income.
(2) The changes would involve a significant intrusion into the privacy of the debtors.
Tax returns are not public documents, and are ordinarily disclosed in litigation only when
they are particularly relevant to a dispute, and only to the parties with a need to review
them. This provision would require debtors to make several years of their tax returns
available for review by any creditor, and the creditors would be free to make whatever use
they wished of the information contained in the returns, including compiling and
disseminating it. Both the difficulty and cost of assembling the required information and
the intrusion on privacy would act as substantial barriers to good faith bankruptcy
filings.
The requirement that debtors provide copies of petitions, schedules and plans to all
creditors on request may encourage routine requests for such documents by creditors who do
not require these documents for their participation in the bankruptcy case (current law
requires notice to creditors of the essential events in the case), imposing additional
expense on debtors and their counsel.
The provision that the required information need not be supplied if the court orders to
the contrary creates the potential for substantial variations in practice from court to
court. Some judges may determine that certain of the information (or all of it) is not
required unless requested by a creditor with cause; other judges may routinely deny any
request by debtors to limit the information. No standards are supplied.
Finally, the need to file all of the additional documents in each consumer case would
impose a substantial additional cost on the clerks’ offices and the offices of the
United States trustees.
§407 ("Dismissal for failure to file schedules timely or provide required
information") (see S. 1301, §312)
Changes. This section creates a new ground for dismissal of Chapter 7 and 11
cases—failure to provide the information required by §406. Failure to file initial
documents (including past tax returns and pay stubs) results in mandatory, automatic
dismissal on the 46th day after filing, subject only to a timely request by the debtor for
an extension of up to 15 days. The court is required to enter an order confirming the
dismissal if requested by any party. Failure to file (or supply to creditors on their
request) any subsequently required documents is also subject to mandatory dismissal, upon
request of any party in interest. The deadline for compliance with a creditor request is
to be set by the court within 10 days of the request, and may not exceed 30 days.
Impact. The difficulty of complying with the proposed initial disclosures (of
tax returns and pay stubs) is noted in the commentary on §406, above. Section 407 would
impose automatic dismissal as a penalty for failure to comply with these disclosure
requirements, without providing notice to the debtor of any deficiency in the filing.
Although the debtor is given an opportunity to seek an additional 15 days to comply, no
further extensions are authorized. Given that it may take more than 60 days to obtain
copies of tax returns from the Internal Revenue Service, these provisions may result in
unavoidable dismissal of cases filed in good faith. In connection with enforcing the
requirements for postpetition copies and tax information, the court is also given no
discretion. It must order the information produced and dismiss the case if the order is
not complied with. These provisions would discourage good faith filings at the outset, and
may result in dismissal of cases that are filed and prosecuted in good faith.
Rather than making debtors subject to such dismissal, some courts may generally order
that the documents need not be filed, but, as noted above, in the discussion of §406, no
standards are provided for orders of nonproduction, and practice among courts can be
expected to vary widely.
Alternative. The failure of a debtor to provide information ordered by a court
to be produced to a creditor in connection with an examination pursuant to Fed.R.Bankr.P.
2004 could be specified as a ground for dismissal of both Chapter 7 and Chapter 13 cases.
§408 ("Adequate time to prepare for hearing on confirmation of the plan")
(see S. 1301, §§304, 313)
Changes. This section provides that the hearing on confirmation of a Chapter 13
plan must take place no sooner than 20 days and no later than 45 days after the first
meeting of creditors.
Impact. Under Section 401 of H.R. 3150, discussed above, creditors’
meetings must be convened between 60 and 90 days after case filing. Section 408 requires
that the confirmation hearing take place between 20 and 45 days after the creditors’
meeting, thus placing confirmation between 80 and 135 days after case filing. Present law
(Fed.R.Bankr.P. 2003(a)) requires creditor meetings between 20 and 50 days after case
filing, with no defined waiting period for the confirmation hearing, and so permits
quicker confirmation of plans and payouts to creditors, but also allows much longer time
to elapse before confirmation. Although the different times provided for by the proposed
bill would delay plan confirmation in many cases, they do move toward uniformity.
Alternative. The more uniform time for confirmation hearings specified by this
section could be combined with the shorter time for creditor meetings currently specified
by Fed.R.Bankr.P. 2003(a).
*§409 ("Chapter 13 plans to have a 5-year duration in certain cases")
Changes. This section would increase the term of Chapter 13 plans from the
present range of three to five years to a new range of five to seven years, for all
debtors with total monthly income equal to at least the national median for their
household size or a smaller household. The proposal would retain the three-to-five year
range for those earning less than the applicable medians. In each situation, plans lasting
longer than the minimum plan term would require court approval. These provisions should be
read in conjunction with §102 of the proposed bill, discussed above, which requires that
all net income of the debtors be paid to general unsecured creditors for the minimum plan
term.
The section also amends §1329 of the Code, which governs modified plans. Although an
original plan is allowed, with court approval, to have a duration two years beyond the
minimum term, the amendment would prohibit this extension for modified plans.
Impact. Consistent with §102 of H.R. 3150, this section would have the effect
of lengthening the minimum Chapter 13 plan term from 3 to 5 years for many Chapter 13
debtors. This increase in minimum plan length may result in increased payments to
creditors, but only if the plans are completed. Increased plan length may discourage use
of Chapter 13 by debtors who have the choice of Chapter 7, and may decrease successful
plan completion by those who do choose Chapter 13.
Extending plans beyond the minimum term is sometimes in the debtor’s
interest—in order to cure large mortgage arrearages or retire nondischargeable debt.
There is no apparent reason why this extension should be prohibited in modified plans.
§410 ("Sense of the Congress regarding expansion of Rule 9011 of the Federal
Rules of Bankruptcy Procedure")
Changes. Fed.R.Bankr.P. 9011 is the bankruptcy analog to Rule 11 of the Federal
Rules of Civil Procedure. It requires the signature of the attorney (for a represented
party) or of the party (if unrepresented) on documents filed with the court, and provides
that this signature constitutes a certificate that the document is, among other things,
well grounded in fact—based on the signer’s knowledge, information, and belief,
formed after reasonable inquiry. Currently, Rule 9011 does not apply to schedules,
apparently with the understanding that debtor’s attorneys are not economically able
to independently verify the accuracy of the information supplied by their clients. This
section suggests that the Rule be modified to apply to all filings, specifically including
schedules.
Impact. Section 103 of H.R. 3150, discussed above, imposes by statute the change
suggested in this section for Fed.R.Bankr.P. 9011. This section, apart from suggesting an
investigatory obligation on pro se debtors, is therefore unnecessary. As discussed in
connection with §103, requiring independent verification by debtors’ attorneys of
all of the schedule information required of their clients would delay bankruptcy filings
and increase the cost of legal services, thus discouraging good faith filings. In light of
the auditing requirement proposed both by this bill and by the National Bankruptcy Review
Commission, it is questionable that attorney verification of schedules is needed to assure
accuracy.
§411 ("Jurisdiction of Courts of Appeals") (new)
Changes. Under present law, appeals of decisions of bankruptcy courts are heard
by the district courts or by Bankruptcy Appellate Panels, composed of bankruptcy judges.
This section would grant jurisdiction over such appeals to the Circuit Courts of Appeals.
Impact. The current system of appeals generates appellate decisions that are
largely without binding precedential impact. Decisions of the Courts of Appeals would be
binding on all courts within the circuit, promoting intercircuit uniformity. Direct
appeals would also eliminate one stage of adjudication in arriving at a decision from the
Courts of Appeal, thus reducing costs for litigants who would appeal to those courts in
any event.
*§412 ("Establishment of official forms") (new)
Changes. This section would require the Judicial Conference of the United States
to establish official forms to facilitate compliance with the means-testing and other
provisions of §§101 and 102, discussed above.
Impact. The Judicial Conference regularly promulgates Official Bankruptcy Forms
to reflect changes in law and technology, and hence a statutory directive is probably
unnecessary
*§413 ("Elimination of certain fees payable in Chapter 11 bankruptcy
cases")
Changes. Under current law, fees payable to the United States trustee are
assessed in Chapter 11 cases, based on the level of funds disbursed, until the case is
closed or converted. This section would reduce the time for fee payment by terminating
payments upon confirmation. The change would be effective on October 1, 1999.
Impact. The proposed change would reduce costs for Chapter 11 debtors and remove
an incentive to prematurely close Chapter 11 cases in order to save fees.
*§414 ("Study of bankruptcy impact of credit extended to dependent
students")
Changes. This section directs the Comptroller General to conduct a study and to
submit a report, within one year of the bill’s enactment, of the impact of credit
extension to dependent students in post-secondary educational institutions on the rate of
bankruptcy filings.
Impact. This study may have significance in determining the causes for the
increase in bankruptcy filings experienced over the past several years. Other empirical
studies, including an ABI-sponsored study on the extent of income available to pay
creditors in Chapter 7 cases, are currently in progress. The results of such studies would
be most helpful if they could be reviewed prior to the enactment of major bankruptcy
legislation.
Subtitle B ("Data Provisions")
§441 ("Improved bankruptcy statistics") (see S. 1301, §306)
Changes. This section would require the Director of the Executive Office for
United States Trustees to compile bankruptcy data in specified categories and require the
Administrative Office of the United States Courts to specify the form of the data and make
it public.
Impact. Although this provision would be costly to implement, it has the
potential for making useful information available to those interested in the functioning
of the bankruptcy system. The National Bankruptcy Review Commission (Final Report at
921-43) recommended that a similar program of data collection and reporting be
implemented. One potential problem in the proposed legislation is in its specification of
matters for data collection and reporting. The Review Commission suggested a pilot program
to develop effective programs, and this might be preferable to establishing categories for
data collection by legislation. As an example of the problem with legislative
specification, the proposal includes a requirement that data be collected and reported as
to "the number of [Chapter 13] cases in which a final order was entered determining
the value of property securing a claim less than the claim." Such a report would
likely yield little useful information, since in many situations of the cramdown of
secured claims the parties negotiate an appropriate bifurcation, with no court order
entered.
Alternative. It may be preferable to implement the Review Commission’s
recommendation of a pilot program to determine effective categories and methods of data
collection and reporting.
§442 ("Bankruptcy data") (see S. 1301, §306)
Changes. This proposal would require the Attorney General to issue regulations
for uniform reporting of bankruptcy cases on standard forms, designed to facilitate both
physical and electronic access to the information contained in the reports. Detailed
contents of the reports are specified.
Impact. A consistent reporting system would provide many benefits, and has been
recommended by the National Bankruptcy Review Commission as part of a national bankruptcy
filing system (Final Report at 105-07). As with the prior provision of the proposed bill,
there may be some difficulty with the details it sets out.
Alternative. It may be preferable to allow the details of any reporting system
to be developed by the office administering the system.
§443 ("Sense of the Congress regarding availability of bankruptcy data")
Changes. This proposal effectively recommends that Congress establish a national
bankruptcy filing system.
Impact. A nationwide reporting system would provide many benefits, and has been
recommended by the National Bankruptcy Review Commission (Final Report at 105-07).
Title V ("Tax Provisions")
Most of the sections of Title V do not involve consumer bankruptcy issues and are
therefore not treated in this analysis.
*§502 ("Enforcement of child and spousal support") (see S. 1301, §328)
Changes. This section adds additional language to §522(c)(1) of the Code to
confirm the rule in In re Davis, 105 F.3d 1017, 1022 (5th Cir.1997) (allowing
enforcement of child support against property exempt under state law).
Impact. The proposed language should serve to clarify the meaning of the
statutory provision.
§503 ("Effective notice to government")
Changes. This section specifies that all notices from a debtor to a governmental
agency (as well as the original scheduling of the agency as a creditor) contain detailed
information regarding the nature of the agency and its claim. For example, a real estate
tax claim is required to be identified by real estate parcel number. The clerk of court is
required to maintain a register of "safe harbor" mailing addresses that may be
used by debtors. The Advisory Committee on Bankruptcy Rules of the Judicial Conference is
required to propose "enhanced rules" for providing notice to governmental
agencies, incorporating the provisions set out earlier in the section. Notices not in
compliance with the proposed requirements would have no effect unless, among other things,
the debtor showed either that notice was sent to the safe harbor address, or both that no
safe harbor address had been specified and that there was actual notice to a responsible
officer of the appropriate agency. In particular, governmental violations of the automatic
stay and turnover provisions of the Code could not result in any sanction if notice of the
commencement of the case was not given in compliance with the requirements of the section.
Impact. The provision would provide surer notice to governmental agencies. Some
of the detail required, however, may unnecessarily increase the cost of case filing, and
litigation can be anticipated on issues of whether notices were in compliance with the
requirements. See the discussion in connection with §405, above.
§508 ("Chapter 13 discharge of fraudulent and other taxes")
Changes. This section would make the tax obligations that are defined by
§523(a)(1) of the Code nondischargeable in Chapter 13 cases as well as in Chapter 7
cases.
Impact. Together with §143, this section of H.R. 3150 has the effect of largely
eliminating the superdischarge of Chapter 13. See the discussion of this issue in
connection with §143, above.
§517 ("Requirement to file tax returns to confirm Chapter 13 plans")
Changes. This section would impose on Chapter 13 debtors the obligation to file
both past due and current tax returns, as a condition for confirmation. Deadlines are
specified for the filing of the returns (at least 120 days from the filing of the
bankruptcy case), and failure to comply is specified as a ground for conversion or
dismissal of the case. The taxing body is given 60 days after the filing of a return to
submit a timely claim for the tax involved in the return. Finally, it is suggested that
the Federal Rules of Bankruptcy Procedure be amended to allow objections to confirmation
to be made by a taxing body "on or before 60 days after" the debtor files all of
the required tax returns.
Impact. These provisions are largely reasonable, and will assist the debtor and
the taxing bodies in resolving past due tax obligations. However, the suggested change in
the bankruptcy rules further complicates the issue of when a confirmation hearing is
supposed to take place under the provisions of H.R. 3150. See the discussion in connection
with §408, above. In order to allow the suggested objection based on the filing of a tax
return 120 days after the bankruptcy filing, confirmation hearings would have to be
scheduled 180 days after the filing of the case, rather than the maximum of 135 days
specified by §408.
Title VI ("Miscellaneous")
This title does not involve consumer bankruptcy issues and is therefore not treated in
this analysis.