Legislative Update

<i>This month's column features the text of Judge Brown's testimony before the House Judiciary Committee on H.R. 833, a

summary of differences between the House and Senate reform bills, as well as graphics on determining the ability to pay

and monthly net income under H.R. 833. For the full text and legislative history of all pending bills, including analysis

and comment, visit ABI World's legislative area.</i>

</p><h3>Oral Statement—Hon. William Houston Brown, March 17, 1999, House Judiciary Committee</h3>

<p>Mr. Chairman and members of the subcommittee, my name is William Houston Brown. I am a

U.S. Bankruptcy Judge for the Western District of Tennessee, historically one of the high

volume chapter 13 districts in the United States, currently having 75 percent of the filings in

that chapter. I am appearing today as a representative of the American Bankruptcy Institute

(ABI) and more specifically as a co-chair, along with Judge Eugene Wedoff of the Northern

District of Illinois, of the ABI's Consumer Bankruptcy Committee. That committee has been

involved for over one year in bringing together a diverse but small group of individuals who

have broad experience with the various views involved in the administration and practice of

consumer bankruptcy law. This group, known as the ABI Consumer Bankruptcy Legislative

Group, includes representatives of consumer debtors, automobile finance lenders, banking

(both credit card and unsecured lenders), credit unions, bankruptcy trustees (chapters 7, 11

and 13), and bankruptcy judges. This group does not attempt to speak as an official voice of the

ABI or its full membership.

</p><p>In our meetings, including the most recent one on March 10, we have operated under a mutual

promise of confidentiality until the full group is able to sign off on agreed recommendations.

Accordingly, I am not able to tell this committee today of specific recommendations that have

been agreed to, because the group's work product is still being circulated among the members

for comment. The group will meet again on April 5 in its goal of having a work product of

recommendations addressing H.R 833 (as well as any Senate bill provisions that may have been

introduced by that date) prepared for presentation to your committee during the month of April.

The group's agreement is to produce a package of recommendations rather than to preview a

single recommendation about one or two provisions of H.R. 833. We believe that the

commitment of confidentiality until the group's members sign off for a release of

recommendations has been a key to the group's progress toward consensus. In contrast to some

other efforts, for example the National Bankruptcy Review Commission, where the positions of

the participants may have become publically fixed before serious negotiations began, making

compromise difficult or impossible, our group has made significant progress because our

members can freely express ideas confident in the knowledge that their discussion will not be

revealed absent their consent. Such a process encourages frank consideration of opposing points

of view and ultimate compromise.

</p><p>I want to emphasize that the members of this group have their own individual ideas about

specific provisions of H.R. 833, but the group has been successful in working toward a

consensus on a package of recommendations that will be consistent with some of the goals of H.R.

833. As identified in Judge Wedoff's commentary on H.R. 833, which is attached to my prepared

written comments, the ABI Consumer Group recognizes that many of the provisions of H.R. 833

are based upon legitimate underlying goals, such as reducing the number of abusive consumer

bankruptcy filings, but the specific provisions of the bill present significant problems of

effective implementation. In many areas of the legislation, clarification of the proposed

statutory language or substitution of alternatives will carry out the bill's goals. There is

legitimate concern by both creditors and debtors that some of the bill's provisions will lead to

results that are opposite from those intended.

</p><p>For example, as to the means-testing provisions of §102, when you bring together experienced

persons from both the debtor and creditor sides, there is confusion and disagreement about how

that section is intended to work. Do you, for example, ever apply the test to debtors whose

current monthly income falls below the median national income for their household size? There

are some who read §102's test as never applying and others who say it may. How do you account

for the debtor's ongoing mortgage and other secured debt? There are some who read §102's test

as permitting a double counting of such debt—a result that would permit some debtors to avoid

the intended purpose of the bill. Or, does the test permit all debtors who owe money on car loans

or mortgages to use actual transportation and housing expenses rather than the IRS monthly

expense standards? If it does, most people will be exempt from the objective IRS standards. Our

group has and continues to explore whether there are monetary standards other than ones from

IRS that would make means-testing more workable. I am optimistic that the ABI group will

reach a consensus on a modification of H.R. 833's means test that accomplishes what the nill

strives for while eliminating these types of questions—perhaps coupled with a recommendation

on a revised bankruptcy schedule J for accounting for the debtor's actual versus average

monthly expenses.

</p><p>Our group is progressing toward consensus on the details of a package of recommendations,

including how to give incentives to the panel chapter 7 trustees to bring successful §707(b)

motions; how to protect creditors who have information that would be of help to the trustees in

consumer cases; how to make reaffirmations, especially of unsecured debt, work more

effectively for debtors and creditors; how to encourage chapter 13 filings while at the same

time recognizing legitimate discharge exception concerns; how to value secured claims in

consumer cases without at the same time harming unsecured creditors; how to adequately

protect secured creditors in chapter 13 without dooming otherwise feasible plans to failure;

how to provide more certain notice to creditors of the filing of pleadings in bankruptcy cases;

and how to effectively implement debtor education and consumer credit counseling.

</p><p>Our group is operating from the stage set by this Congress in H.R. 833, and our

recommendations are not expected to be anti-change. We recognize that the mood of Congress is

to effect some bankruptcy reform, and our group wants to contribute to the effort to bring about

effective and workable changes.

</p><p>There have been many comments about abuse under the current Bankruptcy Code. I am one who

believes there is not significant abuse, and that it is generally detected and punished by efforts

of the courts, the trustees, U.S. trustees or creditors. Abuse is a function of people—there will

be abuse so long as there are abusive people, whether they be debtors or creditors. We should

not kid ourselves that any amount of change in the Code will eliminate abuse. As I have told some

groups, if you think there is abuse in the current Code, just wait until you see the innovative

abuse under a new Code. Having said that, I agree with the concept that the Code can be adjusted

to reduce abuse.

</p><p>Under §124, a predictable result will be the surrender of cars and other personal property

purchased by many debtors within five years of bankruptcy rather than retention and payment

of the full unpaid balance. Is this a result that secured lenders want? Assuming that the debtor

does retain and pay the full balance, this is detrimental to unsecured creditors. Is that a result

that they want? If they have been telling you yes, some of them have been telling me NO WAY. I

believe that a compromise is not only possible, but given any negotiating opportunity, probable.

</p><p>Do we really want to assume that all debtors are akin to shoplifters? I deal every day with

people who have financial crises of varying levels—many brought on by their own failures but

many brought on by other influences. I see very few deadbeats.

</p><p>Giving first priority to domestic support obligations sounds wonderful, until you ponder

whether it will mean that no lawyer will file a consumer or chapter 11 individual case, and that

no trustee will administer that case unless there are no such obligations—otherwise they

assume all of the risk of non-payment. In my district, the collection of delinquent child support

is being accomplished successfully through chapter 13 plans. In fiscal year 1998, the chapter

13 trustees in the Western District paid over $9 million to tax and other priority claimants

(including delinquent support). Unsecured creditors were paid over $16 million in that

year—most of whom would have received nothing in chapter 7.

</p><p>Over 9,600 households are currently using chapter 13 in Memphis to save their homes through

curing of mortgage arrearage. Chapter 13 works. Yes, it can be improved, but don't make it so

cumbersome or so penalty-laden that debtors who are now filing chapter 13 are encouraged to

file chapter 7.

</p><p>Most of the debtors I see are means-testing proof. They still file chapter 13 at a 75 percent

rate. If the Code takes away all incentives to file chapter 13, the result will be a drop in 13

filings in my district.

</p><h3>Summary of Major Differences Between S. 625 (Grassley-Torricelli-Biden-Sessions) and H.R. 833 (Gekas-Boucher-McCollum-Moran)^{<small><a href="#1" name="1a">1</a></small>} Means Test</h3>

<ul>

<li>S. 625 gives bankruptcy judges greater discretion in deciding whether to transfer a chapter 7

debtor to chapter 13.

</li><li>S. 625 requires only a showing of "special circumstances," rather than "extraordinary

circumstances" for chapter 7 debtors with apparent repayment ability to avoid being

transferred to chapter 13.

</li><li>S. 625 raises the minimum dollar amount from $5,000 to $15,000, with the effect that

debtors with a marginal ability to repay won't be swept up by the means test.

</li></ul>

<h4>Consumer Protections</h4>

<ul>

<li>S. 625 requires the Attorney General and the FBI Director to designate one prosecutor and one

agent in every district to investigate reaffirmation practices that violate current federal laws,

including the laws under which Sears was prosecuted.

</li><li>S. 625 specifically authorizes state attorneys general to enforce federal criminal laws

against abusive reaffirmations, again including the laws under which Sears was prosecuted.

</li><li>S. 625 specifically authorizes state attorneys general to enforce state laws regarding unfair

trade practices against creditors who deceive debtors into reaffirmation agreements, including

the laws under which Sears was prosecuted.

</li><li>S. 625 drops a provision in H.R. 833 barring class action lawsuits arising from reaffirmation

violations.

</li><li>S. 625 reinserts a provision making it a violation of the stay to threaten to file motions in

order to coerce reaffirmations.

</li><li>S. 625 reinserts a provision penalizing creditors who fail to acknowledge payments received

in chapter 13 plans and, thereafter, seek a "double payment."</li></ul>

<h4>Greater Protections for Child Support</h4>

<ul>

<li>S. 625 requires bankruptcy trustees to notify appropriate state agencies of a debtor's location

and specific address, if the debtor owes child support. This effectively turns bankruptcy courts

into locator services to help track down "deadbeat" parents.

</li><li>S. 625 requires bankruptcy trustees to notify child support claimants of their rights to

enforce payment through an appropriate state agency.

</li><li>S. 625 permits state agencies which enforce payment of child support obligations to request

that creditors who hold reaffirmed or non-discharged debts provide the last known address and

telephone number of the debtor.

</li><li>S. 625 provides that debts incurred to pay non-dischargeable debts will continue to be

dischargeable if the debtor owes child support or alimony.

</li></ul>

<h4>Fewer Non-dischargeable Debts</h4>

<ul>

<li>S. 625 raises the dollar limits on cash advances on the eve of bankruptcy, presumed

non-dischargeable, from $250 to $750.

</li><li>S. 625 shortens the time during which purchases and cash advances are presumed

non-dischargeable, from 90 days to 70 days.

</li></ul>

<h3>Determining Ability to Pay Under H.R. 833^{<small><a href="#2" name="2a">2</a></small>}</h3>

<p></p><center><img src="/AM/images/journal/hr833pay.gif" align="MIDDLE" border="0" width="400" height="348"></center>

<h3>Determining Monthly Net Income Under H.R. 833</h3>

<p></p><center><img src="/AM/images/journal/hr833net.gif" align="MIDDLE" border="0" width="300" height="476"></center>

<hr>

<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Prepared by the staff of the Senate Subcommittee on Administrative Oversight and the Courts. <a href="#1a">Return to article</a>

</p><p>^{<small><a name="2">2</a></small>} Flow charts prepared by the Consumer Bankruptcy Coalition, a group of consumer creditors, including banks, credit unions, savings institutions, retailers, mortgage companies, sales finance companies and diversified services providers. The coalition supports H.R. 833. <a href="#2a">Return to article</a>