Legislative Update

This month's update contains excerpts of the major effects of the consumer bankruptcy
provisions of the 2001 Bankruptcy Legislation (H.R. 333 and S. 420),
prepared by Hon. Eugene R. Wedoff (N.D. Ill.). The full document can be
found on ABI World at <a href="/mainpoints.pdf" target="window2">www.abiworld.org/mainpoints.pdf</a>.</i&gt;

</p><p>The bankruptcy reform bills passed by the House and Senate, H.R. 333 and S.
420, are largely consistent in their treatment of consumer bankruptcy issues. The
following summary sets out the major areas impacted by the legislation, with references
to the sections of the bills that effect the changes.

</p><h3>Chapter 7</h3>

<h4>1. New §707(b)—means testing.</h4>

<ul>
<li>§102(a)-(d), both bills.</li></ul>

<p>Section 707(b) of the Bankruptcy Code is amended to provide for dismissal of
chapter 7 cases or (with the debtor's consent) conversion to chapter 13, upon a
finding of abuse.

</p><p>Abuse can be shown in one of two ways. First, by invoking a presumption of
abuse, based on a means test. Any party in interest, including the U.S. trustee
or bankruptcy administrator, as well as a judge, may assert that the presumption
applies, but only as to debtors whose income exceeds a defined state median.

</p><p>The means test is designed to determine the extent of a debtor's ability to repay
general unsecured claims and has three elements: (1) a definition of "current monthly
income," measuring the total income a debtor is presumed to have available; (2)
a list of allowed deductions from current monthly income, for purposes of support and
repayment of higher priority debt; and (3) defined "trigger points," at which the
income remaining after the allowed deductions would result in the presumption of abuse.

</p><p>"Current monthly income" is a monthly average of all the income received by the
debtor during the six months preceding the date of determination (including regular
contributions to household expenses made by other persons, but excluding Social Security
benefits).

</p><p>"Date of determination" is undefined in the House bill, but is defined in the
Senate bill, for purposes of schedules filed with the bankruptcy case, as the last
day of the calendar month preceding the filing.

</p><p>The allowed monthly deductions from income vary slightly between the two bills, but
the principal deductions are the same, and include (a) set allowances for food,
clothing, personal care, transportation, housing and entertainment, as established by
the Internal Revenue Service (IRS) for negotiating the repayment of delinquent tax
obligations (the "National and Local Collection Standards"), except that any portion
of these allowances reflecting repayment of debt is not to be counted; (b) actual
expenses of the debtor in categories recognized by the IRS but as to which no
specific allowance has been set (the "Other Necessary Expense Standard"); (c)
1/60 of all secured debt due in the five years following the bankruptcy filing and
of all past due debt secured by property necessary for support; (d) 1/60 of all
priority debt; and (e) as under current law, charitable contributions of up to
15% of gross income.

</p><p>There are two distinct trigger points: (1) if the debtor has at least
$166.67 in monthly income available after the allowed deductions, abuse is
presumed regardless of the amount of the debtor's general unsecured debt, and (2)
if the debtor has at least $100 of such income, abuse is presumed if the income
is sufficient to pay at least 25% of the debtor's general unsecured debt over five
years. Thus, a debtor with $100 in monthly income after allowed deductions would
be subject to a presumption of abuse if the debtor had general unsecured debt of
$24,000 or less; a debtor with $150 in monthly income after deductions would
be subject to the presumption with general unsecured debt of $36,000 or less;
and a debtor with income of $200 after deductions would be subject to the
presumption regardless of how much unsecured debt was owed.

</p><p>To rebut the presumption, a debtor would have to swear to and document "special
circumstances" that would decrease income or increase expenses so as to bring the
debtor's income after expenses below the trigger points.

</p><p>The second basis for a finding of abuse, applicable where the presumption does not
apply or has been rebutted, is that the debtor filed the petition in bad faith or that
the totality of the debtor's financial circumstances indicates abuse. The U.S. trustee,
bankruptcy administrator or judge can assert this basis for finding abuse in any case;
creditors are limited to asserting it in cases where the debtor's income is above the
defined state median.

</p><p>Debtors are required to file a statement as to the calculation under the means test
in all cases: the court would be required to serve this statement on creditors; and,
if the presumption applied, the U.S. trustee would be required to file either a
motion under §707(b) or a statement explaining why the motion was not being filed.

</p><h4>2. Sanctions imposed on debtor's counsel.</h4>

<ul>
<li>§102(a)(4), both bills.</li></ul>

<p>Section 707(b) is amended (a) to require the court to award costs and fees
to a trustee who successfully pursues a §707(b) motion, payable by debtor's
counsel, if it finds that the chapter 7 filing violated Fed. R. Bankr. P.
9011; (b) to specify that if the court finds any violation of Rule 9011 by
the debtor's attorney, it must award a civil penalty against the attorney, payable
to the trustee, U.S. trustee, or bankruptcy administrator; and (c) that the
signature of a debtor's attorney on a petition constitutes a certification that "the
attorney has no knowledge after an inquiry that the information in the schedules filed
with [the] petition is incorrect."

</p><ul><li>§227(a), both bills.</li></ul>

<p>Debtors' counsel are subject to loss of fees, damages, injunctive remedies, and
imposition of costs for any failure to meet new disclosure and record-keeping
requirements.

</p><ul><li>§319, both bills.</li></ul>

<p>A sense of Congress is set out, stating that Fed. R. Bankr. P. 9011
should be amended to include a requirement that all documents submitted by a debtor
either to the court or a trustee, specifically including schedules, be subject to a
reasonable inquiry by the debtor or the debtor's counsel to assure that the information
contained in the document is well grounded in fact and warranted by law.

</p><h4>3. Reaffirmations.</h4>

<ul><li>§203, both bills.</li></ul>

<p>In addition to the provisions of current law, (1) a reaffirmation agreement is
not effective unless the debtor received an extensive set of disclosures, and (2)
the court may disapprove reaffirmation agreements with creditors other than credit unions
if a statement filed by the debtor indicated that the debtor did not have sufficient
funds to make the agreed-upon payments. Creditors are allowed to receive payments
prior to the filing of a reaffirmation agreement, and under agreements "which the
creditor believes in good faith to be effective." The disclosure requirements are met
if "given in good faith."

</p><h4>4. Redemption.</h4>

<ul><li>H.R. 333, §§304, 327; S. 420, §§304, 326.</li></ul>

<p>Redemption requires full payment of the amount of the allowed secured claim at the
time of the redemption, and the claim would be based on the retail replacement price
of the collateral.

</p><h4>5. Ride-through.</h4>

<ul><li>§§304-05, both bills.</li></ul>

<p>A debtor's option to retain collateral without redemption or reaffirmation by making
contract payments, recognized by some courts, is eliminated. Failure to redeem or
reaffirm results in termination of the automatic stay without motion.

</p><h4>6. Trustee compensation.</h4>

<ul><li>§407, both bills.</li></ul>

<p>Section 330 is amended to provide that the compensation to chapter 7 trustees
would not be based on the factors applicable to other professionals, but would be a
commission, based on §326.

</p><ul><li>H.R. 333, §1225; S. 420, §1224.</li></ul>

<p>If a chapter 7 trustee is awarded compensation for services in connection with a
§707(b) motion, and the debtor is later in a chapter 13 case (due to
conversion or refiling after dismissal), any of the §707(b) compensation remaining
unpaid is to be paid during the chapter 13 case, according to a limiting formula.

</p><h4>7. Non-subordination of property tax liens to family support claims.</h4>

<ul><li>§701, both bills.</li></ul>

<p>Section 724(b) of the Bankruptcy Code currently allows a chapter 7 trustee
to pay family support obligations from funds that would otherwise be used to satisfy
a property tax lien, with the tax lien being subordinated to other liens on the
affected property. This type of subordination is eliminated, so that if the debtor
owed both property taxes (secured by a lien on the debtor's property) and support
obligations, the proceeds of any sale of the property will be used to pay the taxes
before the support obligations.

</p><h3>Chapter 13</h3>

<h4>1. Secured claims: strip-down, adequate protection, valuation.</h4>

<ul><li>§306, both bills.</li></ul>

<p>Strip-down of secured claims to the value of the collateral under §506(a) is
limited. Under H.R. 333, purchase money security interests in motor vehicles
purchased within five years of the bankruptcy filing could not be stripped down. Under
S. 420, the anti-strip-down period for motor vehicle loans would be three years.
Under both bills, strip-down would be unavailable as to all other secured debts
incurred within one year of bankruptcy.

</p><ul><li>§309(c), both bills.</li></ul>

<p>Chapter 13 plans would have to provide for payment of secured claims in equal
installments, at lease sufficient to provide adequate protection, and, prior to
confirmation, the debtor would have to make the proposed payment directly to the
secured creditor, and give proof of this payment to the trustee.

</p><ul><li>H.R. 333, §327; S. 420, §326.</li></ul>

<p>Where strip-down is available, the collateral must be valued at replacement
(retail) cost.

</p><h4>2. Superdischarge.</h4>

<ul><li>§§314, 707, both bills.</li></ul>

<p>In addition to those debts excepted from a Chapter 13 discharge under current
law, there would also be exceptions to discharge for debts defined by
§523(a)(1)(B) and (C) [unfiled, late-filed, and fraudulent returns],
(a)(2) [fraud, including credit card misuse], (a)(3) [failure to notify
creditors of the bankruptcy in time to allow assertion of claims], (a)(4)
[embezzlement, breach of fiduciary duty], and—insofar as personal injury or wrongful
death is concerned—(a)(6).

</p><h4>3. The best efforts test: disposable income, plan length.</h4>

<ul><li>§§102(h), 318, both bills.</li></ul>

<p>The best efforts test of §1325(b) currently requires chapter 13 plans (if
objected to by the trustee or an unsecured creditor) to either pay unsecured claims
in full with interest or else provide that all of the debtor's disposable income will
be contributed to the plan for a minimum period of three years. Under the new
legislation, for chapter 13 debtors whose income is more than the defined state
median, "disposable income" for purposes of the best efforts test is to be calculated
under the means test for the presumption of abuse under §707(b), and for those
whose income in not less than the median, "best efforts," in the absence of full
payment, requires a minimum five-year plan.

</p><h4>4. Tax returns, budgets.</h4>

<ul><li>§315(b), both bills.</li></ul>

<p>Section 521 is amended to provide that individual debtors in cases under chapter
7 and 13 must provide to the trustee, at least seven days prior to the §341
meeting, a copy of a tax return or transcript of a tax return (their choice), for
the period for which the return was most recently due, and that chapter 7, 11
and 13 debtors (on request of a party in interest or—under S. 420—the judge)
must file with the court copies of tax returns (or—under S. 420—transcripts of the
returns) that become due while the case is pending. The filed returns are to be
available to any party in interest, with the debtor's privacy protected by regulations
to be adopted by the Director of the Administrative Office. At the request of
any party in interest, the debtor in a chapter 13 case must file a financial
statement annually, showing "income and expenditures in the preceding tax year and
monthly income."

</p><ul><li>§716, both bills.</li></ul>

<p>A new §1308 requires chapter 13 debtors to file any tax returns past due
for the four years preceding the bankruptcy filing within specified times following the
§341 meeting.

</p><h4>5. Delay in confirmation.</h4>

<ul><li>§317, both bills.</li></ul>

<p>Confirmation hearings may not take place until at least 20 days after the §341
meeting.

</p><h3>Chapter 11</h3>

<h4>Individual chapter 11 cases treated like chapter 13 cases.</h4>

<ul><li>§321, both bills.</li></ul>

<p>Individual chapter 11 debtors will receive a discharge only after completion of
their plans; a best-efforts test (five-year minimum contribution of disposable income)
is applicable on the objection of any unsecured creditor; and the post-petition
earnings of the debtor are property of the estate.

</p><h3>General</h3>

<h4>1. Successive discharges.</h4>

<ul><li>§312, both bills.</li></ul>

<p>Under both bills, a chapter 7 debtor would be subject to denial of discharge under
§727 if the debtor received a chapter 7 or 11 discharge in a case filed within
eight years of the filing of the pending case. The treatment of chapter 13 debtors
varies between the two bills. Under H.R. 333, chapter 13 debtors would be
denied discharge if their case was filed within five years of the filing of any other
bankruptcy case in which the debtor received a discharge. Under S. 420, there
would be a denial of discharge if a chapter 13 debtor received (a) a discharge
in a case under chapter 7, 11 or 12, filed within three years of the pending
case filing (without exception), or (b) a discharge in a prior chapter 13 case
filed within two years of the pending case filing (subject to an exception of extreme
hardship).

</p><h4>2. Effective date.</h4>

<ul><li>H.R. 333, §1401; S. 420, §1501.</li></ul>

<p>The changes made by the legislation are generally effective only with respect to
cases filed after its effective date, 180 days after the date of enactment.