WRITTEN STATEMENT of MICHAEL F. MCENENEY
Morrison & Foerster LLP
ON BEHALF OF
THE BANKRUPTCY ISSUES COUNCIL
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
OF THE HOUSE JUDICIARY COMMITTEE
March 18, 1998
Chairman Gekas and members of the Subcommittee, my name is Michael F. McEneney. I am a partner with the law firm of Morrison & Foerster LLP in Washington, D.C., and I am here today on behalf of the Bankruptcy Issues Council.
The Bankruptcy Issues Council strongly supports H.R. 3150 and urges its approval by this Subcommittee. In particular, we believe that H.R. 3150 would fairly and efficiently implement the kind of needs-based bankruptcy system that is necessary to restore the balance between the interests of debtors who need relief from their debts, and the vast majority of American consumers who pay for the system but do not use it. H.R. 3150 would do so by setting forth clear and objective standards for determining a debtor's repayment capacity. Under those standards, a debtor who could repay a portion of his or her debts would automatically enter into a Chapter 13 repayment plan. A debtor who could not repay would be free to receive a discharge of debts in Chapter 7.
Furthermore, H.R. 3150 would place debtors in the appropriate chapter -- Chapter 7 or Chapter 13 -- at the beginning of the case. This would heighten efficiency because the vast majority of cases would then move routinely through the system. Under H.R. 3150, disputes would be limited to the exceptional case.
By contrast, a needs-based bankruptcy approach that relies solely on section 707(b), such as that contained in H.R. 3146, would allow debtors to file in either Chapter 7 or Chapter 13, and then require any disputes about debtor repayment capacity to be litigated in a separate judicial proceeding. Moreover, the section 707(b) needs-based approaches that have been introduced would require a court, as part of such litigation, to make subjective determinations about matters such as the "reasonableness" of a debtor's standard of living. Clearly, litigation based on such subjective standards would be difficult and costly to resolve -- it would require additional court time, more judicial decisions, and the increased expenditure of legal fees.
Thus, we strongly support the needs-based bankruptcy approach that is contained in H.R. 3150. It is important to note, however, that in addition to establishing a fair and efficient needs-based bankruptcy system, H.R. 3150 includes a number of more narrowly focused amendments that are necessary to address specific inequities and other problems in the Bankruptcy Code.
For instance, to support the needs-based provisions of the bill, section 103 of H.R. 3150 defines the circumstances under which a Chapter 7 bankruptcy may be dismissed for "inappropriate use" of the Bankruptcy Code. Section 707(b) of the Code currently provides that a consumer's petition for bankruptcy relief under Chapter 7 may be dismissed by the court for "substantial abuse." Although existing section 707(b) is well intended, it is largely ineffective because of the limitations placed on it at the time it was adopted. Specifically, a claim of substantial abuse cannot be raised by any creditor or anyone else who has a direct pecuniary interest in the bankruptcy case. Substantial abuse may be raised only by the bankruptcy court or by the U.S. Trustee, but even they may not raise the issue "at the request or suggestion of any party in interest." As a result, the parties who are in the best position to identify possible abuse -- namely creditors -- are precluded from raising the substantial abuse issue. Moreover, the effectiveness of the "substantial abuse" provision is further impeded by the fact that there is no definition of substantial abuse in the Code and courts are inconsistent in their interpretation of the term. To address these issues, section 103 would amend the Code to change the standard from "substantial abuse" to "inappropriate use," define the term "inappropriate use," and permit creditors and other parties in interest to file a motion for dismissal of a case on the grounds of "inappropriate use."
In addition, section 405 of the bill would require all debtor filings which refer to the debts of the debtor and all written communications provided to creditors under the Code to contain the account number of the debt owed, if it is reasonably available. This information, which often is not included currently on documents furnished to creditors in connection with bankruptcy cases, would facilitate greatly the process of matching bankruptcy correspondence to creditor records. Many credit card issuers and other creditors operating on a regional or nationwide basis are flooded with thousands of official notices sent by the bankruptcy courts, other creditors, and debtors regarding pending bankruptcy cases. It can be extremely difficult matching these notices with affected accounts, particularly where the account holder has a common last name, or in instances where an individual's name on the bankruptcy notice may vary from the way it appears in the creditor's files. The efficiencies to be gained from the inclusion of this additional information are substantial and the burden to the debtor would be minimal. Moreover, section 405 would require notices to be sent to an address which the creditor has previously specified.
H.R. 3150 provides that a consumer who files for bankruptcy must provide financial information about income and expenses, including tax returns and other income documentation. In order for the parties to assess accurately the likelihood that a debtor is capable of successfully completing a repayment plan, reliable information on the debtor's finances must be made available. To efficiently address this need, section 407 of the bill would amend the Code to require a debtor who files under either Chapter 7 or Chapter 13 to provide the tax returns filed by the debtor during the three (3) years preceding the bankruptcy filing, current pay stubs and other income information.
H.R. 3150 also would allow non-attorneys to attend and participate in meetings of creditors. For many card issuers and other creditors, the amount of debt involved in a particular bankruptcy case may be too low to justify hiring an attorney for every phase of the bankruptcy proceedings. In order to provide a means by which a creditor could reduce the cost of participating in a bankruptcy proceeding, section 402 of the bill would amend the Bankruptcy Code to allow creditors to train paralegals and other professionals to represent the creditor without an attorney in the meetings of creditors.
The bill also would require that debtors receive a notice of alternatives to bankruptcy -- such as debt counseling services -- before filing a petition. More specifically, section 111 of the bill would require all debtors to receive, prior to filing for bankruptcy, a notice containing a brief description of Chapters 7, 11, 12 and 13 of the Bankruptcy Code and a brief description of alternatives to bankruptcy. A significant number of individuals who file appear to be unaware of the help that could be provided by non-profit consumer credit counseling services. This provision would amend the Code to ensure that the debtor is made aware of his or her options before filing for bankruptcy. The intent of this provision is to provide a consumer protection disclosure to the debtor similar to the consumer protection disclosures required by law when a person obtains credit from a lender.
Furthermore, section 441 of H.R. 3150 would require an annual report of statistical information from bankruptcy cases filed under Chapters 7, 11 and 13. The lack of reliable nationwide data regarding bankruptcies continues to be a serious impediment to determining how the bankruptcy system is functioning, and where it can be improved. A system which improves the data collection in the bankruptcy area would provide objective information from an impartial source that all interested parties can use in their analyses of the bankruptcy system. This provision requires the Director of the Executive Office for United States Trustees to compile and make public an annual report comprised of detailed statistical information from bankruptcy cases.
Section 408 provides for the automatic dismissal of a filing if required information is not filed within forty-five (45) days of the bankruptcy filing. This provision addresses the problem of debtors who file for bankruptcy and obtain the automatic stay but do not file the schedules required by the Code. A motion to dismiss the bankruptcy filing is usually required if the schedules are not filed. Thus, the automatic stay sometimes remains in effect for several months even though the debtor has not provided the basic information needed to proceed with the case. This provision would automatically dismiss a debtor's case if the schedules are not filed within forty-five (45) days of the bankruptcy filing.
Section 410 of the bill increases to five (5) years the standard length of a Chapter 13 plan for debtors who meet certain income requirements, and retains the three (3) year length for those with income below the threshold. Under the current Bankruptcy Code, the standard length of a Chapter 13 plan is three (3) years and may be extended up to an additional two (2) years "for cause." The general rule limiting Chapter 13 plans to three (3) years is arbitrary and inappropriately short since the debts the debtor is seeking to discharge often involve repayment periods which are longer than three (3) years. On the other hand, we recognize the need to ensure that consumers are not required to fund Chapter 13 plans indefinitely. Thus, we believe the interests of both creditors and debtors are addressed equitably by the provisions of section 410, which would allow Chapter 13 plans to proceed for a period of time to encompass the repayment periods contemplated under many typical consumer credit arrangements, while also ensuring that consumers are not inappropriately burdened by plans that are too long.
Section 171 of the bill would extend the period between Chapter 7 bankruptcy discharges to ten (10) years. The growing popularity of bankruptcy is beginning to spawn increasing numbers of repetitive filers. In order to discourage such behavior, this provision would amend the Bankruptcy Code to preclude a debtor from receiving Chapter 7 relief more than once every ten (10) years (under the current Code, such relief may be obtained once every six (6) years), and prohibit a discharge of debt under Chapter 13 if the debtor has received such a discharge within the five (5) years prior to the order for relief. This would assist in reducing the burden on overworked bankruptcy courts, and discourage reliance on the system as a means to inappropriately avoid financial responsibility while preserving the benefit of bankruptcy relief for debtors who need it.
H.R. 3150 also addresses problems that are created by those who abuse bankruptcy, such as by loading up on credit just before filing for bankruptcy. Specifically, section 142 of the bill provides that consumer debts owed to a single creditor that were incurred within ninety (90) days prior to filing for bankruptcy are nondischargeable. The Bankruptcy Code, as amended in 1994, provides that certain debts incurred within sixty (60) days prior to filing for bankruptcy are presumed to be nondischargeable. Specifically, debts incurred for luxury goods or services and cash advances obtained within that time frame are presumed to be nondischargeable. The purpose of the nondischargeability presumption is to protect creditors from the practice employed by some debtors of "loading up" on credit in anticipation of filing for bankruptcy relief. The presumption reflects the belief that it is unfair for a debtor to abuse the bankruptcy system by obtaining additional credit when the debtor is on the verge of bankruptcy, and having that debt subsequently discharged. This provision of the Code is a vital protection against bankruptcy abuse. However, because the presumption applies only to "cash advances" and debts incurred to pay for "luxury goods or services," it is too narrowly drawn. For example, the presumption does not cover credit card purchases or other extensions of credit obtained through credit lines, unless it can be demonstrated that the credit was obtained to purchase luxury items. Section 142 of H.R. 3150 addresses this issue by amending the Code to cover all consumer debts owed to a single creditor that were incurred within the nondischargeability period. In addition, Section 142 also would increase the nondischargeability period from the current sixty (60) days to ninety (90) days in order to more adequately protect against bankruptcy abuse.
Similarly, H.R. 3150 addresses abuses that occur when a debtor obtains a loan at a time when the debtor had no reasonable expectation of repaying it. More specifically, section 145 of H.R. 3150 provides that debts incurred without a reasonable expectation or ability to repay are nondischargeable. Under section 523 of the Bankruptcy Code, debts incurred outside the nondischargeability presumption period (currently sixty (60) days, as discussed above) generally are dischargeable unless it can be demonstrated that the debtor incurred the debt with intent to defraud. As a result of this "intent to defraud" standard, it is possible for a consumer to obtain a discharge for a debt incurred at a time when the consumer had no income or other funding sources and, therefore, had no reasonable expectation or ability to repay the debt. In fact, at least one court has granted a discharge to a consumer for a debt incurred at a time when the consumer clearly could not repay, because the court found that the consumer had a "subjective intent" to repay the debt from anticipated future gambling earnings. See Anastas v. American Savings Bank, 94 F.3d 1280 (1996). We believe that it is inappropriate for a debtor to obtain a discharge for a debt that is incurred at a time when, based on an objective review of the debtor's finances, it can be concluded that a debtor did not have a reasonable expectation or ability to repay the debt. Thus, we strongly support section 145 of H.R. 3150, which would amend the Code to provide that debts incurred without a reasonable objective expectation or ability to repay are nondischargeable.
Additionally, the Bankruptcy Code currently provides that debts incurred fraudulently are nondischargeable under Chapter 7. Section 143 of H.R. 3150 would amend the Code to provide the same nondischargeability protection under Chapter 13. This change is necessary to ensure that any portion of fraudulently incurred debts which is left unpaid under a Chapter 13 plan would not be dischargeable.
Moreover, section 141 of H.R. 3150 provides that debts incurred to pay nondischargeable obligations are themselves nondischargeable. Increasingly, governmental entities are allowing consumers to pay tax liabilities by credit cards and other lines of credit. Under the Code, the tax obligations of the debtor are not dischargeable under Chapter 7. Without similar nondischargeability protection for debts incurred to pay taxes, a consumer would be able to use a credit card or line of credit to pay taxes, and thereby convert a nondischargeable tax liability into a dischargeable debt owed to the card issuer. In 1994, Congress addressed this problem with respect to federal taxes by providing that a debt incurred to pay a nondischargeable federal tax liability is itself nondischargeable. However, the problem still exists with respect to debts incurred to pay for state taxes and other nondischargeable obligations such as child support and guaranteed student loans. Thus, section 141 would amend the Code to clarify that a debt incurred to pay a nondischargeable obligation is itself nondischargeable.
Finally, we note that section 112 of H.R. 3150 attempts to begin the process of improving the financial management education and training that is available to debtors across the country. We believe that providing consumers with more financial management educational opportunities is important, and we support this provision of the bill.
These are only some of the amendments contained in H.R. 3150 that are necessary to address specific inequities and other problems in the Bankruptcy Code that inappropriately increase bankruptcy costs and harm the consumers who pay for the system but do not use it. There are many other important consumer bankruptcy amendments in H.R. 3150 which, when taken together, constitute a well-balanced approach which would result in significant benefits for consumers and creditors alike.
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I thank the Subcommittee for the opportunity to appear today, and I would be happy to answer any questions that you may have.