SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

OVERSIGHT HEARING ON

THE NATIONAL BANKRUPTCY REVIEW COMMISSION REPORT



Thursday, October 13, 1997

Room 2237 Rayburn Building, 1:00 PM



Jones Testimony


Statement Before the Subcommittee
on Commercial and Administrative Law
of the House Committee on the Judiciary
Regarding the Report of the
National Bankruptcy Review Commission


November 13, 1997


By Honorable Edith H. Jones, Member of the Commission


The Report of the
National Bankruptcy Review Commission

Testimony of Hon. Edith H. Jones,
Fifth Circuit Court of Appeals and
National Bankruptcy Review Commissioner



It is an honor to appear before members of this subcommittee to testify on the report of the National Bankruptcy Review Commission. Even as a dissenter to many of the Commission's more significant proposals, I was privileged to have served for two years and been allowed to address the serious problems that beset the American bankruptcy system.
Congress has copies of the Commission's voluminous report and the dissents authored by myself and other Commissioners. Helpfully for Congress's purposes, the specific recommendations are contained in boldface at the beginning of the report, and the dissents I wrote specifically identify the recommendations with which I and other Commissioners disagree. Because the time allotted to us today is short, and because I realize that Congress will ponder these recommendations and dissents for some time to come, I wish to highlight those portions of the report that I think most important to the reform of bankruptcy law and procedure, and those recommendations with which I, and often other dissenters, most strongly disagree.

I. Consumer Bankruptcy
The Commission's recommendations which have achieved the most immediate notoriety are those dealing with consumer bankruptcy. As bills have already been introduced in the House and Senate to consider reforming consumer bankruptcy law, I believe Congress will consider this area among its first priorities. Congress should be concerned about the alarming increase in consumer bankruptcies under the 1978 Bankruptcy Code and particularly in the last four years. One research group estimated that given the million-plus level of consumer bankruptcy filings, and the correspondent level of losses imposed on creditors, every American household paid $300-400 in higher credit charges in 1996 to make up those losses. Congress should also be concerned that when consumer bankruptcy filings reach the current extraordinary rate during prosperous economic times, the results might be truly catastrophic when the credit-driven economy turns down and many more people begin losing their jobs.
Between the Commission's five-member majority proposals on consumer bankruptcy and the recommendations of the four-Commissioner dissent, there are represented two distinct philosophical and practical approaches to consumer bankruptcy. As I hope to demonstrate, the five-member majority proposals are agnostic or worse concerning the high level of consumer bankruptcy filings. The five-member dissent proposes measures that would go much further to penalize debtor abuse and deter the widespread "gaming" of the system that now occurs. In a separate dissent, Commissioner Shepard and I furnish additional criticisms of the five-member proposals and advocate that Congress consider means-testing of bankruptcy relief. Our separate dissent identifies five different varieties of means-testing, two of which have already been introduced as legislation.
Lacking time to compare the majority and dissenting proposals item by item, I shall instead describe the problems that they were intended to combat. I will summarize the inadequacy of the five-member proposals to deal with these problems, and identify the stronger and more effective proposals advocated by the four-member dissent.
In four areas, the Commission seems almost united in agreeing that there are opportunities and significant instances of consumer debtor abuse:
1. Debtors' statements of their assets, contained in schedules and statements of affairs, are often widely inaccurate and untrustworthy.
2. Too many debtors file multiple bankruptcy petitions, either to gain the temporary advantage of the automatic stay or repeated protection from indebtedness.
3. Not enough debtors otherwise able to do so choose to pay some of their debts in Chapter 13.
4. Not enough debtors complete payments under Chapter 13 plans, especially to unsecured creditors.
1. Inaccurate/Untrustworthy Statement of Assets
The five-member majority propose to remedy this widespread problem by requiring attorneys to verify the essential accuracy of the debtors' schedules under Bankruptcy Rule 9011, Comm'n. Rec.  1.1.4, and by initiating random audits of debtors. Comm'n. Rec.  1.1.2. Random audits have some value, especially in the 1% of cases they may involve. Enhancing attorneys' responsibility for the trustworthiness of their clients' schedules is also useful. (Note that the final Commission Report has come around to the view on Rule 9011 expressed by the four dissenters in earlier papers. See Four Commissioner Dissent  1.1.4, pp. 19-20.)
Unfortunately, these measures do not significantly penalize debtors who in individual cases are caught secreting or misstating their assets and liabilities. Present law that appears to sanction such debtor conduct is simply ineffective. The four dissenting Commissioners therefore recommended that if a debtor materially falsifies his schedules as initially filed with the court, discharge should be denied. This is no different from the level of veracity required of individuals who file tax returns, applications for gun licenses, loan applications or other important documents. The penalties for inaccuracy must be beefed up. We also recommended, inter alia, filing tax returns and pay stubs, and making discharge contingent on a trustee certification that the debtor cooperated. See generally  1.1.A of the Four-Commissioner Dissent to Consumer Bankruptcy Proposals, pages 19-21.
2. Serial Bankruptcy Filings
The five-member majority proposals call for a national bankruptcy filing registry, Comm'n. Rec.  1.1.1; in rem orders, Comm'n. Rec.  1.5.6; and a modified, "three-strikes" limit on repeat bankruptcy filings. Comm'n. Rec.  1.5.5. We all agree on the advisability of a national filing registry and on allowing courts to issue in rem orders that would prevent individuals from playing tag-team fraud with bankruptcy filings to prevent foreclosures. See Four-Commissioner Dissent,  1.1.1 at p. 14, and  1.5.6 at 57-59.
The Commission is split, however, on the amount and type of deterrents needed to limit access to bankruptcy. Currently, a debtor may secure a Chapter 7 discharge once every six years, but the debtor may repeatedly seek Chapter 13 relief. The five-member majority proposal would allow a minimum of two bankruptcy petitions, either Chapter 7 or 13, within a six-year time frame, and would only limit (by making the stay non-automatic) a debtor who, within six months of dismissal or conversion of the second filing, attempted a third filing. It is difficult to see how any enforceable limit on refiling exists under this proposal. It is absurd to say that the majority proposal imposes any kind of limitation as compared with present law; it does nothing to curtail abusive "Chapter 20" filings.
The four dissenting Commissioners proposed two alternative measures to limit refilings. One of them would limit debtors to seeking bankruptcy relief, whether under Chapter 7 or Chapter 13, no more than once every six years. The other alternative would eliminate the possibility of an "automatic" stay for those who refile within 180 days or who are spouses, co-owners or co-lessees of a person who filed in the previous 180 days. See Four Commissioner Dissent,  1.5.B at 51-57. Neither of these measures is much more stringent than current law. Either of them would be far preferable to the utterly ineffectual majority proposals.
3. Not Enough Chapter 13 Filings
The five-member majority proposals seek to encourage Chapter 13 filings only by enhancing the credit report of debtors who complete their Chapter 13 payments and verbally encouraging incentive loan programs for them. Comm'n. Rec's.  1.5.8 and 1.5.9. While these are laudable measures, with which the dissenters agree, they will not alone significantly increase the number of Chapter 13 filings. Nearly every other major consumer bankruptcy proposal of the five-member majority seriously undercuts the incentives of debtors to engage in Chapter 13 repayment plans. The majority proposals dramatically increase the average level of personal exemptions around the country, and in so doing promote straight discharge of debt in Chapter 7 over Chapter 13. See Comm'n. Rec's.  1.2.1 - 1.2.6. By modifying reaffirmations, they give debtors the same ability to reduce their secured obligations in Chapter 7 as now exists in Chapter 13 "cramdowns" of secured debt. Comm'n. Rec's.  1.3.1 and 1.3.2. Further, there are "consumer-protection" measures proposed for Chapter 7, such as those concerning rent-to-own contracts, Comm'n. Rec.  1.3.5; voiding liens on "household" goods less than $500 "value," Comm'n. Rec.  1.3.4; and a "free ride" discharge for credit card debt incurred (within card limits) more than 30 days before bankruptcy. Comm'n. Rec's.  1.4.1 and 1.4.2. The majority advocate making school loans fully dischargeable even if the debtor files bankruptcy one day after receiving a degree. Comm'n. Rec.  1.4.4. All six of these proposals create disincentives to Chapter 13 payment plans.
Unfortunately, the four-member dissenting proposals do not adequately encourage Chapter 13 filings either. There would, however, be a greater incentive to file Chapter 13 if, consistent with the dissenters' recommendations, Congress passed uniform federal exemptions with far lower limits than those advocated by the majority. See Four-Member Dissent, pp. 25-27. In such cases, debtors would have more non-exempt property exposed to the claims of creditors, and they might be more willing to file Chapter 13 payment plans.
Ultimately, the only way really to encourage Chapter 13 is to means-test bankruptcy relief, requiring those who are able to repay some portion of their unsecured, non-priority debts to do so. The Grassley-Durbin bill offers one such possibility, by modifying  707(b); the McCollum-Boucher bill proposes a means test for access to Chapter 7 relief. In the Jones-Shepard Additional Dissent to the Consumer Bankruptcy Recommendations, pp. 5-17, these and other means-testing proposals are identified and discussed.
4. Too Few Completions of Chapter 13 Plans
Nationwide, nearly two-thirds of Chapter 13 repayment plans are never completed. Precisely what this means to debtors is unclear. Apparently, many of them get the benefits they sought by curing defaults in home mortgages, auto loans and taxes; if they never complete payments on unsecured debts, they are not worried enough about being pursued by creditors to risk the lack of a discharge. The lack of completions disadvantages unsecured creditors, although they prefer Chapter 13 to 7.
The five-member majority sought to enhance the effectiveness of Chapter 13 in two ways. First, the majority would require payments to be made on secured and unsecured debt throughout the life of the plan. If the debtor did not keep up payments on the secured debt until the end, the debtor would not achieve the desired cures of defaults. All of us agree on this proposal. See Four Commissioner Dissent,  1.5.A, pp. 41-43.
The other majority proposal purports to impose on debtors "template" levels of minimum payments based on income. Comm'n. Rec.  1.5.4. This recommendation is useless for two reasons. First, the court can deviate from it whenever it finds that "circumstances" are appropriate. The standard is thus a non-standard. Second, for higher income-earners, the template payments envisioned by the Commission (without any empirical supporting justification) are far too low. The template would do nothing to increase the payments to unsecured creditors in Chapter 13.
Because the four dissenting Commissioners had no time or opportunity to develop a counter-proposal, our recommendations do not promise to enhance payments to creditors in Chapter 13. There are only two ways to do this: to decrease available exemptions, thus incentivizing more debtors to seek Chapter 13 relief; or to means-test bankruptcy and require some debtors to enter into repayment plans.
5. Creditor Abuse
The Commission split five-four over the extent of creditor abuse and need for additional legal measures to counter-act it. The five-member majority proposals that address creditor abuse are those dealing with false claims, Comm'n. Rec.  1.1.3; reaffirmations, Comm'n. Rec's.  1.3.1 and 1.3.2; voiding liens on household goods of $500 "value," Comm'n. Rec.  1.3.4; modifying rent-to-own contracts, Comm'n. Rec.  1.3.5; and enhancing the dischargeability of credit card debt. Comm'n. Rec's.  1.4.1 and 1.4.2.
The dissenters see no need for any of these measures, because current law, as explained in the dissent, adequately addresses the problems. See Four-Commissioner Dissent,  1.1.3 at 16-19; and  1.3.1&2,  1.3.4, and 1.3.5, at pp. 28-41. The Commission did not even consider more modest measures to deter creditor abuse, however, because we were required to vote on the five-member majority proposals as an all-or-nothing package.
The five-member majority proposals would in effect force lenders to change their lending practices, particularly to less-well-off borrowers, because these proposals uniformly increase the risk of credit to such individuals. The results may favor debtors, but they are anti-consumer, as they drive up the risks of lending and the cost and availability of credit to all consumers. They will have particularly harsh effects on the poorer members of society. See the Four-Commissioner Dissent, supra and Part III, pp. 64-71, and the Jones-Shepard Dissent to the consumer bankruptcy proposals, pp. 29-31.
Two other modest remedies proposed by the Four-Member Dissent should be noted here. First, we recommend an expedited affidavit-form practice for granting uncontested motions to lift stay under  362. See  1.5.C, pp. 59-61. We also vigorously support removing residential leases from the automatic stay, because of the widespread abusive practice by tenants of filing bankruptcy solely to delay state-ordered evictions. Four-Member Dissent  1.5.D, pp. 61-64.
In concluding my comments on consumer bankruptcy, I cannot overemphasize that the time has come for Congress to consider whether the bankruptcy discharge and "fresh start" are widely being made available to individuals who could afford to repay some of their unsecured, nonpriority debts. From my experience on the Commission, I believe the discharge is being unjustifiably granted in a significant number of cases. Proportionately, these may not be a large share of overall bankruptcy filings, but taken together, they cast disrespect on the system and impose large losses that ultimately must be borne by non-bankrupt consumers.

II. Direct Appeals to Courts of Appeals
Moving to other Commission recommendations, I believe the next most important area is direct appeals. Congress should adopt the Commission's unanimous recommendation that appeals from bankruptcy courts should be routed directly to the U.S. Courts of Appeals, rather than through an intermediary such as the district courts or bankruptcy appellate panels. The importance of this measure cannot be overstated. The present Bankruptcy Code is vaguely drafted in many instances. There are literally thousands of conflicting precedents for practically every clause in every provision of the Code. A principal reason for the conflicts is that the parties involved in bankruptcy do not have the time or resources to pursue appeals up to the court of appeals level. It is at that level, and that level alone, where binding decisions will be made for all of the bankruptcy courts in a circuit. Further, at that level, the judges are less likely to take a parochial bankruptcy-only view of the law, and they are more likely to interpret the plain language of the law.
District courts are not useful way-stations for bankruptcy appeals. The discomfort of district courts in addressing bankruptcy cases is well known. The district courts also, though not always, have a tendency to let bankruptcy appeals languish for an extended time and then to rubber-stamp the bankruptcy court's decision without serious consideration.
It is my firm belief that bankruptcy appeals can be heard by the courts of appeals without unduly straining the workload at our level. First, the handling of prisoner habeas corpus appeals has become easier because of Congress's recent revisions to the law. Second, the large majority of the increase in our caseload consists of prisoner filings, now over 40% of all appeals at the Fifth Circuit; these cases simply do not take much judge time to resolve. Third, when our circuit council considered (and ultimately declined) establishing a bankruptcy appellate panel, it appeared that at most 400-500 additional such cases might proceed to the court of appeals. Given our current workload of over 7,500 yearly appeals, that is not a significant addition. Moreover, many bankruptcy appeals would, for various reasons, not pose difficult issues, and I believe that parties would be less likely to appeal, as they now do, simply to cause delay.

III. Small Business Reorganizations
The Commission voted, by a seven-two margin, to recommend changes in bankruptcy procedure that will increase the efficiency of small business reorganizations. At present, Chapter 11 does not work well for small businesses or their creditors, and an overwhelming majority of smaller businesses that seek reorganization do not succeed in confirming plans. The Commission's procedural proposals would strengthen the role of the U.S. trustee in its oversight of small business cases; enhance the ability of courts to control the progress of those cases and terminate those which have no hope of reorganizing; and speed up the process for the small businesses that can make it. These proposals were diligently thought out and carefully crafted. Congress should consider them as a package.

IV. Critique of General Chapter 11 Proposals
Unlike the small business proposals, the recommendations geared toward general Chapter 11 practice are not tailored to be either efficient or useful. I filed a separate dissent from a number of controversial proposals, most notably those which would codify the "new value exception" to the absolute priority rule and change the standard for classification of claims. Comm'n. Rec's.  2.4.14 and 2.4.15. See Dissent of Edith H. Jones from certain Commission Recommendations on General Issues in Chapter 11. As the dissent points out, nearly every proposal it addresses passed by a bare five-four majority. Unlike the small business proposals, the recommendations from which I dissent would increase the delay, complexity and cost of business reorganization proceedings. They favor debtors and bankruptcy professionals rather than creditors, without explaining why such favoritism is necessary. Finally, to the extent these proposals would modify the law applicable in small business cases, they conflict with the intent of the small business recommendations and would seriously undermine them.

V. Other Matters
To the Chairman's credit, the Commission ambitiously addressed many other subjects in bankruptcy law, both on a technical and policy level. As time goes on, I hope Congress will be interested in considering the details of other recommendations that I have not had an opportunity to mention here. For future reference, I commend Congress's attention particularly to the recommendations concerning the government as creditor, bankruptcy tax issues, single asset real estate reorganizations, venue of Chapter 11 proceedings, and modification of the preference laws. Reform of the American bankruptcy system would be greatly assisted by adopting any or all of these recommendations.



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