With the end of the 106th Congress, the bipartisan effort to rewrite the consumer bankruptcy law died the death of a post-adjournment veto. Although conventional wisdom dictates that a bill identical or nearly identical to the conference report on H.R. 2415 will be introduced in the House, there is a growing hope that the 107th Congress will pay closer attention to the effect that such reform efforts will make and will draft a bill that can actually accomplish its stated goals.

Even though a significant number of bankruptcy professionals and academics challenged the assumptions made by policy-makers, the desire to stem the rapid growth of consumer bankruptcy filings by altering the structure of consumer bankruptcies was compelling. There are some signs, however, that there may be some re-examination of the methods by which "reform" can be accomplished.

At this juncture, it is appropriate to examine those principles upon which effective reform can be premised. If the policymakers charged with crafting a new bill consider the views of the bankruptcy professionals—particularly those not aligned with either debtor interests or creditor interests—perhaps effective reforms can be achieved. If bankruptcy professionals consider those areas of consumer practice that could be modified without disrupting the basic goals of equitable treatment of creditors and a fresh start to the honest debtor, perhaps the next stage of legislation can be more broadly supported.

Curbing Abusive Filings

Most debtors file bankruptcy seeking to be relieved of oppressive debts that restrict their ability to provide for themselves and their families. Occasionally, a bankruptcy discharge is sought for convenience or to relieve a debtor from debt even though that debtor has the capacity to repay debt. One goal of any reform should be to assist participants in identifying and eliminating abusers—those bankruptcy filers that have the capacity to satisfy their debts, in whole or in part, while not establishing a barrier to debtors needing relief.

The remedy proposed by H.R. 2415 was to bar from chapter 7 relief a debtor whose income exceeded median income but with sufficient income to satisfy secured and priority claims, pay for living expenses (on an allowance schedule as provided by the IRS) and make a "meaningful" payment to general unsecured claims. The remedy was criticized as being arbitrary, expensive, unclear and unworkable.

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A common observation about debtors that find themselves in need of bankruptcy relief is the lack of available education related to budgeting and consumer finance.

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One possible solution would be to bolster the ability of creditors and panel trustees to seek judicial review of a chapter 7 filing, directing a court to dismiss a chapter 7 filing if a debtor has the capacity to repay debt from future income. Creditor abuse of such a system could be limited by enabling creditor action only if the debtors' income exceeded the median income for a family of similar size. Chapter 7 trustees, if successful, could obtain costs from the debtor (or the debtor's estate, if conversion followed).

Curbing Repeat Filings

Debtors often attempt to reorganize under chapter 13 only to fail because of a loss of income, change in marital status or the occurrence of a calamitous personal event. Under current law, such debtors are permitted the opportunity to file again, subject to the requirements of good faith. Occasionally, however, debtors file under chapter 13, seeking the protection of the automatic stay, and if the case is dismissed, feel no limitations on an ability to file a subsequent chapter 13 case to again invoke the automatic stay, sometimes frustrating the legitimate interests of their creditors.

The congressional remedy to this abuse was to limit the duration of the automatic stay if a case was refiled within a year and making the stay available only upon court application on a subsequent filing within a year. This proposal should have the effect of obtaining court involvement early in the bankruptcy process of a repeat filer, and transferring the burden of going forward in a repeat filing on the debtor—the party seeking the benefits of a stay. While criticism of this modification centers on increased transactional costs and taxing the resources of the bankruptcy court, few parties criticized the overall intent: to shift the burden of obtaining protection to the debtor in the case of a repeat filing.

Curing Delays in Distributions

In most jurisdictions, chapter 13 plans are crafted, reviewed and confirmed (or rejected) within several months of filing. This expedites the ability of a chapter 13 trustee to make prompt distributions to creditors and gets funds to creditors quickly. In some jurisdictions, however, judicial review of a debtor's chapter 13 plan is deferred until the bar date for filing claims has passed. Courts, debtors and trustees are concerned that confirmation of a plan prior to receipt and review of all allowed proofs of claim could lead to an unfeasible plan where claims are different from the amounts anticipated by the debtor.

To eliminate this delay, H.R. 2415 provided certain fixed deadlines for the submission of a chapter 13 plan, holding of a confirmation hearing and distribution of funds. While these deadlines would certainly have expedited the distribution of funds to some creditors, without some careful crafting, problems relating to claims filed after confirmation would arise.

One solution to the perceived problem would be to freely permit creditors, debtors and trustees to seek modification of plans in which allowed claims differ from the claims assumed by debtors. While it can be argued that there is no limit on the ability of a trustee or debtor to seek modification of a plan pursuant to §1329 under existing law when such a condition exists, perhaps conferring specific standing to a debtor, creditors and trustees can be included in §1329 when claims are filed that are inconsistent with the assumption made at confirmation to clarify this standard.

In cases where confirmation of a chapter 13 plan is delayed for other reasons, "adequate protection" payments could be required for secured creditors with allowed claims based on the debtor's proposed chapter 13 plan, unless the court fixes different distributions. This type of pre-confirmation distribution was included in H.R. 2415 and can provide a practical response.

Education

A common observation about debtors that find themselves in need of bankruptcy relief is the lack of available education related to budgeting and consumer finance. The Bankruptcy Review Commission decried the lack of financial educational opportunities for the public, and both the House and Senate versions of the reform bill in the 106th Congress included provisions calling for greater public commitment to improved financial literacy. Increased commitment to education as part of the consumer bankruptcy process became part of reform legislation by imposing mandatory education as a condition to discharge. The emphasis that Congress placed on pre-petition credit counseling could also find its roots in a perceived need to enhance the education of debtors. Although the rapid implementation of mandatory education was criticized, few participants criticized the need to offer some type of education in the bankruptcy system, so long as there is adequate time to implement a delivery system.

Adoption of an educational requirement as part of a new reform package would be generally accepted, provided there is a sufficient window of time within which a curriculum could be established, a delivery mechanism constructed and a means of funding created.

Enhanced Noticing

Debtors are required to disclose the names and addresses of their creditors. The accurate listing of names and addresses enhances prompt disclosure of the existence of a bankruptcy filing and promotes adequate creditor participation, a necessity if creditor and debtor interests are to be balanced. While most debtors make a sincere effort to correctly list the identity of their creditors, occasionally debtors will deliberately disclose incorrect or inaccurate locations for their creditors. Without prompt notice, creditors lose the opportunity to shape a reorganization outcome and protect their own interests.

The reform efforts had sought to limit the effect of the automatic stay on creditors with inadequate notice. It appears markedly unfair to impose sanctions or deprive creditors of their right to participate where notice is inadequate. The ability to administer chapter 13 cases is threatened if there is no limit on creditor activity, even those creditors with inadequate notice.

One reform that is possible is to clearly spell out that creditors without reasonable adequate notice are not subject to a discharge and should be granted relief from the stay as to any collateral. To encourage accurate noticing, however, there should also be created a "safe harbor" for debtors where creditors can register a name and address for notices with the court, and only where if such registered address is ignored will the sanction of non-dischargeability be imposed.

Only two years ago, ABI established a task force to examine existing reform legislation and provide suggestions on methods to achieve the apparent goals of the reformers without disrupting the overall effect and benefits provided by the consumer bankruptcy system. With bankruptcy filings expected to rise over the next several quarters, pressures will increase on lawmakers to effect modifications. Any changes to the Code should be met with analyses of the effects of the change, its cost and consequences, and whether such change truly furthers the public good. As bankruptcy professionals, we must re-examine the suggestions made by the ABI task force and place them in the hands of those policymakers charged with the consideration of reform in this Congress. Responsible practitioners can enhance the prospects of effective reform by sharing reasonable and effective recommendations with those policymakers.