Gerdano: We are poised on the brink of Senate passage of a bankruptcy reform bill, thereby increasing the likelihood that we will actually have bankruptcy reform this year. It is perhaps the biggest change in the last 20 years. As you've had a chance to look at the bill and ponder what the Congress might do, what's your overall view of the reform before Congress?

Judge Newsome: My overall feeling is that it is somewhat unfortunate—unfortunate in the sense that all of the necessary information for such a sweeping set of amendments has not been put before Congress to allow them to make a fully informed decision, although the Senate bill is more workable than H.R. 3150. There are radical changes in the Senate bill, such as the provision making certain consumer debts over $400 that are incurred within 90 days of filing presumptively non-dischargeable debts, the provision making credit counseling an eligibility requirement and the requirement that the debtor must file his tax returns. The effect of these provisions has not been fully examined by anyone. As a result, we are really in uncharted waters as to how this is going to impact the bankruptcy system and how this will affect the people who are going through it. So my overall feeling about it is that it's gone too fast, and the results may be unfortunate for everybody.

Gerdano: You've been involved in the process on behalf of the NCBJ and in your own capacity. You've testified before the House Judiciary Committee. In your judgment, how do you think the bill got to look the way it does today?

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I think the proponents of the legislation successfully tapped into a pervasive antipathy to bankruptcy in general and consumer debtors in particular...The legislation proposed is out of proportion to the problems it attempts to address.

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Judge Newsome: I don't frankly know. I can only speculate. I think the proponents of the legislation successfully tapped into a pervasive antipathy to bankruptcy in general and consumer debtors in particular. Why the message presented resonated so clearly I really don't know, except that apparently there is a widespread perception that many or most people who file consumer bankruptcies really don't need the relief. I don't agree with that perception and am confident that the members of the NCBJ don't agree with it. We certainly agree that there are changes that need to be made. We made that point repeatedly over the course of the legislative debate. The legislation proposed is out of proportion to the problems it attempts to address. It apparently is premised on the belief that the bankruptcy system is riddled with abuse. That underlying premise has yet to be established.

Gerdano: Playing devil's advocate, we have 1.4 million new cases this year, 97 percent of them filed by individuals during a time of an otherwise healthy economy. What's wrong with having those who have the ability to make some repayment in bankruptcy being obliged to do so?

Judge Newsome: Well the question assumes that there are gross numbers of people who can do as you suggest, who can make the payment.

Gerdano: But if there are any who can...

Judge Newsome: There may be some number of people who can, but the question is whether you are going to impose significant hurdles to bankruptcy relief before a determination is made that the amount of abuse justifies those hurdles. What hasn't been focused on adequately is that the level of consumer indebtedness has doubled in the last 10 years or so, while people's income has been declining. The average income in this country for the average person is stagnant if not declining, and that alone suggests that it isn't a question of abuse, but a question of people being tapped out and having no other recourse. Who's responsible for that? The responsibility should be shared by everyone. And perhaps the problem could have been solved, not by tinkering with the bankruptcy laws, but rather by letting the market do its work: You don't like the level of debt default, then don't lend the money. If the proposed legislation is enacted, it's going to be interesting to see what its impact will be on filings. People may still file because they don't have any other alternative, and the numbers may not go down. Whether the number of bankruptcies declines is, or should be, of less significance than the amount of money creditors will recover because of bankruptcy reform. I'll bet they see very little, if any, increase in collections.

Gerdano: But there is no quarrel with the underlying premise that if, pursuant to a formula or on a case-by-case basis, it is determined that a particular debtor has the ability to repay 20 percent of its unsecured debt, the debtor should be obliged to do so as opposed to receiving a broad discharge in chapter 7?

Judge Newsome: I don't have any quarrel with that, and that essentially is what §707(b) is all about. Ithink the direction in the Senate bill that the court consider the debtor's ability to repay is workable.

Gerdano: Let's move to the comparison between the approaches taken by the two bills. The House bill relies on a more formulaic approach to determine the eligibility for the criteria in a chapter 7, while the Senate bill provides for a more case-by-case determination. If you had to choose between the two, for purposes of judicial economy, fairness of result, and return to creditors, which version would you prefer?

Judge Newsome: I think I'm on record, in my testimony before the Subcommittee in the House, that the Senate version is much better, and I personally still believe that.

Gerdano: The Senate bill contemplates creditors bringing individual motions to deny relief in chapter 7 and motions to convert these cases to a chapter 13. What kind of impact do you think that would have on your own workload, as well as on the use of a chapter 7 or 13?

Judge Newsome: Frankly, I think that it would be manageable. Unless the creditors determine that a debtor is capable of a truly substantial repayment, they won't hire a lawyer to come in and file that kind of motion. They don't want to throw good money after bad.

Gerdano: They don't think that they can get 20 percent repayment?

Judge Newsome: I don't have a crystal ball, and I can't predict whether the threshold for filing such a motion would be 20 percent, or possibly 50 percent repayment, but I would suggest that unless they think there is a feasible chapter 13 plan where they are going to get a substantial repayment as an unsecured creditor, they are just not going to bother with this. I also believe that you're probably not going to find many cases that qualify. But again, no one really knows because Congress has been presented with virtually no raw data.

Gerdano: If that is true, would that in turn be a reason why the House bill would not impact as many debtors as imagined?

Judge Newsome: The problem with the House bill is not only the lack of solid data to form the foundation for the reform proposal, but the unintended and capricious outcomes based on the way it's put together. That is what I said in my testimony in the House, and we have tried to emphasize that point as an organization for the last nine months. We don't know enough to know whether this is going to have a serious impact on people or whether it's going to affect very few. But it surely will have perverse outcomes on occasion. We'll have people who are swept into chapter 13 under the House bill who probably shouldn't be there and we'll have people who won't be swept in who most certainly should be in chapter 13, based on the kinds of abusive spending they've engaged in that led to their bankruptcy.

Gerdano: You suggested earlier that the current Senate bill might not change current practice very much. How would your role change under the House bill?

Judge Newsome: The degree of court involvement under the House bill probably can't be overstated. We will become embroiled routinely in chapter 7 eligibility issues, chapter 13 plan issues, motions to set aside dismissals resulting from breach of the myriad of new debtor duties and obligations the bill imposes—the list goes on and on. So I think that the prospect for court involvement is much greater than anything the Senate has proposed.

Gerdano: If you had the chance to write this bill and could therefore address the biggest problem in consumer bankruptcy, what would that problem be and how would you address it?

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The serial bankruptcy problem is extremely corrosive to the integrity of the system.

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Judge Newsome: Probably the biggest abuse in consumer bankruptcies is the frequent filer problem. And I think there is a way to address that problem, such as putting a limit on the number of filings over a period of years, making filings in excess of that limit void or voidable, and providing for quick review of whether the limitation has been violated by the debtor. There are other solutions that have been proposed to address that problem. Unfortunately, neither the House nor the Senate bill will solve it. And I think that really needs to be solved. The serial bankruptcy problem is extremely corrosive to the integrity of the system.

Gerdano: And under current law, the remedies aren't adequate?

Judge Newsome: You have to read the statute in a way I'm not capable of reading it to come up with the kinds of remedies judges are imposing, such as in rem relief. That's something that has been put in both the House and Senate bills, and that is a step in the right direction. But it's not going to provide a comprehensive solution to the problem. The system should be designed to root out abuse before anyone has to spend any money to do so by way of a motion. That really is the secret to it. Neither bill has such a solution.

Gerdano: Isn't that the purpose of the House language, to have this checking be done administratively, rather than by having parties spend resources to litigate eligibility criteria?

Judge Newsome: Maybe that's the intent of the House bill, but I don't think that is going to be the result. I think eligibility disputes under the House bill are going to be frequent, contentious and quite time-consuming. And expensive to boot.

Gerdano: Is that because there are other factors that the court would consider that would still permit the filing under a chapter 7? Even if they have income levels and debts that would be sufficient to force them to chapter 13?

Judge Newsome: It's because peoples' problems don't fit neatly into formulas. And because they don't, their lawyers will be compelled to try to fit them into the extraordinary circumstances exception provided in the statute.

Gerdano: Let's shift to another issue that is going to be part of Congress's reform effort, and that is a change in the rules that affect small business cases. What kind of impact do you think these changes will have on business bankruptcies in chapter 11?

Judge Newsome: My sense from talking to my colleagues from around the country, and my own sense, is that those amendments are really not going to have a severe or negative impact upon small business chapter 11s. I know that there is a debate going on over whether this is bad for small businesses. I don't think it will be. Many of the things that the bill incorporates have already been tried and tested by some of us who, for example, hold status conferences in small chapter 11s, and set realistic limitations on how long a case will go on before a plan is filed. The experience has been that those sorts of things are good for the system and don't really harm the debtors, but instead instill a sense of reality in the debtor that has been lacking up to that point. My experience has been that most people who file a chapter 11 case don't really know what their business is about or what their financial ments on them, it has a very sobering effect. For the first time they start seeing the reality of their financial situation. So I think that all in all, the business bankruptcy reforms are not going to be a bad thing.

Gerdano: It has been estimated that the new small business rules and the eligibility requirement would affect 80-85 percent of all chapter 11 cases. Do you have a sense of what a $5 million chapter 11 case means for coverage in your district?

Judge Newsome: I think they are probably right. It's probably closer to 90 percent in our district. Our district has more than 6 million people, and most of my cases have under $5 million in debt. I imagine the $5 million threshold will affect more than 80 percent of the cases in almost all districts.

Gerdano: So your view is that the business bankruptcy case changes would be a positive development, as opposed to the proposed consumer changes?

Judge Newsome: I believe so, yes.

Gerdano: You identified serial filings as the most serious debtor abuse in bankruptcy filings; what do you see as the most often occurring creditor abuse?

Judge Newsome: The most troubling is the use of §523(a) 2, 4 and 6 as a collection device, as opposed to being used in the fashion Congress intended. Too often I see creditors bring lawsuits under those sections merely to leverage the debtor into paying some or all of the debt. Because I don't see a significant amount of abuse by either debtors or creditors, I view the numerous fee-shifting provisions in the Senate bill as unnecessary, particularly since we already have remedies available when abuse occurs.

Gerdano: In other words just because you simply file a motion that loses doesn't automatically mean you should be sanctioned.

Judge Newsome: Yes, that is absolutely right. I don't think that serves a good or productive purpose.

Gerdano: Could it be designed to deter the kind of leverage use of the non- dischargeability sections?

Judge Newsome: That's true, but again, we have the tools to control that problem. Admittedly, those tools can't be used unless people know about them or the court acts sua sponte. Many of the people that appear in these adversary proceedings are representing themselves. All they want to do is get their problem resolved so that they can get on with their lives. They often don't raise the issue of sanctions.

Gerdano: But isn't the point of the Senate language make it automatic?

Judge Newsome: Anytime that you make sanctions automatic you are bound to do some injustice, and your run the risk of polarizing the bar. I don't think that the abuse is so great that it requires additional remedies.

Gerdano: How about reaffirmation abuse?

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Because I don't see a significant amount of abuse by either debtors or creditors, I view the numerous fee-shifting provisions in the Senate bill as unnecessary, particularly since we already have remedies available when abuse occurs.

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Judge Newsome: Yes, I do see some reaffirmation abuse, and we have had some large scale abuses that have occurred around the country. But again I think if reaffirmations are monitored and the right questions are asked, and you have reaffirmation hearings for pro se litigants in particular, I think that is something we can deal with under existing law. We really don't need the kinds of penalties that have been proposed.

Gerdano: Let me ask you one question that is more related to the upcoming function of becoming the new NCBJ president this month. What do you see the role or function of the NCBJ over the next year if this bill becomes law?

Judge Newsome: I think that our role has to be one of being an information source, of trying to be an impartial resource that Congress and others can look to as we all seek to make sure that the bankruptcy system works. If there is no legislation passed this year, we will continue to try to add to the dialogue in a meaningful and intelligent way.