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.
1. New §707(b)—means testing.
- §102(a)-(d), both bills.
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.
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.
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.
"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).
"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.
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.
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.
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.
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.
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.
2. Sanctions imposed on debtor's counsel.
- §102(a)(4), both bills.
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."
- §227(a), both bills.
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.
- §319, both bills.
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.
- §203, both bills.
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."
- H.R. 333, §§304, 327; S. 420, §§304, 326.
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.
- §§304-05, both bills.
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.
6. Trustee compensation.
- §407, both bills.
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.
- H.R. 333, §1225; S. 420, §1224.
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.
7. Non-subordination of property tax liens to family support claims.
- §701, both bills.
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.
1. Secured claims: strip-down, adequate protection, valuation.
- §306, both bills.
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.
- §309(c), both bills.
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.
- H.R. 333, §327; S. 420, §326.
Where strip-down is available, the collateral must be valued at replacement (retail) cost.
- §§314, 707, both bills.
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).
3. The best efforts test: disposable income, plan length.
- §§102(h), 318, both bills.
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.
4. Tax returns, budgets.
- §315(b), both bills.
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."
- §716, both bills.
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.
5. Delay in confirmation.
- §317, both bills.
Confirmation hearings may not take place until at least 20 days after the §341 meeting.
Individual chapter 11 cases treated like chapter 13 cases.
- §321, both bills.
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.
1. Successive discharges.
- §312, both bills.
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).
2. Effective date.
- H.R. 333, §1401; S. 420, §1501.
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.