Legislative Update The Bankruptcy Reform Act of 1998
THE BANKRUPTCY REFORM ACT OF 1998
H.R. 3150 (Gekas)
Section-by-section Analysis (excerpts)
Title I — Consumer Bankruptcy ProvisionsSec. 101. Needs-based Bankruptcy.
This section of the bill requires those who have a current monthly total income of at least 75 percent of the national median family income for a family of equal size (or, in the case of a household of one person, at least 75 percent of the national median household income for one earner) plus a monthly net income greater than $50 and the ability to pay at least 20 percent of their unsecured, non-priority debts over five years to enter into a repayment plan under chapter 13.
Sec. 102. Adequate Income Shall be Committed to a Plan that Pays Unsecured Creditors.
This section amends the Code to substitute for "disposable income" a new concept, "monthly net income," which is determined based upon expenditure levels now set by the Internal Revenue Service and used extensively throughout the country to make similar determinations.
Sec. 103. Definitions of Inappropriate Use.
The bill amends §707(b) to permit any party in interest to move to dismiss a chapter 7 bankruptcy case on the basis that the granting of relief would be an inappropriate use of the Bankruptcy Code. A court shall find that the granting of relief would constitute an inappropriate use where the debtor is ineligible for chapter 7 under the needs-based provisions of the bill or where the totality of the circumstances demonstrates inappropriate use.
Sec. 111. Notice of Alternatives.
This section assures that, before filing for bankruptcy, debtors receive information about debt counseling services and different options under bankruptcy.
Sec. 112. Debtor Financial Manage-ment Training Test Program.
This section would require the Executive Office for U.S. Trustees (EOUST) to develop and test a financial management training curriculum and materials that can be used to educate debtors on how to better manage their finances.
Sec. 121. Discouraging Bad Faith Repeat Filings.
The section provides that the automatic stay will terminate in a consumer bankruptcy case on the 30th day after the filing if, in the previous year, the same debtor filed a bankruptcy case that was dismissed.
Sec. 123. Debtor Retention of Personal Property Security.
The bill would add a new subsection to §521 to provide that a chapter 7 individual debtor may not retain possession of personal property securing an allowed claim for the purchase price unless the debtor either (a) reaffirms the debt or (b) redeems the property within 30 days after the first meeting of creditors.
Sec. 124. Relief from Stay When the Debtor Does Not Complete Intended Surrender of Consumer Debt Collateral.
This section amends §362 to provide that if an individual debtor does not file a timely statement of intention with respect to property securing the creditor’s claim or act in accordance with that statement of intention, a secured creditor may seek relief from the stay.
Sec. 125. Giving Secured Creditors Fair Treatment in Chapter 13.
The bill amends §1325(a)(5)(B)(1) to provide that the holder of an allowed secured claim shall retain the lien securing the claim until payment of the underlying debt or the debtor receives a discharge, whichever occurs earlier.
Sec. 129. Fair Valuation of Collateral.
The bill amends §506(a) to set the value of personal property securing an individual debtor’s personal property as the replacement value of the property on the petition date (without deductions for marketing or sales costs). The provision also clarifies that "replacement value" means the price a retail merchant would charge for property of that kind, considering its age and condition.
Sec. 142. Credit Extensions on the Eve of a Bankruptcy Presumed Non-dischargeable.
The bill amends §523(a)(2)(C) to create a presumption that consumer debts incurred within 90 days of bankruptcy are non-dischargeable.
Sec. 144. Applying the Co-debtor Stay Only When It Protects the Debtor.
The bill amends §1301 so that the co-debtor stay would continue to be available when the debtor who borrowed the money sought chapter 13 relief, but if a guarantor or other co-debtor who did not receive the consideration for the creditor’s claim filed for relief, the debtor who borrowed the money would not be protected by a stay unless he or she also filed for bankruptcy protection.
Sec. 145. Credit Extensions Without a Reasonable Expectation of Repayment Made Non-dischargeable.
This section amends the Bankruptcy Code to provide that debts incurred when the debtor had no reasonable expectation or ability to repay are non-dischargeable.
Sec. 171. Extend Period Between Bankruptcy Discharges.
The bill would expand the amount of time that must pass before a debtor may receive another discharge. The time period would expand to 10 years for chapter 7 individual cases and five years for chapter 13 cases.
Sec. 181. Exemptions.
The bill amends §522(b)(2)(A) to require a debtor to be domiciled in a state for 365 days, or the majority of 365 days, before filing a petition in order for that state’s exemptions to apply. Currently, a debtor must be domiciled in a state only for 180 days, or the majority of 180 days, for a state’s exemptions to apply.
Title II — Business Bankruptcy Provisions
Sec. 201. Limitation Relating to the Use of Fee Examiners.
This provision explicitly precludes the appointment of so-called "fee examiners."
Sec. 203. Chapter 12 Made Permanent Law.
This provision makes chapter 12, Adjustments of Debts of a Family Farmer With Regular Annual Income, permanent law.
Sec. 207. Preferences.
This provision helps enable small creditors to mount effective defenses against preference actions. Proposed §547(c)(9) increases the minimum aggregate transfer that must be sought in a case against a creditor to $5,000. This section also clarifies the ordinary course of business exception for preferential transfers by disallowing a creditor from being sued for receipt of a preferential transfer if it has received a payment in the ordinary course of the debtor’s business or made according to ordinary business terms.
Sec. 208. Venue of Certain Proceedings.
This provision mandates that a preference recovery action against a non-insider seeking less than $10,000 must be brought in the bankruptcy court in the district where the creditor resides.
Chapter 1 — Small Business Bankruptcy
Sec. 231. Definition.
The section establishes a "bright line" definition to identify those cases that merit special rules which enhance the efficient use of judicial resources and which streamline the reorganization process for debtors with meritorious cases by fixing the threshold at the $5 million debt level.
Sec. 234 & 235. Uniform National Reporting Requirements.
This section amends the Bankruptcy Code and Rules to expressly require the periodic filing of financial and other reports, such as monthly operating reports, and the filing of schedules and statements within 30 days post-petition.
Sec. 236. Debtor’s Duties in Small Business Cases.
This section requires all small business debtors to establish segregated bank accounts for timely deposit of tax funds withheld or collected from third parties after the commencement of the case to stop the abusive practice of debtors, suffering from cash shortages, using government money for unauthorized business loans by financing their day-to-day operations with cash withheld from employee paychecks or sales-tax revenues, or other like "trust fund" taxes.
Sec. 237, 238 & 239. Plan Filing and Confirmation Deadlines.
This section addresses the need to move small business chapter 11 cases at a pace appropriate for those cases by (1) establishing presumptive plan-filing and plan-confirmation deadlines specially tailored to fit small business cases and, (2) directing bankruptcy judges to use modern case-management techniques in all small business cases to further reduce cost and delay.
Sec. 240. Duties of the U.S. Trustee.
This section directs the U.S. Trustee to play a more active role throughout the chapter 11 proceeding and provides the necessary tools to effectively manage chapter 11 cases, including the ability to recommend conversion or dismissal in appropriate cases.
Sec. 241. Scheduling Conferences.
To quicken the pace for disposition of a chapter 11 plan, the bill requires that judges promptly hold at least one on-the-record status conference, unless the debtor and U.S. Trustee file an agreed scheduling order with the court prior to the judicial scheduling conference.
Sec. 243. Expanded Grounds for Dismissal or Conversion and Appoint-ment of Trustee.
To maintain the legitimacy and continued public acceptance of chapter 11 by limiting its exceptional protections to those cases in which the public derives a benefit therefrom, this section establishes statutory indicia of cases which are likely to fail, those cases in which there is no real likelihood of rehabilitation, and provides a mechanism for moving such cases expeditiously through chapter 11.
Chapter 2 — Single Aset Real Estate
Sec. 251. Single Asset Real Estate Defined.
This section eliminates the dollar cap from the definition of a "single asset real estate" (SARE) debtor and defines the SARE debtor to include real estate investors and to exclude debtors who use real estate in an active business, viewed in terms of economic substance rather than the form of ownership, and eliminates several ambiguities found in the current definition.
Sec. 252. Plan Confirmation.
This section establishes a clear, objective standard for new-value plans in SARE cases—the exception would be satisfied only if the secured portion of the loan was paid down to 80 percent of the value of the property, permitting the debtor to "strip off" liens to the extent that they exceed the current value of the property, while providing the secured creditors conventional terms on the remaining portion of the lien. This section allows the debtor to reorganize overencumbered property in chapter 11, over the objection of its secured creditor, by reducing the mortgage debt to the current value of the property and retaining the property through a new-value contribution.
Sec. 253. Payment of Interest.
Section 362(d)(3), which prescribes the conditions required to impose the stay in SARE cases, requires the SARE debtor, within 90 days after the order for relief, to: (1) file a confirmable plan; (2) commence post-petition mortgage payments; or (3) obtain an extension of the 90-day plan-or-payment deadline. If the SARE debtor fails to perform any of these three options, secured creditors are entitled to relief from the automatic stay.
Title IV — Bankruptcy Administration
Sec. 404. Audit Procedures.
This section amends title 28 to delegate to the Attorney General the responsibility for establishing random audits of the accuracy and completeness of information filed in individual bankruptcy cases under title 11.
Sec. 410. Chapter 13 Plans to Have a Five-year Duration in Certain Cases.
The bill would amend §§1322(d) and 1329(c) to allow confirmation of plans with a life span of five years if the debtor’s current monthly income is at least 75 percent of the national median family income for a family of equal size (or at least 75 percent of the national median household income for one earner) or more on the date of confirmation. In such cases, it would also permit the court to approve a plan longer than five years up to a maximum of seven years.
Sec. 412. Jurisdiction of Appeals Relating to Bankruptcy.
This proposal would streamline and expedite the appeals process by eliminating the first step and allowing appeals to be taken directly to the U.S. Court of Appeals.
Sec. 441. Improved Bankruptcy Statistics.
The bill would create a new 28 U.S.C. §159 that would require the EOUST to compile statistics on bank-ruptcy cases involving individual debtors, and report these statistics annually to Congress.
Sec. 501. Treatment of Certain Liens.
This section provides that ad valorem taxes protected by liens are paid ahead of other expenses, except wage claims and claims for contributions to employee benefit plans, increasing the likelihood that local jurisdictions receive revenues which they would have received absent the operation of the Code.
Sec. 508. Chapter 13 Discharge of Fraudulent and Other Taxes.
This section provides that tax obligations arising from fraudulent returns, willful attempts to evade, and late and unfiled returns shall be non-dischargeable in chapter 13 cases.
Sec. 519. Setoff of Tax Refunds.
After a consumer files a petition in bankruptcy, a taxing authority is required to seek relief from the automatic stay on a case-by-case basis if it wants to offset a refund of pre-petition taxes against a claim for pre-petition taxes, even if the claim is not disputed. The cost to the government of prosecuting often uncontested and routine motions as a prerequisite to enforcing an undisputed, mutual obligation is substantial. Thus this section grants taxing authorities the ability to set off an income tax refund that arose pre-petition against an undisputed income tax liability which similarly arose pre-petition.
THE CONSUMER LENDERS AND BORROWERS BANKRUPTCY ACCOUNTABILITY ACT OF 1998
Section-by-section Analysis (excerpts)
Section 2: Discouraging Reckless Lending Practices.
Subsection 2(a) Limiting Claims Arising from Irresponsible Credit Extensions. Irresponsible conduct by a few aggressive lenders has contributed to the rise in bankruptcies. They should not be rewarded for their irresponsible conduct by then being allowed to use the bankruptcy system to divert the debtor’s assets away from honest and responsible creditors.
The subsection adds to the list of bases on which a creditor’s claim shall be disallowed under 11 U.S.C. §502(b):
—claims for unsecured credit which, when extended, pushed the debtor’s aggregate unsecured debts over 40 percent of the debtor’s annual gross income;
—claims for secured debt, specifically mortgages and second mortgages, that violated the prohibitions against unfair, deceptive or abusive lending practices in violation of the Home Ownership and Equity Protection Act of 1994;
—claims by creditors who refused to waive interest as part of a credit counseling program designed to help debtors avoid bankruptcy;
—claims by creditors for debts incurred in or adjacent to a gambling facility, or debt which the creditor knew or should have known was intended to be used by the debtor for gambling purposes.
Section 4: Stop Creditors’ Abuses of the Bankruptcy System.
Subsection 4(a): Sanctions for Creditor Abuses of the Bankruptcy System. This subsection provides penalties against creditors who force unnecessary litigation in bankruptcy cases by bringing inflated or frivolous claims.
Subsection (a)(1) would require the court to award to a consumer debtor reasonable attorneys’ fees and costs if a claim (other than a claim for alimony or child support) is disallowed or reduced by an amount representing more than 5 percent of the original claim or $500, whichever is less.
Subsection (a)(2) would require the court to award reasonable attorneys’ fees and costs if a creditor challenges the dischargeability of a debt, other than a domestic relations debt, and the debt is discharged.
Subsection (a)(3) provides penalties against creditors who violate the discharge or the automatic stay. Provides for damages of three times actual damages, but not less than $5,000, plus costs and attorneys’ fees, and in appropriate circumstances, punitive damages.
Subsection (a)(4) would increase the penalty for any willful violation of the automatic stay from actual damages, including costs and attorneys’ fees, to three times actual damages, but not less than $5,000, plus costs and attorneys’ fees.
Subsection (b): Dismissal. Provides for damages in the amount of three times the debtor’s actual damages (but not less than $5,000) and, in appropriate circumstances, punitive damages, if the court finds that a motion to dismiss a chapter 7 petition was not substantially justified.
Subsection 4(c): Prohibit Reaffirm-ations and Threats of Repossession Against Debtors Who Are Current in Their Payments. This subsection permits a debtor who is current on all payments on a debt, and who continues to make payments on time, to be protected against having a lien enforced, or having a payment schedule accelerated simply because the debtor has filed for bankruptcy.
This amendment would also prohibit so-called "reaffirmation agreements" under which a debtor contracts with a creditor to "reaffirm," making him or herself liable for the debt after it is discharged in bankruptcy.
Finally, this provision would give the court the option to allow a debtor in chapter 7 to redeem a piece of property in installments, and on such terms as the court may allow, rather than solely in a lump sum.
Section 6: Increase Incentives for Voluntary Repayment of Debts.
Subsection 6(a): Improved Credit Reporting for Chapter 13 Debtors. The proposed change would provide credit references from a consumer’s credit report five years after a successfully completed reorganization case is commenced under chapter 12 or chapter 13.
Subsection 6(b): Effective Implement-ation of Chapter 13 Plans. Some courts have imposed a minimum payment test in addition to the test contained in §1325. The amendment would make clear that only the criteria in §1325(a)(4) or (b) shall apply.
Subsection 6(d): 5-year Chapter 13 Plans. This amendment makes clear provisions of current law that allow a debtor to propose a chapter 13 plan of up to five years, but that the debtor may not be compelled to propose a plan longer than three years.
Section 7: Provide Fair Property Exemptions and Prevent High-rollers from Abusing the System:
Subsection 7(a): Permit Effective Use of Exemptions. This amendment would, without interfering with the right of states to enact exemptions of any size, including unlimited exemptions, make it difficult for debtors to shelter assets through clever pre-bankruptcy planning. The amendment would exempt only the first $100,000 of property converted to take advantage of any unlimited exemption, if the debtor converted the property within a year prior to filing for bankruptcy and while the debtor was insolvent.
Subsection 7(b): Establish a Modest Floor on Exemptions. This change would provide greater fairness in the bankruptcy system by establishing the existing federal exemption as a uniform national minimum exemption. States could still establish higher exemptions under state law.
Section 8: Prevent Abuse of Bankruptcy System by Debtors Who Can Afford to Pay Their Debts.
This provision strengthens the test under current law which allows the court to dismiss a chapter 7 case if the debtor is able to pay those debts in a chapter 13 plan.
It strengthens the test in 11 U.S.C. §707(b), by allowing the court to dismiss a chapter 7 case for "abuse," rather than the requirement under current law that the court find "substantial abuse."
The bill would require a court to dismiss a chapter 7 case for abuse if, after providing a reasonable standard of living for the debtor and the debtor’s dependents that is not excessive, providing for payments on secured debts, non-dischargeable debts, priority debts and arrearages on such debts, the debtor is able to pay the debtor’s unsecured non-priority debts as they come due or pay them in full over a 36-month chapter 13 plan, and the court, after consideration of all the circumstances finds the case to be an abuse of chapter 7.
Section 9: Prevent Abusive Bankruptcy Filings.
Subsection 9(a): Prevent Abuse of Bankruptcy Filings. This amendment would sort out the abusive cases from the non-abusive cases and deny the automatic stay to the abusive repeat filers. It is similar to the recommendations of the National Bankruptcy Review Commission.
If the debtor has filed two bankruptcy cases in the previous six years, and the second case was dismissed in the 180-day period ending on the date of the order for relief in a third case, then the automatic stay will be in effect for only 30 days unless the debtor goes to court and persuades the court to extend it.
Section 12: Prevent Windfalls for Undersecured Creditors.
Subsection 12(a): Invalidating Hidden Security Interests and Valueless Household Liens. Builds on the 1978 Bankruptcy Reform Act, by preventing creditors from retaining liens in household goods, such as clothes and appliances, with a purchase price of $1,500 or less. This provision is similar to a recommendation of the National Bankruptcy Review Commission, except that the Commission recommended eliminating liens on household goods with a current value of $500 or less.
Subsection 12(c): Treat Rent-to-Own Transactions as Credit Sales. The National Bankruptcy Review Commission has recognized that consumer "rent-to-own" transactions, in which consumers make weekly "rental" payments for appliances and furniture and become owners of the items after a certain number of payments are made, are in reality credit sales.
Subsection 12(d): Valuation of Secured Claims. This amendment puts in place a bright-line test for implanting a recent Supreme Court ruling concerning the valuation of secured claims. Associates Commercial Corp. v. Rash, 117 S.Ct. 1879 (1997). The amendment provides that the value shall not be more than the cash wholesale value of the property.
Section 13: Reinforce the Fresh Start.
Subsection 13(a): Restoration of an Effective Discharge. This amendment repeals certain exceptions to discharge. It would allow for discharge of debts incurred to pay non-dischargeable tax debts. The tax debts themselves would remain non-dischargeable.
Subsection 13(b): Protection of Retire-ment Funds in Bankruptcy. Although current law protects ERISA-qualified retirement plans in bankruptcy, many debtors who do not have access to ERISA plans are not similarly protected. This amendment would protect other types of retirement funds to the extent those funds receive favorable tax treatment.
Section 14: Clarifying Amendments.
Subsection 14(a): Clarifying the Anti-discrimination Provisions of the Code. This amendment clarifies that §525(a) prohibits discrimination in all governmental programs based solely on the fact that an individual has been in bankruptcy or has received a discharge.
Subsection 14(d): Treatment of Certain Leases in Chapter 7 Cases. This provision allows for "ride through" on leases of personal or residential property in chapter 7, following the rejection of the lease by the trustee.
Subsection 14(f): Clarifying Issue Preclusion and Vicarious Liability for Non-dischargeability Cases. This change would resolve a split in the case law concerning the preclusive effect of state court judgments in actions to determine the dischargeability of a debt by applying the federal rule that a prior default judgment shall not have issue-preclusive effect.