Needs-based BankruptcyOn What Is the Need Based
Where is a raft of new bankruptcy legislation surfacing in Congress in the wake of the submission of the report last fall from the National Bankruptcy Review Commission. There is Rep. McCollum’s (R-FL) bill, H.R. 2500 (the "Responsible Borrower Protection Act"), introduced last fall, followed shortly thereafter by S. 1301, introduced by Senators Grassley (R-IA) and Durbin (D-IL). After Congress reconvened in January, Rep. Gekas (R-PA) introduced a bill similar to the McCollum bill, H.R. 3150, followed in February by Rep. Nadler’s (D-NY) H.R. 3146 (the "Consumer Lenders and Borrowers Bankruptcy Accountability Act").
Who would have thought two years ago that the first bills to be proposed in response to the Commission’s Report would be consumer-related? For that matter, who would have thought that it would have been the consumer issues that generated the most contentious debates before (and within) the Commission? With consumer bankruptcy filings skyrocketing over the last few years, however, and with credit card default rates climbing during the same period, the phenomenon has begun to attract press attention, and heightened media scrutiny often leads to a flurry of legislative proposals. Of course, there are interest groups too that have been pushing for legislative changes in the Bankruptcy Code (the credit card industry comes immediately to mind), and the increased scrutiny that has been focused on the system has made it easier for these groups to make their case with legislators.
The new bills (except for Rep. Nadler’s bill) propose some sort of means testing as a predicate to eligibility for chapter 7 relief. They also modify the definitions used in chapter 13 so as to assure that at least some amount is paid to unsecured creditors. The obvious design, of course, is to push persons away from simply "writing off" their debts in chapter 7 and push them toward the voluntary repayment system in chapter 13. The mechanisms proposed are, however, quite foreign to what judges and practitioners are currently accustomed to working with.
Both the McCollum and Gekas bills start with a benchmark—75 percent of the national median family income. If a family’s income is over that amount, then a test will be applied before it will be eligible for chapter 7 relief. If the family is under that amount, then the test would not be applied, and the family would be free to file under chapter 7. Now, as it turns out, the national median family income is not such a hard number to retrieve. The Bureau of Census maintains a web site (http://www.census.gov.), and the national median family income can be easily retrieved. For a family of four, it’s $51,518, as of calendar year 1996 (the last date for which the information was available). So the cutoff mark, 75 percent, would have been $38,638.50 for a four-person family. That’s gross monthly income (for those of us who are more comfortable with schedule I and J), of about $3,236.50. After taxes, one would expect a monthly take-home pay of about $2,800 or so.
I worked up those figures recently because I was working on a paper on the topic. Then, just a day or two ago, I had an application to incur debt, filed by a family that has been in chapter 13 now for about 18 months. They wanted to buy a mobile home. Our local procedures require that a debtor filing such an application must file a "before and after" set of schedules I and J, so the court, creditors and the chapter 13 trustee can evaluate the impact of the debt incurrence on the budget and the ability of the debtor to make plan payments. If no one objects, these motions can be turned around in about 10 days, without anyone having to appear for a hearing.
In reviewing the schedule I and J, I realized that this family’s income did not rise to the 75 percent cutoff level set out in either the Gekas or McCollum bills! If those bills had become law, the needs-based test would not even have applied to this family, and they could have filed chapter 7 without question. What is more, they could not have pursued chapter 13 relief under either the Gekas or McCollum bills, because of the way the allowed expenses and required contract payments work.
There’s a mandatory minimum of $50 a month that has to be paid to unsecured creditors under any plan—but that’s after deducting all of the contract payments due to secured creditors, all of the priority obligations (including taxes, attorneys’ fees and, perhaps, the chapter 13 trustee fee), and the allowable expenditures that a family of four is permitted to have. These allowable expenditures are figured by consulting the Collection Standards used by the Internal Revenue Service when it is working out repayment schedules for delinquent taxpayers. This information, too, is available on the Internet. Go to http://www.irs.gov/prod/ind_info/coll_
stds/index.html, and you can find out how much the IRS thinks a family of four should be able to live on. According to the IRS, this family’s expenses, with a monthly income of about $3,200 gross, are $1029 a month for food, clothing, and other items (assuming the family lives in San Antonio, Texas), $1012 for housing costs and utilities, $335 for the first vehicle, and $269 for the second vehicle (like most Midwestern and Southern cities, San Antonio does not have a mass transit system beyond the bus system), and another $279 for vehicle operating expenses. That all totes up to $2,924—which is more than this particular family’s take-home pay!
This was a shock. A typical family of four bringing home $2,800 a month would not be permitted to confirm a chapter 13 plan, because there would not be anything left over to pay unsecured creditors. They not only could file for chapter 7. They would seemingly have no choice. What a fascinating result, given what I was looking at the actual schedules I and J of an actual family that was bringing home less than the amounts we are talking about here, but was paying their unsecured creditors 100 percent of their claims!
Now I have been looking at this kind of information for some time now, because we have a lot of chapter 13 cases. Maybe there is abuse somewhere in these United States, but if it’s present in San Antonio to any great degree, it is well-hidden, because I’m not seeing it. Most of the people who seem to file bankruptcy under either chapter in this part of the world do not even show up on the radar screen, much less trigger any sort of scrutiny when it comes to the levels of income and ability to repay debt. Yet, despite that, we have a very large percentage of families who do not file for straight bankruptcy, but who instead seek out chapter 13 and try to repay their creditors.
The exercise brought to mind some-thing my mother used to tell me when I was a kid—look before you leap. The bills that are now being discussed in the halls of Congress seem all to be based on anecdotal information, and to grow out of assumptions that have been made about who is filing bankruptcy these days and why. I can’t say that those assumptions are right or wrong—only that they do not match up with my experience on the bench with actual cases.
Wednesday, April 1, 1998