The U.S. Trustee Program (USTP) is committed to fulfilling its mandate to make bankruptcy reform work for all stakeholders in the system: debtors, creditors and the general public. Congress gave the USTP the responsibility for carrying out many key features of the bankruptcy reform law. From the enactment of the BAPCPA on April 20, 2005, through the general effective date of Oct. 17, 2005, the USTP engaged in an extraordinary effort to develop comprehensive implementation plans and issue guidance necessary to accomplish our new and expanded responsibilities.

In addition to devoting top attention to the enforcement and implementation of the BAPCPA, the USTP continues to make considerable efforts to report on its activities to the bankruptcy community and to the Congress. On April 26, 2006, I testified before the House Judiciary Committee's Subcommittee on Commercial and Administrative Law during an oversight hearing that also included officials from the Department of Justice's Executive Office for U.S. Attorneys, Civil Division, and Environment and Natural Resources Division. At that hearing, I discussed the USTP's ongoing civil and criminal enforcement activities, as well as our BAPCPA implementation activities. In this article, I would like to share with you some observations about our progress that I made in my congressional testimony and in recent briefings for House and Senate Appropriations and Judiciary Committee staffs.

Civil and Criminal Enforcement

For the past five years, the centerpiece of the USTP's anti-fraud and abuse efforts has been the National Civil Enforcement Initiative, which focuses on wrongdoing both by debtors and by those who seek to exploit debtors. Since FY 2003, more than 165,000 civil enforcement and related actions have been brought by the USTP, yielding $1.75 billion in monetary results. In FY 2005, more than 50,700 actions were initiated that generated nearly $594 million in potential returns to creditors through debts not discharged and other remedies. USTP attorneys prevailed in more than 96 percent of the actions resolved by judicial decision or consent in the key areas of dismissal for substantial abuse (11 U.S.C. §707(b)), denial of discharge (11 U.S.C. §727), fines against bankruptcy petition preparers (11 U.S.C. §110) and disgorgements of debtor attorneys' fees (11 U.S.C. §329).

Criminal enforcement is another key component of the USTP's efforts to promote the integrity of the bankruptcy system. In 2003, the Criminal Enforcement Unit (CREU) was established to coordinate the criminal referral responsibilities carried out by our 95 field offices and to directly assist prosecutors in pursuing bankruptcy crimes. The CREU has made a marked difference in the quality of our criminal program by providing extensive training, developing resource materials and enhancing coordination for the benefit of USTP staff, federal prosecutors and other law enforcement personnel. In FY 2005, the USTP made 744 criminal referrals, a 12 percent increase over FY 2004. In many cases, USTP lawyers directly prosecuted or assisted the prosecution team in cases initiated as a result of criminal referrals made by USTP offices. In addition, the majority of USTP field offices participate in bankruptcy fraud working groups, which are headed by U.S. Attorneys' offices and include other federal law enforcement and investigative agencies. Moreover, with the enactment of 18 U.S.C. §158 as part of BAPCPA, every U.S. Attorney's office is required to designate a prosecutor and every FBI field office an agent who will assume primary responsibility for bankruptcy fraud cases. This provision will strengthen existing bankruptcy fraud working groups by formalizing points of contact and will provide a foundation for establishing new working groups.

BAPCPA Filing Numbers

The unprecedented number of bankruptcy filings in the four weeks leading up to Oct. 17, 2005, surprised all observers and added substantially to the USTP's ongoing civil and criminal enforcement duties. In addition to handling the challenges of implementing bankruptcy reform after BAPCPA's general effective date, the USTP faced the burden of administering more than six times the normal volume of cases. In the four weeks before Oct. 17, 2005, more than 726,500 cases were filed in the 88 judicial districts covered by the USTP. By contrast, post-Oct. 17 filings have decreased substantially, with only about 140,000 cases filed between the BAPCPA's effective date and the end of March 2006. The filing rate is increasing at a moderate pace, but remains well below pre-BAPCPA levels. In addition, the mix of chapter 7 and chapter 13 cases has changed in the cases filed since the BAPCPA's general effective date. Pre-BAPCPA, about 70 percent of cases were filed under chapter 7 and about 30 percent were filed under chapter 13. Since BAPCPA took effect, about 45 percent of cases have been filed under chapter 7 and about 55 percent have been filed under chapter 13, although there are indications that the mix is changing back toward historic patterns.

No commentators predicted such a large bulge in pre-reform filings or such a fall-off immediately afterward. It is impossible to draw firm conclusions about filing trends or BAPCPA results based on the current anomalous situation. There are signs that bankruptcy reform is producing positive results, but the real test will come after a greater passage of time and when filing levels rise to more normal levels.

Means Testing

One of the USTP's primary new responsibilities under BAPCPA is the implementation of the means test in chapter 7. Means testing is helping to identify abusive cases and is providing the USTP with necessary enforcement discretion to decide whether to file or decline to file a motion to dismiss a "presumed abusive" case. Of the debtors who filed chapter 7 cases between Oct. 17, 2005, and March 31, 2006, about 5 percent had incomes above the applicable median state income and were therefore subject to the full means test to determine if the case was "presumed abusive." (Before Oct. 17, about 15 percent of cases—or three times the current percentage—were filed by debtors with income above the applicable state median income.) About 10 percent of the above-median cases filed under BAPCPA, or one-half percent of total cases, have been determined to be "presumed abusive" under the means-testing formula. The USTP filed motions to dismiss in approximately 70 percent of the "presumed abusive" cases that were not voluntarily converted or dismissed. Thus, U.S. Trustees exercised discretion to find that it would not be "appropriate" to file a motion against debtors in about 30 percent of the "presumed abusive" cases. The most common reasons for declining to file a motion to dismiss were that the debtor was a victim of Hurricane Katrina, which supported an expense adjustment as a "special circumstance," or that the debtor experienced a post-petition change in status, such as seasonal employment or disability, which supported an income adjustment as a "special circumstance."

The number of filings is relatively low and, due to the time frames for filing such motions, the pool of cases processed at this point is lower still. The decision to file a motion to dismiss must be made 30 days after the initial determination, which is made within 10 days after conclusion of the §341 meeting, which must be held within 40 days after filing. Accordingly, cases filed within the previous 80 days may just be approaching the filing date for a "presumed abusive" motion. In addition, a significant number of debtors have voluntarily dismissed their cases or converted their cases to chapter 13 after the U.S. Trustee filed a statement of "presumed abuse," rendering a motion to dismiss unnecessary. Further, to some extent, means testing may be self-enforcing. By performing the means-testing calculations, a debtor can determine if his or her case will be presumed abusive unless special circumstances are shown. This may affect the debtor's choice of chapter and/or the decision to file under any chapter.

Credit Counseling and Debtor Education

Another significant new responsibility for the USTP is the approval and monitoring of pre-filing credit counseling agencies and post-filing debtor education providers. The credit counseling and debtor education provisions of the reform law provide potentially salutary protections for consumer debtors by helping to ensure that debtors enter bankruptcy with full knowledge of their options and exit with information to help them avoid future financial calamity.

As of the end of March 2006, the USTP had approved 142 credit counseling agencies covering 88 judicial districts for pre-bankruptcy counseling. In addition to credit counseling agencies that offer Internet and telephonic access, there are 754 walk-in locations for credit counseling in 82 judicial districts. For post-bankruptcy debtor education, the USTP had approved 241 debtor education providers covering 88 judicial districts by the end of March 2006. In addition to debtor education providers offering Internet and telephonic access, there are 915 walk-in locations in 82 judicial districts. Agencies and/or providers offer services in nearly two dozen languages.

The USTP has been commended by consumer groups for developing an effective screening process to keep out unscrupulous providers. Applications and re-applications from credit counseling agencies and debtor education providers are received and processed continuously. The USTP is processing complete applications within 30 to 45 days of receipt, and USTP staff work with applicants where there are deficiencies to collect additional information as needed. About 200 applications for approval as a credit counselor or debtor education provider have been denied or withdrawn. Common reasons for denial of approval as a credit counselor include failure to turn over documents related to an ongoing IRS audit, lack of an independent board of directors, and improper financial tie-ins with third-party vendors. Delay or denial of debtor education provider applications generally relate to inadequate materials, failure to employ trained personnel and fee-disclosure issues. In the near future, the USTP will publish a notice of proposed rule-making in which we will seek public comments on more extensive regulations to be imposed upon providers.

The USTP monitors approved credit counseling agencies to ensure their conduct comports with the statutory requirements. For example, the USTP makes clear that credit counseling agencies may not provide legal advice except as authorized by law. We distinguish between explaining the general consequences of bankruptcy so that a debtor understands the alternatives to bankruptcy and advising a debtor about what will happen to the debtor's home, car and other property if a bankruptcy case is filed. Similarly, while the USTP does not prescribe the criteria for fee waiver by credit counseling agencies, we require agencies to disclose that services must be provided without regard to ability to pay, we review fee schedules and we act on complaints that agencies have refused to waive fees.

The USTP has exercised discretion in enforcing the requirement that a debtor provide a certificate of credit counseling when filing bankruptcy. We have filed about 900 motions to dismiss for failure to file a certificate. Enforcement varies by district because local court rules vary. At the USTP's suggestion, the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States recommended changes to the bankruptcy petition to reduce dismissals for lack of knowledge of the credit counseling requirement. Chief Bankruptcy Judge Eugene Wedoff of the Northern District of Illinois developed an exhibit to the petition that would notify the debtor of the pre-filing credit counseling requirement and provide a simple "check the box" format to show that the statutory requirements were met. These recommendations will be considered by the Judicial Conference's Committee on Rules of Practice and Procedure.

Conclusion

This is a time of unprecedented opportunity for the USTP to make bankruptcy reform work for all stakeholders in the bankruptcy system, including debtors, creditors and the public. The new law provides many important tools that will help us enhance the integrity and efficiency of the bankruptcy system. Enforcement and implementation of the new law has created many daunting challenges, but we believe that the USTP is off to an excellent start. I look forward to providing updated reports on our progress, and I welcome comments and suggestions from the bankruptcy community