An Updated Analysis of the Consumer Bankruptcy Provisions of H.R. 833 Bankruptcy Reform Act of 1999, As passed by the House of Representatives Prepared for the American Bankruptcy Institute
Web posted and Copyright © November 1, 1999, American Bankruptcy Institute.

An Updated Analysis of the Consumer Bankruptcy Provisions
of H.R. 833 Bankruptcy Reform Act of 1999,
As passed by the House of Representatives

Written by:
Hon. Eugene R. Wedoff
United States Bankruptcy Court
Northern District of Illinois
Chicago, Illinois

H.R. 833, passed by the House of Representatives on May 5, 1999, proposes major changes in the Bankruptcy Code (Title 11, U.S.C.). A parallel bill, S. 625, is pending in the Senate. H.R. 833 and S. 625 build on two bills—H.R. 3150 and S. 1301—that were passed by the separate houses of the 105th Congress last year, but which were not enacted into law. The American Bankruptcy Institute published analyses of the consumer provisions of each of the prior bills, see http://www.abiworld.org/legis/bills/98julhr3150.html and http://www.abiworld.org/legis/bills/98julnew1301a.html.

This analysis of H.R. 833 follows the format of the prior analyses: first, by identifying each of the changes that the bill would make in the current consumer law; second, by assessing the impact that these changes would have on the operation of the law; and third, by suggesting alternative approaches, where appropriate, to achieving the goals of the legislation. Several of the suggested alternatives reflect work done by the Consumer Bankruptcy Legislative Group—a group of individuals assembled to represent diverse interests affected by consumer bankruptcy law. The complete recommendations of the group have also been published by ABI: http://www.abiworld.org/legis/reform/rec4000.html.

Introduction to current consumer bankruptcy law.(1)

An Introduction to Proposed Bankruptcy Reform http://www.abiworld.org/legis/bills/s1301intro.html provides a description of the operation of current consumer bankruptcy law, which may be helpful in understanding the changes proposed in H.R. 833.

Summary: major effects of the consumer bankruptcy provisions of H.R. 833.

The major effects that H.R. 833 would have on consumer bankruptcy law include the following (with reference made to the relevant section(s) of the bill):

Chapter 7

1. Means testing. §102. Section 707(b) of the Bankruptcy Code would be 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 would be presumed if the debtor had more than $100 in monthly income available to pay general unsecured debt, based on a formula incorporating collection standards of the Internal Revenue Service. The case trustee would be required to file a statement as to the calculation under the formula in each case, which the court would be required to serve on creditors, and, if the presumption applied, the trustee would be required to file either a motion under §707(b) or a statement explaining why the motion was not being filed. There are conflicting provisions regarding standing to bring §707(b) motions, but such standing would be extended to all parties in interest in cases where the debtor's income is above a defined median.

2. Compensation of trustees for means testing. §§102, 607, 614. No additional compensation would be provided to trustees for work involving means testing that does not involve conversion or dismissal of the case. Section 707(b) would be amended both to require the court to award damages if it finds that a Chapter 7 filing violates Fed.R.Bankr.P. 9011, and to specify that these damages may include an award of fees and costs from debtor's counsel to the trustee or a civil penalty payable to the trustee. Moreover, §§101 and 607 of H.R. 833 are intended to extend Rule 9011 to the debtor's lists and schedules. In the event that the actions of the trustee result in conversion or dismissal of a Chapter 7 case, the trustee would be allowed an administrative claim for compensation and expense reimbursement for these actions. This claims would not be subject to the fee cap of §326 and would be payable if the case converted to Chapter 13 case or in any subsequently filed Chapter 13 case.

3. Support priority. §139. Family support obligations of the debtor would have the first priority in distribution, ahead of the costs of administering the estate.

4. Nonsubordination of property tax liens to family support claims. §801. 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 would be 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 would be used to pay the taxes before the support obligations.

Chapter 13

1. Stripdown of secured claims. §§122, 123. Claims secured by purchase money security interests arising within five years of the bankruptcy filing would not be subject to stripdown under §506(a). Where stripdown remained applicable, collateral would be valued at its retail price.

2. Preconfirmation adequate protection. §135. Prior to distributions to creditors under a confirmed Chapter 13 plan, debtors would be required both to make proposed plan payments and adequate protection payments to lessors of personal property and holders of secured claims. The adequate protection payments would have to be made at least monthly and in at least the contract amounts.

3. Delay in confirmation. §605. Even in the absence of objections to confirmation, the confirmation hearing could not take place until at least 20 days after the §341 meeting of creditors.

4. Plan length. §606. Debtors whose income is above a defined median would be required to pay their creditors either in full or through a plan with a length of five years.

5. Exceptions to discharge. §§127, 807. 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), (2), (3)(b), (4), and—insofar as personal injury or wrongful death is concerned—(6).


1. Tax returns. §§603(b), 604. Individual debtors would generally be required to file with the court copies of their tax returns for the three year period preceding the bankruptcy as well as all returns filed with taxing authorities while the bankruptcy case is pending. The returns could be inspected by any party in interest, subject to regulations designed to prevent use other than in the bankruptcy case. Failure to file the prebankruptcy returns within 45 days of the bankruptcy filing (or within one extension for a maximum of 45 days) would result in automatic dismissal of any voluntary filing.

2. Audits. §602. Audits, conducted by certified or licensed public accounts in accordance with generally accepted auditing standards, would be required (1) of all information provided by the debtors in at least 0.4% of consumer cases, randomly selected, and (2) of any schedules of income and expenses that "reflect greater than average variances from the statistical norm."

3. Credit counseling. §302(a). Individuals would be ineligible for relief under any chapter of the Code unless they had, within 90 days of their bankruptcy filing, received credit counseling—through a service approved by the United States trustee or bankruptcy administrator —that included, at least, a briefing on the opportunities for credit counseling and assistance in performing an initial budget analysis. Exceptions would be made (1) for districts in which adequate services were unavailable and (2) for debtors with exigent circumstances requiring filing before the counseling could be obtained (in which case the debtor would be required to complete the counseling within 30 days after the bankruptcy filing).

4. Debtor education. §§104, 302(b)-(c). Pilot educational programs for debtor financial management would be tested in six judicial districts over an 18 month period, and thereafter evaluated for effectiveness and cost. At the same time, all Chapter 7 debtors would be subject to denial of discharge under §727, and Chapter 13 debtors would not be granted a discharge, if they failed to complete an instructional course concerning personal management, unless the United States trustee or bankruptcy administrator determined that approved courses were inadequate.

5. Successive discharges. § 137. Debtors would be denied discharge in any Chapter 13 case filed within five years of the order of relief in any other bankruptcy case in which the debtor received a discharge. A Chapter 7 case would be subject to denial of discharge under §727 if the debtor received a Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case.

6. Notice to creditors. §603(a). Notice to a creditor would not be effective unless served at the address filed by the creditor with the court or at the address stated on the last communication from the creditor to the debtor.

7. Exemptions. §§ 124, 147. There would be a 730-day residency requirement before a debtor could claim state exemptions. A $250,000 cap would be placed on homestead exemptions, but would be able to be waived by express state legislation.

8. Reaffirmations. §108. Reaffirmations of unsecured debt would require a court hearing unless the debtor was represented by counsel and waived the hearing requirement.

9. Appeals. §612. Final decisions of bankruptcy judges would be appealable directly to the circuit courts of appeal unless the circuit had established bankruptcy appellate panels (BAPs). Where BAPs were established, the appeal would be presented to the BAP unless a party to the appeal elected to have the court of appeals hear the case.

The consumer bankruptcy provisions of H.R. 833: specific proposals.

H.R. 833 is divided into 12 titles, seven of which contain provisions that affect consumer bankruptcy. Most of the relevant provisions are included in Title I, "Consumer Bankruptcy Provisions." However, provisions affecting consumer bankruptcy are also included in Title II, "Discouraging Bankruptcy Abuse"; Title III, "General Business Bankruptcy Provisions"; Title VI, "Streamlining the Bankruptcy System"; Title VII, "Bankruptcy Data"; Title VIII, "Bankruptcy Tax Provisions"; and Title XI, "Technical Corrections." This analysis discusses only those sections of these titles that would have a significant effect on consumer bankruptcy. Finally, there is a discussion of the single section of Title XII, "General Effective Date; Application of Amendments." For each section discussed, a reference is made to any section of S. 625 dealing with the same subject.

Title I ("Consumer Bankruptcy Provisions")

Subtitle A—"Needs based bankruptcy"

§101 ("Conversion") (See S. 625, §101)

Changes. Section 706(c) of the Bankruptcy Code currently provides that the court may not convert a Chapter 7 case to a case under Chapter 12 or 13 unless the debtor requests such a conversion. As amended, Section 101 provides that conversion could also be ordered when the debtor consents to it.

Impact. This section would operate primarily in connection with motions to dismiss Chapter 7 cases brought against a debtor under §707(b) of the Code. Under current law, there may be a question of whether, instead of ordering dismissal in connection with such a motion, the court, with the debtor's consent, could order conversion of the case to Chapter 13. Section 101 would clarify that the option of conversion is available to the debtor in such situations. Because H.R. 833 expands the circumstances under which Chapter 7 cases are subject to dismissal under §707(b)—see the discussion of §102, below—this clarification may be helpful.

§102 ("Dismissal or conversion") (See S. 625, §102)

This provision is the subject of Recommendations 1 and 2 of the Consumer Bankruptcy Legislative Group.

Changes. Section 102, the central provision for the "needs-based" bankruptcy approach of H.R. 833, operates by broadening §707(b) of the Bankruptcy Code. Section 707(b) currently provides for dismissal of Chapter 7 cases if granting relief under Chapter 7 would be a "substantial abuse" of the provisions of Chapter 7. "Substantial abuse" is not defined, and standing to bring a motion for dismissal under §707(b) is limited—it may be brought only by the United States trustee or by the court, and "not at the request or suggestion of any party in interest." Section 102 would change §707(b) in the following respects:

(1) The proposal would change the ground for relief from "substantial abuse" to simple "abuse" of the provisions of Chapter 7, and would remove the current presumption in favor of the form of bankruptcy relief chosen by the debtor.

(2) If abuse is found, the proposal would allow, with the debtor's consent, conversion to Chapter 13 (but not Chapter 11) as an alternative to dismissal.

(3) Although "abuse" would continue to be undefined, two sets of considerations would apply in a court's determination of §707(b) motions: (a) a presumption of abuse would arise in defined circumstances, and (b) general factors would be applicable where the presumption did not arise.

(4) The presumption of abuse would arise under an amended §707(b)(2) where the debtor's "current monthly income"—after specified deductions—was at least $100 ($6,000 over 60 months). "Current monthly income" would be defined as the monthly income received by the debtor (and the debtor's spouse in a joint case), averaged over the 180 days "preceding the date of determination," together with amounts regularly contributed by others to the debtor's household expenses, but not including war crime reparations or Social Security benefits. Five deductions would be made from this amount:

(a) "Estimated administrative expenses and attorneys' fees." This deduction would be defined as "10 percent of projected payments under a chapter 13 plan."

(b) Monthly living expenses as prescribed under standards issued by the Internal Revenue Service for collection of unpaid taxes, with modifications. The expense allowances under the IRS collection standards fall into three categories: National Standards, covering food, housekeeping supplies, clothing, services, personal care products, and miscellaneous expenses; Local Standards, covering housing and transportation; and Other Necessary Expenses, covering taxes, health care, court ordered payments, involuntary wage deductions, accounting and legal fees, and other expenses necessary to produce the debtor's income.(2) Debtors would be limited to deducting the amounts set out in the national IRS standards—except that the IRS allowances for food and clothing could be increased by up to 5% "if it is demonstrated that it is reasonable and necessary." Debtors would also be limited to deductions for housing and transportation set out in the IRS local standards, without including payment of debt (such as home mortgages and auto loans). Finally, for items in the IRS's "other necessary expenses" category, debtors would be allowed to deduct their actual expenses, including "the continuation of actual expenses of a dependent child under the age of 18 for tuition, books, and required fees at a private elementary or secondary school, not exceeding $10,000 per year."

(c) Monthly secured debt payments, defined as all secured debt payments contractually due in the 60 months following the filing of the bankruptcy petition, divided by 60.

(d) Monthly priority debt payments, defined as the total amount of priority debt divided by 60.

(e) Monthly charitable contributions. Section 707(b),as amended by H.R. 833, would continue to provide that in determining whether to dismiss a case under §707, the court may not "take into consideration whether a debtor has made, or continues to make, charitable contributions." "Charitable contributions" are defined to allow up to 15% of a debtor's gross income to be paid to any tax-qualified charitable organization.

(5) Where the presumption arose—that is, where the debtor's "current monthly income," less the five categories of deductions, was at least $100—the debtor would be able to prevail against a §707(b) motion only "by demonstrating extraordinary circumstances that require additional expenses or adjustment of current monthly income" and showing that these extraordinary circumstances were sufficient to reduce the debtor's income after allowable expenses to less than $100 monthly. In order to make such a demonstration, the debtor would have to "itemize each additional expense or adjustment of income and provide documentation for such expenses or adjustment of income and a detailed explanation of the extraordinary circumstances which make such expenses or adjustment of income necessary and reasonable," and the accuracy of all such itemized information would have to be attested to, under oath, by the debtor and the debtor's attorney.

(6) Where the presumption did not arise—that is, where the debtor's "current monthly income," less the five categories of deductions, was less than $100—or where the presumption was rebutted, a court ruling on a §707(b) motion would be required to consider (a) whether the debtor filed the petition in bad faith, and (b) whether the "totality of the circumstances . . . demonstrates abuse."

(7) The debtor's schedules of current income and expenses (currently set out on Schedules I and J) would be required to include a statement of "current monthly income," together with calculations showing whether there would be a presumption of abuse under §707(b). The Federal Rules of Bankruptcy Procedure would be required to be amended so as to prescribe a form for these schedules. The trustee would be required to review the materials submitted by the debtor, and, within 10 days after the §341 meeting of creditors, file a statement with the court as to whether the debtor's schedules would give rise to a presumption of abuse. The court would be required to provide a copy of the statement regarding the presumption to all creditors within five days of its filing.

(8) If the presumption applied, and if the debtor's income was at least equal to a defined national median, then the trustee would have the obligation to file either a motion under §707(b) or a statement as to why such a motion was not being filed.(3)

(9) The current limitation on standing to bring a motion under §707(b) would be reversed, with amended §707(b)(1) affirmatively providing that the motion could be made by "the trustee or any party in interest." However, there would be different and inconsistent limitations on standing to bring a motion under §707(b), depending on whether the presumption was involved. In order for the presumption to be invoked by any party, the debtor's income would have to be above a defined regional median.(4) But for a creditor to bring any motion under §707(b)—even a motion that did not involve the presumption—the debtor's income would have to at least equal to the national median applicable to the trustee's mandatory filing.(5)

(10) If a panel trustee brought a successful motion under §707(b), and if the debtor's attorney violated Fed.R.Bankr.P. 9011 by filing the case under Chapter 7, the court would be required to award damages against the debtor's attorney, which could include both reimbursement of the trustee's expenses and an award of a civil penalty to the trustee. The signature of the debtor's attorney on a bankruptcy petition would be declared to constitute a certificate that the debtor's "petition, lists, schedules, and documents" are "well grounded in fact."

(11) If a party other than a trustee or United States trustee brought an unsuccessful motion under §707(b), and if the court found that the motion was not substantially justified or that the party brought the motion solely to coerce the debtor into waiving a right under the Bankruptcy Code, the court would be authorized to award the debtor all reasonable costs in contesting the motion, including attorneys' fees.

(12) Within three years of the enactment of the amendments, the Director of the Executive Office for the United States Trustees (EOUST) would be required to submit a report to Congress on the utility of the IRS collection standards in measuring abuse under §707(b).

Impact. The purpose of means-testing is to deal with debtors who have the ability to make substantial payments, from current income, to their general unsecured creditors. Under means-testing, these debtors would be denied the right to obtain an immediate discharge of their indebtedness in Chapter 7, under which (depending on the applicable exemption law) they may make little or no payments to general unsecured creditors. The means-testing procedures of H.R. 833, as passed, address several of the problems of earlier proposals, but still present significant difficulties in accomplishing the goal of means-testing:

(1) The presumption of abuse would frequently be difficult to apply or arbitrary. At each step in its application, there are problems with H.R. 833's formula for determining whether a debtor has at least $100 per month available to pay general unsecured debt, and hence should be presumed to be abusing Chapter 7.

  • Determining the total income available to the debtor. In applying the presumption formula, the first step is to determine the debtor's current gross monthly income. There are several problems in this step.

    First, there is no apparent justification for excluding Social Security benefits from income—the source of funds received by a debtor in no way affects the debtor's ability to pay debts. Thus, for example, there would seem to be no reason why a debtor who chooses early retirement and lives on a combination of investment earnings and social security benefits should be treated as having less income than an individual who obtains the same amount of money through continued employment.

    Second, the bill directs that income be averaged over the 180 days preceding the "date of determination." It is unclear whether this date would be the date of the preparation of the debtor's schedules (which could be substantially before filing the bankruptcy case), the date of filing (which could require last-minute changes in the debtor's schedules), or some later date, such as the date of a hearing in which the application of the presumption is being determined (in which case, the schedules would often be unable to reflect the appropriate income figure).

    Third, a 180-day period would often produce anomalous results. Because 180 days is always less than six months, debtors who are paid monthly will often have only five paydays during the 180-day period preceding their bankruptcy filing, artificially reducing current monthly income.

    Fourth, and similarly, the 180-day average will produce anomalous results for seasonal workers; for example, debtors who earn most of their income during the summer would show an artificially high total income if the 180-day period ended in the middle of fall, and an artificially low income if the period ended in mid-spring.

    Fifth, and most significantly, the total income determined by a 180-day average will simply be inaccurate whenever the debtor's income has permanently changed during the 180-day period. For example, a debtor may file a bankruptcy case after a prolonged period of unemployment, but shortly after getting a new permanent job, in which case the salary of the new job would be artificially reduced by the lower income during the period of unemployment. Conversely, a debtor who files a Chapter 7 case shortly after obtaining a new permanent job with substantially reduced income, would have the presumption calculated based on an artificially high income. H.R. 833 provides for a debtor to show extraordinary circumstances justifying a reduction from the 180-day average, but there is no provision for disclosure of factors indicating that a debtor's actual income is higher than the average.

  • Deduction of administrative expenses and attorneys' fees. Once a debtor's current monthly income is determined, the formula for the presumption requires that several expense items be deducted. The first of these is administrative expenses and attorneys' fees, defined as "10 percent of projected payments under a chapter 13 plan." This definition is ambiguous. It could mean (a) all payments that a debtor would make under the plan, including direct payments to creditors like mortgagees, (b) only the payments that the debtor would make to the Chapter 13 trustee, or (c) the payments that the Chapter 13 trustee would make to creditors. Of these possibilities, the second is perhaps the most likely, since this would approximate the actual administrative expenses that would be incurred by a trustee in disbursing funds to creditors under a Chapter 13 plan, pursuant to 28 U.S.C. §586(e)(1)(B). However, even with this understanding, there would still be substantial questions about how much would be paid by the debtor to the trustee in a Chapter 13 case. Most significantly, this sum would vary greatly depending on whether the debtor would have current mortgage payments made by the Chapter 13 trustee or paid directly. For example, if the debtor had a monthly mortgage payment of $2000, the administrative expense deduction would be $200 greater if it assumed that the mortgage would be paid by the trustee in a Chapter 13 plan.

  • Deduction under IRS "National Standards." The first of the monthly living expenses to be deducted under the means-test formula are the "National Standards" that allowed by the Internal Revenue Service. These standards set out specific allowances— regardless of the debtors' actual expenditures—for items such as food, clothing, and household supplies, on a nationwide basis. Because the standard is nationwide, it would discriminate against debtors in areas with a higher-than-average cost of living. Moreover, because the statute would allow an increase of up to 5% for food and clothing allowances "if it is demonstrated that it is reasonable and necessary," a discretionary determination of reasonableness will be required whenever a debtor claims the increase.

  • Deduction under IRS "Local Standards." The IRS "Local Standards" include deductions from income for housing and transportation costs, set out on a regional basis. In contrast to the national standards, the IRS Manual states that the local standards are maximum allowances—if the debtor's actual housing or transportation costs are less, then the actual costs are to be applied. Thus, in order to apply the local standards, the debtor's actual housing and transportation costs must be determined in every case. Another set of problems would arise from the bill's requirement that "the debtor's monthly expenses shall not include any payments for debts." The IRS's local standards include payments for debt. The local standards for transportation include an "ownership" component to cover monthly loan or lease payments and the housing standards are intended to cover the cost of obtaining housing, including rent or mortgage payments. Thus, in order to apply the local standards under the bill, the auto loan and home mortgage payments must be deleted from the amounts allowed by the standards. For the transportation standards, this can be done, because the standards separate ownership costs from operating costs. A debtor who owned an automobile would therefore be allowed only actual operating costs, up to the maximum specified by the standards. However, it is not possible to similarly apply the local standards for housing to debtors who pay home mortgages, since the IRS provides a single allowance to cover the cost both of acquiring and maintaining housing. For example, the housing allowance for a family of four in Cuyahoga County, Ohio is $1069 monthly. There is no way to know what part of this allowance should be deducted in order to account for a mortgage payment. If the debtor's mortgage payment is $500 per month, it is not clear that $569 should be allowed as a maximum cost for items such as insurance, utilities and repairs. On the other hand, if the debtor's mortgage is $1100, it can hardly be that the debtor should receive no monthly allowance for maintaining the home. For debtors with mortgages, the IRS local standard simply cannot be meaningfully applied in the manner directed by H.R. 833.

  • Deduction for "Other Necessary Expenses." The IRS collection standards recognize that there are a number of expenses that debtors may have, that (1) are either necessary to provide for the health and welfare of the debtor and the debtor's family or necessary for the production of income, but (2) are not covered by the national and local standards. The IRS allows for such expenses in the amounts established as necessary by the taxpayer. The IRS Manual (at §5323.434) sets out two different lists of categories into which these "other necessary expenses" may fall, but the Manual also states: "The expenses listed . . . do not exhaust the category of necessary expenses. Other expenses may be considered if they meet the necessary expense test: health and welfare and /or production of income." The incorporation of the IRS's "Other Necessary Expenses" into H.R. 833's presumption formula raises several questions. The bill specifies that the debtor should be allowed "actual monthly expenses for the categories specified as Other Necessary Expenses." This appears to imply if the debtor's expenses fit within categories specified in the Manual as Other Necessary Expenses, then they should be allowed in the amounts actually expended by the debtor, even if these amounts are not shown to be necessary. For example, one category specified in the Manual in the "Other Necessary Expenses" category is child care. Exhibit 5300-46 of the IRS Manual states: "Care should be taken to ensure that only a reasonable amount is allowed. Costs of child care can vary greatly. We should not allow expensive child care if more reasonable alternatives are available." The bill would appear to contradict this provision of the Manual, requiring a deduction for purposes of the presumption formula for whatever child care expenses are actually incurred by the debtor. On the other hand, a debtor may have an expense necessary for the welfare of the family but not specifically identified in the IRS Manual. For example, the debtor may own a rental unit, and incur costs of maintaining that unit in order to obtain rental income. The costs of maintaining a rental unit are not specifically listed in the IRS Manual as a category of necessary expenses, but would plainly be included under the "production of income" test set out in the Manual. The bill could be interpreted to disallow such expenses in applying the presumption formula. In any event, it can be anticipated that debtors will assert as "other necessary expenses" many items that might be questioned, such as life insurance premiums, special diets for health reasons, and contributions for the care of elderly relatives. For all such questionable claims, a determination will have to be made before the presumption formula can be applied. The bill does specify, contrary to the IRS Manual, that the expenses of private primary and secondary education should be deducted, up to $10,000 annually for each dependent child under 18 years of age.

  • Deduction for secured debt. The bill provides a deduction for secured debt, calculated as 1/60th of all the secured debt that will be "contractually due" in the 60 months following the date of the petition. It is unclear whether this would include payments that are in default at the time of the petition. However, unless such defaulted amounts are deducted, the presumption formula would not give an accurate picture of the debtor's ability to make payments in a Chapter 13 plan. In any event, the deduction discriminates against those who do not have secured debt. For example, a debtor who drives an old car, with no outstanding loan, will receive no allowance for ownership costs under the IRS local standards; a debtor who leases a car will have ownership costs capped by the local standards; but a debtor who buys a new car on credit will have the entire cost of the loan, in an unlimited amount, deducted from income. Similarly, a debtor would not be allowed a special deduction for monthly cable television fees, but would be allowed to deduct the cost of a satellite dish purchased on credit.

  • Deduction for priority debt. The deduction for priority debt is defined as "the total amount of unsecured debts entitled to priority" divided by 60. In order for this deduction to apply meaningfully, it would have to include not only the priority debt outstanding at the time of the bankruptcy filing, but also any interest that would accrue on the debt during the period after the bankruptcy filing.

  • Deduction for charitable contributions. Charitable contributions of up to 15% of the debtor's gross income are deducted only if it can be found that the debtor "continues to make the contributions." This may lead to questions about whether charitable contributions proposed by the debtor are a "continuation" of a prior practice.

In summary, the presumption formula is problematic in that (1) calculation of current monthly income has no fixed period for determination, and would often produce a figure different from the debtor's actual monthly income; (2) the deductions for food, clothing, and other necessary expenses would require discretionary determinations; (3) the IRS local standard for housing cannot be applied to debtors with home mortgages; (4) debtors without secured indebtedness would be substantially disadvantaged; and (5) debtors would be encouraged to increase secured indebtedness, charitable donations, and expenditures on discretionary "other necessary expenses" in order to avoid the presumption of abuse.

(2) The presumption of abuse is subject to manipulation. Due to some of the features of the means-testing formula outlined above, debtors would be able to avoid an otherwise applicable presumption of abuse by prebankruptcy planning. For example, a debtor might, at the time of consulting a bankruptcy attorney, have gross monthly income of $10,000 and "current monthly income" after the allowed deductions, of $1,500. The debtor could remove this remaining income by commencing a program of charitable contributions or by incurring additional secured debt (for example, by trading in a used car for a new one, purchased on credit). Current estimates indicate that the means-testing of H.R. 833 would result in no more than 10% of currently filed Chapter 7 cases being subject to a presumption of abuse.(6) However, these estimates are based on filing made under current law, which presents little incentive to increase charitable contributions and secured indebtedness prior to filing under Chapter 7. Under the means test of H.R. 833, it can be expected (1) that the percentage of affected cases would be lower than anticipated because of the ability of debtors to work around the means-testing formula, and (2) that courts will be required to make substantial numbers of discretionary determinations as to whether prebankruptcy actions of the debtor were undertaken in good faith.

(3) The proposal requires significant additional work by trustees and the court, with no provision for additional funding. As noted in the previous paragraph, the means-testing provisions of H.R. 833 are likely to result in only a small percentage of Chapter 7 cases being converted to Chapter 13. The vast majority of Chapter 7 cases are "no-asset" cases, in which no funds are available for paying administrative expenses. Nevertheless, the bill would mandate that Chapter 7 trustees file with the court in every case a report as to application of the presumption. This would add to the cost of the trustee's processing of routine no-asset cases, with no provision for additional compensation. Moreover, in each case, the bill would require the court to serve creditors with a copy of the report. Assuming 15 to 25 creditors in each of 1.4 million cases, this requirement would burden the clerk's office and the postal service with the handling of 20 to 37 million additional pieces of mail annually. This additional activity, in the great majority of cases, will merely inform creditors that the presumption is inapplicable.

(4) The complex standing limitations would be difficult to apply and arbitrary. H.R. 833 would apply two different definitions of median income to issues of standing to bring motions under §707(b). If a debtor's current monthly income is less than a defined national median, standing to bring any motion under §707(b) would be limited to the court, the United States trustee and the case trustee. But if the debtor's income is not greater than a defined regional income, no party (including the court and trustees) would be able to invoke the exemption. This system of dual standing limitations will require calculation and maintenance of multiple lists of median income, with resulting uncertainty in application. Moreover, where the national and regional medians differ, there will be standing limitations with no apparent basis in policy: (a) for debtors whose income is at least equal to the national median but is not greater than the regional median, any party could bring a §707(b) motion, but the motion could not assert the presumption of abuse; (b) for debtors whose income is greater than the regional median but less than the national, only the court and trustees could bring a §707(b) motion, but they would be allowed to assert the presumption.

(5) The relationship between the proposed statutory language and Fed.R.Bankr.P. 9011 is confused. Fed.R.Bankr.P. 9011 is the bankruptcy equivalent of Rule 11 of the Federal Rules of Civil Procedure. It requires, among other things, that an attorney representing a debtor sign every petition filed under the Bankruptcy Code, and it provides that this signature constitutes a certificate, among other things, "that the attorney . . . has read the document [and] that to the best of the attorney's . . . knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law." The rule requires sanctions for its violation that may, but need not, include a civil penalty. The rule does not apply to lists, schedules, and statements. The proposed change to §707(b) contains language that (1) requires a civil penalty if the court finds a violation of Rule 9011 in connection with a §707(b) motion filed by a panel trustee or bankruptcy administrator, and (2) states that the signature of an attorney in connection with a Chapter 7 petition constitutes a certification of the kind specified in Rule 9011, applicable to lists, schedules and statements. Under these provisions, where a Rule 9011 motion is brought in connection with a Chapter 7 petition, it would be unclear whether: (1) the terms of the rule or the terms of the proposed statute would apply; (2) whether the civil penalty required by the statute applies only to violations of the terms of Rule 9011, or whether it applies to violations of the signature requirement set out in the proposed statutory language; and (3) whether, if Rule 9011 were amended in the future, the mandatory civil penalty imposed by the statute would apply to the amended language of the rule.


1. Method for determining income available for payment of general unsecured debt.

Scheduling of monthly income. The debtor's schedules should list "current monthly income," as defined in H.R. 833, except that the "180-day" average should be the average income during the six calendar months preceding the date of filing. If current monthly income does not reflect the income that will actually be available to the debtor at the time of the bankruptcy filing, the debtor should be required to state the amount of income that will actually be available, and the reasons why current monthly income does not reflect the actually available monthly income.(7)

Scheduling of expenses. Deductions from income should be scheduled for (1) secured debt payments, including arrearages, (2) priority debt payments, and (3) charitable contributions, again, as each of these categories is defined in the bill. Finally, the other living expenses of the debtor should be measured against average expenditure levels, based on data compiled by the Bureau of Labor Statistics (BLS).(8) Specifically, (1) Federal Rules of Bankruptcy Procedure and Official Forms should be adopted to require the scheduling of expenses in categories corresponding to those in which consumer expenditure data is collected by BLS;(9) (2) the United States trustees and bankruptcy administrators should be required to designate and publish, on an annual basis, tables of average expenditure levels, applicable within their districts, for the categories specified in the rules and forms, based on BLS data; (3) a reasonable allowance should be designated by law for discretionary expenditures;(10) and (4) debtors should be required to schedule their living expenses within the specified categories, compare their expenditures to the designated level in each category, and provide a specific explanation for any expenditure that is greater than the designated level. Debtors should also be required to enumerate and explain any necessary expenses for which average expenditure data cannot be designated, such as costs of child care, future support payments, and the expenses of operating a business owned by the debtor.(11)

2. Procedure for dismissal or conversion.

Filing obligations. There should be no additional filing obligations imposed on case trustees, United States trustees, or bankruptcy administrators. Rather, case trustees should be given an incentive to pursue meritorious motions under §707(b) (as proposed in Point 3, below).

Standing and time for filing. Standing to bring §707(b) motions should be as provided in the H.R. 833, but a single, national median income test should apply: case trustees (not limited to panel trustees) as well as judges, bankruptcy administrators, and United States trustees should be allowed to bring §707(b) motions in any Chapter 7 case. Other parties in interest, in all Chapter 7 cases, should be allowed to suggest specific grounds for the filing of a §707(b) motion to the judge, bankruptcy administrator, United States trustee or case trustee, but they should be allowed to bring such motions themselves only in cases where the debtor's current monthly income exceeds the national median income, adjusted for inflation. A deadline for filing §707(b) motions should be fixed at 10 days after the conclusion of the meeting of creditors, subject to extension of time for cause.

Burden of proof. On a motion brought under §707(b), the court would be required to convert or dismiss the Chapter 7 case if the debtor's schedules themselves reflected income available to pay general unsecured claims in excess of the defined level, unless the debtor established that reductions in current income or increases in appropriate expenses, resulting from events subsequent to the filing of the schedules, reduced available income below the defined level. Where the debtor's schedules reflected less than the defined amount of income available to pay general unsecured debts, but where the debtor's current monthly income exceeded the applicable median, the debtor, in responding to a §707 motion, would bear the burden of establishing (1) the income actually available to the debtor, (2) the appropriateness of any expenditures in excess of the designated amounts, and (3) the appropriateness of any expenditures in categories for which there is no designated amount. Where the debtor's schedules reflected less than the defined amount of income to pay general unsecured debt and the debtor's current monthly income was below the applicable median, the moving party would bear the burden of establishing that the debtor's actually available income and appropriate expenses result in available income to pay general unsecured claims in excess of the defined amount.

3. Compensation for successful motions under §707(b).

There should be no special provisions for awards of costs and fees against debtors' counsel. Rather, trustees and bankruptcy administrators who bring any successful §707(b) motion should be awarded an administrative claim against the debtor that is not subject to discharge in the pending case or in any subsequently filed case. There should be no special provisions for application of Fed.R.Bankr.P. 9011.

§103 ("Notice of alternatives") (See S. 625, §103)

Changes. Section 342(b) of the Bankruptcy Code currently requires that the clerk of court provide each consumer debtor with a notice indicating the chapters of the Code under which the debtor may proceed. This subsection would be changed to require further information in the notice—(1) the "purpose, benefits, and costs" of each chapter, (2) "the types of services available from credit counseling agencies," and (3) warnings, regarding both the penalties for false statements in connection with bankruptcy cases and the fact that information supplied by debtors is subject to examination by the Attorney General.

Impact. This change has the potential for providing useful information at little additional cost to the bankruptcy system.

§104 ("Debtor financial management training test program") (See S. 625, §104)

Changes. The Executive Office of the United States Trustee would be required (1) to develop a program to educate debtors on the management of their finances, (2) to test the program for 18 months in six judicial districts, (3) to evaluate the effectiveness of the program during that period,(12) and (4) to submit a report of the evaluation to Congress within three months of the conclusion of the evaluation. There is no authorization given to bankruptcy courts to require debtors to participate in financial management training.

Impact. A test program of the kind outlined in H.R. 833 could be very helpful in determining what types of debtor education would be effective. The only apparent problem with the proposal is that 18 months may not be a long enough time to assess the effectiveness of an educational program. Success in financial management would be indicated by such factors as completion of a Chapter 13 plan, ability to reestablish high quality credit, and (most importantly) avoidance of further financial overspending. These factors are unlikely to be measurable after one year.

Alternatives. The legislation might better provide for an interim report within 3 months of the completion of the test program, with a follow-up reports at intervals of two and four years thereafter.

Subtitle B—"Consumer bankruptcy protections"

§105 ("Definitions") (See S. 625, §221)
§106 ("Enforcement") (See S. 625, §§222-24)

Changes. These two sections of H.R. 833 set up a new system for regulating the providers of consumer bankruptcy services. Section 105 defines the term "debt relief agency" to include both lawyers and non-lawyer providers of consumer bankruptcy goods or services (excluding tax-exempt nonprofit organizations, creditors, and depository institutions and credit unions). Section 106 would establish, in a new § 526 of the Bankruptcy Code, a set of regulations bearing on "debt relief agencies" and a mechanism for enforcing the regulations.

The regulations would prohibit "debt relief agencies" from (1) failing to perform promised services, (2) negligently making or counseling to be made any false statement in a bankruptcy filing, (3) misrepresenting the services to be provided, or the benefits or detriments of bankruptcy, and (4) advising the incurring of debt to pay for bankruptcy related services. Waivers of these prohibitions by debtors would be invalid.

There would be three distinct mechanisms for enforcing the prohibitions. First, a debtor would have a private cause of action against a "debt relief agency" (1) for intentional or negligent failure to comply with the prohibitions, (2) for dismissal or conversion of a bankruptcy case due to the agency's intentional or negligent failure to make required filings, and (3) for any intentional or negligent "disregard" of "the material requirements" of the Bankruptcy Code and Rules "applicable to such debt relief agency." In any such action, the debt relief agency would be liable for the fees and charges it received in connection with services rendered to the debtor, as well as actual damages and reasonable attorneys' fees and costs. Second, state governments would be authorized (through their chief law enforcement officers or designated agencies) to bring actions to enjoin violations of the new §526 or to pursue the private cause of action granted to debtors on their behalf (with an award of fees and costs awarded to the state in any successful action). Any district court in the state would be given "concurrent jurisdiction" over such actions by the state.(13) Third, the bankruptcy court, on its own motion or on motion of the United States trustee or the debtor, would be authorized to enjoin both intentional violations of the new §526 and any "clear and consistent pattern or practice" of violating the section. Civil penalties would also be authorized in connection with such motions.State consumer protection laws would be superseded only to the extent that they were inconsistent with the new federal debtor protections specified for the Bankruptcy Code.

Impact. The proposed prohibitions and enforcement mechanisms would strengthen the ability of the courts to deal with dishonest and incompetent providers of bankruptcy-related services. However, the prohibition against advising the incurring of debt to fund a bankruptcy filing is overbroad. While a debtor should never be counseled to borrow money fraudulently, with the intent of discharging the debt, it may be entirely appropriate to enter into a secured loan for the purposes of financing a bankruptcy filing, and a loan from a friend or relative (intended to be repaid despite the discharge) may also be proper. Moreover, the exclusion of nonprofit organizations may unnecessarily weaken the effectiveness of the proposal. Such organizations—which may be sponsored by debtors' attorneys as well as by creditor-funded organizations—also have the potential for engaging in dishonest or incompetent provision of services.

Alternatives. (1) The prohibition against counseling the incurring of debt to pay for a bankruptcy filing should be limited to fraudulent incurred debt. (2) The exclusion of nonprofit organizations should be removed.

§107 ("Sense of the Congress") (no parallel in S. 625)

Changes. None. The section simply expresses the sense of Congress that the states should develop courses in personal finance for grade school and high school. No action is required.

§108 ("Discouraging abusive reaffirmation practices") (See S. 625, §204)

This provision is the subject of Recommendation 7 of the Consumer Bankruptcy Legislative Group.

Changes. This section would impose special requirements for the reaffirmation of wholly unsecured debts. Unless such a debt was owed to a credit union (in which case the special provisions would not apply), the reaffirmation agreement could only go into effect after a court hearing, at which the debtor would be required to appear in person, and at which the court would determine whether the agreement (1) was an undue hardship, (2) was in the debtor's best interest, and (3) was a result of a threat by the creditor to take action that was either illegal or that the creditor did actually intend to take. The reaffirmation agreement for such debts would be required to contain a clear and conspicuous statement of the right of the debtor to such a hearing. A debtor represented by counsel would be able to waive the right to the hearing by signing a written statement of waiver, identifying the debtor's counsel.

Impact. This proposal is directed at the potential for creditor abuse in obtaining reaffirmations of unsecured debt. This focus is reasonable. Abuse of the reaffirmation process is much more likely to occur when the claim in question is not secured by collateral with substantial value, since there is often little need for debtors to reaffirm such debt. Nevertheless, the proposal is unlikely to have a major impact. Under current law (§524(c) and (d)), a court hearing on reaffirmations is already required for unrepresented debtors, so the requirement of a hearing for unsecured debt reaffirmations makes little difference for such debtors. Debtors represented by counsel may currently enter into binding reaffirmation agreements, under current law, if their attorneys execute a declaration stating, among other things, that the reaffirmation would not impose an undue hardship on the debtor. It can be anticipated that debtors whose counsel have executed such a declaration will almost always waive the "right" to a court hearing (and thus avoid the need to make an appearance at court). It is likely that hearings would only be held where conscientious debtors' counsel, rather than simply refusing to approve a reaffirmation agreement, execute the required declaration only if their clients agree not to waive hearing. This would have the effect of leaving to the court the question of whether the reaffirmation agreement is in the debtor's best interests.

The proposal would create uncertainty by failing to indicate how the required hearing would be initiated. Finally, the proposal excludes debts owing to credit unions, for no apparent reason, since reaffirmations of unsecured credit union debt may also be against a debtor's best interests.


1. Unless a reaffirmation agreement involves a claim secured by a valid, perfected and enforceable purchase money security interest in property with an original selling price to the debtor (exclusive of costs of financing) of not less than $3,000, the agreement should be effective only (a) after a hearing, on motion by the creditor, attended by the debtor, and (b) upon findings by the court (1) that the agreement is in the best interest of the debtor and (2) that, in light of the income and expenses set forth on the debtor's schedules filed in the case, the debtor has the ability both to pay the reaffirmed debt and to provide support to all of the persons for whom he or she is responsible, including all court-ordered support payments.

2. For all reaffirmations as to which a court hearing is not conducted, the debtor's attorney's certificate should include a representation that the debtor has the ability to pay the reaffirmed debt as well as provide necessary support, including all court-ordered support payments, in light of the income and expenses set forth on the debtor's schedules filed in the case.

§109 ("Promotion of alternative dispute resolution") (See S. 625, §201)

Changes. Two distinct changes would be effected by this section of H.R. 833. First, an additional ground for partial disallowance of claims would be created. Claims based on wholly unsecured consumer debts could be reduced by up to 20 percent upon a showing by the debtor (by clear and convincing evidence) (1) that the debtor offered the creditor an alternative repayment schedule through an approved credit counseling agency within 60 days before filing bankruptcy, (2) that the offer provided for payment to the claimant of at least 60 percent of the amount of the debt over 'the repayment period of the loan, or a reasonable extension thereof," (3) that no part of the debt is nondischargeable, or entitled to priority, or "would be paid a greater percentage in a chapter 13 plan than offered by the debtor," and (4) that "the creditor unreasonably refused to consider the debtor's proposal."

The second change would prohibit trustees from using preference theory (under §547 of the Code) to recover any sums paid to creditors as part of a repayment plan created by an approved credit counseling agency.

Impact. The additional ground for partial disallowance is unlikely to have a substantial impact, for several reasons: (1) A debtor is only affected by the allowance of unsecured claims in situations where unsecured creditors are paid in full. Otherwise, any reduction in one creditor's claim merely results in other creditors receiving a higher dividend. (2) The maximum reduction is only 20% of the claim, unlikely to be a significant amount in most consumer cases. (3) A heavy burden of proof (clear and convincing evidence) is placed on the debtor, as to elements such as the reasonableness of the debtor's proposal and whether the creditor refused to "consider" the proposal. Such a burden is likely to be difficult to meet in most situations. (4) No provision is made for any award of a debtor's costs and fees in pursuing the claim reduction. A debtor following a bankruptcy filing is unlikely to have funds available to prosecute the objection.

A debtor who enters into a credit counseling plan may very well exclude certain creditors whom the debtor does not wish to have paid. Unless payments to other creditors can be recovered as preferences, the credit counseling plan will have the effect of ratifying the debtor's discrimination.

Alternatives. (1) The grounds for disallowance of claims under §502(b) could include failure of a creditor to negotiate in good faith when presented with a repayment plan proposed by the debtor in consultation with an approved credit counseling service. This ground for disallowance could be limited (as in the proposal) to general unsecured debt, and could provide for partial disallowance at a fixed rate of 50%. Any party in interest would have standing to assert the objection.

(2) Payments made under a repayment plan proposed through an approved credit counseling service should only be exempt from preference recovery if the plan was proposed by the debtor in good faith.

§110 ("Enhanced disclosure for credit extensions secured by a dwelling") (no parallel in S. 625)

Changes. None. The Federal Reserve Board would be directed to conduct a study and submit a report to Congress regarding the need for additional disclosures to consumers entering into home equity