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Description:

To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

Description:

To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

Description:

To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

Description:

To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.
Religious Liberty and Charitable Donation Protection Act of 1998
(Engrossed as Agreed to or Passed by Senate)

S 1244 ES

105th CONGRESS

2d Session

S. 1244


AN ACT

To amend title 11, United States Code, to protect certain
charitable contributions, and for other purposes.

    Be it enacted by the Senate and House of Representatives of
    the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the `Religious Liberty and Charitable
    Donation Protection Act of 1998'.

SEC. 2. DEFINITIONS.

    Section 548(d) of title 11, United States Code, is amended by
    adding at the end the following:

    `(3) In this section, the term `charitable contribution' means
    a charitable contribution, as that term is defined in section 170(c) of
    the Internal Revenue Code of 1986, if that contribution--

      `(A) is made by a natural person; and

      `(B) consists of--

        `(i) a financial instrument (as that term is defined in
        section 731(c)(2)(C) of the Internal Revenue Code of 1986);
        or

        `(ii) cash.

    `(4) In this section, the term `qualified religious or
    charitable entity or organization' means--

      `(A) an entity described in section 170(c)(1) of the
      Internal Revenue Code of 1986; or

      `(B) an entity or organization described in section
      170(c)(2) of the Internal Revenue Code of 1986.'.

SEC. 3. TREATMENT OF PRE-PETITION QUALIFIED CHARITABLE
CONTRIBUTIONS.

    (a) IN GENERAL- Section 548(a) of title 11, United States Code,
    is amended--

      (1) by inserting `(1)' after `(a)';

      (2) by striking `(1) made' and inserting `(A)
      made';

      (3) by striking `(2)(A)' and inserting `(B)(i);

      (4) by striking `(B)(i)' and inserting `(ii)(I)';

      (5) by striking `(ii) was' and inserting `(II)
      was';

      (6) by striking `(iii)' and inserting `(III)';
      and

      (7) by adding at the end the following:

    `(2) A transfer of a charitable contribution to a qualified
    religious or charitable entity or organization shall not be considered
    to be a transfer covered under paragraph (1)(B) in any case in
    which--

      `(A) the amount of that contribution does not exceed 15
      percent of the gross annual income of the debtor for the year in which
      the transfer of the contribution is made; or

      `(B) the contribution made by a debtor exceeded the
      percentage amount of gross annual income specified in subparagraph (A),
      if the transfer was consistent with the practices of the debtor in
      making charitable contributions.'.

    (b) TRUSTEE AS LIEN CREDITOR AND AS SUCCESSOR TO CERTAIN
    CREDITORS AND PURCHASERS- Section 544(b) of title 11, United States
    Code, is amended--

      (1) by striking `(b) The trustee' and inserting `(b)(1)
      Except as provided in paragraph (2), the trustee'; and

      (2) by adding at the end the following:

    `(2) Paragraph (1) shall not apply to a transfer of a
    charitable contribution (as that term is defined in section 548(d)(3))
    that is not covered under section 548(a)(1)(B), by reason of section
    548(a)(2). Any claim by any person to recover a transferred contribution
    described in the preceding sentence under Federal or State law in a
    Federal or State court shall be preempted by the commencement of the
    case.'.

    (c) CONFORMING AMENDMENTS- Section 546 of title 11, United
    States Code, is amended--

      (1) in subsection (e)--

        (A) by striking `548(a)(2)' and inserting
        `548(a)(1)(B)'; and

        (B) by striking `548(a)(1)' and inserting
        `548(a)(1)(A)';

      (2) in subsection (f)--

        (A) by striking `548(a)(2)' and inserting
        `548(a)(1)(B)'; and

        (B) by striking `548(a)(1)' and inserting
        `548(a)(1)(A)'; and

      (3) in subsection (g)--

        (A) by striking `section 548(a)(1)' each place it
        appears and inserting `section 548(a)(1)(A)'; and

        (B) by striking `548(a)(2)' and inserting
        `548(a)(1)(B)'.

SEC. 4. TREATMENT OF POST-PETITION CHARITABLE CONTRIBUTIONS.

    (a) CONFIRMATION OF PLAN- Section 1325(b)(2)(A) of title 11,
    United States Code, is amended by inserting before the semicolon the
    following: `, including charitable contributions (that meet the
    definition of `charitable contribution' under section 548(d)(3)) to a
    qualified religious or charitable entity or organization (as that term
    is defined in section 548(d)(4)) in an amount not to exceed 15 percent
    of the gross income of the debtor for the year in which the
    contributions are made'.

    (b) DISMISSAL- Section 707(b) of title 11, United States Code,
    is amended by adding at the end the following: `In making a
    determination whether to dismiss a case under this section, the court
    may not take into consideration whether a debtor has made, or continues
    to make, charitable contributions (that meet the definition of
    `charitable contribution' under section 548(d)(3)) to any qualified
    religious or charitable entity or organization (as that term is defined
    in section 548(d)(4)).'.

SEC. 5. APPLICABILITY.

    This Act and the amendments made by this Act shall apply to any
    case brought under an applicable provision of title 11, United States
    Code, that is pending or commenced on or after the date of enactment of
    this Act.

SEC. 6. RULE OF CONSTRUCTION.

    Nothing in the amendments made by this Act is intended to limit
    the applicability of the Religious Freedom Restoration Act of 1993 (42
    U.S.C. 2002bb et seq.).

Passed the Senate May 13, 1998.

Attest:

Secretary.

105th CONGRESS

2d Session

S. 1244

AN ACT

To amend title 11, United States Code, to protect certain charitable
contributions, and for other purposes.



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Related Files

S. 1244 GPO PDF (PDF File)

S. 1244: Comments

View Companion Bill H.R. 2604 (Introduced in House) (PDF File)

View Companion Bill H.R. 2604 (Reported in House) (PDF File)

Description:

To combat waste, fraud, and abuse in payments for home health services provided under the medicare program, and to improve the quality of those home health services.

Description:

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.

Description:

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
American Bankruptcy Institute


Analysis of S.1914 Business Reorganization Provisions

Written by:

Christian C. Onsager, Co-chair

ABI Business Reorganization Committee

Faegre & Benson LLP

Prepared by the American Bankruptcy Institute<

Web posted and Copyright ©

June 16, 1998, American Bankruptcy Institute.

The purpose of this paper to analyze the potential impact of S.1914 as it relates to business reorganizations. It is the product of the Business Reorganization Committee of the ABI. The ABI is the nation’s largest multidisciplinary organization of professionals devoted to research and education on issues related to insolvency. ABI’s more than 6,200 members represent both debtors and creditors in business and consumer cases. While ABI takes no advocacy positions on pending legislation, it regularly testifies before Congressional committees and provides analysis of the impact of such legislation.

Overall Comment

In 1994, Congress authorized and funded the National Bankruptcy Review Commission, which filed its report in October 1997. The Commission heard many hours of testimony by various interested parties and had the benefit of recommendations from its Working Groups. The ABI assisted the Commission by preparation of a survey on preference laws, a survey of ABI members’ impressions on various issues, and a series of symposia on nine different issues. The recommendations of the Commission are far-reaching and, in some instances, controversial.

The Commission’s final Report recognized that the Bankruptcy Code is a complicated and integrated system, composed of many pieces designed to balance the rights of the different interests. Since the adoption of the Code in 1978, there have been numerous amendments designed to address the concerns of a particular constituency. Such modifications to the system often have unintended consequences and provisions which appear to prefer a particular creditor group vis a vis a debtor may adversely affect the rights of other creditor groups. This often unintended effect can jeopardize potentially successful reorganizations. Successful cases preserve jobs and provide a source of continuing business for trade creditors.

Although the centerpiece of S.1914 relating to business reorganizations is the adoption of "small business bankruptcy" provisions, a number of other provisions of the Billcould significantly impact the business reorganization process and the rights of various constituencies.

Section by Section Analysis

Title IV

General Comment. One impetus for the creation of a separate procedure for small business cases is the perception that Chapter 11 in its current state is not "one size that fits all." The small business provisions may, however, not eliminate the perceived problems for small and medium size cases, if there is not sufficient flexibility to create exceptions when appropriate for the benefit of creditors and reorganizing businesses.

Section 401—Small Business Defined. S.1914 proposes to define small businesses in terms of a total noncontingent, liquidated, secured and unsecured debt of $5 million or less (excluding insider debt) or unlimited debt for single asset real estate debtors. Under these limits, approximately 86% of current Chapter 11 cases would be small business cases. The use of total unliquidated noncontingent debt has the advantage of relative certainty, and Bankruptcy Judges are generally familiar with this test.

The disadvantage of a binding debt limit test is that it is not always an accurate guide to the potential complexity of a reorganization case. Thus, many debtors with smaller amounts of liquidated debt, but large amounts of unliquidated potential liabilities, may be forced into a faster track Chapter 11 which is not necessarily in the best interests of thevarious creditors constituencies. Indeed, some of these constituencies may be holders of the unliquidated debt, such as tort claimants or holders of claims relating to environmental liabilities. For example, a Chapter 11 case in Maine involved a small independent power producer, which was a small town’s major employer. A flood disrupted its operations and created serious "downstream contamination" issues. Sorting out environmental claims (both potential and actual) and insurance coverage, as well as sale of the business, took over a year. A 150 day deadline would have caused the failure of the case to the detriment of the employees, the economy of the small town and the creditors.

Such cases are not unusual. At a minimum, some mechanism should be considered which would allow the court to "opt out" of the small business procedure in the appropriate case.

Section 402—Rules for Disclosure Statement and Plan. A disclosure statement is intended to contain such information as is necessary to allow creditors to cast an informed vote, but is often an item of considerable cost to even a small business debtor. Following a trend in the Bankruptcy Courts, Section 402 grants significant additional flexibility regarding the form, content and timing for approval of a disclosure statement in Chapter 11 cases. The ability to streamline a disclosure statement, especially in cases where the creditors are already familiar with the business, offers the advantage of expense reduction.

One concern is the language in proposed § 1125(f)(2)(B), which would allow a courtto eliminate a separate disclosure statement. The disclosure statement requires the debtor to set down in writing its forecasts and the assumptions on which such forecasts are based. The disclosure statement process serves as an important control on business debtors, as well as an important source of information for unsecured creditors who, as a body, are often not represented in smaller cases. If this section is read to permit the total elimination of the disclosure statement, it would shift the burden of discovering critical information to unrepresented creditors, who may be in the least favorable position to obtain and disseminate the information in a cost efficient manner. The court’s ability to streamline the disclosure statement to fit the case would provide beneficial flexibility.

Section 403—Standard Form Disclosure Statements and Plans. Section 403 proposes the development of standard form disclosure statements for small business cases. Such forms, particularly in very small cases, offers the potential advantage of reducing costs and providing often unsophisticated debtors with help as to the type of information to provide. Care should be taken so that any rule mandating the use of standard forms does not conflict with the flexibility of the court under proposed Section 402.

Section 404—Uniform National Reporting Requirements. Proposed section 404 would require periodic reports to be filed by the small business debtor with certain current and projected financials. The proposal requires basic information which virtually any debtor,including small business debtors, should be able to produce in order to allow the Court to evaluate their prospects for reorganization on an ongoing basis. In addition, the section would give the Bankruptcy Court flexibility to expand the reporting requirements if deemed appropriate.

Any increase in the cost or potential burden on management of the debtor should be deminiums as Section 404 would require only relatively simple and basic information.

Section 405—Uniform Reporting Rules and Forms. This section would require the development of Bankruptcy Rules regarding the uniform national reporting requirements mandated under section 404. Such rules would have the advantage of potentially reducing the cost of the reporting requirements and thus the cost of the overall reorganization effort. Standard forms would be disadvantageous only to the extent the rules do not provide sufficient flexibility to vary the forms when appropriate.

Section 406—Duties in Small Business Cases. This section would expand on the duties of a small business debtor. It would require the debtor either (i) to file its most recent "balance sheet," "statement of operations and cash flow statement" and its most recent federal income tax return, or (ii) to state that the financial statements and income tax returns are not available, all within three days of the filing of the petition. The apparent object of this expanded duty is to provide creditors and the U.S. Trustee with increased informationfrom the outset of the case, pending the filing of the schedules. The additional information would supplement the initial financial report already required to be filed with the U.S. Trustee, which is due fifteen days after filing of the petition.

There is an ambiguity regarding the contents of the statement of operations or a cash flow statement. Also, there is some question as to the utility of the information at the outset of the case, particularly for unsecured creditors. Much of the information will be contained in the schedules which, under the proposed statutory amendments, will have more stringent requirements. Accordingly, the additional burden on the debtor may add some cost while being of little use to creditors.

Section 406 would require either senior management or counsel to attend court scheduling conferences, initial debtor interviews, and the meeting of creditors. This statutory amendment does not appear to change current practice in most courts.

Section 406 would make it more difficult for a small business debtor to obtain an extension of the time to file schedules. There is limited flexibility given to the court to extend the deadline. The books and records of many small business debtors are in disarray and are often a contributing cause to a reorganization filing. Under the proposed language, it is unclear whether such disarray would constitute "extraordinary and compelling circumstances" that would merit an extension, and thus a case may fail unnecessarily to the potential detriment of unsecured creditors.

Section 406 would require timely filing of post-petition financial and other reports, the maintenance of insurance, and the timely filing of tax returns. This does not change existing practice in many courts.

Section 406 would require timely payment of all administrative expense tax claims, which is generally consistent with existing practice in many courts. The proposal is unclear as to whether a debtor is required to only make payment in the amount shown in a filed return even if the governmental taxing unit asserts a larger claim.

The proposed amendment would also require the debtor to establish separate accounts for the deposit of trust fund taxes. Segregation of such taxes is not required outside of bankruptcy and may result in some small increase in administrative expense.

Section 406 would also allow the U.S. Trustee, bankruptcy administrator or a designated representative to inspect the debtor’s business premises, books, and records after reasonable prior written notice. This provision would expand upon the existing rights of the U.S. Trustee or bankruptcy administrator, which are available only after notice to the debtor and opportunity for hearing in the event of any dispute. The provision raises due process concerns. Moreover, as a practical matter, the U.S. Trustee or bankruptcy administrator may not have the resources to conduct such inspections or the expertise to accurately analyze the information. The intent of "designated representative" is unclear, and could allow the designation of creditors or others whose interests are potentially adverse to the debtor. For example, provisions to preserve trade secrets are not included.

Section 407—Plan Filing and Confirmation Deadlines. Section 407 of the bill would set a statutory deadline of 90 days for the small business debtor to file a plan of reorganization and imposes stricter requirements on any extension. This section must be considered in connection with Sections 408 and 409 , which would require a court to confirm a plan within 150 days of the petition date and would only allow extension of confirmation on the same conditions. In some cases, these shortened deadlines may be appropriate to bring a measure of objective discipline to the process.

However, the use of deadlines presumes that speed equates with efficiency, lower cost, and the best interests of creditors. In many cases, the interests of the unsecured creditors are better served if confirmation is delayed. For example, a debtor may need additional time to carry out a changed marketing strategy; a turn-around expert may need additional time to actually accomplish the task of turning around the company’s business; or a company’s product may need additional development time. In many cases, it would appear the primary beneficiary of statutory deadlines for plan filing and confirmation are secured creditors. Thus, absent the ability of the Courts to grant extensions that would benefit unsecured creditors, sections 407, 408 and 409 appear to strengthen the protection of secured creditors at the expense of the often unrepresented unsecured creditors.

Further, Chapter 11 is often used to effectuate an asset sale of the company to a buyer who will continue some or all of the business. The proceeds of sale often significantly enhance the return to secured and unsecured creditors. As a practical matter, such casescannot be filed initially as Chapter 7 liquidation cases because a trustee does not have the ability to operate the business in order to maintain its going concern value. Once the sale has taken place, however, such cases are often converted to Chapter 7 as a more efficient mechanism for distributing the sale proceeds. The bidding and sale process may take longer than the proposed deadlines. Conditioning an extension of the statutory deadlines on a showing that a plan of reorganization can be confirmed may thus allow one creditor constituency to disrupt the sale process to the detriment of the other creditors.

The statutory deadlines also create practical mechanical and practical problems. Bankruptcy Rule 2002 requires at least 25 days’ notice of the hearing on approval of the disclosure statement and an additional 25 days’ notice for the hearing on confirmation. The statutes, however, leave only a 60-day gap between the time a plan may be filed and the time it must be confirmed (the difference between 90 and 150 days). There may also be an issue of availability on a court’s calendar.

Section 410—Duties of the United States Trustee and Bankruptcy Administrator. Section 410 of the bill would impose significant new duties on the office of the United States Trustee, including the obligation to investigate the debtor’s viability and to review and monitor the debtor’s activities throughout the case. There may be benefits from an institutionalized role for a bankruptcy examiner who could evaluate and monitor the debtor’s business for the benefit of creditors. In reality, however, this institutionalization may createmany problems. Chapter 11 filings encompass every conceivable kind of business with every conceivable kind of problem. A useful investigation of a debtor’s viability and business plan and monitoring of the debtor’s activities require numerous different types of expertise for each type of business. The U.S. Trustee’s office currently neither has this diverse expertise nor the funds with which to develop such expertise.

Moreover, there is the potential for a dramatic increase in the bureaucracy that would be required to implement these investigatory duties. The investigation and continuous monitoring of a debtor’s viability is not a process which takes one or two hours, if it is to be accurate and useful. In a strong economy, there are approximately 27,000 Chapter 11 filings a year. Of these, it is conservatively estimated that at least 80% will be small business cases as defined by the statute even if the average investigation and monitoring were only ten (10) hours per case, and the case load remained constant - it would take over five thousand full time employees. The resulting manpower needs could be significant.

Section 411—Scheduling Conferences. This proposed section would require the court to hold a status conference on its own motion or the request of any party. Generally, it reiterates a power which virtually all bankruptcy courts believe they can now exercise. Consideration should be given to changing the language "shall hold such status conferences" to "may hold such status conferences," so that each court will not be required to hold a conference at the whim of every creditor.

Section 412—Serial Filer Provisions. Generally, section 412 provides that the automatic stay will not be available to a small business debtor that files a new Chapter 11 case within two years of obtaining confirmation of a plan of reorganization in a prior case. Currently, whether and under what circumstances a debtor may file successive Chapter 11 cases differ from court to court. Courts either (a) allow a successive Chapter 11 filing subject to requirements of good faith; (b) allow a successive filing after a showing that the prior confirmed plan has failed for reasons that could not reasonably be foreseen or (c) prohibit all successive Chapter 11 filings. This provision provides certainty with regard to the ability to file sequential Chapter 11 cases.

However, rather than defining the requirements for a permissible second Chapter 11 filing, the proposal would remove the protections of the automatic stay in the second case unless the debtor makes certain evidentiary showings sufficient to justify a reimposition of the stay. This provides little relief for the unsecured creditors in the second filing. The proposal would benefit secured creditors at the potential expense of unsecured creditors.

However, the secured creditor may be allowed to foreclose before the debtor (and the potentially unsecured creditors) has obtained relief. This concern is reflected in the current Bankruptcy Code which provides for the stay to be automatic, subject to the right of a creditor to obtain an order "lifting" the stay in the appropriate circumstances.

The proposal would allow the debtor to obtain an order reimposing the stay in a second Chapter 11 case upon a showing that it could confirm a feasible plan, other than aliquidating plan. This appears to statutorily reverse the current assumption that a second Chapter 11 filed for the purpose of liquidation is presumptively in good faith. As noted, an liquidating Chapter 11 is often a useful vehicle to maximize the return for creditors by preserving the going concern value of all or some of the business pending a sale (i.e., pending a liquidation). For that reason, liquidating plans are often favored by both secured and unsecured creditors and the statute appears to eliminate this valuable use of Chapter 11 in serial filings for no apparent countervailing benefit. If, as a matter of policy, the reversal of burdens regarding the automatic stay is deemed the appropriate control mechanism for serial filings, it may be more appropriate to provide for automatic imposition of the stay as in all other bankruptcy cases, subject to reduction in burden of proof on the part of the secured creditor for its removal or a shift of the burden of proof to the debtor to support continuation of the stay.

Further we note that the proposed statute appears to be internally inconsistent. Subsection (1)(D) would appear to remove the stay in those circumstances in which subsection (3)(A) would impose it.

Section 413—Expanded Grounds for Dismissal or Conversion and Appointment of Trustee. Section 413 of the bill establishes additional grounds for dismissal or conversion of a Chapter 11 case. It also would set short deadlines within which the court must hold a hearing and rule on a motion to dismiss or convert. The list of new grounds are generallyduplicative of those currently examined by the courts and codification could provide uniformity.

Other language in the proposal warrants scrutiny. Currently, the bankruptcy court "may" dismiss a case upon the requisite showing, which generally relates to the "best interests" of creditors. The proposed section 413 appears to make dismissal mandatory if a creditor makes the requisite showing regardless of the best interests of the general creditor body. As a result a single creditor with its own agenda can cause a dismissal of the case to the disadvantage of the majority of other creditors, secured or unsecured. There appears to be little reason deprive the bankruptcy court to weigh the interests of all constituencies.

The proposed amendment would also impose specific deadlines by which the court must (a) hold a hearing and (b) decide the matter. The impetus for such deadlines appears to be a perception that certain courts defer or delay such decisions. Assuming this to be the case, the setting of mandatory deadlines for hearings can create problems for the court and creditors. The Bankruptcy Code already sets deadlines, with potentially severe consequences if such deadlines are not met (e.g.. relief from stay hearings). A full hearing on a motion to dismiss may take a half to a full day or more of court time. The Bankruptcy Courts may have difficulty fulfilling another statutory mandate to hold hearings in a relatively short period.

Section 414—Single Asset Real Estate Defined. Section 414 of the bill proposes three changes: (1) defining a single asset real estate as "a single development or project" ratherthan a "single property or project;" (2) excluding from the definition of single asset real estate property on which an affiliate of the debtor is conducting a substantial business (provided the affiliate is also in Chapter 11); and (3) eliminating the current $4 million dollar secured debt cap.

Clarification of the definition of "single asset real estate" would be beneficial, as the current statute is somewhat ambiguous. However, the suggested change does not appear to accomplish such a goal. Moreover, the change to "single development or project" combined with the elimination of any dollar cap on secured debt would expand the definition of single asset real estate cases to include many large real estate projects, (i.e. large residential developments and most shopping center developments would be included) even though these projects do not generally display the characteristics of the more traditional "single asset real estate" cases.

Section 415—Plan Confirmation. Proposed section 415 would impose certain requirements for confirming a reorganization plan involving single asset real estate over the objection of secured creditors holding unsecured deficiency claims. In general, the proposal would condition confirmation on the contribution of new capital sufficient to pay down secured claims to a 75% loan-to-value ratio. In general, this proposal seeks to bring certainty to the concept of the "new value" rule and, assuming new value is permissible, the amount of "new value" that is required to confirm a plan.

The language may create unintended consequences. First, it is not clear that the class of secured claims holding unsecured deficiency claims are creditors that are secured by the single asset real estate. Thus, it is possible that the beneficiaries of the 75% loan-to-value ratio test would not be creditors who are secured by the real estate. Third, the proposal as drafted may be unintentionally overinclusive. A manufacturing business (or other substantial business) that leases its site from an unrelated party would be subject to the requirements of section 415. The Section should be restricted to debtors that own single asset real estate.

The statute provides that new value that must be infused cannot be convertible into any form of debt. Such a restriction would eliminate the possibility of infusion through unsecured or secured subordinated debt or debt that is secured by some other asset of the debtor. The purpose of the provision is apparently to provide the secured creditor with an equity cushion for its secured claim. This restriction on the form of the capital infusion does not appear to be logically related. Fourth, the provision requires a 75% loan to value ratio, notwithstanding the fact that the original loan may have been a high risk venture that was only marginally or even partially secured. As a matter of policy, should the position of such creditors be improved in a Chapter 11 case at the expense other potential beneficiaries of any new value infusion?

Section 416—Payment of Interest. Current law requires a debtor to commence payments to secured creditors in a single asset real estate case within 90 days of the filingequal to current fair market interest rates. The new proposal would require the payments to be made only after the later of ninety days or when the court determines that the case is a single asset real estate case. The proposed language would allow the debtor to make the payments from rents generated by the property, whether or not the secured creditors consent. This change cures a potential ambiguity.

The proposal would also change the applicable interest rate to the currently applicable contract rate rather than the current fair market rate. This change would prevent debtors with fixed rate mortgages from using Chapter 11 as a tool to force refinancing at a lower interest rate if the interest rates have dropped. However, the change is a departure from the rule that a secured creditor should be adequately protected only against the interest it would lose if it were entitled to foreclose and reinvest the funds realized from the foreclosure at current market rates. In all events, the proposal should follow that in H.R. 3150 by adding the words "non-default" between "then applicable" and "contract rate of interest" to prevent a creditor from obtaining an artificially high rate of interest at the expense of other creditors.

Title V

General Comment. In general, Sections 501 through 515 of the proposed bill clarify the rights of taxpayers in the government in bankruptcy cases. For the most part, these proposed changes would further clarify the law or fix minor but troublesome inconsistencies. A few provisions, however, have far-reaching consequences that should be evaluated carefully.

Section 501—Effective Notice to Government. Section 501 of the proposed bill would radically alter the current requirements for notice to governmental units. Any notice to a governmental unit would be required to include various items of information that might be helpful to the governmental unit, such as the taxpayer identification number, the account or contract number or real estate parcel number, a description of the nature of the debt and the particular subdivision, agency or entity of governmental unit that is concerned. The debtor would have the burden of proof regarding the issue of notice in any dispute. Governmental units could, at their election, file a "safe harbor address" with the clerk of the court and notice made to a safe harbor address would be presumed given.

In some instances, notices in bankruptcy cases are sent only to a general address for a state or municipality. Larger governmental units such as states and larger cities apparently encounter difficulties in routing these notices to their correct departments or agencies. Section 501 is an attempt to resolve this problem by requiring debtors to make their notices more specific when dealing with governmental units. The concept of a safe harbor address for each governmental unit would be very useful if governmental units uniformly elect to provide such addresses.

As proposed, however, the notice requirements are potentially very onerous and problematic. The proposed statute covers not only notice of the bankruptcy filing itself, but every motion or other notice sent by the debtor during a case. In a modest Chapter 11 case, such notices are numerous; in a large chapter 11 case, there may be hundreds of notices (which in turn would need to be sent to thousands of different governmental units). Under the proposed statute, the penalty for failing to give any one of these numerous notices in proper form would be to prevent discharge of the obligation to the governmental unit, regardless of the content of the notice.

The proposed notice procedure also treats governmental units significantly more favorably than private parties who may have similar notice difficulties, e.g., larger corporations with numerous divisions.

The mechanics of giving the required notices is likely to create practical difficulties for debtor and its counsel. In a typical Chapter 11 case, a debtor may be required to serve hundreds of parties at a time; the time and expense of giving special notice to governmental units is likely to be substantial. Even in a modest Chapter 11 case, the debtor may own numerous properties in different states or deal with numerous different governmental units in many different locales. In each notice to each of these local government units, the debtor would be required to provide the laundry list of particularized information. In a national retail case, the complexity is beyond comprehension.

Many chapter 11 filings are done on an emergency basis, with little opportunity to prepare. At the outset of many filings, however, a debtor needs emergency relief on matters such as use of cash collateral, financing, authority to pay employees, etc. In such circumstances, it is often impossible as a practical matter to give notice to all non-government creditors, much less all governmental units with the special information particularized for each unit. Yet the penalty for failing to do so even in such exigent circumstances would be the non-dischargeability of the governmental units’ claims, to the potential detriment of the other creditors, as well as to the debtor.

Determining the correct contact person for notices to a governmental unit can be a frustrating and difficult task, even for sophisticated debtors. For example, it is often difficult to determine exactly which governmental department may handle a particular kind of claim. Moreover, notice must often be sent to creditors who the debtor believes may have a claim, but who have yet to assert it. Ascertaining the correct department is difficult enough for debtors who are aware of actual claims by governmental units. The proposed legislation would shift the consequences of this confusion to the debtor and require nothing in return from the governmental units.

It should be noted that the statute imposes the potentially burdensome notice requirements on the debtor, but not on any other party to the case. Thus, notices of actions by other parties that may affect the interests of one or more governmental units will be given in a manner different than is required for notice by the debtor.

Most tax claims are already nondischargeable. In chapter 11 cases, a plan must provide to pay virtually all tax claims in full in order for the plan to be confirmed. The proposed notice requirements therefore are not necessary to ensure payment of tax claims. With regard to other debts, no other creditor is entitled to the same kind of detailed notice. Moreover, making government claims nondischargeable (if the notice is for any reason erroneous) leaves governmental units in competition with other creditors whose debts are automatically not dischargeable, e.g., mothers owed child support. Indeed, the effect of the notice statute may be to elevate the government’s general unsecured claims to nondischarged status while priority tax claims remain dischargeable.

Finally, the proposal as drafted is internally inconsistent regarding proof of notice. The proposed §342(f)(1) states that to take advantage of the statute, the governmental unit must demonstrate "by a preponderance of the evidence, that the governmental unit did not receive timely actual notice as required..." The proposed §342(f)(2) states that the "debtor shall have the burden of proof in refuting an assertion by a governmental unit under paragraph (1) that the governmental unit did not receive the timely actual notice referred to in that paragraph." Thus, each party appears to have the same burden. Further, it is unclear whether the statute is intended to alter the presumption that notice is received by a party if deposited into the U.S. mail, postage prepaid (known as the "mailbox rule") since the statute addresses timely "actual" notice.

Although the provision allowing the government to supply a safe harbor address may be of some assistance, it is effective only to the extent the governmental units voluntarily provide such addresses. Further, many chapter 11 debtors do business in numerous different states other than the district in which the bankruptcy case is filed. Unless every governmental unit files its safe harbor address in every bankruptcy court in the country, the notice of safe harbor addresses will not be effective.

Other less disruptive mechanism may be more effective. For example, the presumption in the statute might be reversed: notice would be ineffective if a governmental unit has filed a safe harbor address, but that address is not used. This would induce governmental units to file safe harbor addresses. The issue of where the addresses would be filed and how debtors and counsel could access them immediately from any jurisdiction would need to be addressed. Governmental units could establish a single central address for bankruptcy notices, e.g. city attorneys and Attorneys General.

Section 508—Periodic Payment of Taxes in Chapter 11 Cases. Section 508 would require payment of unsecured priority claims and tax claims secured by liens under a confirmed plan of reorganization in quarterly installments within six years of the petition date. This provision would resolve the perceived problem of irregular payment plans. Extending the requirement to secured tax claims, however, may have the effect of requiring non ad valorem tax liens to be paid more quickly than senior mortgages. This potentialrearranging of priorities of secured claims should be examined more closely.

Section 514—Standards for Tax Disclosure. Section 514 would require a disclosure statement to contain a full discussion of the potential federal and state tax consequences of a plan of reorganization, not only with respect to the debtor, but with regard to each class of claims or interests. The current practice in most courts is to require a discussion of the potential material federal and state tax consequences to the debtor. Requiring tax disclosures with regard to hypothetical claim holders may create significant problems for reorganizing debtors and their counsel, as well as significant increases in cost. The tax treatment of creditors’ claims very often depends upon the individual situation of the creditor and how the creditor already has treated the debt for tax purposes. Such disclosure would therefore require the debtor and its tax advisors to speculate on the possible ways in which distributions under a plan might be given different tax treatments in the hands of various creditors in different situations, even within a single class. In some instances, a creditor may be entitled to different or more favorable tax treatment than in another case, and the disclosure statement would be misleading if it did not cover that creditor’s special case. Taxing authorities who allow a potentially erroneous disclosure to go unopposed could be estopped from assessing taxes against creditors. The bankruptcy court and the office of the United States Trustee, which comments on disclosure statements (and, in some jurisdictions is required to preapprove disclosure statements before the court will set a hearing) would berequired to develop even more expertise in tax matters to cover this new disclosure. Further, the propenent plan might have to conduct discovery to ascertain the treatment of debts and, in some instances, the basis in such debt.

Title VI

Section 601—Executory Contracts and Unexpired Leases. Section 601 would require business leases of real property to be assumed or rejected on the earlier of 120 days from the filing of a case or confirmation of a plan. The deadline could be extended only upon motion of the landlord.

Assumption of a lease in a Chapter 11 case converts a landlord’s claim for future damages from a general unsecured claim to a first priority administrative expense. In the event the Chapter 11 case fails, courts have held that a landlord’s claim for future unearned rent under unassumed lease is senior to all priority and general unsecured creditors (including employee wage claims, tax claims and the like). For this reason, current law balances the rights of the landlord and the other creditors. By requiring a Chapter 11 debtor to commence making payments to the landlord within 60 days of the filing of the case , while allowing the Court to defer the assumption decision until confirmation of a plan when success of the case is relatively assured. The proposed change accords landlords more favorable treatment to the potential detriment of other creditors.

Moreover, since current law not only requires current payment, but also requires that leases be assumed or rejected no later than plan confirmation, the adoption of small business Chapter 11 provisions with their accelerated time lines for confirmation creates a questionable rationale to grant landlords more of an advantage over other creditor classes.

Section 602—Allowance of Claims or Interests. Section 602 of the proposed bill would change the method of calculating a landlord’s claim by allowing future estimated costs to be added to the calculation for future rent damages, while requiring that the claim be reduced by any mitigation of damages "that is required by law."

Traditionally, a landlord’s claim is calculated under applicable state law, subject to a cap imposed by the Bankruptcy Code. The proposed change would add a federally mandated element to the damage calculation which the law of a particular state may not allow. At the same time, reduction of the claim would apparently only be required if required by the applicable state law. The result is therefore a somewhat non-uniform approach to calculating lessor damages.

Description:

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.

U.S. Department of Justice

Executive Office for United States Trustees



Office of Research and Planning

901 E Street, NW, Suite 740 Ph: (202) 616-9193

Washington, D.C. 20530 Fax: (202)
616-4576

Samuel J. Gerdano

Executive Director American Bankruptcy Institute

44 Canal Center Plaza

Alexandria, VA 22314

Dear Mr. Gerdano:

The American Bankruptcy Institute recently posted on its web site
"An Analysis of S. 1914 Business
Reorganization Provisions"
by Christian Onsager. Mr. Onsager estimates that
implementation of Section 410 of S. 1914 would require over 5,000 additional United States
Trustee employees. This analysis of the demands on the United States Trustee Programs is
flawed by at least two major errors.

First, his estimate is based on 27,000 chapter 11
filings per year. Annual chapter 11 filings have never reached 27,000 in any year, and the
current annual volume is about 10,000 filings. As of April 1998, the open
chapter 11 caseload for all United States Trustees was 9,930 cases.

Second, Mr. Onsager appears to make a fundamental arithmetic error.
Mr. Onsager estimates that 80 percent of chapter 11 cases will be small business cases
under S. 1914's provisions. Based on his estimate of 27,000 case filings, there would then
be 21,600 cases requiring -- again according to Mr. Onsager -- an additional 10 hours per
case. The additional workload under this analysis would total 210,600 employee hours. A
work year is general estimated to consist of 2,080 hours. Using Mr. Onsager's numbers, S.
1914 would require -- at most -- 103 additional United States Trustee employees.
Mr. Onsager's estimate of 5,000 additional employees is therefore in error by a multiple
of 50, even using his excessive chapter 11 case estimates.

The United States Trustee Program has expressed its support of S.
1914. Because the bill requires practices already put in place by United States Trustees
in many chapter 11 cases, and the chapter 11 caseload is likely to be less than half of
that predicted by Mr. Onsager, the need for additional personnel would be far more modest
than he states. Currently, there are approximately 1,000 employees of the United States
Trustee Program. There may be a need for some increase in United States Trustee personnel
to meet the needs of S. 1914 and the other provisions in the pending bankruptcy
legislation. However, much of the work required by S. 1914 is already being performed by
existing personnel. While there will undoubtedly continue to be debate about S. 1914,
opposition should not be based on exaggerated estimates of additional employees needed to
do the work required by the bill's provisions.

Very truly yours,

Joseph A. Guzinski

Description:

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
S. 1914

Analysis Of Title VI


Miscellaneous

Written by:


Mark N. Berman


Hutchins, Wheeler & Dittmar


Boston, Massachusetts



Prepared for the American Bankruptcy Institute


Web posted and Copyright ©

April 27, 1998, American Bankruptcy Institute.


Sec. 601. Executory Contracts and Unexpired Leases.

This section proposes to amend Section 365(d)(4) of the Bankruptcy Code to provide that when a debtor is the lessee under a commercial lease, the lease will be deemed rejected and the debtor forced to vacate the premises unless the lease is assumed within 120 days after the beginning of the case. There is also a provision that allows the commercial lease to be assumed at an earlier point in time, i.e. the date of the order confirming a plan of reorganization, but this would appear of limited utility since plans are seldom confirmed within 120 days after a case is filed. Under this amendment, the only way to extend the 120 day period is for the lessor to file a motion asking the court to grant such an extension. Once a lease is rejected, the amendment repeats the language contained in the current version of Section 365(d)(4) requiring that the property be surrendered to the lessor.

This amendment proposes a significant change in the law. It is a change that will most likely benefit lessors of commercial property at the expense of successful reorganizations and unsecured creditors. The current version of Section 364(d)(4) allows the debtor or the trustee a shorter period, 60 days, within which to either assume or reject a commercial lease, but also allows the court to extend that period if a motion seeking such an extension is filed within the 60 day period and the court finds cause for the extension. Cause usually requires that the lessor is being paid all of the rent due under the lease for the period of time subsequent to the filing of the case. In actual practice, it is common for the 60 day period to be extended. It is also common for the extension to exceed an additional 60 days.

Under Section 365(b), which is unaffected by this proposed amendment, a debtor or its trustee can assume a commercial lease by filing a motion, by curing any defaults under the lease, by paying the lessor any damages suffered as a result of the previous defaults and by providing the lessor with adequate assurance of future performance. In order to accommodate the timetable mandated by the proposed amendment to Section 365(d)(4), the debtor or the trustee would have 120 days within which to secure the funds necessary to cure defaults under a lease, to compensate the lessor for any damages and to provide adequate assurance of future performance. While the lessor might be convinced to move for an extension so as to allow the debtor or trustee more time within which to accomplish these tasks, the landlord is likely to do so only when it is in its economic best interest to do so. Where the lease is below market value, i.e. the rent is below what the lessor could now obtain from a new tenant, the landlord will have to weigh the benefits of a higher rental stream from a new tenant and recovery on the unsecured claim obtained by a lessor upon rejection, against the lower rental stream called for by the lease plus the chances that the debtor or trustee, given more time, may be able to secure the necessary funds to cure andcompensate the lessor.

The amendment is also a potential threat to the dividend available to unsecured creditors. When a lease is assumed, not only are defaults cured and the lessor receives compensation for actual damages, but all future damages that might accrue should the debtor or trustee later fail become elevated to the level of expenses of administration, i.e. they must be paid in full before unsecured creditors receive any distribution. As a result, unsecured creditors are usually reluctant to permit a debtor or trustee to assume a commercial lease unless it is done either 1) as part of the plan of reorganization where creditors know what they will receive, 2) as the first step in the ultimate transfer of the lease to a third party who will thereafter be responsible to the landlord for the future rent, or 3) when the debtor’s reorganization is so far along that the prospects for a successful reorganization are real enough to warrant the risk of a large administrative claim by a lessor should the reorganization fail.

The amendment also fails to take the opportunity to resolve a conflict that has arisen in case law concerning the requirement that the property be surrendered to the lessor once the commercial lease has been rejected. Some cases have held that despite the "immediately surrender" language in the statute, the bankruptcy court will not get involved in post-rejection disputes between the lessor and the debtor or trustee regarding the lessor gaining access to the premises. Instead, those courts require the lessor to rely on state court process thereby occasioning further delay and cost to the lessor. Other cases have interpreted the language to allow the bankruptcy court to be the forum in which the lessor can obtain an enforceable court order requiring the lessee to deliver possession to the lessor. Since the same "immediately surrender" language is brought forward in the amendment, it can be expected that this dispute will continue and the application of this law will not be uniform throughout the country.

Section 602. Allowance of Claims or Interests.

This section proposes to amend Section 502(b)(6) of the Bankruptcy Code to alter the way in which a lessor of real estate calculates its claim against the bankrupt estate. A lessor’s claim has long been a concern in bankruptcy legislation because that portion of the lessor’s claim related to future rent reserved under a long-term lease could dwarf the claims of other creditors who often do not have a similar opportunity to mitigate damages, i.e. reduce their damages by finding a new tenant for the premises. Historically, the lessor’s claim has been limited or "capped" with the current version of the statute limiting that claim to the rent reserved under the lease, without acceleration, for the greater of one year, or 15% of the remaining term of the lease, not to exceed three years, plus any rent owed as of the earlier of the date of the filing of the case or the date of surrender/repossession of the property. The proposed amendment will re-write the limit of the lessor’s claim to the sum of the following:

1) monies due under the lease from and after its termination, without acceleration, either; (a) for the next one year period after termination, or (b) for the next 15% of the remaining term of the lease not to exceed three years, plus

2) any monies owed to the lessor as of the filing of the case, plus

3) all costs reasonably incurred or that will be reasonably incurred by the lessor during the one year period after termination of the lease. A non-exclusive list of such costs is included.

The amendment also requires that the lessor mitigate its claim to the extent mitigation is required by law. The mitigation is applied against the lessor’s total damage calculation before applying the limitations or "cap" imposed on claims for future rent.

The amendment has the benefit of codifying the lessor’s obligation to mitigate its claim for damages, although the reference to "any mitigation required by law" suggests that mitigation requirements may vary from state to state and that some states may not require any mitigation at all. The amendment also resolves a conflict in the case law regarding whether mitigation, i.e. the reduction in the claim, is applied to the lessor’s damage calculation before it is limited by this section, or only after the lessor’s claim has been capped. By using the words "monetary obligations" rather than "rent", the amendment also attempts to prevent a lessor from including in its claim a sum attributable to a non-monetary obligation that is denominated as rent under the lease.

The amendment allows the lessor to include in its claim all rent accrued but unpaid up to the date of the filing of this case. The current version of Section 502(b)(6) uses the earlier of the date of the filing of the case or the date of surrender/repossession of the premises. As a result, in those situations where the lessor has recovered possession of the premises prior to the filing of the case but has not yet found a new tenant, the lessor will have a larger claim in the case.

The most significant change proposed by the amendment is to allow a lessor to include as part of its claim any cost reasonably incurred or that will be reasonably incurred within the next year after termination of the lease. The determination of what those costs are is made on the date the claim is to be "determined." It is unclear whether the date of determination is the date the lessor files its claim, the date the bankruptcy court rules on any challenge to the claim or the date an appellate court might overturn a bankruptcy court’s previously erroneous determination. This uncertainty could make debtors, trustees and creditors reluctant to object to a lessor’s claim because of fear that additional costs incurred within the year after termination of the lease, but not then part of the claim, might be added to the claim.The lessor can be expected to include in its claim the costs of brokers’ fees or commissions and tenant improvements relating to securing a new tenant, because those costs are specifically included in the ammendment as examples. Less obvious costs that a lessor can be expected to include in its claim include advertising, security, utilities, taxes, legal costs related to negotiating and documenting a new tenant’s lease, moving expenses paid by the lessor to the new lessee, and the like. Disputes are likely to flourish over whether these costs are "reasonably incurred." Advocates for other parties in a bankruptcy case would also be expected to argue that these costs should not be included in the lessor’s claim because they are as likely to be incurred by the lessor after the normal, non-bankruptcy related termination of a lease. They are only being accelerated due to the bankruptcy related termination of the lease.

Section 603. Expedited Appeals of Bankruptcy Cases to Courts of Appeals.

This section proposes to amend Section 158 of Title 28 of the United States Code which contains the statutory provisions governing appeals in bankruptcy cases. The proposed amendment maintains the existing structure of bankruptcy appeals, but adds a new feature which applies exclusively in circumstances where an appeal has been taken from a bankruptcy court to the federal district court. In that event, if the district court has not filed its decision within 30 days after the appeal was filed, then the amendment would permit the appeal to be taken to the appropriate court of appeals. In such an instance, the court of appeals is required by the amendment to issue an order directing the clerk of the district court from which the appeal was taken to make the bankruptcy court’s decision the decision of the district court. That decision is then made the subject of the appeal to the court of appeals.

The current bankruptcy appeal system provides for two levels of appeal. First, an appeal may be taken from the bankruptcy court to the district court or, if the circuit has established a bankruptcy appellate panel, then the appeal may go from the bankruptcy court to the bankruptcy appellate panel. A further appeal may then be taken from the decision of either the district court or the bankruptcy appellate panel to the courts of appeal. When the National Bankruptcy Review Commission considered recommendations to Congress, it issued recommendation 3.1.3 to the effect that Congress should eliminate the first layer of review, i.e. all appeals to the district court or the bankruptcy appellate panel should be eliminated. Instead, all appeals would go directly from the bankruptcy courts to the courts of appeal. The proposed amendment does not implement the Commission’s recommendation.

The amendment appears to address the situation where a decision is needed from the district court within a 30 days time frame but no decision is forthcoming. In such an instance, the amendment will allow a party to the appeal to jump from the district court and pursue the matter in the appropriate court of appeal. However, there is no time requirement for a decision in that higher court. Furthermore, no parallel provision is proposed for matters pending before the bankruptcy appellate panel. This might motivate appellants to choose to pursue an appeal in the district court rather than the bankruptcy appellate panel if they view quick access to the court of appeals as advantageous.

The amendment appears to anticipate the elimination of the district courts from appellate review of bankruptcy cases except to the extent emergency consideration requires a resolution within thirty days. It is unlikely that an appeal from a decision of a bankruptcy court will be capable of going through the normal process of designating an appellate record, designating issues on appeal, briefing and oral argument leading to a decision within 30 days after the appeal is filed with the district court. It is possible that adoption of the amendment will result in emergency appeals going to the district court and bankruptcy appellate panel, while regular, non-emergency appeals will be heard whether by the bankruptcy appellate panel or the court of appeals.

It is also curious that the proposed amendment refers to " [a]ny final judgment decision, order, or decree of a bankruptcy judge entered for a case in accordance with Section 157. . ." (emphasis added). Section 157 consistently uses the word "proceeding" in addition to the word "case" when referring to matters that are place before the bankruptcy courts. The proposed language leads to a suggestion that a "proceeding" may not be subject to the special 30-day right to remove a matter from the district court and send it the court of appeals. This could lead to litigation over whether an issue is presented in a "proceeding" or in a "case."

Sec. 604. Creditors in Equity Security Holders’ Committees.

Section 604 proposes to amend Section 1102(a)(2) of the Bankruptcy Code to permit the court to order a change in the membership of a committee appointed in a bankruptcy case. In order to make such an order, the court must first receive a request from a party in interest although it is allowed to act on its own motion. The court must also determine that the change in committee membership is necessary to ensure adequate representation of creditors or equity security holders.

The existing Section 1102(a)(2) allows the court to order the appointment of additional committees of creditors or of equity security holders. It is silent about the court’s authority to order a change in the membership of an appointed committee. Some bankruptcy courts have found that authority in Section 105 of the Bankruptcy Code. The amendment would eliminate any confusion in this issue.

Assuming the amendment is adopted, it will remain unclear whether a court order requiring a change in membership of a committee will allow the court to designate exactly how that change should be effected or whether responsibility for choosing the actual members of a committee will remain vested in the United States Trustee. It is reasonable to expect that the Office of the United States Trustee will take the position that only it has the authority to designate who will be members of the committee. To clear up this uncertainty, the amendment could specify who will have the power to designate members of a committee, i.e. the court or the United States Trustee, if the court feels that a change is necessary to ensure adequate representation.

Sec. 605. Repeal of Sunset Provisions.

Section 605 proposes to eliminate the sunset provision applicable to Chapter 12 of the Bankruptcy Code which governs the adjustment of debts of a family farmer with regular annual income. If the amendment is adopted, Chapter 12 will be become a permanent feature of the Bankruptcy Code.

The National Bankruptcy Review Commission proposed at 4.4.1 of its recommendations that the sunset provision be eliminated and Chapter 12 be made a permanent addition to the Bankruptcy Code. The amendment will implement that recommendation.

Sec. 606. Cases Ancillary to Foreign Proceedings.

Section 606 proposes to amend Section 304 of the Bankruptcy Code. The main purpose of Section 304 is to allow a foreign representative, i.e. a duly selected trustee administration or other representative of an estate in a foreign proceeding, to initiate a case ancillary to that foreign proceeding in the United States Bankruptcy Court. This amendment will increase the protections afforded to residents of the United States when a foreign insurance company, not engaged in the business of insurance or reinsurance in the United States, initiates a foreign proceeding. If the amendment is adopted, it will prohibit the bankruptcy court from enjoining actions, enforcing judgments, ordering turnover or ordering other appropriate relief, whenever there is a United States creditor with a claim against certain deposits or multi-beneficiary trusts authorized under state insurance laws.

Section 304 allows the United States Bankruptcy Court system to co-exist with foreign proceedings. The bankruptcy courts are given flexibility to enter orders which are requested by a foreign representative but the entry of those orders is not mandatory. Section 304(c) requires that the bankruptcy court be guided by what will best assure an economical and expeditious administration of the estate consistent with just treatment, protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the foreign proceeding, comity and similar notions. The proposed amendment is absolute in prohibiting the bankruptcy court from considering any order if the foreign proceedings meets the amendment’s qualifications. Such an absolute and inflexible provision may undercut efforts to generate uniformity of bankruptcy proceedings throughout the world.


Description:

To amend title 11, United States Code, provide for business bankruptcy reform, and for other purposes.
S. 1914

Analysis Of Title IV


Small Business Bankruptcy

Written by:

Joseph B. Collins

Joseph H. Reinhardt

HENDEL, COLLINS & NEWTON, P.C.


Springfield, MA



Prepared for the American Bankruptcy Institute


Web posted and Copyright ©

April 27, 1998, American Bankruptcy Institute.


Introduction. The small business bankruptcy provisions set forth in Title IV of the proposed bill include many of the recommendations made by the Bankruptcy Review Commission ("Commission"). The Commission expressed its concern that no bankruptcy purpose was served by lengthy and inconclusive reorganization proceedings that served primarily to protect debtors from creditor action. The Commission was concerned that Chapter 11 lured many small business debtors that had no realistic hope of confirming a Plan of Reorganization. Conversely, the Commission also recognized that a successful reorganization can save jobs, enhance the return to creditors and preserve the going value of a business.

The proposed bill sets up a class of cases to which special reorganization provisions apply. That class includes all debtors having liquidated debt less than $5,000,000.00 and all single asset real estate cases. Although statistics are not available, this classification may include the great majority of Chapter 11 cases. Certain provisions of the bill seem to relax the difficulty of reorganization for a small business. For example, the provisions that modify disclosure statement requirements should assist debtors in Small Business Cases. The preparation of a disclosure statement sufficient to satisfy the requirements of the existing Code has always been a time consuming and expensive proposition for debtors.

Other sections of the bill seem to make the reorganization process more complex for small companies. The bill not only restricts the time for filing and confirming a Plan of Reorganization, but also increases the debtor's duties during that period by requiring additional reporting requirements and attendance at additional conferences.

With these observations in mind, comment is provided on each of the proposed sections of Title IV - Small Business Bankruptcy.

Sec. 401. Small Business Defined. Under the present version of the Code, §§101(51)(B) and (51)(C), small business activity is bifurcated into small business entities with total undisputed debt of $2,000,000.00 or less (exclusive of owners/operators of real estate) and single asset real estate cases with undisputed secured debt of $4,000,000.00 or less. The bifurcation continues with the distinction that the small business provisions are elective §1121(e), while the single asset real estate provisions are mandatory §101(51)(B). The bifurcation concludes with provisions §§1102(a)(3), 1121(e) and 1125(f), which tend to simplify and expedite the reorganization process in Small Business Cases.

The proposed bill will make designation as a Small Business Case mandatory in single asset real estate cases and when the total debt of other debtors is $5,000,000.00 or less. The bill will eliminate most of the bifurcation between a small business and single asset real estate cases. Certain distinctions will, however, exist for the single asset real estate case as discussed in the analysis of §§415 and 416 of the proposed bill.

Although statistics do not seem to be available, it seems that the vast majority of Chapter 11 cases will be Small Business Cases under the proposed bill. The mandatory application of thesmall business provisions of the bill will, therefore, result in a substantial change in small business reorganization efforts throughout the country.

Sec. 402. Flexible Rules for Disclosure Statements. Under the present Code, Small Business Cases have a simplified disclosure statement procedure. Single asset real estate cases face a full disclosure statement requirement. The proposed bill provides the potential for elimination of a disclosure statement altogether, at the Court's discretion. Even if the Court elects to proceed with the disclosure statement process, it can do so in a procedurally simplified manner, due to the proposed use of form disclosure statements and the combination of disclosure statement and plan confirmation hearings.

Sec. 403. Standard Form Disclosure Statements and Plans. This Section is a major departure from the present Code, which has no provision for standard form disclosure statements and plans. The present disclosure standard is adequate information along the lines of an investment prospectus, §1125. The proposed bill provides for a balance in the construction of standard forms between "reasonably complete information" for the Courts, creditors, economy and simplicity for debtors. Standard form disclosure statements and plans have the potential for reducing the time that a debtor spends in bankruptcy and the expense of the case.

Sec. 404. Uniform National Reporting Requirements. This Section represents an entirely new set of provisions for reporting, unparalleled in the present Code. These reports deal with profit and loss, financial projections, historical comparisons of the current financial data with past projections, statutory and rules compliance, and tax compliance.

These reporting requirements are likely to add to the administrative cost of a Small Business Case. Small businesses do not have the ability to produce them, although the desirability of the reports cannot be denied, many Debtors will be obliged to seek professional assistance to comply with the proposed new reporting requirements.

The new provisions also do not address the fact that the Office of the U.S. Trustee already requires Debtors to provide some of the information required by new §404. The U.S. Trustee's Operating Guidelines and Reporting Requirements for Chapter 11 Cases ("OGRR") requires debtors to provide information regarding cash flow, unpaid administrative expense, and tax compliance. If the OGRR continues, small business debtors will have inconsistent and duplicative reporting requirements for the Court and for the U.S. Trustee.

Title IV generally seems to shift the responsibility for monitoring the Debtors day to day activities from the U.S. Trustee to the Court. The requirement that statutory reports be filed with the Court rather than with the U.S. Trustee is one example of this. In the days preceding the enactment of the Bankruptcy Reform Act of 1978, much concern was expressed about the Bankruptcy Courts involvement in the administrative and business aspects of the case, rather than with the application of the law. By involving the Court in financial reporting and status conferences (See §406), Congress should be aware that it is taking a step back in that direction.

Sec. 405. Uniform Reporting Rules and Forms. The guidelines for the structure and format of the financial reporting rules is the same as that for the content of form disclosure statements and plans, the balancing of a need for information with simplicity and economy for debtors.

Sec. 406. Duties of a Trustee or Debtor in Possession in Small Business Cases. The present version of the Code contains two sections that deal with the duties of a debtor. Section 521 deals with a debtor's duties in general and focuses predominantly on individual debtors. Section 1106 is applicable (with the exception of the investigating requirements) to Chapter 11 debtors in possession through the mandate of §1107.

The proposed bill specifies certain additional duties to be performed by a small business debtor. Some of these duties (i.e., filing tax returns and paying post petition taxes, maintenance of insurance, and filing required post petition financial reports) codify existing practice. Other requirements go beyond existing practice and should be considered separately.

a. Additional Financial Disclosures to be Filed With Voluntary Petition.

The additional documents that a debtor will be required to filed with the voluntary petition are typical of those items that will be produced at the request of the U.S. Trustee or a Creditor's Committee in a Chapter 11 case. What is significant about the requirement is that these documents must be appended to the voluntary petition or in a case of an involuntary case filed within three days after the entry of an order of relief. The Bankruptcy Rules have long recognized the fact that a debtor often enters bankruptcy in response to exigent circumstances, see generally, Rule 1007. The Bankruptcy Rules have established procedures that allow a debtor to seek extensions of time to file the various lists, schedules and statements required to commence a bankruptcy case. In order to make the requirements for Small Business Cases consistent with the debtor's other bankruptcy duties, proposed §1115(1) might be amended by deleting the phrase "append to the voluntary petition or, in an involuntary case, file within 3 days after the order for relief" and inserting the word "file."

b. Attendance at Interviews, Conferences and Meetings.

The present law requires a debtor to attend a meeting held pursuant to §341. The U.S. Trustee has also assumed the responsibility for conducting initial meetings with the debtor and its largest creditors at the outset of a case. Typically these meeting will determine whether a Creditor's Committee is appointed. Proposed §1115(2) modifies current practice by requiring initial debtor interviews and adds the additional requirement for scheduling conferences to held before the Court.

With respect to initial debtor interviews, the law seems to codify the U.S. Trustee's existing practice and require attendance by the debtor's senior management personnel and its counsel.

With respect to scheduling conferences, a new requirement is imposed. These conferences are to be held before the Court and are apparently nonevidentiary. Since a debtor's time is at a premium under the expedited requirements for Small Business Cases, one wonders why senior management personnel of a small business would be required to attend a scheduling conference.

c. Depositing Taxes into Separate Accounts.

Proposed §1115(6)(C) requires the establishment of separate deposit accounts into which all taxes collected or withheld must be deposited within one business day after receipt. The requirement for the escrow of taxes within one business day after receipt is a substantial departure from the routine practice of most solvent and insolvent companies. Every business that collects a sales tax, for example, would be required to implement a procedure for the daily accounting and escrow of sales tax receipts in order to comply with the law. The imposition of this new requirement will undoubtedly add additional pressure to owners of small businesses that are placed under pressure by the condensed time limits of the new bill.

Sec. 407. Plan Filing and Confirmation Deadlines. Proposed §407 reduces the time within which a small business debtor may file a plan from 100 days to 90 days. The Section also reduces the time within which a third party can file a plan from 160 days to 90 days. The Section also makes it more difficult for the debtor to obtain an extension of the time within which a plan might be filed. Under existing law, an extension may be given if the debtor can show that the need for an increased time period is the result of circumstances for which it should not be held accountable. Under the proposed law, the debtor must demonstrate by clear and convincing evidence that is more likely than not to confirm a plan within a reasonable period of time.

The most obvious effect of the compressed time period for the filing of a plan is to place pressure on a debtor to formulate its reorganization alternatives shortly after the commencement of the case. A more subtle effect of this section is to create circumstances in which it would be difficult for a third party to file a competing plan within the statutory time constraints. A debtor that fears a competing plan is not likely to inform its competitor of its reorganization plans until the last day allowed for the filing of a plan. Since the third party will not know whether it can offer a better plan until the debtor's is filed, and since the preparation of a competing plan requires a significant expenditure of time and effort, third parties may be less likely to expend the resources necessary to file a competing plan.

Sec. 408. Plan Confirmation Deadline. Section 408 adds a new paragraph to §1129 of the Bankruptcy Code that mandates the confirmation of a plan on or before 150 days from the commencement of a case. Since most plans are likely to be filed on the 90th day filing the commencement of the case, this basically leaves a 60 day period for plan confirmation. During this 60 day period, the following events would have to occur:

1.The filing of a plan and disclosure statement presumably with a Motion seeking the Court's conditional approval of the disclosure statement.

2.A hearing on conditional approval of the disclosure statement, together with any objections that might be filed to the Debtor's Motion seeking conditional approval.

3.The modification of the disclosure statement in order to comply with any requirements that the Court might make in granting conditional approval.

4.The printing of the plan and disclosure statement and the circulation of the plan and disclosure statement to creditors.

5.The expiration of a 25 day solicitation period; Rule 2002(b), plus a three day mailing period, Rule 9006(f).

6.The preparation of a report on acceptances and other documents and materials necessary to confirm the plan.

7.The confirmation hearing and funding of the plan.

The events noted above, of course, involve only the bankruptcy requirements. Since many plans contemplate a sale of assets or a financing transaction, the debtor would have to coordinate these events so that they took place within the statutory deadlines. Although no statistics seem to exist, we feel that it is safe to say that very few Chapter 11 cases have been confirmed on this fast of a track. Even with the reduced disclosure statement requirements, the schedule for the debtor will be grueling.

Sec. 409. Prohibition Against Extension of Time. Section 105 of the Bankruptcy Code gives the Bankruptcy Court broad authority to enter Orders necessary and appropriate to carry out the bankruptcy process. Under this section, the Bankruptcy Courts have historically entered a wide variety of orders that have been deemed appropriate to further the bankruptcy process.

Proposed §409 will restrict the Court's discretion to grant extensions of time for the filing or confirmation of a Plan under §105.

Sec. 410. Duties of the U.S. Trustee and Bankruptcy Administrator. The present Code does not contain any statutory duties for the U.S. Trustee or Bankruptcy Administrators that are aimed at Small Business Cases. The duties promulgated in the proposed bill, however, are similar to those that have already been undertaken by many U.S. Trustees without the statutory mandate. For example, an initial conference is held in many jurisdictions in which many of the issues enumerated in proposed §586(a)(3)(H) are discussed.

The proposed statute departs from existing practice by suggesting that the U.S. Trustee should attempt to develop a scheduling order. The concept of a scheduling order is new to the Bankruptcy Code. The proposed statute contains no guidance as to what is to be scheduled, how an order will be presented to the Court, or what the U.S. Trustee's rights are if its attempts to reach agreement with a debtor fail.

Sec. 411. Scheduling Conferences. Under the present Bankruptcy Code, the Court had the discretion to hold status conferences. The proposed bill mandates status conferences that are requested by parties in interest. As noted in connection with §404, status conferences tend to deal with administrative, rather than legal aspects of the case.

Sec. 412. Serial Filer Provisions. The present Code does not contain any specific provisions for dealing with serial filers. The serial filer problem is becoming increasingly prevalent in consumer and Small Business Cases. The proposed bill seems to adequately address the problem.

Sec. 413. Expanded Grounds for Dismissal or Conversion and Appointment of Trustee. In the present Code, the Court has a significant level of discretion as to whether to convert, dismiss or appoint a Trustee. The proposed bill serves to significantly reduce this discretion, making conversion or dismissal mandatory in certain specified circumstances. The proposed bill goes on to force motions to dismiss or convert to the top of the Court's docket by requiring hearings to be held within 30 days from the filing of the Motion and decisions within 15 days thereafter.

There are two places in the proposed bill where the language might be changed to clarify the apparent intent of the bill. Specifically, §1112(b)(2)(A)(i) should be changed by deleting the word "an" and inserting the word "the". Also, §1112(b)(2)(A)(ii) might be changed by deleting the phrase "by order of" and inserting the phrase "within the period of time ordered by". Also, §1112(b)(3)(J)(i) and §1112(b)(3)(J)(ii) might be revised to conform more precisely with Paragraph (2)(A). Specifically, Paragraph (3)(J)(i) could be amended to read "within the applicable period of time specified in this title; or" and Paragraph 3(J)(ii) could be amended to read "within the period of time ordered by the Court; and".

Sec. 414. Single Asset Real Estate Defined. Under the present Code, a single asset real estate case is limited to situations where the aggregate secured debt does not exceed $4,000,000.00. The proposed bill removes the debt limitation and thus subjects all single asset real estate projects to the requirements of a Small Business Case.

The new bill continues to exclude from the definition of single asset real estate cases, those companies in which substantial business, other than the business of operating the real property, is involved. Given the difficulties that real estate projects will have in meeting the deadlines of the proposed bill, and in consideration of the difficulties that a real estate project will have in confirming a plan under the revisions to §1129, it can be anticipated that litigation over the "substantial business" exclusion will increase.

Sec. 415. Plan Confirmation. There is considerable debate under the present Code and its interpretive case law as to whether there is a "new value exception" to the Absolute Priority Rule. This conundrum frequently arises in single asset real estate cases in which the plan proposes to "cram down" the secured creditors' claim. The proposed bill gives the secured creditor the right to limit the Court's ability to find that the new value exception has been satisfied to circumstances in which the new value is at least equivalent to 25% of the value of the real estate. The 25% capital contribution would be payable in cash. This requirement, taken together with the time frame in which the single asset case must proceed to confirmation, will make it very difficult for real estate projects to successfully reorganize.

Sec. 416. Payment of Interest. This section of the proposed bill requires that a Debtor pay a contract rate of interest on the value of the creditors' interest in collateral in a single asset real estate case. This changes the current law which required the payment of a fair market rate of interest.

The proposed bill also provides that such payments may begin as early as 30 days from the date that the Court determines that the debtor is a single asset real estate case.

Description:

To amend the Truth in Lending Act to prohibit the distribution of any negotiable check or other instrument with any solicitation to a consumer by a creditor to open an account under any consumer credit plan or to engage in any other credit transaction which is subject to that Act, and for other purposes.

Description:

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

Description:

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

Description:

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.
MEMORANDUM

Family Farmer Protection Act of 1997 (S. 1024)

Web posted and Copyright ©
July 11, 1997, American Bankruptcy Institute.


On July 16, 1997, Sen. Charles Grassley (R - Iowa) introduced The Family Farmer Protection Act
of 1997 (S. 1024), also co-sponsored by Sens. Richard Durbin (D - Ill.) and
Thomas A. Daschle (D - S.D.), intended to make chapter 12 of title 11 of the United States Code
permanent.

The bill would repeal the sunset provision of Section 302 of the Bankruptcy Judges, United
States Trustees, and Family Farmer Bankruptcy Act of 1986 (28 U.S.C. 581) by striking
subsection (f). The bill also seeks to clarify the rights of family farmers after the completion of a
plan.

Below are the text of the proposed bill and the relavant text of PL 104-127, which initiated
the exception to loan prohibitions for family farmers.

S. 1024

...

SEC. 2. REPEAL OF SUNSET PROVISION.

Section 302 of the Bankruptcy Judges, United States Trustees, and Family Farmer
Bankruptcy Act of 1986 (28 U.S.C. 581 note) is amended by striking subsection (f).

SEC. 3. CLARIFICATION OF RIGHTS OF FAMILY FARMERS AFTER
SUCCESSFUL COMPLETION OF A PLAN.

Section 2008h(b)(2), of title 7, United States Code is amended by adding `or has
successfully completed a reorganization plan under Chapter 12 of title 11, United States
Code (the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act
of 1986, Public Law No. 99-554, as amended)' after `title'.


PL 104-127

Sec. 648 of H.R. 2854

SEC. 648. DELINQUENT BORROWERS.

(b) LOAN AND LOAN SERVICING LIMITATIONS- The Consolidated Farm and
Rural Development Act (7 U.S.C. 1921 et seq.) (as amended by subsection (a)) is
amended by adding at the end the following:

`SEC. 373. LOAN AND LOAN SERVICING LIMITATIONS.

Description:

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

Description:

To make chapter 12 of title 11 of the United States Code permanent, and for other purposes.

Description:

To provide for the appointment of additional Federal circuit and district judges, and for other purposes.

Description:

To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.

Description:

To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
MEMORANDUM

In Further Response to Prof. Bruce Markell Re: Section 603 of Chemical Weapons
Convention Implementation
Act

Editor's Note:

Other Commentary on Section 603 of S. 610:

Professor Markell has now responded to my comments on his article about the proposed
revisions to the automatic stay that are contained in S. 610, the implementing legislation for the
Chemical Weapons Bill. He attacks the process by which the language was included and disputes
whether the bill says what it means. What he conspicuously fails to do is engage the real issue
here: namely, what should be the proper scope of the police and regulatory exception. If
there is agreement on that point, then it matters little whether Congress arrived at that conclusion
on its own or whether it recognized and built on the work of the Commission. (In this regard, I
would reiterate the point I made previously — while NAAG is obviously in agreement with
this proposal, it did not contact the Senate or request that this issue be dealt with in this
bill. To the contrary, the government has raised these issues with the Commission from day one
and proposals have been presented to and debated extensively before the Government Working
Group and the Commission as a whole. Indeed, the Commissions's current working proposal
endorses much, albeit not all, of this proposal. That is all that the government did.) It
does little to advance the debate to engage in ad hominem references to "lobbyist-supported and lobbyist-drafted language" to describe actions that are no different from those of
every other participant in the process before the Commission (including, of course, the good
Professor himself.)

I also find offensive Professor Markell's statement, that the government's position that the
proposal excludes payment of monetary judgments is bad drafting, at best, and "dissembling," at
worst. The government has stated explicitly and unequivocally in every discussion there has been
of these issues that it does not seek to change the current system by which it may
liquidate, but not collect, monetary judgments obtained in police and regulatory actions.
Professor Markell can hardly deny that the proposed language, by incorporating the limitation that
is presently contained in §362(a)(5), at least evinces an effort to retain that distinction
— and Commissioner Edith Jones of the 5th Circuit
has indicated that she reads the proposal in the same way that the government does. While
ambiguity in drafting is an ever-present hazard, accusing a proposal's proponents of undertaking
the effort in bad faith is unlikely to advance the dialogue. In any event, fighting over the current
language, I suggest, misses the point. If the debate would, instead, focus on reaching agreement
on what the scope of the exception should be, it should certainly then be possible for
persons of good will to ensure that the proposal does correctly state that understanding.

Turning to the merits of this debate, then, the government believes that there is a
great need to clarify the existing language in §362. Congress has already made clear that it
wishes to allow the normal police and regulatory processes to go on, even in situations where
enforcement of the regulatory decision would, inevitably, affect estate property. Having made the
policy judgment to allow the process to proceed to that point, it will only be in rare situations that
the bankruptcy court will have any power to bar the government from implementing the
order. This is not because government actions are unique; rather, it is simply an inescapable result
of the Full Faith and Credit Clause — like every other court, a bankruptcy court is not
authorized to relitigate the merits of determinations made by other courts with jurisdiction to hear
the case. If one accepts that simple principle of jurisprudence, then it follows logically that a
bankruptcy court can refuse to allow the enforcement of those governmental orders only

if it decides that it can disregard the finding that the debtor is violating the law and authorize that
lawbreaking if this is what is necessary to assist the debtor's reorganization. I challenged
Professor Markell in my initial response to find authority in the Bankruptcy Code for placing such
startling and far-ranging authority in the bankruptcy courts and I renew that challenge now.

I submit that there is no such general authority. (Congress clearly knows how to make the
Code govern, "notwithstanding applicable non-bankruptcy law" in treating matters such as
executory contracts — but there is no such statement with respect to police and regulatory
actions.) Yet, despite the fact that the court will have virtually no discretion, at that stage of
the proceedings
, to deny the government's request to enforce its order, the current language
in §§362(a)(3) and (6) can be read to hold that the implementation of such orders is
barred until the court carries out the ministerial act of lifting the stay. The proposed language was
meant to eliminate the need for the government to take that additional step, because it is an
unnecessary source of cost and delay and encourages debtors to seek to relitigate matters which
have been finally adjudicated.

  • That is not to say that the bankruptcy court will never have the power to enjoin police and
    regulatory actions. Clearly, it may act on a motion by the debtor that challenges the government's
    assertion that is exercising police and regulatory authority. In addition, even if the action is
    ostensibly covered by the governmental exception to the stay, the court may still enjoin use of
    applicable non-bankruptcy principles, such as bad faith or equitable estoppel, to enjoin the
    government. Excepting an action from the automatic stay does not immunize the government
    from such motions; at most, it merely presumes the regularity of the government's actions and
    requires the debtor to affirmatively raise the issue if it believes the government is not acting
    properly. Thus, while I may debate Professor Markell's view that check prosecutions are "bad
    faith" actions, the fact is that motions to enjoin the government on that basis are routinely filed
    (and usually denied) in criminal cases, even though such cases are exempt from all
    aspects of the stay. Ipso facto, the debtor is entitled to raise the issues in civil
    proceedings. Allowing challenges on these limited bases, though, is a far cry from an assertion
    that the court has a general authority to enjoin the government so as to allow the debtor
    to continue to break the law.

    Moreover, even though I agree that these challenges may be made, if they are raised at
    the appropriate time
    , I strongly disagree with the assumption that the debtor should be able
    to use §362(a)(3) as the basis for seeking a plenary, de novo review of these issues

    after the regulatory process is complete and the government is prepared to implement its
    order. Waiting to conduct such a review until that point, I suggest, comes far too late in the
    process. In all but the most unusual cases, these issues will be apparent and ripe for decision as
    soon as the government begins its regulatory actions. When the government continues an
    enforcement action after a bankruptcy filing, it does so, perforce, based on the assertion (whether
    explicit or implicit) that its actions are justified by the police and regulatory exception and are not
    being taken in bad faith. If the debtor disagrees with that position, it can and I suggest
    must timely assert them, either before the bankruptcy court by means of a requested
    injunction, or in the nonbankruptcy proceedings as an affirmative defense, long before the final
    judgment is reached. It makes neither legal nor logical sense to suggest that a debtor may allow
    the litigation process to run its course in state court and only then raise these issue before the
    bankruptcy court if the results prove unfavorable. The non-bankruptcy court may have explicitly
    ruled on these issues — and, if so, its judgment is entitled to full faith and credit. But, even
    if it did not, the principles of res judicata dictate that these defenses must be raise at an
    appropriate time or they will be waived. It is one thing to say that the government must be
    prepared to defend its actions if the debtor challenges them in a timely fashion; it is quite another
    to say that the reason for retaining §§362(a)(3) and/or (6) is to ensure that debtors
    may have this very belated bite at that apple.

    Some may view these arguments as overly technical or legalistic. Why not, after all, let the
    bankruptcy court, the "authority" on the automatic stay, decide those issues once they are really
    "crucial?" Or why not let the bankruptcy court "balance" the important goals of the Code against
    the regulatory requirements of the other statute? Why not indeed. While these arguments may
    seem tempting, they are based on the notion that bankruptcy is an area in which normal rules of
    jurisprudence simply don't apply — and that is a very dangerous slope to begin to venture
    down. Moreover, while there may seem to be little harm in allowing judges to exempt a debtor
    "just this once" from just this little "technicality," the legal and practical drawbacks to granting
    such unbounded authority to judicial actors are insurmountable. What standard would they use to
    "balance" a goal against a law? What evidence would be admissible to prove the "need" for the
    law? What presumption of validity would be accorded to the conclusions of the statute's drafters
    on those issues? Perhaps most importantly, how would the interests of third parties like neighbors
    and competitors be recognized in this process? Professor Markell does not like legislatures
    passing laws without notice and comment — surely he does not suggest that a court should
    be allowed to override a duly-enacted law without according those same rights to
    everyone affected by the change?

    All of this suggests why we believe the present proposal is necessary. Professor Markell
    disagrees and argues that there is no reason why the current legislation should go beyond
    language dealing with chemical weapons inspectors. His proposal is flawed for several reasons:

    • First, if a change is made only with respect to chemical weapons, this would
      strongly suggest, by negative implication, that §§362(a)(3) and (6) do apply
      to bar all other governmental police and regulatory actions that may affect estate property. The
      courts are currently split on these issues, but adopting Professor Markell's proposal would
      strongly suggest to them that the argument should be resolved against the government. Thus, his
      change would not be neutral, but would leave regulators in a weaker position than they are now
      — which directly contradicts the recommendation from the Working Group of the
      Bankruptcy Review Commission that the government's ability to act should be
      strengthened.

    • Second, while chemical weapons are undoubtedly dangerous, in reality, the number of
      filings involving such parties are likely to be minuscule, at best. If it's important to ensure that the
      government can act in those highly unlikely cases, why is it any less important to ensure that it
      may act in the more mundane, but far more likely, situations that occur? Shutting down an
      unsanitary restaurant without delay, for instance, does not have the glamour of seizing chemical
      weapons — but is far more likely to actually prevent illness and death. Granted, most courts
      will probably overlook the "technical" violation that occurs when the health inspectors padlock
      the doors without obtaining relief from the stay, but should a government be forced to
      operate this way — protecting the public good only at its peril and under the constant threat
      of contempt sanctions? I suggest that is no way to run a railroad —or a government.

    • Finally, Professor Markell's suggested language does not deal with §362(a)(6)
      and he continues to profess a lack of understanding as to why the proposal in S.610 deals with
      that section. The reason is simple. By its terms, that section prohibits any act to collect
      or recover on a pre-petition claim — words which, applied literally, cover far more than just
      attempts to receive actual payment of one's claim. Debtors have frequently argued that
      the section should be applied according to its literal terms, so as to bar even regulatory actions
      that are explicitly covered by the section 362(b)(4) and (5) exceptions. In their view, every act
      that the government takes, from the first filing of a complaint to the last appeal, is simply a step
      along the way to collecting on the claim and, as such, is barred. Again, to be sure, most courts
      view that interpretation of the section as "absurd," and rewrite its language so that it does not
      apply to actions that are otherwise excepted from the stay. But, so long as the words are as broad
      as they are, they will invite unnecessary litigation. If the section were rewritten to narrow it to its

      intended scope; i.e., nonjudicial acts of harassment or coercion, then there might
      be no need to have a governmental exception to it. Until then, though, it is important to clarify
      that it does not apply to normal police and regulatory litigation and that is what the language in
      S.610 attempts to do, by allowing enforcement of regulatory judgments, while excepting the
      enforcement of money judgments.

    Finally, Professor Markell returns to Seminole as a reason for retaining the
    automatic stay. Much of the debate on this topic seems to proceed on the notion that state laws
    allow government officials to seize money and assets of the estate in blithe disregard of the Due
    Process Clause. Obviously that is not the case. Indeed, the vast majority of police and regulatory
    seizures will only take place after prolonged bureaucratic wrangling so the debtor will have ample
    opportunity to name the appropriate state official (rather than the state directly) and request an
    injunction against the actions being threatened by that official. Moreover, even where tangible
    assets or a bank account are seized or frozen without a preliminary hearing, it may still be possible
    to obtain injunctive relief against the state official to obtain the return of the items, so long as the
    debtor retains an ownership interest in the property. Finally, as to the small number of cases that
    may remain, I am confident that there be some forum where monetary claims against a state may
    be heard in virtually all instances. State politicians must answer to their constituents, after all, and
    those persons are unlikely to allow the government to trample on them without an opportunity for
    redress for long. Those state forums, in turn, are required to enforce federal laws equally with
    state laws.

    Failing to do so is unconstitutional and would be subject to appeal to the state Supreme Court
    and to the United States Supreme Court. While in an occasional case, the need for such review
    may result in greater cost and delay than would occur if the states were fully amenable to suit in
    bankruptcy court, this is part of the price we pay for our federal system. (Indeed, the frequent
    efforts by debtors to use bankruptcy as a means of shifting pending state court litigation to
    bankruptcy court has its costs as well, but that too is part of the system.) In any event, the
    Supreme Court has spoken and Seminole is the law of the land. In my view, the cases
    where Seminole will raise substantial issues will be far fewer than those where it is
    important to clarify the government's ability to act to protect its citizens during a bankruptcy
    case. That is what this amendment is about, and I continue to believe it is necessary and
    appropriate.

  • Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
    Big Changes in Stay Exemptions Brewing


    Written by:

    Bruce A. Markell

    Professor of Law

    Indiana University School of Law—Bloomington


    bmarkell@polecat.law.indiana.edu

    Web posted and Copyright ©
    June 25, 1997, American Bankruptcy
    Institute
    .

    Editor's Note:

    Other Commentary on Section 603 of S. 610:

    The Changes

    here
    are some potentially large changes to the automatic stay brewing in Congress. The Chemical
    Weapons Convention Implementation Act of 1997", S. 610, which
    passed the Senate on May 23, and
    which was introduced in the House on June 10, has changes to the exemptions to the automatic
    stay which go way beyond Chemical Weapons treaties.

    The full text of Section 603 of the bill, which would make the changes, is reproduced below. In essence, the changes increase the current exemptions from the
    stay for governmental entities seeking to enforce any police or regulatory power (it is
    not limited to actions under the Chemical Weapons Treaty).

    Section 603 accomplishes this sweeping change by first eliminating the current exemptions for
    police and regulatory activity (§§362(b)(4) and 362(b)(5)). It then replaces them
    with an omnibus exemption for any actions stay by §362(a)(1) (the commencement or
    continuation of an action on a pre-petition claim), §362(a)(2) (the enforcement of a
    pre-petition judgment), §362(a)(3) (any act to take possession or control of property of the
    estate or of the debtor) and §362(a)(6) (any act to collect, assess or recover a pre-petition
    claim). The exemption will apply if the actions are "the commencement or continuation of an
    action or proceeding by a governmental unit . . . to enforce such governmental unit's . . . police
    and regulatory power, including the enforcement of a judgment other than a money judgment,
    obtained in an action or proceeding by the governmental unit to enforce such governmental unit's
    . . . police or regulatory power."

    Similar changes do not appear in the House companion bill, HR 1590,
    sponsored by Lee Hamilton of Indiana.

    Current Law

    Under current law, a governmental entity is not restricted in enforcing its police or regulatory
    powers so long as it does not try to take possession or exercise control over property of the
    estate. For example, the government can continue or initiate a criminal prosecution and can
    initiate an injunctive proceeding to stop pollution, even if such activities relate back to a period
    before the petition.

    What the government cannot do, however, is take control of estate property, in part because
    it is within the exclusive jurisdiction of the bankruptcy court under §1334(e) of the Judicial
    Code (title 28, U.S.C.). For example, the government cannot take control of transferrable liquor
    licenses, or exercise its regulatory powers for private gain. If there is any question, the
    government can always seek relief from the stay, in many cases on an ex parte basis
    (depending on the emergency), and if there is a problem with any legitimate action, the stay can
    always be retroatively annulled. (Technically, §§362(b)(4) and (5) currently contain
    no exemptions for actions stayed under §362(a)(3)).

    Effect of the Changes

    Under the change contained in Section 603 of the Chemical Weapons bill, governmental entities
    need not worry about the stay if they determine that their action fits within police or regulatory
    power. This is because it adds, for the first time, exemptions to §362(a)(3) and
    §362(a)(6) for any exercise of police or regulatory powers by governmental entities. If
    adopted, §362(b) would exempt, for example, the seizure and destruction of T-shirts in the
    debtor's warehouse if they violate copyright law. It could also conceivably be used to justify the
    seizure and sale of a $1000 care containing $100 of contraband drugs, with the legitimate $900
    profit going to tax coffers instead of creditors. [Note: at least one circuit has held that civil
    forfeitures relating to pre-petition exemptions are already exempt from the stay. In re
    James
    , 940 F.2d 46 (3d Cir. 1991). There are, however, cases that go the other way: See
    In re Goff
    , 159 BR 33 (Bankr. N.D. Okla. 1993); In re Thomas, 179 BR 523 (Bankr.
    E.D. Tenn. 1995) (post petition seizure); In re Ryan, 15 BR 514 (Bankr. D. Md. 1981).]

    Exceptions for Collection Activity?

    The bill also permits, by including an exemption to §362(a)(6), governmental action
    pursuant to the police or regulatory power in order to collect a debt. (§362(a)(6) stays
    "any act to collect, assess or recover a [pre-petition] claim.") I can't figure that one out, but I
    guess some court will have to.

    Double Whammy:

    Seminole and the Exemption from §362(a)(3)

    This legislation is particularly troubling in light of the uncertainty caused by the Supreme Court's
    decision in Seminole Tribe of Florida v. Florida, 116 S.Ct. 1114 (1996). Under some
    readings of Seminole, the states (but not municipalities) are immune, under the Eleventh
    Amendment, from jurisdiction in bankruptcy court. If so, whether they may be sued in state court
    then turns on the status of sovereign immunity under state law.

    This leads to the specter of a state making a unilateral determination that a seizure is
    permitted by its interpretation of its police and regulatory powers, and then never having
    that issue reviewed in any court, federal or state. To put it in context, if a state
    determines that products manufactured by a debtor violate state unfair trade law, and if state law
    permits civil seizure and forfeiture in such circumstances, the whole business may be confiscated
    without ever having to seek bankruptcy court relief.

    After confiscation, the identity of who may challenge the state's determination, and how it
    will be challenged, will solely be a function of state law. This can be troubling, especially in light
    of recent Supreme Court determination that co-owners and lienors need not be given any
    opportunity to contest a civil forfeiture. Bennis v. Michigan, 116 S. Ct. 994 (1996)
    (upholding Michigan statute allowing car to be forfeited as abatable nuisance after man engaged
    service of prostitute in car, notwithstanding state's failure to reimburse man's wife's part
    ownership interest).

    Lack of Public Input

    As far as I know, there were no hearings or any testimony on the issue. Press releases from Sen.
    Grassley's office indicate that the changes were suggested by the National Association of
    Attorneys General. There is nothing in the public record to explain why the changes go beyond
    changes necessary to implement the Chemical Weapons convention.

    One irony behind these changes is that one of the reasons that Congress created the National Bankruptcy Review
    Commission
    was to stop piecemeal riders such as that found in the Chemical Weapons bill.
    The Commission initially rejected the type of amendments set forth in the Chemical Weapons bill
    last fall, but decided early this year to discuss them again. When it finally was able to fit the
    discussion onto its agenda, at the Friday, June 20 meeting of the Commission in Detroit, the
    Commission was reduced to a roundtable discussion on the effect of pending legislation, rather
    than an investigation of what ought to be the law.


    The Text of the Bill

    Here are the changes, found in Section 603 of S. 610:

    Section 362(b) of title 11, United States Code, is amended—
    (1) by striking paragraphs (4) and (5); and
    (2) by inserting after paragraph (3) the following:

    "(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the
    commencement or continuation of an action or proceeding by a
    governmental unit or any organization exercising authority under the
    Convention on the Prohibition of the Development, Production,
    Stockpiling and Use of Chemical Weapons and on Their Destruction,
    opened for signature on January 13, 1993, to enforce such governmental
    unit's or organization's police and regulatory power, including the
    enforcement of a judgment other than a money judgment, obtained in an
    action or proceeding by the governmental unit to enforce such
    governmental unit's or organization's police or regulatory power; "

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
    MEMORANDUM

    Re: Section 603 of Chemical Weapons Convention Implementation Act

    Editor's Note: Other Commentary on Section 603 of S. 610:


    June 23, 1997

    As chair of the Bankruptcy and Taxation Working Group of the National Association of
    Attorneys General, I write to support the bankruptcy provisions contained in S. 610, the
    implementing legislation for the Chemical Weapons Treaty. We believe these provisions
    represent a balanced approach that recognizes the needs of the debtor and creditors, while
    ensuring that the government may continue to exercise its vital and fundamental police and
    regulatory powers to protect the citizenry as a whole. The new language does not expand
    the scope of those police powers, rather it only serves to clarify existing Congressional
    intent about the extent to which the exercise of such powers should be exempt from the
    automatic stay. Its inclusion will remove the ambiguities in current law, thereby
    eliminating unnecessary litigation, delay, and expense for all parties involved in such
    matters.

    The provisions in S. 610 will allow the government to continue to adjudicate liability
    issues and liquidate damages in cases involving police and regulatory matters, including
    areas such as environmental protection, consumer protection, and labor laws. In addition,
    as under current law, the government will be free to force compliance with injunctive
    obligations that are not claims and to enforce non-monetary judgments. The proposal,
    however, specifically excludes the enforcement of monetary judgments from the police and
    regulatory power exception
    . Thus, as is currently the case, the stay will continue to
    bar the actual collection of money judgments even where they are entered in true
    police and regulatory actions. Moreover, it does nothing to change the existing scope
    of police and regulatory powers which do not include matters such as collection of taxes,
    student loans, small business loans, or other similar purely monetary issues
    . Finally,
    it does not except governmental actions from the provisions of the automatic stay
    (§§362(a)(4) and (5)) which bar the creation or enforcement of liens against property of
    the estate and/or the debtor. Thus, the interests of secured creditors will not be
    affected by these provisions.

    The provisions ensure that the government’s authority to carry out bona fide
    police and regulatory actions will not be impeded by the automatic stay where no attempt
    to collect a monetary judgment is at issue. Under the current language, the provisions of
    §§362(a)(3) and/or (6) have sometimes been held to bar implementation of decisions in
    police and regulatory actions where they would, unavoidably, impact on property of the
    estate. The situations dealt with in the Chemical Weapons bill are an obvious example of
    where the application of §§362(a)(3) and (6) to governmental actions could cause serious
    danger. Clearly, even if a maker of such weapons files bankruptcy, the government must
    retain the ability to control the weapons and the chemicals used to make them, to seize
    them if authorized to do so by the bill, and, in general, to exercise the full authority
    provided for in S. 610 without being required to defer critical actions while it files a
    motion with the bankruptcy court to lift the stay. Indeed, financial difficulties facing a
    debtor may be the very reason that it tries to circumvent the law to find an easy source
    of funds to escape those problems. It is in those situations that the ability of the
    government to act quickly is more important, not less.

    Chemical weapons, however, are only one of a myriad of areas in which the government
    must be free to act in order to protect its citizenry, even if those actions may,
    unavoidably, make it more difficult for an individual entity to reorganize. When a law is
    passed, it is often clear that some portion of the regulated businesses may not be able to
    survive if they must comply with its terms, but the decision to accept that risk is a
    choice that has been made by the legislature, and should not be subject to revision on an ad
    hoc
    basis by the bankruptcy courts. There are many instances where the government must
    be free to act directly and expeditiously to control estate property: the destruction of
    unsafe and condemned buildings, [ FN: In re Javens,
    107 F.3d (6th Cir. 1997).]
    seizure of diseased or contaminated meat or
    confiscation of produce infested with Mediterranean fruit flies can hardly be held hostage
    to the need to obtain a lifting of the stay. The government must also be able to act on
    licensing issues where public health and safety or consumer protection issues are at
    stake, even if this means an unsafe or crooked facility is put out of business. [ FN: In re Wilner Wood Products Co. v. State of Maine,
    128 B.R. 1 (D. Me. 1992);In re Professional Sales Corp., 56 B.R. 753 (N.D. Ill.
    1985).]
    Finally, the legislature may determine that some estate property
    must be treated as contraband and removed from the stream of commerce, regardless of its
    sales value. This may involve the destruction of counterfeit goods or those made in
    violation of applicable labor laws, [ FN: In re
    Brock v. Rusco Industries Inc.
    , 842 F.2d 270 (11th Cir. 1988); Donovan v. TMC
    Industries Inc.
    , 20 B.R. 997 (N.D. Ga. 1982).]
    or the forfeiture of
    items which are the proceeds and instrumentalities of a crime. [

    FN: In re James, 940 F.2d 46 (3rd Cir. 1991)] Regardless of
    the intrinsic "value" of the goods, the government must be allowed to seize
    and/or destroy such items in order to protect against the harm that they do to the
    debtor’s employees and competitors by their very existence; to do otherwise would be
    to make the government an accomplice in the debtor’s unlawful actions. Moreover,
    forfeiture of assets, whether on a civil or criminal basis, has been made an integral part
    of this country’s war on crime, particularly in the drug area. Again, bankruptcy
    cannot and should not be seen as an avenue of escape from those legislative policy
    choices.

    This provision ensures that those choices will be respected. The courts retain power to
    restrain bad faith conduct by the government in the limited circumstances where this would
    also be allowed outside of bankruptcy courts. [ FN: Younger
    v. Harris
    , 401 U.S. 37 (1971).]
    That exception, though, cannot be
    equated to a general power in the bankruptcy courts to authorize a debtor to violate the
    law that all others must obey whenever the court thinks the law is unwise, unnecessary, or
    unduly burdensome. Those policy judgments are for the legislature, not the courts and this
    proposal clarifies that fundamental position.

    Heidi Heitkamp, Chair

    Bankruptcy and Taxation Working Group

    National Association of Attorneys General

    Note: The above was forwarded to Sen. Charles Grassley and Sen. Patrick
    Leahy, Ranking Member of the Subcommittee on Administrative Oversight and the Courts and
    its members.

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
    Brewing a Tempest in a Teapot:

    A Response to Professor Markell


    Written by:

    Karen Cordry

    NAAG Bankruptcy Counsel

    National Association of Attorneys General


    kcordry@naag.org

    Web posted and Copyright ©
    July 1, 1997, American Bankruptcy
    Institute
    .

    Editor's Note:

    Other Commentary on Section 603 of S. 610:

    rof. Markell has written an analysis of the language in S.610 that
    revises §362 of the Bankruptcy Code. As NAAG has been publicly accorded responsibility
    for the inclusion of the language in the bill, I would like to present a counterpoint to some of the
    more alarmist portions of the Professor's discussion. I have also included a letter that was sent to the
    House and Senate subcommittee by the Chair of NAAG's Bankruptcy and Taxation Working
    Group, Attorney General Heidi Heitkamp of North Dakota, which further discusses these issues.

    Just a note on process first. I do take responsibility for suggesting that the Justice
    Department's
    December 1996 memorandum to the National Bankruptcy Review Commission include the language that is
    now part of S. 610, but that is as far as I go. The Senate acted independently, and without
    consultation with NAAG, when it decided to include that language in the Chemical Weapons bill.
    It is my understanding that they were initially concerned with whether the non-governmental
    inspection teams that enforce the Chemical Weapons Treaty would qualify for inclusion under the
    police and regulatory exemptions from the stay. Although that concern could be easily addressed,
    the subcommittee was then forced to consider whether a party could file bankruptcy and assert
    the automatic stay as a bar to the regulatory actions of such teams. In deciding to add language
    to address those concerns, the Senate subcommittee concluded that the revisions were equally
    appropriate with respect to governmental police and regulatory actions generally. (Some have
    suggested that they should have only made the change with respect to the chemical weapons
    teams, but this could have resulted in unwarranted negative implications about the scope of the
    police and regulatory exception in other areas.) S. 610 then passed the Senate
    unanimously—a result with which NAAG is well pleased, although not directly responsible.

    On the merits, then, the bill simplifies the existing structure by combining present
    §§362(b)(4) and (5) into a single section which also exempts police and regulatory
    actions from §§362(a)(3) and (6). This change is not necessarily an expansion of the
    Code's present provisions; a substantial number of courts already consider that either or both of
    §§362(a)(3) and (6) cannot reasonably be deemed to apply to actions which are
    explicitly exempted by §§362(b)(4) and (5). See, e.g. Javens v. City of Hazel
    Park
    , 107 F.3d 359 (§362(a)(3)) and In re Mateer, 205 B.R. 915, 921-922
    (C.D. Ill. 1997) (§362(a)(6)). But, to the extent that the case law is split, and the proposal
    does propose a change, I submit it is reasonable, necessary, and, indeed, inevitable.

    In so stating, I refer, of course, only to the changes that the proposal actually makes, not to
    the imaginative list of horribles that have been conjured up about it. To clarify the situation:

    • The proposal only exempts police and regulatory actions. Collection of taxes,
      student loans, SBA loans, and the like have never been viewed as police and regulatory
      actions and would not be affected by this change.
    • A monetary judgment may be entered in a police and regulatory action but, as is the case
      now, cannot be enforced through collection from the estate's or the debtor's assets. (Thus, Prof.
      Markell's assertion that the exemption from §362(a)(6) will allow the government to
      "collect a debt" is simply incorrect. The exemption from §362(a)(6) is included, not to
      allow for collection of money judgments, but rather to clarify that the extremely broad language in
      that section should not be used to bar legitimate governmental actions which are explicitly
      exempted from the more specific sections of the Code.)
    • The provisions of §§362(a)(4) and (5), which bar actions to create, perfect, or
      enforce a lien remain effective against governmental entities.
    • Exempting an action from the automatic stay does not exempt the government or the debtor
      from other restrictions in the Code; thus, the government would still not be able to discriminate
      against a debtor for failure to pay a dischargeable debt, nor would the debtor be free to make
      post-petition payments on governmental claims except in accordance with the Code's provisions.
    • Section 105 remains available to restrict actions by the government which could be enjoined
      under nonbankruptcy law, such as where the government is acting in bad faith or could be subject
      to equitable estoppel.

    To the extent, though, that true police and regulatory actions do require the exercise
    of control over property of the estate, the bill clarifies that generally applicable law continues to
    control, even with respect to entities that file for bankruptcy. I make no apology for that
    proposition—a civilized society cannot function if its laws can be set aside whenever they
    impinge on business' profit-making opportunities. The choices as to whether the benefits of a law
    outweigh its impact on marginal enterprises is one that must be faced by the legislature when it
    enacts the statute; once that choice is made, there is nothing in the Code that authorizes a
    bankruptcy judge to override the legislative judgment, based on his own ad hoc weighing
    of the equities of the situation. This does not mean that the government can "exercise its
    regulatory powers for private gain." It does mean that the government can continue to protect
    the public interest in health, safety, consumer protection, environmental protection, labor laws,
    and the like even when a debtor is involved.

    At times, those protective actions inevitably will impact on property of the estate. Under
    current law, the government is plainly allowed to complete all necessary proceedings to determine
    that the particular actions should be taken, but arguably must come to the bankruptcy
    court for a "Mother, may I?" type of hearing before it is allowed to actually take the
    actions. But requiring a motion to lift the stay makes sense only if the bankruptcy court has any
    meaningful discretion to grant or deny the request. But, on what basis may it do so? There really
    are only two options: it can refuse to grant full faith and credit to a judgment of another court and
    redetermine the merits of that judgment, or it can admit the validity of the order but conclude that
    it may allow the debtor to violate the law in order to assist the reorganization effort or to provide
    more money to creditors. I invite Prof. Markell or anyone else to find the language in the Code
    that authorizes either of those results. (Contrast, for instance, the language in §505 that
    allows tax liabilities to be redetermined, with the language in 28 U.S.C. 959(b) which explicitly
    requires the debtor to obey applicable state police and regulatory statutes.)

    This is not to say that a state court judgment, for instance, is always right, but full faith and
    credit does not depend on the merits of the other court's actions. Rather, our federal system
    requires each branch of government to respect the actions of other branches and nothing
    in the Code overrules that fundamental principle of federalism. (See In the Matter of Pope
    (Pope v. Wagner)
    , 1997 WL 341702, fn. 9 (Bankr. N.D. Ga. 6/16/97), which discusses the
    Rooker-Feldman abstention doctrine, which provides that even if a state court decision is wrong,
    only the Supreme Court has appellate jurisdiction to modify that decision). In short, the
    bankruptcy courts do not exercise appellate authority over every other state and federal court in
    the land. And, if the bankruptcy court must accept the validity of those judgments, then
    requiring a pro forma motion will be, at best, a waste of time and money for all
    concerned and, at worst, will allow serious harm while time is wasting. Professor Markell's
    suggestion that the government should simply either routinely make ex parte motions to
    lift the stay or seek retroactive annulment of the stay is, I submit, no way to run a railroad.
    Government should not have to function by emergency motion or court contempt sanctions with
    the hope that its good intentions will save it from being punished.

    Prof. Markell then goes on to cite some examples of government actions that would be
    allowed under this section, but which he believes should not be allowed to take place. I suggest,
    however, that there is no alternative to allowing those actions to proceed. For instance, he states
    that the amendment would allow the government to seize and destroy T-shirts that violate
    copyright law. That is probably true, but does he seriously suggest that creditors have a right to
    demand that the government must sell the shirts for their benefit, thus becoming an
    accomplice to the debtor's illegal actions? If so, how does one balance the benefit to those
    creditors with the harm to the debtor's competitors who must stand by and watch the federal
    government take sales away from them by marketing goods when the debtor is not allowed to
    sell? By the same token, if current forfeiture laws allow for the seizure and sale of a car that is
    used as an instrumentality in the sale of drugs, does he mean to say that a bankruptcy judge may
    refuse to lift the stay if the judge believes that the law is unfair and should not be applied in that
    fashion? That conclusion is a prescription for judicial anarchism. I suggest, instead, that if one
    disagrees with the current forfeiture laws (and there may be much to disagree with), the proper
    solution is to go to Congress and have them changed, not to allow debtors to use bankruptcy
    courts as an end run around the law to gain additional rights that do not now exist.

    Finally, Prof. Markell argues at length that the problem is heightened with respect to state
    actions because of the Supreme Court's decision in the Seminole Tribe case. To be sure,
    that decision did give the states a measure of immunity from federal court jurisdiction
    over challenges to their actions. That is a far cry from "the specter of a state making a unilateral
    determination that a seizure is permitted by its interpretation of its police and regulatory powers,
    and then never having that issue reviewed in any court, federal or state."
    Seminole did not repeal either the Due Process or the Supremacy Clauses of the
    Constitution. Thus, I would be more impressed by this "specter" if the article provided examples
    of where a governmental agency could seize property without satisfying due process
    requirements, including appropriate notice, a hearing, and rights to object. It is one thing to say
    that review of a civil seizure or forfeiture decision may not be available in the bankruptcy court; it
    is quite another to imply that this means there is no independent review of the action or
    remedies for an improper action. I assume, Prof. Markell did not intend to suggest that state
    courts are incapable or unwilling to apply state and federal law competently and evenhandedly. If
    bankruptcy courts believe themselves competent to administer state law, they should be equally
    willing to extend the same collegial respect to state court judges.

    Moreover, it is not at all clear that the bankruptcy courts are totally barred from adjudicating
    challenges to state property seizures. The Supreme Court's recent decision in Idaho v. Couer D'Alene Tribe, No. 94-1474 (June 23, 1997)
    discusses the scope of the Ex Parte Young exception, as it pertains to declaratory
    judgments against state officials with respect to control of property. While the unusual facts of
    that case resulted in a determination that the exception did not apply, I think there is room for
    debtors to argue that they may normally sue state officials in bankruptcy court to determine rights
    of possession, if not final ownership, in goods seized from them during the case. If so, then there
    is a federal avenue to regain these assets for the estate's use during the case even if a
    final decision on ownership may need to be made in state court. I do not concede this point, I
    merely note that the issue is by no means settled or hopeless for debtors. Nor, of course, in any
    event, do I believe that going to state court is a fate worse than death, as some commentators
    seem to assume. Most state courts are well aware of their obligations to obey federal law, are
    reasonably competent at reading and applying a statute, and may even be capable of deciding a
    case correctly without assistance from the federal judiciary. Seminole probably does
    mean that other parties will need to visit state courts more often—and we welcome their
    arrival.

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
    MEMORANDUM

    Re: Section 603 of Chemical Weapons Convention Implementation
    Act

    Editor's Note:

    Other Commentary on Section 603 of S. 610:


    Also included in this response: A letter to Rep. Lee H. Hamilton
    and a proposed section addressing concerns regarding the automatic
    stay.


    Karen Cordry has written a spirited defense of proposed revisions to the exemptions from the
    automatic stay. I have the following brief points in reply:

    • I fully support exemptions to the stay for chemical weapons teams. That, however is not
      the
      issue.

    • There are two types of issues that divide Ms. Cordry and me: process issues; and
      substantive
      issues.

    • The process issues involve how we should go about amending the Bankruptcy Code. I
      do
      not believe that lobbyist-supported and lobbyist-drafted language should go into the Code without
      any hearings on the matter, and without giving other interested parties a chance to comment.
      Further, the National Bankruptcy
      Review Commission
      debated this very topic last fall, and took no action after that debate.
      The Commission revived the topic this June, but has still not acted. Thus, if Congress enacts
      Section 603, not only will the normal hearing and comment process be short-circuited, but
      Congress will ignore the deliberations of the body it created to advise it on the necessity of
      proposed changes to the Code.

    • On the process issue, my colleague Douglass Boshkoff and I have written to
      Representative
      Lee Hamilton, who is the sponsor of the companion bill in the House (H.R.
      1590
      ). We have urged him not to add language similar to Section 603 to the
      House bill, or to any final bill approved by the House. We have also drafted language which
      addresses the narrow concern presented by the Chemical Weapons Convention which could be
      used instead of Section 603. That letter is reprinted below, as well as
      the proposed alternative language. Anyone who wishes to write to
      Representative Hamilton may do so using the address on our letter.

    • The substantive issue is Ms. Cordry's assertion that the changes are "inevitable" and that
      without the unfettered ability of government agencies to unilaterally seize a debtor's property "a
      civilized society cannot function." I note that the provisions at issue have been in the Code for
      almost 20 years, and the world as we know it has not ended yet.

    • There is a further substantive point. The proposed language is badly drafted. The
      inclusion
      of an exception to §362(a)(6) is a key (but not only) example of the overbreadth. Section
      362(a)(6) stays any action "to collect, assess or recover a [pre-petition] claim against the debtor .
      . . ." If the bill becomes law, then a government entity could use its police or regulatory power to
      collect or recover a debt if it is doing so pursuant to its police and regulatory power. That is what
      the language says. As I stated before, I don't know what this means, but I submit that it means
      more than a "simple clarif[ication] that the extremely broad language in that section should not be
      used to bar legitimate governmental actions . . . ." And I will wager that members of Ms.
      Cordry's organization will likely say that it means more than that as well. Given that it would be
      relatively easy to draft language which specifically addresses the Chemical Weapon Convention
      concerns, one wonders why this overbroad and confusing language is being proposed.

    • In addition, in Ms. Heitkamp's memorandum explaining the bill, the assertion is made, in bold type,
      that: "The proposal, however, specifically excludes the enforcement of monetary judgments from
      the police and regulatory power exception." I disagree. The relevant language states that there
      are exemptions for:

      the commencement or continuation of an action or proceeding by a governmental unit . . .to
      enforce such governmental unit's . . . police and regulatory power, including the
      enforcement of a judgment other than a money judgment,
      obtained in an action or
      proceeding by the governmental unit to enforce such governmental unit's . . . police or regulatory
      power."

      I do not see how this language "specifically excludes" money judgments. Indeed, it does the
      opposite. Under the Code, "includes" is not limiting. Section 102(1). Thus the
      bold-faced language above does not limit the general language by excluding anything. It
      is
      an explanatory appositive. At best, Ms. Heitkamp's statement is bad interpretation; at worst it is
      dissembling.

    • Ms. Cordry's response
      also seems to assume that once a state or government passes a law, of whatever type, bankruptcy
      courts must enforce it unless it is unconstitutional. That is not my understanding of the law. For
      example, bankruptcy courts can (although for good reasons they often don't) enjoin bad faith
      criminal prosecutions for writing bad checks if the purpose of that prosecution is to aid private
      recovery. See Collier on Bankruptcy ¶105.03[3][c]. I suspect a bankruptcy court
      could also apply the same reasoning (using Younger v. Harris reasoning) to a civil
      forfeiture statute that was drafted and being used for the purpose of augmenting tax coffers,
      rather than protecting the public.

    • Ms. Cordry likewise raises the Supremacy and Due Process Clauses to my analysis of
      the
      Court's Seminole decision. Talking about Seminole in an abbreviated forum such
      as this is problematic, but let me try again: Seminole may (and time will tell) have two
      components: a jurisdictional bar, and a federalism overlay. Initially, if all the decision did was to
      move the dispute to state instead of federal court, I would grumble about the erosion of the goal
      of having the bankruptcy court as the single forum to resolve disputes, but I wouldn't object too
      loud. State courts are competent. But that is part of the problem. Once you get into state court,
      you are suing the sovereign that established that court. Competent state court judges will then
      notice that there are state sovereign immunity concerns, particularly with money judgments. In
      short, even if the state court has jurisdiction over the state, the state may have a complete and
      total affirmative defense: sovereign immunity. If the state has not seen fit to waive sovereign
      immunity, I think the bankrutpcy estate is in a quandry. Does it then have to go into federal court
      alleging that the failure to waive sovereign immunity is unconstitutional? Does it appeal that
      decision to the State Supreme Court? If the Eleventh Amendment means what it says, where is
      the jurisdiction for the any federal district court (or indeed, the U.S. Supreme Court) to hear the
      case against the state? How is a harmed debtor to collect? Even if my immunity analysis is
      flawed (and I hope it is) haven't we just increased the cost of proving that the state has proceeded
      unconstitutionally, thereby ensuring practical immunity for the state in cases involving amounts
      where the cost of litigation is less than the amount at issue? Especially in an area where we are
      concerned with insolvent estates, I question the wisdom of this approach.

    • Finally, Ms. Cordry suggests that if the bankruptcy bar does not like civil forfeiture laws
      (which appear to be the focus of much of this debate), then they should go to Congress to get
      them changed. I agree with that suggestion. I suspect, however, that Ms. Cordry would like to
      get advance notice of the proposed changes so that she could express her organization's view to
      Congress (even though some changes are inevitable), would expect Congress to at least listen to
      agencies created to study the legislation, and would not expect to see the changes for the first
      time after they had been opportunistically tacked-on to an unrelated bill. At least I think those
      would be her expectations.


    The Honorable Lee H. Hamilton,

    Member, United States House of Representatives

    9th Congressional District, Indiana

    2314 Rayburn House Office Building

    Washington, DC 20515-1409

    Re: Changes to Bankruptcy Code (title 11, U.S.C.) Contained in H.R. 1590 (Chemical
    Weapons Convention Implementation Act of 1997)

    Dear Representative Hamilton:

    We teach bankruptcy and commercial law at Indiana University School of
    Law—Bloomington. We write to you in your capacity as sponsor of H.R. 1590, the
    Chemical Weapons Convention Implementation Act of 1997 ("Chemical Weapons Convention.").

    As you know, the Senate passed a similar bill on May 23 (S. 610), and that bill was
    introduced in the House on June 10, 1997.

    We write to point out that S. 610 contains a provision (Section 603) amending title 11 (the
    Bankruptcy Code) in ways wholly unrelated to the needs of assuring compliance with the
    Chemical Weapons Convention. One of us has written on Section 603, and we include that article
    with this letter. To summarize, however, Section 603 purports to modify bankruptcy's automatic
    stay—a provision necessary for orderly liquidation and efficient reorganization—to
    allow entities charged with enforcing the Chemical Weapons Convention to dispense with
    bankruptcy court approval for any actions taken when dealing with debtors in bankruptcy.

    While it certainly does this, it does far more. In addition, it would permit federal, state and
    local governments to seize or take control of any property of a debtor in bankruptcy so long as
    the seizure was for "police or regulatory power," regardless of whether the
    governmental entities' activity has any relation to the Chemical Weapons Convention.
    This power is new, controversial and would amend a provision of title 11 that has been unchanged
    since the adoption of the current Bankruptcy Code in 1978.

    Although we think the proposed amendment unwise, our concerns are more fundamental.
    We do not think Congress should amend the Bankruptcy Code in such a piecemeal basis. In
    1994, Congress created the National Bankruptcy Review Commission in part to address this
    problem, and that body debated the advisability of similar changes as recently as June 20, 1997. It
    has yet to reach a consensus. Moreover, the Senate held no hearings, and as far as we know,
    invited no comment beyond that of the National Association of Attorneys General who suggested
    the amendment. Changes of the type proposed by Section 603, especially when the National
    Bankruptcy Review Commission is debating similar changes, deserve better and wider input from
    interested parties.

    To the extent the bankruptcy concerns addressed by Section 603 are valid, we include a
    revised section which only permits relief from the automatic stay for purposes of enforcing the
    Chemical Weapons Convention. We believe this section addresses all legitimate concerns.

    In summary, we urge you to resist efforts to change H.R. 1590 bill to conform to Section 603
    of S. 610. To the extent that some modification of the automatic stay is necessary, we urge you
    to go no further than the text we have supplied.

    Thank you for your time.

    Very truly yours,
    Douglass Boshkoff

    Robert McKinney Professor of Law (Emeritus)

    Bruce A. Markell

    Professor of Law



    Proposed Section Addressing Concerns Regarding Automatic Stay

    Section 362(b) of title 11, United States Code, is amended—(1) by adding a new paragraph
    (19) which would read as follow:

    "(19) under paragraph (1), (2) or (3) of subsection (a) of this section, of the commencement or
    continuation of any action or proceeding, or the taking of any action, by any person or
    governmental unit exercising authority under the Convention on the Prohibition of the
    Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction,
    opened for signature on January 13, 1993."

    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.
    MEMORANDUM

    Section 603 of Chemical Weapons Convention Implementation Act Would Reduce
    Reach of Automatic Stay

    Editor's Note:

    Other Commentary on Section 603 of S. 610:

    On May 23, 1997, the Senate by voice vote passed S. 610, the Chemical Weapons
    Convention Implementation Act.

    Section 603 of the Bill amends Section 362(b) of the Bankruptcy Code by dramatically
    reducing the reach of the automatic stay imposed on governmental units. Section 362 of the
    Bankruptcy Code is known as the automatic stay. It provides a sweeping halt to enumerated
    collection efforts automatically upon the filing of a bankruptcy petition. This provision is a critical
    implement in the Bankruptcy Code's tool set for fixing the affairs of a debtor in financial trouble.
    It provides the debtor or appointed trustee with a breathing spell after the filing of a petition. By
    halting creditor actions against the debtor and its property, the automatic stay permits the
    implementation of a statutory scheme which attempts a fair and equal treatment of creditor claims
    consistent with the priorities established by the Bankruptcy Code. For these reasons the automatic
    stay is said to benefit both the debtor and its creditors.

    The exceptions to the automatic stay are set forth in Section 362(b). For either policy or
    practical reasons, the listed actions are not subject to immediate halt upon the filing of a
    bankruptcy case. Section 362(b)(4) allows for the commencement or continuation of an action or
    proceeding by a governmental unit to enforce its police or regulatory power. Section 362(b)(5)
    allows for the enforcement of a judgment, other than a money judgment, obtained by a
    governmental unit to enforce its police or regulatory power. The legislative history suggested that
    these exceptions were to be narrowly construed to permit a governmental unit to protect the
    public health and safety, but not to permit the governmental unit to protect a monetary interest in
    the debtor's property.

    Section 603 of S. 610 attempts to rewrite Sections 362(b)(4) and (5) into a new Section (4).
    In the first instance, Section 603 of S. 610 addresses the legitimate concerns of the Chemical
    Weapons Convention by adding "any organization exercising authority under the Convention on
    the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and
    on their Destruction, opened for signature on January 18, 1993," to the governmental unit's
    statutory exception. This change appears to be an appropriate amendment necessary to implement
    the Convention's mandate. The international body that oversees the Convention is not a
    governmental body within the Bankruptcy Code's definition so that body either must be added to
    the definition of governmental body or added to the kind of entity that may enforce its police or
    regulatory authority without hindrance from the automatic stay.

    However, the effect of the language of Section 603 would not be limited to actions in
    connection with the Chemical Weapons Convention, but rather would extend to all governmental
    units and all types of actions. Thus Section 603 would have substantial and far-reaching
    implications for the entire bankruptcy reorganization process. There is a significant split of
    opinion about the appropriate application of the stay to governmental units. Indeed, I participated
    in a lengthy debate of these very issues before the National Bankruptcy Review Commission in
    October, 1996, and the subject is now under careful consideration by the Commission. Such a
    major change in the current balance of interests, as proposed by Section 603, should not be
    considered without a full public airing of the various points of view. This is particularly true given
    that the Commission's recommendations in the area are due to be released to Congress in just four
    months.

    The following examples illustrate the potential unintended impact of Section 603. Each is
    subject to debate about whether the government's police and regulatory power is involved, or
    whether the government is acting in some other capacity. The problem is that the authorization
    provided for by Section 603 of unilateral action by the governmental unit makes any consideration
    of the "capacity" question a post mortem debate.

    • The Federal Communications Commission could revoke or seize a radio or television station
      license for failure to pay a pre-petition obligation, even though the payment of such an obligation
      is prohibited by other sections of the Bankruptcy Code.

    • A local governmental unit charged with the responsibility of controlling liquor licenses
      could revoke or seize such a license unilaterally.

    Deletion of Section 603 of the Bill will not limit the government's police and regulatory
    powers but rather leave them where they are today, in need of a court order to modify the
    automatic stay, except for the existing exceptions. Such a process provides an opportunity for a
    hearing on the merits, at which time all parties can be heard and all arguments considered by the
    court.

    In sum, Section 603, if enacted, would clearly change the prospects for a successful
    reorganization for many entities, and significantly shift the balance of power in the bankruptcy
    process in favor of certain governmental creditors over all others, including other governmental
    creditors, lenders, trade creditors and the debtor. While Congress can legitimately elect to
    approve such a shift, it should do so only after having the benefit of a thorough public debate.

    For these reasons, the ABI urges the deletion of Section 603 from this Bill, or to modify it in
    a way to narrow its effect to chemical weapons matters.

    Note: The above was forwarded to Rep. Henry J. Hyde,
    Chairman of the House Committee on the Judiciary; Rep. Newt Gingrich, Speaker of the House;
    Rep. Richard Gephardt, Minority Leader; and Rep. John Conyers, Jr., Ranking Member of the
    House.
    • S.Res.
      75
      To advise and consent to the ratification of the Chemical Weapons Convention, subject to
      certain conditions.

    • The Chemical Weapons Convention Home Page

    • Complete text
      of The Chemical Weapons Convention
    Description:

    To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993.

    Description:

    To amend title 11, United States Code, to limit the value of certain real and personal property that a debtor may elect to exempt under State or local law, and for other purposes.

    Description:

    To amend title 28, United States Code, to divide the ninth judicial circuit of the United States into two circuits, and for other purposes.

    House - Introduced Bills

    Description:

    To revise the banking and bankruptcy insolvency laws with respect to the termination and netting of financial contracts, and for other purposes.

    Description:

    To revise the banking and bankruptcy insolvency laws with respect to the termination and netting of financial contracts, and for other purposes.

    Description:

    To impose certain sanctions on foreign persons who transfer items contributing to Iran's efforts to acquire, develop, or produce ballistic missiles, and to implement the obligations of the United States under the Chemical Weapons Convention.

    Description:

    To amend title 11 of the United States Code, and for other purposes.
    Analysis of Tax Proposals in H.R. 3150

    Testimony before the House Judiciary Committee

    March 18, 1998

    Written by:

    Grant W. Newton

    Chair, ABI Bankruptcy Taxation Committee



    Web prepared, posted and
    Copyright © March 18,
    1998, American Bankruptcy Institute.


    H.R. 3150 contains several tax proposals that involve
    modifications of the Bankruptcy Code. Most of the proposals were
    recommendations made by the National Bankruptcy Review Commission
    ("NBRC"). However, several of the proposals contradict the
    recommendations of both the NBRC and the Tax Advisory Committee
    appointed by the Chairman of the NBRC. The objective of this analysis
    is to explain the tax provisions that are in H.R. 3150 and identify
    some of the issues that need to be addressed before these provisions
    become law. H.R. 3150 contains no recommended changes to the Internal
    Revenue Code because these provisions must originate in the House
    Ways and Means Committee rather than the Judiciary Committee to which
    H.R. 3150 has been referred. The proposed changes recommended by the
    NBRC to the Bankruptcy Code that were not addressed by H.R. 3150 are
    described in the final section.

    The views expressed here are my own and not necessarily those of
    the American Bankruptcy Institute.

    Listed below is a summary of the recommended changes to H.R. 3150.


    H.R. 3150

    Section and Topic

    Recommendations

    Sec. 501(a)(1). Exempting ad valorem tax from
    subordination under section 724.

    No change recommended.

    Sec. 501(a)(2). Subordination of tax liens to chapter 7
    expense only.

    Delete this provision. It will limit the recovery of
    assets for unsecured creditors. A chapter 11 trustee is
    often better equipped to recover assets than taxing
    authorities.

    Sec. 501(a)(3). Trustee exhaust unencumbered assets,
    recover from secured lender reasonable and necessary costs
    and expenses to preserve or dispose of the property, and
    subordinate tax lines to wages and employee benefit plans.

    No change recommended.

    Sec. 501(b). Precludes determination of taxes where
    applicable period under any law other than a bankruptcy law
    has expired.

    Modify to provide that bankruptcy court can determine the
    tax. Often debtors in financial difficulty do not object to
    tax claims that are based on assets that have declined in
    value or for which no return was filed resulting in tax
    being based on unreasonably high values.

    Sec. 502. Section 522(c)(1) is modified to provide that
    exempt property shall be liable for debts of a kind
    specified in section 523(a)(1) or (5) of this title.

    The meaning of this section is not clear. Since the
    impact this change will have is not known, it is difficult
    to comment on the proposed change.

    Sec. 503. Provides for effective notice to Governmental
    Units.

    Modify to provide that Rules Committee issues notice
    requirements.

    Sec. 504. Requires proper notice before taxes determined
    under section 505(b).

    No change recommended.

    Sec. 505. Provides for use of the interest rate in IRS
    section 6621(a)(2) for prepetition taxes.

    Modify to provided that it is the rate without reference
    to section 6621(c) and that it is the rate in effect as of
    the confirmation date. In a chapter 11 case the rate should
    not be allowed to fluctuate from quarter to quarter.

    Sec 506. (1) Provides for tolling of priority of tax
    claim time periods during prior bankruptcy.

    Agree with general provision, but suggest that to be
    consistent with the provision that the additional time gives
    the taxing authority time to respond once the stay has been
    removed, the wording should be greater of time the stay (or
    offer in compromise) was in effect or six months (30 days
    for offer in compromise).

    (2) Extends the tolling to installment agreements.

    Delete this provision. During the time period prior to or
    at the time the IRS enters into an installment agreement,
    the IRS has the right to place liens on the debtor's
    property. This change penalizes those individuals that in
    good faith extend the time period for payment of their
    claims, and an unfortunate events force them to file a
    bankruptcy petition resulting in their taxes not being
    discharged, but would have been if they had not entered into
    the agreement.

    Sec. 507. Assessment defined.

    No change recommended.

    Sec. 508. Section 1328 would be modified to make chapter
    13 nondischarge provisions consistent with chapter 7
    provisions.

    Delete this provision. Chapter 13 facilitates the workout
    of tax claims and is consistent with other provisions of
    H.R. 3150 that require taxpayers to pay some of their claims
    over the plan period.

    Sec. 509. Section 1141(d) the confirmation of a plan does
    not discharge a corporation for a tax claim with respect to
    which the debtor made a fraudulent return or willfully
    attempted in any manner to evade or defeat such tax.

    Delete this provision. Management of the company that was
    involved with the fraud is generally replaced and a
    provision that prohibits a nonpriority tax from being
    discharged limits the ability of the creditors to reorganize
    the debtor and punishes employees and other interested
    parties.

    Sec. 510. (1) The stay under section 362(a)(8) would be
    revised to apply only to a tax liability for a taxable
    period ending before the order for relief.

    Modify provision to apply to only prepetition taxes.
    Taxes incurred after year-end, but before filing of petition
    may still be prepetition taxes.

    (2) Provides that the stay does not apply to the appeal
    of a previous court.

    No change recommended.

    Sec. 511. (1) Establishes required payments of at least
    15 % first five years and no more than 20% in final year.

    Modify to follow the recommendation of the NBRC and the
    Tax Advisory Committee suggested that the payments should be
    periodic, but did not define periodic other than to suggest
    that the payments should be monthly or quarterly and that
    balloon payments be prohibited.

    (2) Require secured claims to follow requirements of
    section 1129(a)(9).

    No change recommended provided above suggestion is
    followed.

    Sec. 512. Overrule cases that penalize the government due
    to certain benefits for purchasers provided for in the lien
    provision of the IRC.

    No comments on this proposed change.

    Sec. 513. Payment of postpetition taxes is required when
    taxes are due in the course of such business.

    No change recommended. However, the writer is concerned
    that this provision may on occasion place taxes above other
    administrative expenses.

    Sec. 514 Provides that taxing authority must file a claim
    before the final order approving the trustee's report.

    No change recommended.

    Sec. 515. Modifies section 523(a)(1)(B) to include tax
    return prepared by taxing authorities.

    Delete last section of proposed law and follow both NBRC
    and Tax Advisory Committee to include returns filed under
    section 6020(b).

    Sec. 516. Includes the word "estate" for purposes of tax
    determination under section 505(b).

    No change recommended. However, section 505(b) should
    provide that IRS must determine tax for partnerships and S
    corporations.

    Sec. 517. Requires tax returns for six years in chapter
    13 cases.

    Modify to provide that a return filed under IRC section
    6020(b) or similar federal, state, or local law provisions,
    constitute a filed return for Bankruptcy Code
    dischargeability purposes.

    Sec. 518. Requires tax disclosure.

    No change recommended.

    Sec. 519. Setoff of tax liability against tax refund.

    No comments on this proposal.


    Subordination of Tax Liens (H.R. 3150, Section 501(a))

    Section 724 of the Bankruptcy Code provides for the subordination
    of tax liens to administrative expenses and other priority taxes.
    H.R. 3150 would modify the subordination provision by not
    subordinating perfected, unavoidable tax lien arising in connection
    with an ad valorem tax on real or personal property, as recommended
    by the NBRC. Additionally, administrative expense incurred after the
    petition is filed is restricted to chapter 7 expenses unless the
    claim is for wages, salaries or commissions. The subordination only
    to chapter 7 expenses was not included in the recommendation of the
    NBRC.

    H.R. 3150, as recommended by the NBRC, would also add a subsection
    (e) to section 724, providing that before a tax lien may be
    subordinated, the trustee shall (1) exhaust the unencumbered assets
    of the estate, and (2) in a manner consistent with section 506(c)
    recover from property securing an allowed secured claim the
    reasonable, necessary costs and expenses of preserving or disposing
    of that property.

    Subsection (f) provides that notwithstanding the exclusion of ad
    valorem tax liens claims for wages, salaries, and commissions that
    are entitled to a section 507(a)(3) priority and claims for
    contributions to an employee benefit plan entitled to a 507(a)(4)
    priority may be paid from property of the estate which secures a tax
    lien, or the proceeds of such property.

    Comment: The proposals to not subordinate property taxes,
    to use unencumbered assets, and to subordinate property tax claims to
    wage holders, appears fair.

    However, the provision to limit the subordination to chapter 7
    expenses will limit the recovery of assets for unsecured creditors. A
    trustee appointed in a chapter 11 case, where there is a tax lien on
    all assets, has no incentive to go after known or potential
    recoveries because any costs that are incurred will not be allowed
    unless the tax claims are paid in full. Trustees are often better
    equipped to recover assets than the taxing authorities. Removing the
    incentive for the chapter 11 trustee may in fact result in less
    recovery to both the taxing authorities and to other creditors.

    Studies have shown that state and local governments have suffered
    losses because of the subordination of ad valorem tax liens. However
    that generalization should not be applied to the IRS and other state
    income taxing authorities by not allowing the tax lien to be
    subordinated to chapter 11 administrative expenses. Abuses have
    occurred where administrative expenses have been in excess of what
    they should have been, resulting in less return to taxing
    authorities. In most cases, the U.S. trustee appoints chapter 7 and
    11 trustees. The activities of trustees are monitored by the U.S.
    trustees and their involvement should help control the actions of the
    appointed trustee. No doubt a much greater abuse occurs when a
    chapter 11 case with no prospects of successful reorganization is
    allowed to continue until all of the free assets are consumed by
    professionals and then the case is converted to chapter 7. The change
    to section 724 that limits subordination to chapter 7 administrative
    expenses does nothing to deal with this abuse, however.

    Determination of Tax Liability (H.R. 3150, Sections 501(b),
    504 and 516))

    H.R. 3150 modifies section 505(a)(2) to provide that the court may
    not determine an ad valorem tax if the applicable period for
    contesting or redetermining the amount under any law other than
    bankruptcy law has expired. Some bankruptcy courts have redetermined
    the tax because the bankruptcy court may determine all claims. The
    NBRC did not recommend this change.

    H.R. 3150 also provides that the debtor-in-possession or trustee
    may request a determination of the tax at the time the tax return is
    filed. Upon payment of the amount shown on the return, the trustee,
    debtor, and any successor to the debtor is discharged unless the
    governmental unit notifies the trustee or debtor-in-possession within
    60 days that the return has been selected for examination and
    completes the examination within180 days after the request was made.
    Note that the wording in section 505(b) does not discharge the
    estate. Courts have held that the IRS may assess additional taxes
    against the estate but not against the trustee or debtor. Thus, even
    though the estate received the letter stating that the taxes were
    accepted as filed, additional taxes may be assessed against the
    assets that remain in the estate. To correct this problem H.R. 3150
    follows the recommendation of the NBRC and the Tax Advisory Committee
    and proposes to amend section 505(b) of the Bankruptcy Code by
    inserting "the estate."

    Section 505(b) of the Bankruptcy Code would be amended by
    providing that the request for tax determination must be made in the
    manner designated by the governmental unit (see notice section
    below). This was recommended by the NBRC.

    Comment: By not allowing the bankruptcy court to determine
    the ad valorem tax claim, the proposed change would allow a
    governmental unit to collect a tax that is greater than the amount
    allowed. If the tax were properly determined, the state will receive
    its priority payment. For example, in one case where a chapter 11
    trustee was appointed, the debtor allegedly borrowed millions of
    dollars of debt under false pretense. The debtor did not file
    business tax forms and the taxing unit determined the tax based on
    values that were greater than the actual values of the assets. Under
    this proposal, since the time for redetermining the tax expired, the
    business tax would remain, even though all parties know the tax was
    incorrectly calculated. Taxes already have a priority over all other
    general unsecured claim holders and this change will allow the taxing
    authority to collect or retain taxes for amounts that are greater
    than the amount that should be allowed.

    The inclusion of the "estate" in section 505(b) is a change that
    is needed.

    The modification to section 505(b) requiring notice be made
    according to the manner designed by the governmental units seems
    reasonable; however, the section should also be modified to provide
    that a partnership and S corporation in bankruptcy and chapter 13
    debtors are within the provisions of section 505(b). The IRS has
    issued a policy statement stating that section 505(b) does not apply
    to partnership and S corporations and has refused to apply section
    505(b) to chapter 13 cases.

    Use of Exempt Property (H.R. 3150, Section 502)

    Section 522(c)(1) of title 11 is amended by inserting at the end
    of the paragraph: "except that, notwithstanding any other Federal law
    or State law relating to exempted property, exempt property shall be
    liable for debts of a kind specified in section 523(a)(1) or (5) of
    this title." This proposed change was not recommended by the NBRC.

    Comment: The meaning of this section is not clear. Since
    the impact this change will have is not known, it is difficult to
    comment on the proposed change.

    Effective Notice to Governmental Units (H.R. 3150, Section
    503)

    Section 342 of the Bankruptcy Code under H.R. 3150 would be
    modified to establish standards for effective notice and provide
    information about the taxpayer such as taxpayer identification
    number, loan, account or contract number, or real estate parcel
    number. H.R. 3150 also provides that the clerk shall keep and update
    quarterly, in the form and manner as the Director of the
    Administrative Office for the United States Courts prescribes, and
    makes available to debtors, the register in which a governmental unit
    may designate a safe harbor mailing address for service of notice in
    bankruptcy cases.

    H.R. 3150 directs the Advisory Committee on Bankruptcy Rules of
    the Judicial Conference to adopt rules that provide notice to state,
    federal and local governmental units that have regulatory authority
    over the debtor and suggests selected items that should be included.

    H.R. 3150 also provides that no sanction under section 362(h) of
    the Bankruptcy Code or any other sanction that a court may impose on
    account of violations of the stay under section 362(a) of this title
    or failure to comply with section 542 or 543 of this title may be
    imposed unless the action takes place after notice of the
    commencement of the case has been received as required by section
    342.

    Comment: The NBRC adopted the Tax Advisory Committee's
    recommendation that all issues affecting governmental unit notice be
    in the form of proposed changes to the Bankruptcy Rules. H.R. 3150
    codifies part of the notice provisions and includes the revision to
    section 362(a) that was not part of the NBRC recommendations. This
    provision is intended to somewhat codify for the benefit of taxing
    authorities, In re Bloom, 875 F.2d 224 (9th Cir.
    1989), which held that "the statute provides for damages upon a
    finding that the defendant knew of the automatic stay and that the
    defendant's actions which violated the stay were intentional."

    Section 342(g) is troublesome in that it appears that this section
    would require the debtor to notify a governmental entity of a
    potential trust fund tax (100 percent penalty) even though the debtor
    was not aware of the potential liability.

    Taxing authorities need to be notified of bankruptcy filings;
    however, the requirements for such notice including content, timing
    of notice, sanctions for non-compliance, etc. should be covered by
    the Rules Committee.

    Rate of Interest on Tax Claims (H.R. 3150, Section 505)

    H R. 3150 would add a new section 511 to the Bankruptcy Code that
    would provide for interest on claims existing before the order of
    relief to be applied at the rate provided in section 6621(a)(2) of
    the Internal Revenue Code of 1986. Section 6621(a)(2) provides that
    the rate should be the federal-short-term rate determined under
    subsection (b) plus 3 percentage points. Subsection (b) provides that
    the Secretary shall determine the Federal short-term rate for the
    first month in each calendar quarter. Subsection (c) provides that
    the rate for large corporations should be increased by 2 percentage
    points. It is assumed that subsection (c) would not apply.

    Comment: The Bankruptcy Code does not specify the interest
    rate that is to be used for tax claims that are entitled to interest.
    Judicial consensus is that a market rate of interest should be used
    and that the federal statutory rate is relevant in determining the
    appropriate rate. To avoid the wasting of both judicial and debtor
    resources by litigating the rate, the NBRC followed the
    recommendation of the Tax Advisory Committee that the rate be fixed
    at the statutory rate under section 6621(a)(2), without reference to
    section 6621(c) and it should be the rate in effect as of the
    confirmation date. H.R. 3150 ignores the comment of the NBRC that the
    rate should not consider 6621(c) and that it should be set as of the
    confirmation date of the plan. If the rate in section 6621(a)(2) is
    allowed, it should be determined as of the confirmation date and
    should not be allowed to fluctuate from quarter to quarter. Since all
    other creditors generally must assume the risk of changes in the
    market rate of interest, the same consideration should also apply to
    the IRS. Regarding the rate under section 6621(c), since only the
    rate in section 6621(a) is mentioned, it is not clear if the section
    6621(c) rate would also apply. These changes are needed, if for no
    other reason than to avoid the litigation necessary to clarify the
    point.

    Tolling of Priority of Tax Claim Time Periods (H.R. 3150,
    Section 506)

    The first changes would provide that the period of three years
    before the filing of the petition under section 507(a)(8)(A)(i) would
    be modified to provide for any time, plus 6 months, during which the
    stay of proceedings was in effect under a prior case.

    The second change would provide a revised section
    507(a)(8)(A)(ii): "(ii) assessed within 240 days before the date of
    the filing of the petition, exclusive of- (I) any time plus 30 days
    during which an offer in compromise or installment agreement with
    respect of such tax, was pending or in effect during such 240-day
    period, and (II) any time plus 6 months during which a stay of
    proceedings against collections was in effect in a prior case under
    this title during such 240-day period."

    Comment: The majority of courts (justifiably) have allowed
    for tolling of priority time periods during prior bankruptcies
    because the stay was in effect and the IRS was limited as to the type
    of action it could take. This provision codifies the impact of the
    tolling. The added time allows the IRS time to respond once the stay
    has been removed. Thus, rather than extending the time period by six
    months or 30 days (in case of an offer in compromise), the extension
    should be the greater of any time during which the stay of
    proceedings was in effect in a prior case (or offer in compromise
    pending) or six months (or 30 days for an offer in compromise).

    H.R. 3150 would extend the tolling to installment agreements.
    During the time period prior to or at the time the IRS enters into an
    installment agreement, the IRS has the right to place liens on the
    debtor's property. Even during the installment period, the IRS may
    reserve the right to place liens on the debtor's property and take
    other actions to protect its interest. Some tax practitioners have
    indicated that they will recommend a larger number of their clients
    file bankruptcy rather than apply for an installment agreement if
    this change goes into effect. This change penalizes those individuals
    that in good faith extend the time period for payment of their
    claims, and a major illness, loss of job or other unfortunate events
    force them to file a bankruptcy petition. Prior years' taxes for this
    individual would be a priority claim because of the tolling
    provision, but if this individual had no interest in paying the taxes
    and had not contacted the IRS to work out an installment payment
    plan, the taxes may be discharged.

    The IRS seeks this change because it has seen numerous cases where
    a taxpayer entered into a minimal installment agreement to buy time
    until the 240-day measuring period passed thereby making the tax
    nondischargeable.

    The NBRC stated in its report that the proposal for tolling during
    the period of compromise did not extend to installment agreements.

    Assessment Defined (H.R. 3150, Section 507)

    There has been some conflict with state law as to the meaning of
    the term "assessment." Section 101 of the Bankruptcy Code is amended
    by inserting a definition for assessment: "(3) 'assessment'- (A) for
    purposes of State and local taxes, means that action which is
    sufficiently final so that thereafter a taxing authority may commence
    an action to collect the tax, and (B) for Federal tax purposes has
    the meaning given such term in the Internal Revenue Code of 1986; and
    'assessed' and 'assessable' shall be interpreted in light of the
    definition of assessment in this paragraph."

    Comment: Assessment was defined in accordance with the
    recommendations of the NBRC.

    Making Chapter 13 Nondischarge Provision Consistent with
    Chapter 7 (H.R. 3150, Section 508)

    Section 1328(a)(2) of the Bankruptcy Code is amended by expanding
    the dischargeability of taxes to cover those taxes that are
    nondischargeable in chapter 7. Thus, the provisions for chapter 13
    regarding tax discharge for fraudulent and unfiled tax returns under
    this proposal would be equivalent to those in chapter 7.

    Comment: In general, it can be argued that there should be
    no difference between the dischargeability of taxes under chapter 7
    and chapter 13. Chapter 13 facilitates the workout of tax claims and
    is consistent with other provisions of H.R. 3150 that require
    taxpayers to pay some of their claims over the plan period. Taxing
    authorities collect substantial taxes because chapter 13 requires
    that all priority taxes be paid during the plan period and it places
    on the tax rolls individuals that have not paid taxes in several
    years. On the other hand, in chapter 7, taxing authorities receive a
    very small percent of the taxes due and probably less than would have
    been received in chapter 13. This proposed change was debated by the
    NBRC, but the Commission was unable to obtain enough votes to pass
    the proposal. To assist the taxing authorities in determining the
    tax, especially the priority taxes, the Tax Advisory Committee
    recommended that tax returns for six years be filed as described
    below. This author supported the six-year requirement on the
    assumption that the discharge provisions in chapter 13 would not be
    repealed.

    Nondischarge of Corporate Taxes (H.R. 3150, Section 509)

    Section 1141(d) of the Bankruptcy Code is amended by adding the
    following provision: "(4) Notwithstanding the provisions of paragraph
    (1), the confirmation of a plan does not discharge a debtor which is
    a corporation from any debt for a tax or customs duty with respect to
    which the debtor made a fraudulent return or willfully attempted in
    any manner to evade or defeat such tax."

    Comment: The NBRC recommended that section 1141(d) be
    modified to deny a discharge to a corporation for which a fraudulent
    return was filed. There is considerable opposition to this
    recommendation on the basis that the management of the company that
    was involved with the fraud is often replaced and a provision that
    prohibits a nonpriority tax from being discharged limits the ability
    of the creditors to reorganize the debtor. Because of the inability
    to restructure the troubled business due to the inability to obtain a
    discharge of nonpriority taxes, the Service may even collect less.
    The Service should file criminal action against the corporate officer
    that filed a fraudulent return, but the creditors should not be
    punished because of the errors of prior management. It should,
    however, be recognized that there is a significant difference between
    what constitutes civil fraud and what constitutes criminal fraud.

    Stay of Tax Proceedings (H.R. 3150, Section 510)

    The stay under section 362(a)(8) would be revised to apply only to
    a tax liability for a taxable period ending before the order for
    relief. H.R. 3150 would revise section 362(b)(9) to provide that the
    stay does not apply to the appeal of a decision by a court or
    administrative tribunal that determines a tax liability of the
    debtor.

    Comment: Although designed to apply to postpetition taxes,
    the stay as restricted in section 362(a)(8) would also apply to some
    prepetition taxes. For example, the Eight and Ninth Circuits, In
    re L.J. O'Neill Shoe Co.
    , 64 F. 3d 1146 (8th Cir.
    1995) and In re Pac-Alt. Trading Co., 64 F.3d 1292
    (9th Cir. 1995), have held that the taxes of a corporation
    can be bifurcated into two parts&2151;the part prior to the
    filing of the petition (a prepetition tax with eighth priority) and
    the tax incurred after the filing (an administrative expense). This
    change would allow the taxing authorities to collect the prepetition
    tax even before the plan is developed because the stay does not cover
    these taxes. While it can be argued that both the O'Neill and

    Pac-Alt. Trading Co. decisions are judge-made law and do not
    follow the provisions of tax law, it is necessary for the bifurcation
    issues to be settled before the proposed change becomes law.

    Additionally, based on the provisions in section 507(a)(8) it has
    become a common practice for employers' taxes and trust fund tax
    withholdings that were made prior to the filing of the petition to be
    classified as prepetition taxes even though the tax period may end
    after the petition is filed. While this type of tax is not actually a
    quarterly or yearly tax, but an each-pay-day- tax, it is important
    that the proposed change is clear that it only applies to
    postpetition taxes.

    Thus, before this provision becomes effective, it needs to, at
    least, be revised to provide that it only applies to postpetition
    taxes.

    Both the NBRC and the Tax Advisory Committee recommended that the
    relevant event for triggering the application of section 362(a)
    limitation is the filing of the petition and not the entry of the
    order for relief as advocated by H.R. 3150 and recommended the
    application of the stay to tax appeals as proposed in H.R. 3150.

    Periodic Payment of Chapter 11 Taxes (H.R. 3150, Section
    511)

    H.R. 3150 proposes to amend the Bankruptcy Code to provide that
    the payments under section 1129(a)(9) must be periodic and must be
    "in at least quarterly installments designed to pay at least 15
    percent of the claim in each of the first 5 years of the plan and no
    more than 20 percent of the claim in the final year of the plan."

    H.R. 3150 follows the recommendation of both the NBRC and the Tax
    Advisory Committee in proposing that the requirements of section
    1129(a)(9) should also apply to secured taxes that would be entitled
    to priority absent their secured status.

    Comment: Both the NBRC and the Tax Advisory Committee
    suggested that the payments should be periodic, but did not define
    periodic other than to suggest that the payments should be monthly or
    quarterly and that balloon payments be prohibited. Because of the
    difficulty of establishing the time of assessment, both the NBRC and
    the Tax Advisory Committee recommend that the six-year period begin
    with the date of the order for relief. H.R. 3150 only deals with the
    issue of periodic and balloon payments. For some debtors, it is
    difficult for large payments to be made in the first year or two
    after emerging from bankruptcy. To facilitate that process, some
    creditors agree to limit the payments the first year or two to
    interest only or interest and limited principal payments. It seems
    reasonable that under these conditions the tax authorities should
    also receive less in the first year or two than is paid in the latter
    years. Thus, the recommendation of the NBRC provides, under these
    conditions, an opportunity for the court to approve payments that are
    less than equal payments, but would not allow plans to be approved
    that provide for one balloon payment at the end of the sixth year.

    The 15 percent and 20 percent rule will not work. For example,
    assume that the taxes were assessed one year before the petition was
    filed and that the company was in chapter 11 for two years. Payments
    under the plan would be made over three years.

    However, payments could not be evenly distributed because only 20
    percent of the claim could be paid in the third year. Another
    problem, in using the word "claim", does it include interest that
    begins to accrue on the allowed claim as of the effective date of the
    plan? If not, would the service allocate the first part of the
    payment as interest and the balance as payment on the claim? If so,
    then the payments in the first year would involve interest on the
    full amount of the claim plus a payment of 15 percent of the
    principal (claim). Thus, payments spread over six years may be
    required to be larger in the first year than in any other year. This
    proposal in its current conditions will create more problems than
    solutions and should not become law.

    Tax Avoidance of Statutory Tax Liens (H.R. 3150, Section
    512)

    H.R. 3150 amends section 545(2), as recommended by the NBRC and
    the Tax Advisory Committee, to overrule cases that penalize the
    government due to certain benefits for purchasers provided for in the
    lien provision of the IRC or similar provisions of state or local
    law.

    Course of Business Payment of Taxes (H.R. 3150, Section
    513)

    Payment of postpetition taxes is required when taxes are due in
    the course of such business unless the tax is a property tax secured
    by a lien against property that is abandoned by the trustee under
    section 554 of the Bankruptcy Code within a reasonable time after the
    lien attaches as provided for in H.R. 3150. Also H.R. 3150 modifies
    section 503 to provide that property taxes are to be paid as an
    administrative expense and that it is unnecessary for a governmental
    unit to make a request to the debtor to pay taxes that are entitled
    to payment as administrative expenses.

    Comment. These provisions were recommendations by both the
    NBRC and the Tax Advisory Committee.

    2. Tardily Filed Priority Tax Claim (H.R. 3150, Section
    514)

    H.R. 3150 provides, as recommended by both the NBRC and the Tax
    Advisory Committee, that a taxing authority must file a claim for
    priority tax before the final order approving the trustee's report is
    entered by the court.

    Comment: It is important that the claim be filed before the
    final order approving the trustee's report is entered to avoid
    requiring the trustee to recalculate the amount paid to creditors and
    equity holders, to rewrite the report, and to reschedule the hearings
    to approve the report. Filing a claim after the report is filed
    clearly impacts the efficient court administration of the case. See
    Pioneer Investment Servs. Co. v. New Brunswick Assocs. Ltd.
    113 S. Ct. 1489 (1993).

    Income Tax Returns Prepared by Tax Authorities (H.R. 3150,
    Section 515)

    H.R. 3150 amends section 523(a)(1)(B) by providing a definition of
    a tax return for purposes of dischargeability as follows:

    (iii) for purposes of this subsection, a return-

    (I) must satisfy the requirements of applicable nonbankruptcy law,
    and includes a return prepared pursuant to section 6020(a) of the
    Internal Revenue Code of 1986, or similar State or local law, or a
    written stipulation to a judgment entered by a nonbankruptcy
    tribunal, but does not include a return made pursuant to section
    6020(b) of the Internal Revenue Code of 1986, or similar State or
    local law, and

    (II) must have been filed in a manner permitted by applicable
    nonbankruptcy law.

    The last provision "(II) must have been filed in a manner
    permitted by applicable nonbankruptcy law" is confusing; it muddles a
    provision that was clarified in (I) above.

    Comment: Both the Tax Advisory Committee and the NBRC
    recommended that a return filed under IRC section 6020(b) or similar
    federal, state, or local law provisions, should constitute a filed
    return for Bankruptcy Code dischargeability purposes where the
    taxpayer has taken reasonable steps to sign and file the return, even
    though the taxing authorities fail to accept such return for filing.

    Tax Returns Required to Confirm Chapter 13 Plans (H.R. 3150,
    Section 517)

    Section 1325 of the Bankruptcy Code is amended by H.R. 3150 to
    provide that one of the requirements for plan confirmation is the
    filing of income tax returns required under section 1308 of the
    Bankruptcy Code. The proposed section 1308 is as follows:

    11308. Filing of prepetition tax returns

    (a) On or before the day prior to the day on which the first
    meeting of the creditors is convened under section 341(a) of this
    title, the debtor shall have filed with appropriate tax authorities
    all tax returns for all taxable periods ending in the 6-year period
    ending on the date of filing of the petition.

    (b) If the tax returns required by subsection (a) have not been
    filed by the date on which the first meeting of creditors is convened
    under section 341(a) of this title, the trustee may continue such
    meeting for a reasonable period of time, to allow the debtor
    additional time to file any unfiled returns, but such additional time
    shall be no more than-

    (1) for returns that are past due as of the date of the filing of
    the petition, 120 days from such date, and

    (2) for returns which are not past due as of the date of the
    filing of the petition, the later of 120 days from such date or the
    due date for such returns under the last automatic extension of time
    for filing such returns to which the debtor is entitled, and for
    which request has been timely made, according to applicable
    nonbankruptcy law,

    (3) upon notice and hearing, and order entered before the lapse of
    any deadline fixed according to this subsection, where the debtor
    demonstrates, by clear and convincing evidence, that the failure to
    file the returns as required is because of circumstances beyond the
    control of the debtor, the court may extend the deadlines set by the
    trustee as provided in this subsection for-

    (A) a period of no more than 30 days for returns described in
    paragraph (1) of this subsection, and

    (B) for no more than the period of time ending on the applicable
    extended due date for the returns described in paragraph (2).

    (c) For purposes of this section, a return-

    (1) must satisfy the requirements of applicable nonbankruptcy law,
    and includes a return prepared pursuant to section 6020(a) of the
    Internal Revenue Code of 1986, or similar State or local law, or a
    written stipulation to a judgment entered by a nonbankruptcy
    tribunal, but does not include a return made pursuant to section
    6020(b) of the Internal Revenue Code of 1986, or similar State or
    local law, and

    (2) must have been filed in a manner permitted by applicable
    nonbankruptcy law.".

    Section 1307 of the Bankruptcy Code would be amended under H.R.
    3150 to provide that upon the failure of the debtor to file the
    returns required under section 1308, on request of a party in
    interest or the U.S. trustee and after and a hearing, the court shall
    dismiss or convert the chapter 13 case to chapter 7, whichever is in
    the best interest of the estate.

    H.R. 3150 proposes to amend section 502(b)(9) to provide that an
    objection to the confirmation of a plan is considered to be timely if
    it is filed within 60 days after the debtors' tax returns were filed
    under section 1308. Additionally, H.R. 3150 proposes that Congress
    direct the Advisory Committee on Bankruptcy Rules of the Judicial
    Conference to propose rules that provide for an opportunity for
    governmental units to object to (1) the confirmation of a plan on or
    before 60 days after the debtor files all tax returns required under
    sections 1308 and 1325(a)(7) of the Bankruptcy Code and (2) that no
    objection can be filed in reference to a tax of a return required to
    be filed under section 1308 until such return has been filed as
    required.

    Comment: The Tax Advisory Committee concluded that this
    provision would help reestablish the chapter 13 debtor as a
    "taxpayer" and would determine the priority tax that must be paid for
    a debtor to qualify for the chapter 13 super discharge. The Tax
    Advisory Committee concluded, after discussion with federal and local
    taxing authorities and with attorneys and accountants that render
    services for chapter 13 debtors, that requiring the chapter 13 debtor
    to file tax returns for six years, pay through the chapter 13 plan
    all of the priority taxes, and provide for some payment of the
    nonpriority taxes (realizing that some courts approve a zero plan for
    unsecured claim holders) along with other general unsecured claim
    holders will most likely result in the taxing authorities collecting
    more taxes now and in the future than would be collected with the
    filing of a chapter 7 petition. With the proposed repeal of the
    chapter 13 tax discharge provisions, tax professionals generally will
    not recommend that clients file chapter 13. As a result, this
    provision will not have the impact that was intended. This writer
    would not have supported the six-year chapter 13 filing requirement
    on the Tax Advisory Committee with a repeal of the chapter 13
    discharge provisions.

    As noted above, both the Tax Advisory Committee and the NBRC
    recommended that a return filed under IRC section 6020(b) or similar
    federal, state, or local law provisions, should constitute a filed
    return for Bankruptcy Code dischargeability purposes. H.R. 3150 would
    not treat a return filed under section 6020(b) as a filed return for
    tax discharge purposes.

    1. Standard for Tax Disclosure (H.R. 3150, Section 518)

    Section 1125(a) of the Bankruptcy Code dealing with the disclosure
    requirements is expanded by requiring the proponent of the plan to
    include full discussion of the potential material Federal and State
    tax consequences of the plan to the debtor, any successor to the
    debtor, and a hypothetical investor typical of the holders of claims
    or interests in the case.

    Comment: In general, the disclosure requirements for income
    tax impact of the plan has not generated the desired results. Often,
    interested parties have been told to talk with their tax specialists
    to find out the income tax impact of the plan. Time will only tell if
    this requirement, if enacted, would result in the tax impact of the
    plan being explained in such a manner that readers of the disclosure
    statement would understand tax consequences. The purpose of the
    amendment is not to change existing law, but to make plan proponents
    adhere to the original intent of the law to effectively disclose the
    tax ramifications of the plan on the debtor.

    Setoff of Tax Liability against Tax Refund (H.R. 3150, Section
    519)

    Section 362(b) of the Bankruptcy Code would be amended to provide
    that the setoff of an undisputed prepetition tax liability against an
    income tax refund does not violate the automatic stay. Setoff could
    not be taken if, prior to the setoff, an action was commenced under
    section 505(a) to determine the amount or the legality of the tax.
    However, if the setoff is tolled during the 505(a) hearing, the
    taxing authority may hold the refund.

    Comment: The writer supported the recommendation of the Tax
    Advisory Committee. However, it has been pointed out by some writers
    that the impact of Seminole Tribe of Florida, 116 S. Ct. 1114
    (1996), suggests that no change should be made regarding the tax
    setoff be considered because the debtor may be unable to recover tax
    refunds that were setoff improperly by a state taxing authority.

    Summary of NBRC recommendations not included in H.R. 3150

    Listed below are some of the changes that were recommended by the
    NBRC that were not a part of H.R. 3150 that should be considered.

    Conform State and Local Tax Issues to Federal Laws

    Conform section 346 of the Bankruptcy Code to the 1398(d)(2)
    election and conform state and local tax attributes that are
    transferred to the estate to those transferred for federal income tax
    purposes. Conform treatment of state and local claims to that
    provided for federal tax claims, including confirming state and local
    tax attributes to the federal list. Considerable conflicts exist
    between state and local taxes and federal taxes. Congress indicated
    at the time the Bankruptcy Reform Act of 1978 became law that the
    state and local tax issues would be changed when the Congress passed
    the federal bankruptcy tax laws. A few years later Congress passed
    the Bankruptcy Tax Act of 1980 and no action has been taken to
    eliminate the tax problems that arise because of the differences
    between the two federal laws. To correct these problems, changes need
    to be made only in the Bankruptcy Code, which means that these
    changes should be a part of the Bankruptcy Bill and not a Tax Bill.
    (NBRC Proposals 4.2.4, 4.2.16-4.2.17)

    Bifurcation Corporate Taxes that Straddles the Petition
    Date

    The NBRC recommended that corporations have the same right as
    individuals to elect to have taxes incurred prior to the filing for
    tax years that straddle the petition date to be considered a
    prepetition tax and tax incurred for the balance of the tax year
    after the petition is filed to be classified as an administrative
    expense. The Eighth and Ninth Circuits allow the debtor to bifurcate
    the taxes.

    Tax Impact of Plan

    Currently, section 1146(d) of the Bankruptcy Code gives the
    bankruptcy court the power to determine the tax impact of a plan for
    state and local tax purposes. The NBRC recommended that this power
    also be extended to cover federal income taxes as well. Section
    1146(d) should be modified by removing the "state or local."

    Subordination of Tax Penalties

    The NBRC recommended that the payment of prepetition tax penalties
    in chapters 11, 12 and 13 be subordinated to payment of general
    unsecured claims the payment is in chapter 7 cases. The NBRC noted
    that granting a priority to penalties works unfairness on general
    unsecured creditors by, in effect, punishing them for the debtor's
    misconduct. This is, according to NBRC, inequitable, especially where
    creditors have limited access and ability to monitor a taxpayer's
    compliance with tax reporting requirements.

    Description:

    To amend title 11 of the United States Code, and for other purposes.

    Description:

    To amend title 11 of the United States Code, and for other purposes.
    The Gekas-Moran Bankruptcy Reform Act Of 1998

    The Gekas-Moran Bankruptcy Reform Act Of 1998

    Section-by-Section Analysis (Excerpts)




    Web posted and Copyright ©
    February 5, 1998 American Bankruptcy Institute


    Title I -- Consumer Bankruptcy Provisions

    Subtitle A -- Needs-Based Bankruptcy

    Sec. 101. Needs-Based Bankruptcy.

    This section of the Bill requires those who have a current monthly total income of at least seventy-five percent (75%) of the national median family income for a family of equal size (or, in the case of a household of one person, at least seventy-five percent (75%) of the national median household income for one earner) plus a monthly net income greater than fifty dollars ($50) and the ability to pay at least twenty percent (20%) of their unsecured, non-priority debts over five (5) 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. Provision is also made in a new Code section 111 for the adjustment of monthly net income in extraordinary cases, for example when the debtor experiences loss of income or when the debtor has unusual expenses.

    Sec. 103. Definitions of Inappropriate Use.

    The Bill amends Code section 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 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.

    Subtitle B - Adequate Protections for Consumers

    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. Specifically, this section requires that each consumer debtor receive a notice containing a brief description of services that may be available from independent non-profit debt counseling services.

    Sec. 112. Debtor Financial Management Training Test Program.

    This section would require the Executive Officer 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. The EOUST would be required to select three (3) judicial districts in which to test the effectiveness of the training program.

    Subtitle C -- Adequate Protections for Secured Lenders

    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. The Bill provides an exception to this provision in the event the subsequent filing is made in good faith.

    Sec. 122. Definition of Household Goods and Antiques.

    The Bill defines "household goods" by using the definition already used in a similar context by the Federal Trade Commission in the Trade Regulation Rule on Credit Practices, 16 C.F.R. Sec. 444.1(I).

    Sec. 123. Debtor Retention of Personal Property Security.

    The Bill would add a new subsection to Code section 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 thirty (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 Code section 362 to provide that if an individual debtor does not file a timely statement of intention with respect to property securing the creditors 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 Code section 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. 126. Prompt Relief From Stay in Individual Cases.

    This section amends Code section 362(e) to provide that the stay shall automatically terminate sixty (60) days after a request for relief from it is made, unless the court decides the relief from stay request during the sixty-day period, the parties agree to take a longer time, or thecourt orders additional time.

    Sec. 127. Stopping Abusive Conversions from Chapter 13.

    This section provides that when a debtor converts from Chapter 13 to Chapter 7, the cram down is not retained except for the limited purpose of redemption under Code section 722.

    Sec. 129. Fair Valuation of Collateral.

    The Bill amends Code section 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.

    Subtitle D -- Adequate Protection for Unsecured Lenders

    Sec. 142. Credit Extensions on the Eve of a Bankruptcy Presumed Nondischargeable.

    The Bill amends Bankruptcy Code section 523(a)(2)(C) to create a presumption that consumer debts incurred within ninety (90) days of bankruptcy are nondischargeable.

    Sec. 144. Applying the Co-Debtor Stay Only When it Protects the Debtor.

    The Bill amends section 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 Nondischargeable.

    This section amends the Bankruptcy Code to provide that debts incurred when the debtor had no reasonable expectation or ability to repay are nondischargeable.

    Subtitle E -- Adequate Protections for Lessors

    Sec. 161. Giving Debtors the Ability to Keep Leased Personal Property by Assumption.

    If the debtor then notifies the lessor that the debtor wants to assume the lease, the lease remains enforceable according to its terms.

    Sec. 163. Adequate Protection for Lessors.

    This provision extends Code section 362(b)(10) to residential leases, clarifying that the automatic stay does not bar a property owner from recovering rental property due to the filing by a resident for bankruptcy.

    Subtitle F -- Bankruptcy Relief Less Frequently Available for Repeat Filers

    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 ten (10) years for Chapter 7 individual cases and five (5) years for Chapter 13 cases.

    Subtitle G -- Exemptions

    Sec. 181. Exemptions.

    The Bill amends section 522(b)(2)(A) of the Bankruptcy Code 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

    Subtitle A -- General 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. 204. Meetings of Creditors and Equity Security Holders.

    This section would give the court the discretion not to convene a meeting of creditors if there is a prepackaged plan of reorganization.

    Sec. 205. Creditors’ and Equity Security Holders’ Committees.

    The Bill gives the court the discretion to change the membership of any committee to assure that it adequately represents its constituency.

    Sec. 207. Preferences.

    This provision helps enable small creditors to mount effective defenses against preference actions. Proposed Code section 547(c)(9) increases the minimum aggregate transfer that must be sought in a case against a creditor to $5000. 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 noninsider seeking less than $10,000 must be brought in the bankruptcy court in the district where the creditor resides.

    Sec. 209. Setting a Date Certain for Trustees to Accept or Reject Unexpired Leases on Nonresidential Property.

    The Bill amends Code section 365(d)(4) to eliminate the current 60-day period for assumption or rejection of a lease of nonresidential real property and replaces it with a 120-day initial time period following the date of the order for relief.

    Subtitle B -- Specific Provisions

    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 $5,000,000 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 thirty days postpetition.

    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 United States 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 Appointment 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 Asset 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 postpetition 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

    Subtitle A -- General Provisions

    Sec. 402. Creditor Representation at First Meeting of Creditors.

    This sections amends Code section 341(c) to provide that non-attorney representatives can attend and participate in the first meeting of creditors.

    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. 405 Giving Creditors Fair Notice in Chapter 7 and 13 Cases.

    This section provides that the debtor include in any notice to the creditor the debtor’s account number if it is reasonably available, and to send any notices to an address which the creditor has previously specified.

    Sec. 410. Chapter 13 Plans to Have a 5-Year Duration in Certain Cases.

    The Bill would amend Code sections 1322(d) and 1329(c) to allow confirmation of plans with a life span of five (5) years if the debtor’s current monthly income is at least seventy-five percent (75%) of the national median family income for a family of equal size (or at least seventy-five percent (75%) 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 (5) years up to a maximum of seven (7) 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.

    Subtitle B -- Data Provisions

    Sec. 441. Improved Bankruptcy Statistics.

    The Bill would create a new 28 U.S.C. Sec. 159 that would require the EOUST to compile statistics on bankruptcy cases involving individual debtors, and report these statistics annually to Congress.

    Sec. 442. Bankruptcy Data.

    This provision requires the Attorney General to establish uniform national reporting forms for final reports in Chapter 7, 11 and 13 cases.

    Sec. 443. Sense of the Congress Regarding Availability of Bankruptcy Data.

    This provision expresses the Sense of the Congress that all non-confidential data held in electronic form by clerks of bankruptcy courts should be released to the public on the Internet on demand.

    Title V -- Tax Provisions

    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 nondischargeable in Chapter 13 cases.

    Sec. 517. Requirement to File Tax Returns to Confirm Chapter 13 Plans.

    In a Chapter 13 plan, the debtor is required to provide for the full payment of all claims entitled to priority, including taxes which have not been assessed but are still assessable.

    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 prepetition taxes against a claim for prepetition 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 theability to set off an income tax refund that arose prepetition against an undisputed income tax liability which similarly arose prepetition.

    Sec. 602. Effective Date; Application of Amendments.

    This section ensures that nothing in this Act will not have an effect on pending bankruptcy cases.

    Description:

    To amend title 11 of the United States Code, and for other purposes.

    Description:

    To amend title 11 of the United States Code, and for other purposes.

    Description:

    To amend title 11 of the United States Code, and for other purposes.
    An Analysis of the Consumer Bankruptcy Provisions of H.R. 3150

    Proposed Bankruptcy Reform Legislation (Revised)

    Written by:

    Hon. Eugene R. Wedoff


    United States Bankruptcy Court


    Northern District of Illinois


    Chair, Consumer Bankruptcy Committee



    Prepared for the American Bankruptcy Institute


    Web prepared, posted and Copyright ©

    April 6, 1998, American Bankruptcy Institute.


    Revised critique points out problems with the means-testing procedure of H.R. 3150.


    H.R. 3150, presently pending before the the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee, would add "means-testing" as a prerequisite for Chapter 7 relief, denying that relief to individuals who can pay a defined portion of their future income to general unsecured creditors. The procedure for means-testing in H.R. 3150 adopts standards used by the Internal Revenue Service in collecting unpaid taxes. According to a revised critique of H.R. 3150, written by Bankruptcy Judge Eugene R. Wedoff, these IRS standards do not operate effectively in the context of H.R. 3150, and hence the means-testing procedure of the proposed legislation may be unworkable. The critique discusses the means-testing procedure in connection with §101 of H.R. 3150.

    Introduction: The general operation of consumer bankruptcy.

    H.R. 3150, currently pending before the 105th Congress, proposes major changes to the consumer provisions of the Bankruptcy Code (Title 11, U.S.C.). Similar changes have been proposed by two other bills, H.R. 2500 and S. 1301, that are the subject of an earlier analysis published by the American Bankruptcy Institute. Like the earlier analysis, this paper reviews the proposed legislation with three aims: first, identifying each of the changes that the bill would make in current consumer bankruptcy law; second, assessing the impact that these changes would have in the operation of the law; and third, suggesting alternative approaches, as appropriate, to achieving the goals of the bill. Where the provisions of H.R. 3150 are substantially the same as those of H.R. 2500 or S. 1301, the comments from the earlier analysis are reproduced here, to avoid the need for cross-reference.

    In order to discuss the proposed changes and their impact, it is necessary first to have an understanding of how consumer bankruptcy operates under the present law. It is helpful to look at the law as a two-part system, that (1) determines the assets that are available to consumer debtors and (2) divides the assets, allowing the debtor to retain some of those assets, and using other assets to pay the debtor’s creditors.

    The assets available. The Bankruptcy Code views consumer debtors as having two basic types of assets: present assets and future assets. The present assets are what a debtor owns at the time a bankruptcy is filed. These include tangible assets like a home, a car, clothing, furniture, and cash, as well as intangible assets, like savings and retirement accounts and lawsuits for personal injury. Future assets are those to which a debtor first becomes entitled after a bankruptcy is filed. The principal future assets of most debtors are the personal earnings to which they become entitled after the bankruptcy filing; other future assets include gifts received or lawsuits accruing after the filing.

    The classes of claims. In a bankruptcy case, the assets available to the debtor are divided between the debtor and the debtor’s creditors. The share of each creditor depends on the type of claim the creditor holds. The Bankruptcy Code sets out several different classes of claims.

    (a) Secured claims. Debts that are supported by liens on property owned by the debtor (like a home mortgage, or a lien on an automobile), are known as "secured claims." The Bankruptcy Code generally provides that secured claims must be paid at least the value of the collateral that supports them before that collateral can be used by the debtor or paid to other creditors. In other words, the debtor and other creditors are only entitled to the "equity" that exists in the property above the amount of the claim for which the property is collateral. In this way, secured claims are generally first in the distribution of a debtor’s assets. Claims that are not supported by a lien on property of the debtor are known as "unsecured" claims.

    (b) Priority claims. Certain claims are viewed by the Bankruptcy Code as being especially entitled to payment. Examples include certain tax obligations, expenses of administering a case in bankruptcy, and family support obligations of the debtor. Although these claims against the debtor may not be secured, the Bankruptcy Code provides that when a debtor’s assets are distributed, these claims should be paid ahead of other unsecured claims, and so they are known as "priority unsecured" or simply "priority" claims, in contrast to ordinary ( "general") unsecured claims against the debtor.

    (c) General unsecured claims. Unsecured claims that do not have priority status—"general unsecured" claims—are involved in nearly every consumer bankruptcy case. Examples include most credit card debt and medical bills. However, even a creditor secured by a home mortgage or automobile lien may hold a general unsecured claim. An important concept in the Bankruptcy Code is that, whenever the value of collateral is insufficient to cover the entire amount owed on the creditor’s claim, the creditor holding the lien has both a secured claim (to the extent of the collateral value) and an unsecured claim (in the amount of the deficiency in the value of the collateral). Thus, a creditor with a $10,000 claim, secured by an automobile worth only $7,000, is treated as having a secured claim of $7,000 and a general unsecured claim of $3,000.

    (d) Nondischargeable claims. Ordinarily, when the distribution of a debtor’s assets under the Bankruptcy Code has been concluded, the debtor is given a discharge, wiping out the debts that the debtor owed at the time the bankruptcy was filed. Thus, all of the debtor’s future assets, after the distribution, are allowed to be retained by the debtor. However, there is an exception to the discharge for certain types of debt. Some of this debt is of the same nature as priority debt (taxes and family support obligations), but the Bankruptcy Code also excepts from discharge certain debts that were incurred through misconduct of the debtor, such as debts arising from fraud and intentional injuries. These "nondischargeable" claims—to the extent they have not been paid from the assets that are distributed during a bankruptcy case—remain payable from the future assets of the debtor.

    Chapter 7: distributing present assets to creditors. Since the enactment of the Bankruptcy Act of 1898, the standard process of a bankruptcy case has been for a trustee to collect the debtors’ present assets, liquidate them, and divide the proceeds among the debtors’ creditors, with the debtors, in exchange, being discharged from their debts, so that they retain the right to their future assets, free of claims of creditors. This process, set out in Chapter 7 of the current Bankruptcy Code, is known as "liquidation" or "straight bankruptcy." Allowing the debtors to use future assets free of creditor claims is known as the "fresh start."

    There are, however, two features of Chapter 7 that vary the general plan of liquidating present assets for distribution to creditors and leaving future assets for the debtor. First, debtors are allowed to retain some of their present assets. The Bankruptcy Code sets forth a list of "exempt" property, deemed necessary for debtors’ maintenance. States may provide an alternative to this list, and then either allow the debtors to choose between the two lists of exempt property (state and federal) or else provide that the state exemptions are the only ones available. In any event, debtors are allowed to keep some of their current assets as exempt, excluding them from distribution in Chapter 7. Where debtors have no substantial assets beyond those that are exempt, there will be no distribution to creditors. Cases such as these are known as "no asset" Chapter 7 cases.

    Second, debtors in Chapter 7 are not always discharged from all of their debts. As noted above, some debts are nondischargeable, and these remain, after bankruptcy, so that the creditors holding these claims may seek payment from future assets of the debtor. Moreover, under certain circumstances (generally involving misconduct by the debtor in the course of the bankruptcy itself), a Chapter 7 debtor may be denied a discharge altogether.

    Taking all of this into consideration, Chapter 7 generally divides a debtor’s assets as follows:

    (1) Secured creditors are given the value of their liens in the debtor’s present assets.

    (2) The debtor’s exemptions are deducted from the present assets.

    (3) Any remaining present assets are liquidated and distributed, first to priority claims, and then to general unsecured claims.

    (4) The debtor is given a discharge, allowing the debtor to have future assets free of creditor claims, subject to nondischargeable claims.

    (5) Nondischargeable claims remain payable in full from the future assets.

    Chapter 13: distributing future assets to creditors. Chapter 13 is presented in the Bankruptcy Code as an alternative to the standard Chapter 7 liquidation. The basic idea of Chapter 13 is to allow debtors to retain all of their present assets, in exchange for paying to creditors, out of future assets, at least as much as the creditors would have received if there had been a Chapter 7 liquidation. To accomplish this, the debtor must propose a plan, administered by a trustee, to pay creditors through periodic contributions from the debtor’s regular income. Chapter 13 recognizes that debtors cannot pay all of their income into the plan, since some income will be necessary for the support of the debtors and their dependents. However, all income not necessary for that support is defined as "disposable" income, and a Chapter 13 plan must either pay creditors in full, or devote all disposable income to the plan. A plan that does not provide for full payment of debts must have a duration of at least three years, and five years is the maximum length of the plan. Because of the disposable income requirement, Chapter 13 plans may be required to pay much more to creditors than they would have received in a Chapter 7 bankruptcy.

    Under current law, Chapter 13 is entirely voluntary. Only a debtor can propose a Chapter 13 plan; a debtor has an absolute right to dismiss a case that was originally filed under Chapter 13; and a debtor can convert a Chapter 13 case to Chapter 7 at any time. To encourage debtors to choose Chapter 13 over Chapter 7 (and thus provide greater payment to creditors), the Bankruptcy Code has two distinct types of incentives. First, at the conclusion of a Chapter 13 plan, the debtor is given a broader discharge than is available in Chapter 7. This "superdischarge" results in the discharge of several types of debt (including those for fraud and intentional injuries) that are not discharged in Chapter 7. Second, debtors are allowed to keep property that is encumbered by liens, even though they are in default on the underlying obligations. A debtor with a home in foreclosure or a car subject to repossession may be able to retain the home or car by making payments to the secured creditors through a Chapter 13 plan. Moreover, except for certain home mortgages, the debtor in Chapter 13 may pay to a secured creditor the value of the collateral, even though it is less than the full amount owing, and obtain a release of the lien. Chapter 13 contains detailed provisions as to the type of payments required on secured claims.

    Plans in Chapter 13 are required to pay priority claims in full, over the course of the plan, and not to discriminate unfairly among general unsecured creditors. Considering all of its provisions, Chapter 13 generally divides a debtor’s assets as follows:

    (1) The debtor retains all present assets.

    (2) The debtor contributes disposable future assets to a plan for a period of three to five years, or for a shorter period sufficient to pay the debts in full. The payments to be received by creditors must be at least as much as they would have received in a Chapter 7 case. Secured creditors must receive at least the value of their liens. Priority claims must be paid in full.

    (3) The debtor retains all nondisposable future assets during the time of the plan.

    (4) After the completion of the plan, the debtor is given a discharge, allowing the debtor to retain all future assets, free of dischargeable creditor claims.

    (5) Nondischargeable claims remain payable in full from the future assets. However, many debts that are nondischargeable in Chapter 7 are able to be discharged in Chapter 13.

    Choice of Chapter 7 or Chapter 13. Under current law, consumers have a largely free choice between Chapter 7 and Chapter 13 as a form of relief. However, there are some limitations, the most significant of which are the following: First, a debtor cannot file any bankruptcy case within 180 days after a prior case was dismissed under specified circumstances. Second, Chapter 13 is unavailable to individuals with large amounts of debt (over $250,000 in unsecured debt or $750,000 in secured debt). Third, a Chapter 7 case may be dismissed on motion of the court or the United States trustee if granting Chapter 7 relief would be a "substantial abuse." Fourth, a debtor cannot receive a discharge in a Chapter 7 case if that case was filed within six years of an earlier filing in which the debtor received a Chapter 7 discharge. However, a debtor may receive a discharge in a Chapter 13 case regardless of whether or when a discharge was granted in any prior bankruptcy case. The absence of such limits on Chapter 13 discharge is a third incentive encouraging debtors to choose Chapter 13 over Chapter 7.

    The automatic stay. In either Chapter 7 or Chapter 13, an automatic stay goes into effect at the time the case is filed, which generally operates to prohibit any collection activity—including foreclosure and repossession—on debts that were in existence at the time of the filing. In order to obtain the right to proceed with collection activity, a creditor must obtain relief from the automatic stay. In either Chapter 7 or Chapter 13, a creditor is entitled to relief if the value of its lien is declining or at risk of declining, and no action (known as "adequate protection") is taken to make up for the decline. In Chapter 7, the creditor is also entitled to relief if there is no equity in the property that might be obtained for the benefit of creditors. In Chapter 13, relief is granted if there is no equity and the property is not needed for the debtor’s plan to be effective.

    Summary: major effects of the consumer bankruptcy provisions of H.R. 3150.

    As discussed in the section-by-section analysis that follows, H.R. 3150 appears designed to reduce bankruptcy filings and increase payments to creditors in bankruptcy. A number of features would increase the cost of bankruptcy filing and administration. Among the significant changes proposed in H.R. 3150 include the following:

    1. The ability of a debtor to obtain successive discharges would be substantially limited. After a debtor received a bankruptcy discharge, the debtor would be ineligible for any bankruptcy relief for a period of five years, and ineligible for Chapter 7 relief for a period of 10 years. §171.

    2. Chapter 7 relief would be denied to certain debtors, based on their ability to pay a specified portion of their debt. Debtors with relatively large debt would remain eligible for Chapter 7 relief, but those with smaller debt would be ineligible. Testing for eligibility would be required for most debtors. §§101, 103.

    3. Chapter 13 would be changed by increasing minimum plan terms and eliminating the superdischarge. §§102, 410, 508.

    4. Debtors would be notified about alternatives to bankruptcy, and of their obligations in filing bankruptcy. These obligations would include submission of tax returns to the United States trustee (with disclosure to any interested party), and the filing of detailed information regarding income, expenses, and assets, subject to formal audit. §§111, 404, 407.

    5. In both Chapter 7 and Chapter 13 cases, secured creditors would receive payment of their claims in an amount no less than the retail value of the collateral that secures the claim, and, in some circumstances, the full amount of the claim, regardless of collateral value. §§128, 129, 130, 162. Relief from stay would be granted in certain circumstances without regard to equity available for distribution to creditors generally. §§121, 124.

    6. Credit card debt would be nondischargeable, on the ground of fraud, if the debtor did not have a reasonable ability to repay the debt at the time it was incurred, regardless of the debtor’s subjective intent to repay. Such debts would be nondischargeable in both Chapter 7 and Chapter 13 cases. All debts incurred by a debtor within 90 days of a bankruptcy would be presumed to have been incurred fraudulently. §§141, 142, 143, 145.

    7. New deadlines would be established for important events in consumer bankruptcy cases, but there are conflicting provisions regarding the time for confirmation of a Chapter 13 plan. §§401, 405, 406, 409.

    8. Bankruptcy court decisions would be appealable directly to the Circuit Courts of Appeals. §412.

    9. A detailed program would be established for the centralized collection and dissemination of bankruptcy data. §§441-43.

    10. Only minor changes would be made in the exemption provisions of the Code. §§181, 502.

    The consumer bankruptcy provisions of H.R. 3150: specific proposals.

    More than 40 of the sections of H.R. 3150 affect consumer bankruptcy cases. These provisions are included in three of the bill’s titles. Title I ( "Consumer Bankruptcy Provisions"), Title IV ( "Bankruptcy Administration"), and Title V ( "Tax Provisions"). This analysis deals with each of these sections in the order of presentation; cross-references indicate areas in which one proposal affects another. An indication is also given where the substance of the proposal is similar to a provision of H.R. 2500 or of S. 1301.

    Title I ( "Consumer bankruptcy provisions")

    Subtitle A ( "Needs-Based Bankruptcy")

    §101 ("Needs based bankruptcy") (see H.R. 2500, §101; S. 1301, §102).

    The changes. This section of the bill would institute "means-testing" for Chapter 7 relief, eliminating the choice of Chapter 7 bankruptcy for debtors who can pay a defined portion of their future income to general unsecured creditors. Subsection 101(3) of the bill would add a new provision to §109(b) of the Code. The new provision would prohibit an individual from being a debtor under Chapter 7 if the individual had "income available to pay creditors." The remainder of §101 sets up a procedure for determining "income available to pay creditors" and a mechanism for implementing the denial of Chapter 7 relief to debtors who have such income.

    Means-testing. Whether a debtor has "income available to pay creditors," and thus is ineligible for Chapter 7 relief, involves a three-step determination. The first step compares the debtor’s "current monthly total income" (all of the debtor’s income from any sources, averaged over the six months preceding bankruptcy) against a national median income established by the Census Bureau. The debtor’s income must be at least 75% of the national median, based on household size, in order to be subject to exclusion from Chapter 7 relief. Because the Census Bureau’s reports deal with pre-tax income, rather than "take-home pay," this provision of the bill presumably deals with pre-tax income as well.

    In the second step, the debtor’s total monthly income is reduced by three "automatic" categories of payments to obtain "projected monthly net income," i.e., the amount available to pay general unsecured claims. The three payment categories are: (1) general living expenses for the debtor and the debtor’s dependents, according to standards established by the Internal Revenue Service for purposes of collecting unpaid tax obligations; (2) all of the payments on secured debt that will come due during the five years after filing, divided by 60 (to obtain a monthly average); and (3) all of the priority debt owed by the debtor, again divided by 60.

    Finally, in the third step, projected monthly net income may be further reduced by a "personalized" category of expenses, resulting from "extraordinary circumstances" established by the debtor.

    A debtor will be found to have "income available to pay creditors"—and hence be ineligible for Chapter 7 relief— if, in addition to meeting the total income test, the debtor’s "projected monthly net income" is both greater than $50, and is "sufficient to repay twenty per cent or more of unsecured non-priority claims during a five-year repayment plan."

    Implementation. Section 101 of the bill contains two mechanisms for implementing means testing. First, Chapter 7 trustees are given the additional duty of investigating and verifying the debtor’s projected monthly net income and filing a report with the court as to whether the debtor is disqualified for Chapter 7 relief under the "income available" standard.

    Second, if the debtor asserts extraordinary expenses, a statement to that effect is required to be included with the debtor’s bankruptcy petition, together with an itemization and detailed description of each expense, and a sworn statement by the debtor and the debtor’s attorney that the statement is true. Any party may object to the statement within 60 days after the debtor makes the disclosures required by § 521 of the Code (as expanded by §407 of the bill, discussed below), and if such an objection is made, the bankruptcy court is to determine the matter, with the debtor having the burden of proof.

    A third implementation of means-testing is contained in §103 of H.R. 3150. As discussed below, this provision would amend §707(b) of the Code to allow creditors to seek dismissal or conversion of Chapter 7 cases that they believe fail the means test.

    Chapter 13. Finally, Subsection 101(6) of the bill sets out a provision unrelated to means-testing. This final change would impose on Chapter 13 trustees the additional responsibility of investigating and verifying the debtor’s monthly net income, and filing annual reports with the court as to whether the debtor’s plan should be modified because of changes in the debtor’s net income.

    The impact. Means-testing in general. The means-testing incorporated in Section 101 of H.R. 3150 would effect a major change in bankruptcy policy. That policy has traditionally allowed debtors in financial difficulty to obtain an immediate fresh start in exchange for surrendering their nonexempt assets. Accordingly, current § 707(b) denies Chapter 7 relief only where this relief would be a "substantial abuse" of the provisions of Chapter 7, and it provides that there is a presumption in favor of granting the relief sought by the debtor. The means-testing provisions of H.R. 3150 would change this, denying an immediate fresh start to a significant category of debtors in genuine financial difficulty—unable to pay their current bills from available income—because their future income is sufficient to pay 20 percent of their debt over five years. Thus, at a given income level, those who have accumulated relatively small amounts of debt would be denied Chapter 7 relief, while those who have accumulated relatively large amounts would remain eligible. It can be anticipated that this change would decrease the number of Chapter 7 bankruptcies, with a corresponding increase in Chapter 13 cases or in nonbankruptcy resolutions of consumer debts. In this way, means-testing may lead to greater payments to creditors. But it may also have unintended consequences. For example, at the present time, many debtors are able to avoid bankruptcy by working out voluntary arrangements with creditors through credit counseling services. The willingness of creditors to cooperate in such voluntary arrangements may be influenced by the fact that the debtors otherwise have the option of Chapter 7 bankruptcy. If that option is removed, the creditors may be less willing to enter into the voluntary arrangements. Means-testing may also increase home foreclosure rates, since debtors now able to remove other debt in Chapter 7 would be denied that option, and may be ineligible for Chapter 13 or unable to complete a Chapter 13 plan.

    The threshold for means-testing. Median household income, varying with size of the household, is used in the proposal to establish a threshold below which there is no need to examine income on an individualized basis: an individual whose total household income is less than 75% of the median income, as determined by the Census Bureau for a household of the same size, would not be disqualified from Chapter 7 relief regardless of the household expenses. However, there are two difficulties with the use of Census Bureau medians. First, the information may be outdated. For any given year, the proposal states that household income is based on the most recent Census Bureau figures available as of January 1. As of January 1 of any year, the Census only has information available for the second year before that date. Thus, 1996 income figures are presently the most recent. In this way, the threshold under the proposal compares a debtor’s current income to the median income that existed up to two years earlier. In times of high inflation, this would greatly increase the number of cases subject to individual scrutiny. (Similarly, the six-month average used to determine the debtor’s current income will result in an artificially high income figure whenever the debtor’s income has declined shortly before the bankruptcy filing.)

    A second problem has to do with household size. The proposal employs median household income, varying with the size of the household, with the apparent intent of allowing a higher threshold income for larger households. In reality, however, median household income changes erratically with household size. The median income for a single individual (in 1996, the last year for which Census Bureau figures are currently available) was $18,426, so that any single individual earning over $13,819.50 would be subject to individualized scrutiny under the proposal. This is only about $4,500 more than the federal poverty level of $9,260. But median income for a household of two was $39,039, producing a threshold for scrutiny, under the proposed bill, of $29,279.25, more than twice the poverty level of $12,480. The median income continues to increase with household size for households of three and four persons, but household income decreases for families of five and six persons. The median family income for a household of six persons was $44,782 in 1996—less than the median income for a family of three—which would result in a threshold for scrutiny, under the proposed bill, of $33,586.50, compared to a poverty level of $25,360. Thus, for single individuals and individuals in large households, the bill is much more likely to require individualized scrutiny than for individuals in households of two to four persons. (Income figures are drawn from U.S. Bureau of the Census, P60-197, Money Income in the United States: 1996, Table 1 (1997). Poverty figures are from the Annual Update of the HHS Poverty Guidelines, 63 Fed.Reg. 9235, 9236 (1998).)

    The means-testing process—IRS collection standards. For those debtors whose income is above the threshold, §101 of H.R. 3150 prescribes a two-part means test for determining how much of the debtors’ projected monthly income during the five-year period after the bankruptcy filing is "net income," available to pay general unsecured debt. In the first part of the means-testing process, a debtor’s projected total monthly income is reduced by a set of "automatic" deductions: (1) monthly expenses allowances defined by Internal Revenue Service collection standards, (2) monthly payments on secured debt, and (3) monthly payments on priority debt. To avoid double deductions, §101 specifies that payment of debt should be excluded from the IRS allowances. In the second part of the process, further deductions are allowed where the debtor can establish extraordinary expenses. The balance that remains after the two sets of deductions is the "projected monthly net income" available to pay general unsecured debt.

    There are several problems with this process—resulting primarily from the incorporation of the IRS standards—that render it unworkable or inequitable. The IRS collection standards are set out in the Internal Revenue Manual ("Manual") §5323 (CCH 1995), and incorporate a number of exhibits also set out in the Manual (Exhibits 5300-45 to 5300-51). More recent versions of some of the exhibits may be found at the IRS website, e.g.:

    http://www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-other.html

    As reflected in §101, 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 (Manual §5323.432); local standards, covering housing and transportation (Manual §5323.433); and other necessary expenses, covering taxes, health care, court-ordered payments, involuntary wage deductions, accounting and legal fees, and secured debt, with provision for other necessary expenses (Manual, §5323.434).

    The difficulties in applying the IRS standards within the procedures of §101 include the following:

    The IRS standards are not automatic. The Manual defines the "necessary expenses" category as including any expense necessary to "provide for a taxpayer’s and his or her family’s health and welfare and/or the production of income." Manual § 5323.12. The "other necessary expense" category thus includes all necessary expenses (such as costs of health care) that do not fall within the national and local standards. Id. For all such expenses, the Manual requires a discretionary determination of reasonable amounts for the expense: "Since there are no nationally or locally established standards for determining reasonable amounts, the [Internal Revenue] Service employee responsible for the case must determine whether the expense is necessary and the amount is reasonable." Id. Thus, review of a debtor’s schedules—presumably by the Chapter 7 trustee—will be necessary whenever a debtor lists "other necessary expenses" under the IRS standards.

    There is no way to distinguish between the"other necessary expenses" category of the IRS standards and the category of "extraordinary circumstances that require allowance for additional expenses" established by §101 of H.R. 3150. Section 101 makes a substantial distinction between expenses covered by the IRS standards and those arising from "extraordinary circumstances." If an expense is within the IRS category, §101 simply provides for its deduction from the debtor’s income. But if an expense arises from "extraordinary circumstances," then the debtor must provide detailed explanations of the expense, subscribed to by counsel, and subject to challenge by the trustee and creditors. However, as noted above, the IRS category includes any necessary expense not otherwise treated by the Manual, specifically including health care, and hence would appear to cover many expenses that could be considered "extraordinary."

    There is no way to determine what portion of the IRS allowances reflect payment of secured debt. The means-testing proposed in §101 deducts from the debtor’s household income all monthly payments made on account of secured and priority claims, and so, to the extent that the IRS standards allow deduction for debt payments, §101 provides that payments for debt should be excluded from the IRS allowances. In many situations, however, this exclusion will be impossible. The IRS local standards specify a single monthly allowance for all housing expenses, including mortgage or rent, property taxes, interest, parking, maintenance and repair, insurance, condominium fees and all utilities—including heating and cooking fuel, electricity, and telephone. Manual, Exhibit 5300-46. Thus, for example, the current IRS local standard for the District of Columbia allows total monthly housing expenses, for a family of four or more, in the amount of $1397, while a household of two in rural Illinois is allowed less than $500. (See website listings at http://www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-dc.html and http://www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-il.html.) This single housing allowance is intended to include any mortgage and property tax payments—which would be payments of secured claims—but there is no way to separate an allowance for those claims from the total housing allowance.

    Similarly, the IRS’s local standard provides a single monthly allowance covering all transportation expenses, including payment for vehicles (either by purchase or lease), insurance, maintenance, fuel, registration, vehicle inspection, parking fees, tolls, drivers’ licenses, and public transportation costs. The current monthly transportation expense allowed for the District of Columbia, for a debtor with two cars, is $357, while a debtor with one car in Buffalo is allowed $179. (See website listings at http://www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-trans.html.) Again, for a debtor with auto loans, some part of these totals would be attributable to payments on the loan, but it is not possible to determine what part.

    For both housing and transportation expenses, it might be thought that there could simply be an exclusion from the IRS standard in the amount of whatever mortgage or car loan payments are actually being made by the debtor. That approach, however, cannot be used in any situation where the debtor’s secured debt payments approach or exceed the IRS allowance, since excluding the secured debt payment would leave insufficient allowance for the other expenses included in the category.

    The means-testing process would impose burdens disproportionately on debtors without secured debt. The means-testing of §101 excludes secured debt payment from projected monthly net income, and so mortgage and auto loan payments are automatically deducted from income available to pay creditors, even if they are much higher than average for the community in which the debtor resides. However, rental payments are not secured debt, and so would only be excluded to the extent that they were part of the standard levels of expense established by the IRS. Housing expenses in particular vary widely from community to community within a metropolitan area, yet the IRS allowances are based on county wide figures. Thus, the proposal would require all debtors in higher than average rental communities to declare and prove "extraordinary" expenses, with the potential for litigation concerning the extent to which bankruptcy courts should allow as "extraordinary expenses" rental payments at a level higher than that determined by the IRS.

    Similarly, a debtor could buy a new car on credit without affecting the means-testing of §101, but if the debtor leased a car with payments that caused the IRS transportation allowance to be exceeded, there would again be a need to declare an extraordinary expense in order to retain the car.

    Finally, costs of rental housing may rise very quickly in a given area, but, as with Census Bureau data, the IRS standards will necessarily lag. Thus, debtors in rental housing may be required to establish "extraordinary circumstances" simply to continue to rent an average apartment for their area.

    The means-test leaves unresolved recurring questions regarding the appropriateness of various categories of expense. Currently, questions about the reasonableness and necessity of expenses claimed by a debtor arise under §1325(b) of the Code, which requires that Chapter 13 debtors contribute to their repayment plans any income not "reasonably necessary" for their support and the support of their dependents. In applying this standard, the courts have struggled to determine whether debtors should be allowed to claim expenses for private school tuition, religious and other charitable contributions, and care of elderly relatives or others whom the debtor may not be legally obligated to support. See 2 Keith M. Lundin, Chapter 13 Bankruptcy §§ 5.36-5.37 (1994 & Supp. 1997). None of these questions are resolved by the means-testing proposed in §101 of H.R. 3150. To the contrary, the IRS collection standards make clear that private school tuition and charitable contributions are generally not allowed as "other necessary expenses," and that care for the elderly, invalid, or handicapped only "is necessary if there is no recourse except for a taxpayer to pay the expense." Manual, Exhibit 5300-46. Thus, a debtor seeking to make any of these payments would be required to list them as extraordinary expenses, with the potential for litigation.

    Costs of the proposed means-testing. Largely because of the difficulties outlined above, the means-testing proposed by §101 can be expected to generate substantial additional cost:

    (1) A substantial burden would be placed on the Internal Revenue Service to maintain current expense standards, for each distinct economic area in the country, These determinations by the IRS may well require formal rulemaking procedures. While the Internal Revenue Manual, under current law, is simply an intra-agency document giving direction to IRS employees, §101 would transform the collection standards into an administrative rule. (The definition of "rule" in the Administrative Procedure Act, 5 U.S.C. § 551(5), includes "an agency statement of general . . . applicability and future effect designed to implement . . . law or policy.")

    (2) An increased burden would be placed on bankruptcy professionals. The proposal requires Chapter 7 trustees to investigate and report on the debtor’s net income in each Chapter 7 case. The vast majority of Chapter 7 cases involve no assets for distribution to creditors, and hence only a nominal fee for the trustee. The new investigation and report will substantially add to the work required of trustees in no-asset cases, with no provision for additional compensation. The trustees will also have to review the appropriateness of any expenses claimed by the debtor under the IRS’s "other necessary expenses" category. (The investigation and reporting requirements for Chapter 13 would increase the costs of the Chapter 13 trustee, reducing the portion of plan contributions available to creditors.) Similarly, the proposal requires debtors’ counsel to swear to the accuracy of any extraordinary expenses claimed by a Chapter 7 debtor. Unless this oath is simply based on the statement of the debtor (in which case it would add nothing to the debtor’s oath), this requirement would impose on debtors’ counsel the obligation of independently verifying all of the extraordinary expenses claimed by the debtor, thus increasing the cost of the bankruptcy and the time required to file the case.

    (3) The proposal would lead to increased "bankruptcy planning." The formula employed for determining net monthly income is subject to manipulation by debtors. Most obviously, because secured debt is excluded from projected monthly net income, a debtor can reduce the income available to pay debts simply by taking on additional secured debt. For example, assume that a debtor with $30,000 in unsecured, nonpriority debt owns a three-year old car with no outstanding car loan, and that the debtor has $300 in monthly net income as defined in the proposed bill. Over five years, that income would total $18,000, well over 20% of the unsecured debt. However, if the debtor trades in the three-year old car for a new one, and finances $12,000 for three years at 5% interest, the debtor will need to make payments on the secured car loan of about $13,000, reducing the total "net income" over the five years after filing to about $5000, less than 20% of the unsecured debt. Similarly, a debtor with projected income that is slightly over 20% of outstanding unsecured debt could increase the amount of that debt to arrive at a point where disposable income is less than 20%. Finally, debtors may be able to manipulate income, by terminating second jobs, reducing hours, or changing employment.

    (4) The proposal would lead to greater court involvement in Chapter 7 cases. The court will be required to hear any disputes regarding "other necessary expenses," or extraordinary income, as well as any questions of good faith arising out of the kind of bankruptcy planning discussed above. These hearings will generate additional expense for the courts and the parties involved in them.

    Alternatives. The Bankruptcy Code has limited the availability of Chapter 7 relief in situations of improperly incurred debt by creating exceptions to discharge in Chapter 7. To obtain relief from the improperly incurred debt, the debtor is then required to complete a Chapter 13 plan. Rather than making Chapter 7 relief unavailable to a large class of debtors (many of whom will have incurred their debt in good faith), it may be preferable to define the type of debt (such as excessive credit card debt) that is improper, and make that debt nondischargeable in Chapter 7, regardless of the disposable income currently available to the debtor. Alternatively, if there are to be thresholds for denial of Chapter 7 relief based on household income, those thresholds should be based on some formula (such as a multiple of poverty level) that is not tied to median household income.

    §102 ("Adequate income shall be committed to a plan that pays unsecured creditors") (see H.R. 2500, § 102).

    The changes. Section 102 of H.R. 2500 proposes essentially two major changes in the operation of Chapter 13.

    Plan length. First, §102 imposes an increased minimum plan length for most debtors. Instead of the current three-year minimum, the proposed legislation provides that, if the debtor’s total income is 75% or more of the national median income, based on household size, the debtor’s plan must have a duration of at least five years. If the debtor’s total income is less than 75% of the national median income, the three year minimum is retained. (These provisions are elaborated in §410 of the proposed bill which sets out maximum plan lengths of two years in addition to the minimum plan length set forth here.)

    Minimum payments to unsecured creditors. The second major change proposed by §102 replaces the current "disposable income test" of Chapter 13 with a two-part formula requiring minimum payments on unsecured nonpriority debt. Under the first part of the formula, the plan must provide for payments of at least $50 per month to unsecured nonpriority creditors who are not insiders. The second part of the formula defines "monthly net income" for purposes of a Chapter 13 plan, and creates a mechanism for requiring that "the total amount of monthly net income" is paid to unsecured nonpriority creditors during the minimum plan period, less only expenses of administering the case.

    The definition of "monthly net income" created by §102 is similar to "projected monthly net income" established under §101—it starts with total monthly income and deducts expense allowances pursuant to Internal Revenue Service collection standards, with the potential for adjustment if the debtor has extraordinary expenses or loss of income. In contrast to §102 of H.R. 2500, secured debt and priority debt are also deducted from net income.

    To assure that all monthly net income is paid through a plan to unsecured nonpriority creditors (and administrative claimants), §102 requires that the debtor itemize extraordinary expenses or loss of income in a statement sworn to by the debtor and the debtor’s attorney. The debtor’s statement of extraordinary expenses could be challenged by objection, and the prevailing party in a hearing on the objection could be awarded fees and costs. If the debtor files such a statement, the statement must be refiled, to reflect current conditions, no less than annually during the duration of the plan. All Chapter 13 plans would also be required to provide that future net monthly income will be paid as reasonably determined by the Chapter 13 trustee, with at least annual reviews to determine whether net income has increased or decreased. [This last provision is inconsistent with §101 of the proposed bill. As noted above, §101 imposes a duty of the Chapter 13 trustee to report annually to the court as to whether any increases or decreases in the debtor’s net income should result in modification of the debtor’s plan. Under the terms of §102, increases or decreases in the debtor’s net income, as determined by the trustee, would automatically result in changes in payments to creditors, without plan modification.]

    The impact. Three substantial impacts that can be anticipated as a result of the changes made in §102 of the bill:

    Plan length. The new five-year minimum plan length would be arbitrarily imposed, depending on size of household. This new plan length is required whenever the debtor’s household income is at least 75% of the median household income determined by the Census Bureau, according to the number of persons in the debtor’s household. As discussed above, in connection with §101, median income varies erratically with the number of persons in the household. Single individuals would be required, using currently available census figures, to propose a five-year minimum plan whenever their gross annual income was at least $13,819.50, but the trigger point for a married couple would be $29,279.25. Individuals in a household of four would not face the five-year minimum until their household income reached $40,278; but in a household of six, the five-year minimum would be triggered by income of $33,586.50.

    Where the five-year minimum plan length is imposed, it may increase payments to general unsecured creditors; however, the longer length can be expected to increase the number of cases that fail for default in payment. A five-year minimum term may also have the effect of discouraging any Chapter 13 filing, giving debtors additional incentive for prebankruptcy planning to meet the proposed new filing requirements for Chapter 7. As discussed above in connection with §101, these limitations may be met by increasing debt and decreasing income prior to filing.

    The substitution of "net income" for "disposable" income. Current law requires Chapter 13 debtors to contribute all of their disposable income to the Chapter 13 plan, and, after payment of secured and priority claims, this income would be used to pay general unsecured creditors. Disposable income is very generally defined in the Code (§1325(b)(2)), and courts have varied in their interpretation. The proposed change would require that all of a debtor’s "net" income be used to pay general unsecured creditors. Because secured priority claims are deducted from the calculation of net income, the principal difference introduced by the proposed legislation is that standard expense allowances would be determined, in the first instance, by the IRS—rather than by the courts—subject to individualized exceptions, reviewed annually. This process could reduce the arbitrariness associated with the disposable income test; for this reason, some use of general guidelines for determining appropriate levels of Chapter 13 plan contributions has been recommended by the National Bankruptcy Review Commission. National Bankr. Review Comm’n, Bankruptcy: The Next Twenty Years 262-73 (1997) ("Final Report"). However, the application of the IRS standards is very uncertain, for the reasons listed in the discussion of §101, above, and can be expected to generate substantial cost and litigation.

    Minimum monthly payments of $50 to general unsecured claims of noninsiders. The $50 minimum payment to general unsecured creditors, proposed by §102, applies to all Chapter 13 debtors, even those who have no net income, or less than $50 in net income. This minimum payment may make Chapter 13 unavailable, or at least discourage its use, by lower income debtors.

    The situation of low or nonexistent net income is common in Chapter 13—for example, debtors emerging from a divorce may have very great difficulty in making both required support payments and mortgage payments. In order to save their homes or automobiles, Chapter 13 debtors are often willing to attempt to live on substantially less than what would be considered an appropriate level of expense for necessities. Plans proposing food budgets of $100 for a family of four are not uncommon, with all or almost all of the plan payments going to secured or priority creditors. The $50 minimum for unsecured debt may render such marginal plans completely impossible.

    A second problem exists for lower income debtors who owe unsecured debts both to family members and others. Section 102 would require that the first $50 of every monthly payment go to the nonfamily members (since family members are insiders). The $50 minimum thus provides substantial incentive for debtors with low net income to choose Chapter 7, where all of their debts will be discharged, so that they can repay debts owing to family members voluntarily.

    Alternative. As suggested by the National Bankruptcy Review Commission, the objective of obtaining payment for general unsecured creditors might be advanced by requiring that payments proposed for general unsecured claims in a Chapter 13 plan be made in equal installments throughout the plan, rather than paid only after secured and priority claims. See Final Report at 262.

    §103 ( "Definition of inappropriate use") (see H.R. 2500, §115; S. 1301, §102)

    The changes. This section makes five changes to §707(b) of the Bankruptcy Code. Section 707(b) currently allows for dismissal of Chapter 7 cases that are a "substantial abuse" of the provisions of Chapter 7. Section 103 of H.R. 3150 would change the operative term from "substantial abuse" to "inappropriate use." Next, the section would require a finding of "inappropriate use" if the debtor is disqualified from Chapter 7 filing by the "ability to pay" provisions of §101, discussed above, or if "the totality of circumstances of the debtor’s financial situation demonstrates such inappropriate use." The third change made by this section would allow creditors and Chapter 7 trustees to bring motions under §707(b). Currently, such motions may only be initiated by the United States trustee or the court. Fourth, the section would allow conversion to Chapter 13, with the debtor’s consent, as an alternative to dismissal of the bankruptcy case. Finally, the section would allow the court to award fees and costs against a creditor who brought a motion seeking dismissal for substantial abuse, upon a finding by the court that the allegations of the motion were unsubstantiated.

    The impact. The proposed changes principally provide a means of enforcing the limitation on Chapter 7 relief proposed in §101 of the proposed bill. Current law limits the right to bring §707(b) motions based on the understanding that debtors should generally be able to choose to obtain an immediate fresh start when they are in financial difficulty, and this understanding would be changed by §101, as discussed above. If creditors are allowed to bring motions for substantial abuse, the fee shifting provision may help to reduce creditor motions brought merely to exert leverage on debtors. Just as current law does not define "substantial abuse," the proposed change would retain a large degree of judicial discretion by allowing courts to grant relief based on the "totality of circumstances." The option of conversion to Chapter 13 would usually exist under present law, pursuant to §706(a), which generally gives a Chapter 7 debtor the option of converting the case to Chapter 13 "at any time."

    Subtitle B ( "Adequate Protections for Consumers")

    §111 ( "Notice of alternatives") (see H.R. 2500, §103; S. 1301, §301).

    The changes. The major change involved in §111 is to assure that each consumer bankruptcy debtor is given a written notice that both discusses the option of consumer credit counseling and lists credit counseling services with offices in the district in which the bankruptcy is filed. The list would be prescribed by the United States trustee and questions about whether a particular counseling service should be included in the list would be determined by the court.

    The impact. This proposal can result in relevant information being made available to debtors, although it is likely that debtors consulting an attorney will place more weight on the attorney’s advice than on the information in a form given to them by the attorney. The proposal will probably have the greatest impact on pro se filers. Difficulties may exist in describing the services available from credit counselors, at least if the description includes any comparison of credit counseling and bankruptcy in satisfying debt or in maintaining or reestablishing credit. The need to administer the list of credit counselors will involve some additional cost to the United States trustee.

    §112 ( "Debtor Financial Management Training Test Program") (new)

    The changes. This section of H.R. 3150 would require the Executive Office of the United States Trustee (1) to develop a program to educate debtors on the management of their finances, (2) to test the program for one year in three judicial districts, (3) to evaluate the effectiveness of the program during that period, and (4) to submit a report of the evaluation to Congress within three months of the conclusion of the evaluation. The test program is to be made available, on request, to both Chapter 7 and 13 debtors, and, in the test districts, bankruptcy courts could require financial management training as a condition to discharge.

    The impact. Debtor financial education was a recommendation of the National Bankruptcy Review Commission, but the Commission did not recommend any methodology for implementing it. See Final Report at 114-16. There are two potential problems with the methodology suggested here. First, one year may not be a long enough time to assess the effectiveness of any 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 difficulty. None of these bench marks can be assessed after one year. Second, the power to compel debtor education as a condition for discharge is accorded without specifying the circumstances in which it should be exercised, with the potential for widely varying application. Some judges might require debtor education in all consumer cases, while others never require it. Compulsory education in pilot districts also would be subject to constitutional challenge, as nonuniform bankruptcy legislation. See Railway Labor Executives' Assn. v. Gibbons, 455 U.S. 457, 469-71 (1982) (invalidating bankruptcy legislation that applied to a single railroad).

    Alternatives. A study could be conducted of the effectiveness of the existing debtor education programs, based on their past experience. Compulsory education should be imposed only after an education program is available nationwide, and should be imposed only in situations defined by law.

    §113 ( "Definitions") (new)

    §114 ( "Disclosures") (new)

    §115 ( "Debtor’s Bill of Rights") (new)

    §116 ( "Enforcement") (new)

    The changes. These four sections of H.R. 3150 set up a new system for regulating the providers of consumer bankruptcy services. Section 113 defines the term "debt relief counselling agency" to include both lawyers and non-lawyer providers of consumer bankruptcy goods or services, and the remaining sections establish regulations bearing on these providers. Section 114 would place a new §526 in the Bankruptcy Code, imposing a set of disclosure obligations on consumer bankruptcy providers. The disclosure would include (1) the availability of consumer credit counseling services, (2) the need for a truthful listing of assets and income in bankruptcy, subject to audit and criminal sanctions, (3) the obligation of the provider to issue a contract specifying the services that will be provided and their cost, together with a list of the services that might be needed, and (4) directions on how to complete bankruptcy schedules. Copies of the first two of these notices would be required to be maintained by the provider for two years after the notice is given, or two years after a discharge is received, whichever is longer.

    Section 115 would add a new §527 to the Code, with further regulation of consumer bankruptcy providers. It would require a written contract for bankruptcy-related services, with a copy for the client, and specify that the advertising of consumer bankruptcy providers include a conspicuous disclosure that they are engaged in bankruptcy filing. Finally the section would prohibit consumer bankruptcy providers 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.

    Section 116 would enforce the new regulations on consumer bankruptcy providers. It provides debtors may not waive the provisions of "section 526" and that contracts not complying with "section 526" are void. [This is apparently a drafting error, since proposed §526 governs notices, while proposed §527 governs the content of contracts and the performance of services on behalf of debtors.] The section would further impose sanctions on consumer bankruptcy providers who engage in prohibited conduct. There is a mandatory sanction of loss of all fees previously paid by the debtor, and a potential sanction of being required to continue the representation of the debtor without further fees. The prohibited activities include intentional or negligent failure to comply with any applicable requirement of the Code or the Federal Rules of Bankruptcy Procedure applicable to consumer bankruptcy providers, and providing assistance to a debtor whose case is dismissed or converted under §707(b), or dismissed for failure to file bankruptcy papers. The section would allow enforcement of the provisions of §526 by officials of state government, in either federal or state court, with actual damages awarded to the debtors affected, and with the consumer bankruptcy provider required to pay the costs and fees of any successful enforcement action. Finally, the section specifies that its provisions do not supersede any state regulation of consumer bankruptcy services except to the extent of any inconsistency.

    The impact. The likely impact of the new regulations imposed by H.R. 3150 on the providers of consumer bankruptcy services can be divided into three classes.

    First, some of the requirements reiterate existing obligations or good practices. In this category are the obligations (1) to provide written contracts specifying the services to be performed and their cost and (2) to perform the promised services. (Fees and services of petition preparers and attorneys are presently regulated by §§110, 329, and 330 of the Code.) The restatement of these obligations may be helpful, particularly as coupled with defined sanctions.

    Second, some of the requirements may impose unnecessary costs on the providers. For example, the requirement to retain copies of each notice provided to a client or prospective client for at least two years involves substantial cost with no apparent benefit. Similarly, the requirement of "conspicuous notices" in all advertisements could impose unnecessary costs in connection with advertisements in newspaper classifieds and in telephone directories.

    Third, some of the regulations may have a chilling effect on the provision of consumer bankruptcy services. For example, the automatic denial of fees in any case dismissed under §707(b) can be expected to discourage attorneys from filing Chapter 7 cases in situations where eligibility for Chapter 7 relief was questionable. Similarly, automatic denial of fees in cases dismissed for failure to file documents may discourage attorneys from filing cases whenever the debtor’s ability to produce documents is doubtful. Finally, the provision that a provider may never counsel borrowing to pay for bankruptcy fees may be overbroad, prohibiting appropriate advice necessary to permit a bankruptcy filing. 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.

    Alternative. This provision might be limited to addressing specific misconduct by providers of consumer bankruptcy services that is not adequately addressed by existing law. For example, if it is found that bankruptcy providers are misrepresenting their services as not involving bankruptcy, that misconduct could be specified as a ground for mandatory sanctions.

    Subtitle C ( "Adequate Protections for Secured Lenders").

    §121 ( "Discouraging bad faith repeat filings") (see H.R. 2500, §109; S. 1301, §303).

    The changes. This section provides (1) that the automatic stay will terminate after 30 days in cases of repeated bankruptcy filings within one year, unless a party in interest demonstrates that the filing of the later case was in good faith, and (2) that the bankruptcy court have discretion to enter orders granting relief from the stay "in rem," providing that the automatic stay will not apply in subsequent cases filed by the same debtor or in cases filed by other parties with specified knowledge of the order.

    The impact. The role of the automatic stay differs substantially in Chapter 7 and in Chapter 13. In Chapter 7, the stay has the effect of allowing a trustee to determine whether property of the debtor should be liquidated for the benefit of creditors. For example, a home that is about to be sold in a foreclosure sale, might, in the trustee’s judgment, be able to be sold by a broker for a higher price, sufficient to pay the mortgage and generate a surplus for distribution to unsecured creditors. The automatic stay prevents a foreclosure from taking place in a situation like this, while allowing the mortgagee to seek relief from the stay by showing that there is in fact no equity in the property. In Chapter 13, the automatic stay has the effect of allowing a debtor to propose and carry out a plan that deals with secured claims in such a way that the debtor is allowed to retain the collateral, even if there is no equity. A debtor who has no ability to deal with a secured claim properly in Chapter 13 may nevertheless file repeated bankruptcy cases in order to prevent a foreclosure or repossession from going forward, by invoking the automatic stay repeatedly. The proposal seeks to limit debtors’ ability to use this tactic, and many of its features would be helpful. However, the proposed changes do not reflect the different roles that the automatic stay plays in Chapter 7 and Chapter 13, and thus may have unintended consequences.

    In Chapter 7 cases, regardless of whether there was a prior case, the issue involved in application of the automatic stay should be limited to the question of equity. To allow the automatic stay to remain in effect, a Chapter 7 trustee should simply be required to show that there is equity in the property at issue; the good faith of the debtor in filing the case is not relevant. To see the problem with the proposal in this connection, consider the following example: a debtor with limited income has taken out a home equity loan on the family home, and cannot keep up with the payments. The lender files a foreclosure action, and the debtor seeks to save the home in Chapter 13, but fails to make plan payments, so that the bankruptcy case is dismissed and the foreclosure action is recommenced. This time, again to stop the foreclosure, the debtor files a Chapter 7 case. There is considerable equity in the home. Under the proposal, there is a presumption (since the debtor failed to make plan payments) that the second case is filed in bad faith, and if the Chapter 7 trustee wants to keep the automatic stay in effect beyond 30 days, the proposal would require the trustee to establish, by clear and convincing evidence, that the case was filed in good faith. If the trustee is unable to do so, the foreclosure will go forward, and the estate will lose the higher value that could have been obtained in a conventional sale, outside of foreclosure.

    On the other hand, the good faith standards set out in the proposal are reasonably applicable to Chapter 13 cases, requiring that the debtor establish good faith for repeatedly invoking the automatic stay.

    The impact of the "in rem" provision is difficult to determine, because no standards are set out for the entry of in rem orders. These orders would be most appropriate as applied to property in which there was no equity, and as to which there had been a pattern of bankruptcy filings. In such situations, the orders could help to prevent debtor abuse. In other situations, the orders might again prevent sales by Chapter 7 trustees to the benefit of unsecured creditors. Also, the proposal does not state whether the court would be authorized to vacate an in rem order in a subsequent case upon a showing that the case was filed in good faith. Absent such specification, there may substantial litigation to determine the issue.

    Alternatives. The 30-day termination of the automatic stay should be postponed in Chapter 7 cases upon a request by the trustee for a hearing on the question of equity. In rem orders for relief from stay should be limited to situations in which there is no equity in the property and in which the property has been the subject of more than one bankruptcy filing.

    §122 ( "Definition of household goods and antiques") (see H.R. 2500, §119).

    The changes. The proposed legislation would add a definition for "household goods" to the definitions of §101 of the Code. "Household goods" are a category of debtors’ assets that may be exempted under §522(d), and as to which certain liens may be avoided under §522(f). The proposal would define "household goods" by incorporating the definition that appears in 16 C.F.R. §444.1(i). That regulation of the Federal Trade Commission defines "household goods" as:

    Clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of the consumer and his or her dependents, provided that the following are not included within the scope of the term "household goods": (1) Works of art; (2) Electronic entertainment equipment (except one television and one radio); (3) Items acquired as antiques; and (4) Jewelry (except wedding rings).

    [Although the heading of the proposed section mentions antiques, no definition of "antiques" is given in the text.]

    The impact. Section 522(f) allows the avoidance of nonpurchase money, nonpossessory liens on certain items of exempt household property. The policy underlying this provision is that when a lender extends credit on the basis of used household goods in the possession of the debtor, it is unlikely that there would be any substantial resale value in the collateral, and that the lender is primarily relying on the difficulty that the debtor would face in replacing the items. The Bankruptcy Code made the determination that such liens should not be enforced. It appears to be the intent of the proposed legislation to strictly limit the type of property that may be excluded from nonpossessory, nonpurchase money security interests. The FTC definition of household goods would exclude such common items as home computers, CD players, speaker systems, earrings, and framed prints. If so, it would be unduly restrictive. To some extent, the limitations of the FTC definition would not restrict §522(f), "because household goods" is only one of the categories of personal property as to which liens may be avoided under that subsection. Other categories include "household furnishings," and "jewelry." The major impact of the change may be to give rise to new litigation as to whether particular items not within the FTC definition of "household goods" constitute "household furnishings."

    Alternative. In order to protect nonpurchase money lenders who genuinely rely on the value of the debtor’s personal property in extending credit, Section 522(f) could be amended to exclude from lien avoidance any items of personal property not within the FTC definition whose resale value exceeds a specified amount (for example, $1000).

    §123 ( "Debtor retention of personal property security") (see H.R. 2500, §112).

    The changes. Some courts have held that debtors in Chapter 7 may redeem personal property in installments. The proposed change would require that redemption take place by payment in full at the time of redemption. In addition, this section proposes that if the debtor does not redeem personal property that is collateral for a claim, or enter into a reaffirmation agreement with respect to the property, that the property will be deemed abandoned by the Chapter 7 trustee, so that the creditor may repossess the property or take other action allowed by nonbankruptcy law.

    The impact. Although debtors rarely have equity in personal property that is collateral for debt, there can be situations where equity does exist, as in jewelry or luxury cars. This proposal, perhaps unintentionally, would remove property from the estate even if there was equity in the property. As applied to property in which there is no equity, the impact of the proposal would be to create an appropriate incentive in favor of Chapter 13 filings whenever a debtor wished to retain property that could not be redeemed, and as to which a reaffirmation agreement could not be negotiated.

    Alternative. The proposal should be amended to allow a trustee to require that abandonment take place only after notice to the Chapter 7 trustee, with an opportunity for the trustee to be heard on the question of whether there is equity in the property.

    §124 ( "Relief from stay when the debtor does not complete intended surrender of consumer debt collateral") (see H.R. 2500, §208).

    The changes. Section 521(2) of the Bankruptcy Code currently requires Chapter 7 debtors to make an election as to their property which serves as collateral for consumer debts: they must indicate that they intend to retain or surrender the property, and "if applicable" state that the property is claimed exempt, that the debtor intends to redeem the property, or that the debtor intends to reaffirm the debts secured by the property. The law further indicates that the debtor is obligated to carry out the specified choice within 45 days of filing its notice of the election as to the property involved. Section 124 of the H.R. 3150 would make a number of changes in the operation of this provision:

    (1) The section would be made applicable to all collateral, not merely collateral securing consumer debts.

    (2) The time for performing the election would be changed from 45 days after the filing of the notice to "30 days after the first meeting of creditors under section 341(a)."

    (3) The option for retaining the property and claiming it as exempt is eliminated, so that the only options given the debtor for collateral are: (1) surrender, (2) redemption, and (3) reaffirmation or lease assumption.

    (4) A failure by the debtor to timely perform its election would result in termination of the automatic stay as to the property involved unless the debtor chose reaffirmation and the creditor refused to reaffirm on the original contract terms.

    (5) If the automatic stay terminates pursuant to the above provisions, it is specified that the creditor should be allowed to proceed with any state law remedies for default based on the filing of the bankruptcy. Thus, the fact that the debtor was current in payments would not be grounds to prohibit repossession or foreclosure if state law allowed these remedies based on the filing of a bankruptcy. This provision would not be applicable as to property for which a lien was avoided in the bankruptcy case. [In this connection, there appears to be drafting error—including §553 of the Code in a list of sections under which a lien might be avoided. Section 553 terminates certain setoffs, which can function like liens in some circumstances, but the provisions of §521(2), sought to be enforced by this proposal, have nothing to do with setoffs.]

    The impact. Current law has no enforcement mechanism for §521(2), and this section provides the most reasonable enforcement mechanism—relief from the automatic stay. Similarly, expressly allowing repossession based on the bankruptcy filing (if permitted by state law) addresses creditor concern that the collateral will not be maintained once the debtor is no longer personally liable for any deficiency. However, the proposal does not deal with the situation in which there may be equity in the property. Thus, in the situation of a home mortgage where there is equity in the property, the failure of the debtor to comply with the requirements of §521 results in relief from the automatic stay with no opportunity for the trustee to oppose that relief.

    Moreover, the proposal would interfere with the debtor’s option to retain exempt property without reaffirmation or redemption. Debtors are allowed by §522(f) of the Code to avoid liens on certain exempt personal property secured by nonpossessory, nonpurchase money security interests. A requirement that the debtor surrender, redeem, or reaffirm debt as to this property would contradict this lien avoidance provision. Under the proposal, the automatic stay would terminate as to property exempted under §522(f) when the debtor failed to redeem or reaffirm the debt, even though no discharge had yet been granted the debtor. The debtor would presumably have a defense of lien avoidance if the creditor pursued state law remedies as to the property in question, but there is no reason why the automatic stay should not remain in effect in this situation.

    A final difficulty with the proposal is its ambiguity in establishing the date by which a debtor must make the §521(2) election. The language "30 days after the first meeting of creditors under section 341(a)" might mean (1) 30 days after the first date set for the meeting (see Fed.R.Bankr.P. 3002(c)), (2) 30 days after the date on which the meeting is actually commenced, or (3) 30 days after the meeting is concluded (see Fed.R.Bankr.P. 4003(b)). This ambiguity, if uncorrected, can be expected to generate litigation.

    Alternative. Failure by debtors to exercise their obligations under §521 could be made grounds for relief from the automatic stay, but relief awarded only on notice to the trustee. Relief would not be awarded where there is equity in the property and the trustee wishes to sell the property. The provision should also include as an option the retention of property with lien avoidance under §522(f), and should specify that the debtor must make the election within 30 days from the first date set for the creditors’ meeting.

    §125 ( "Giving secured creditors fair treatment in Chapter 13") (see H.R. 2500, §105; S. 1301, §302).

    The changes. Current case law interpreting Chapter 13 is in disagreement about the time at which a lien should be deemed released under a plan. This provision would resolve the dispute by amending §1325 of the Code to state that a lien can only be released at the time the debtor is discharged under §1328, or until the claim secured by the lien is fully paid, whichever is earlier. The provision also states that, in the event of conversion or dismissal of a Chapter 13 case, the lien would remain to the extent recognized under nonbankruptcy law.

    The impact. This change would primarily affect automobile loans. Frequently an auto loan in a Chapter 13 case is in an amount greater than the value of the automobile. In such a case, the debtor is allowed to pay the value of the car in satisfaction of the secured claim, with the balance of the claim treated as unsecured. The plan may provide that as soon as the secured portion of the claim is satisfied, the creditor is required to release its lien. Thereafter, the debtor may fail to complete the plan, so that the creditor does not receive full payment of the unsecured portion of its claim. This provision would allow the creditor to retain its lien to secure payment of that unsecured portion.

    The provision contradicts the bankruptcy policy requiring equal treatment of creditors. To the extent that a secured creditor has a claim not supported by collateral value, the Bankruptcy Code treats the creditor’s claim as unsecured, and entitled to the same treatment as other unsecured claims. This provision would allow the unsecured portion of a secured claim a preferential position—even though the value of its secured claim was paid, the creditor would be able to take action against property of the debtor to enforce its unsecured claim, a right that no other unsecured creditor would have.

    The effect of conversion or dismissal of a Chapter 13 case is treated in separate provisions of the Bankruptcy Code, §§348 and 349. See §127 of H.R. 3150, discussed below. If changes are made regarding the effect of conversion or dismissal and not placed in those sections, questions may arise as to which section controls.

    Alternative. Payments on account of unsecured claims can be required to be made in equal installments throughout a plan, so that the unsecured portion of a bifurcated claim is paid during the same time that the secured portion is paid, and all unsecured claims are treated in the same way. Changes in the effect of conversion or dismissal should be made in §§348 and 349 of the Code.

    §126 ( "Prompt relief from stay in individual cases") (see H.R. 2500, §207; S. 1301, §311).

    The changes. This section would provide that in individual bankruptcy cases under Chapters 7, 11, or 13, the automatic stay would terminate 60 days after a request for relief from the stay, unless (1) the court denies the motion, or (2) all parties in interest agree to a continuance of the stay beyond that time, or (3) the court makes a finding that continuance of the stay is required by compelling circumstances.

    The impact. This provision does not substantially change existing law, which requires that all motions for relief from stay must be heard initially within 30 days, and that if the initial hearing is not final, the final hearing must commence within 30 days after the conclusion of the preliminary hearing. Both present law and the proposal allow extensions by the court for compelling circumstances.

    §127 ( "Stopping abusive conversions from Chapter 13") (see H.R. 2500, §108; S. 1301, §310).

    The changes. This section of the proposed legislation has two parts. First, under §348(f) of the Bankruptcy Code, when a debtor converts a Chapter 13 case to a case under Chapter 7, the valuation of allowed secured claims is carried over from the Chapter 13 case to Chapter 7, with the amount of the secured claim reduced by whatever payments were made on account of that claim to the secured creditor. The proposed bill would change this result, providing that to the extent any amount remains owing to the secured creditor at the time of the conversion, the entire amount owed will be secured by the collateral. Second, the section provides that, to the extent that any default in payments is not fully cured, the default "shall have the effect given under applicable nonbankruptcy law." [Note: This section of the proposed bill contains a drafting error. Section 348(f) of the Bankruptcy Code applies to all cases converted from Chapter 13 to other chapters of the Code. Section 108 is intended to leave the terms of §348(f) in place as they apply to Chapter 13 cases converted to Chapter 11 or 12, and then set out new terms, in a new subsection 348(f)(C), for cases converted from Chapter 13 to Chapter 7. Thus, the new subsection should have been introduced by the phrase "with respect to cases converted to Chapter 7." Instead, the new subsection is introduced by the redundant and confusing phrase "with respect to cases converted from Chapter 13."]

    The impact. The first proposed change has a very narrow impact. In Chapter 7, pursuant to the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992), a debtor cannot simply pay the secured portion of any secured creditor’s claim and retain the collateral. Rather, a Chapter 7 debtor can only exercise this right in the context of a redemption, pursuant to §722 of the Code. This section allows a debtor to pay the amount of the "allowed secured claim" in order to redeem "tangible personal property intended primarily for personal, family or household use, from a lien securing a dischargeable consumer debt, if the property is exempted . . . or has been abandoned." When a case is converted from Chapter 13 to Chapter 7, a question may arise as to how much is required to be paid by the debtor in order to redeem tangible personal property, such as an automobile. Current law provides that the amount of the secured claim, fixed during the Chapter 13 case at the value of the collateral, continues to be the amount of the secured claim for purposes of the case on conversion to Chapter 7, and that any payments made on account of the secured claim during the Chapter 13 case reduce the claim on conversion. For example, if the debtor owed $10,000 on a car loan at the outset of a Chapter 13 case, and the car was valued by the court at $7,000, the lender would have had a secured claim of $7,000 in the Chapter 13 case and an unsecured claim of $3,000. If the debtor paid $2,000 on the secured claim through the Chapter 13 plan, and then converted the case, current law would provide that, on conversion, the lender had a secured claim of $5,000 (the original $7,000 claim reduced by the $2,000 payment). Thus, if the debtor wished to redeem the automobile in Chapter 7, the price for redemption would be $5,000, even if the car was worth more than that amount at the time of redemption. Under the proposed change, the intent appears to be that the creditor would have an $8,000 claim secured by the automobile (the total claim of $10,000 less the $2,000 paid during the Chapter 13 plan). In order to redeem, the debtor would then have to pay the entire value of the automobile, up to $8,000. In this way, the secured creditor could receive, as a price for redemption, a total compensation greater than the value of the collateral at the time of the filing of the case.

    The second provision of the section, dealing with the cure of default, is unclear. Under nonbankruptcy law, a default gives secured creditors certain rights to the collateral, which may include immediate repossession or commencement of a foreclosure action. In a Chapter 7 bankruptcy, those rights are stayed. It may be that this provision is intended to terminate the automatic stay in a case converted from Chapter 13 to Chapter 7 whenever there is an uncured default. If so, the provision would violate the principle that the Chapter 7 trustees are allowed to sell property in which there is equity, for the benefit of all creditors.

    Alternatives. Bad faith conversion from Chapter 13 is currently penalized by §348(f)(2), which provides that the Chapter 7 trustee in the converted case may liquidate all of the nonexempt property in the possession of the debtor at the time of conversion. This penalty could be made more effective by uniform exemption laws. Another alternative would be to allow denial of conversion in situations of bad faith.

    §128 ( "Restraining abusive purchases on secured credit") (see H.R. 2500, §110).

    The changes. This section of the proposed bill would change the bifurcation of any secured claim resulting from the debtor’s incurring secured credit within 180 days of the bankruptcy filing. Instead of the secured creditor having a secured claim only to the extent of the value of its collateral, with an unsecured claim for the difference, the secured creditor would be given a secured claim in the amount of the entire indebtedness outstanding at the time the bankruptcy was filed. If the creditor is also secured by other property, purchased more than 180 days prior to the bankruptcy, the claim would be bifurcated, but the resulting secured claim could not be less than the debt outstanding as a result of the purchase made within the 180 day period.

    The impact. The section is not limited to situations of bad faith purchases—it applies in any case in which the debtor files bankruptcy after making a credit purchase. For example, if a debtor purchased an automobile in January, was laid off in February, and filed bankruptcy in May, this provision would result in a change in the operation of the Bankruptcy Code with respect to the claim secured by the automobile. In Chapter 7, one impact of this provision is to increase the cost of redemption. Instead of paying the value of the collateral at the time of redemption, the debtor would be required to pay the entire outstanding indebtedness. Another impact may be to reduce the recovery of the secured creditor in any Chapter 7 case where there is a distribution. Under existing law, any secured creditor would be viewed as having a secured claim to the extent of the value of the collateral, and an unsecured claim for the difference between the value of the collateral and the total claim. Thus, in the example given above, if $25,000 was the outstanding loan balance, and the car was valued at $20,000, current law would allow the creditor both to repossess the car and have a $5000 unsecured claim, payable through sale of the debtor’s other assets. Under the proposal, the creditor’s claim would be treated as fully secured, and repossession would be the sole recovery.

    In Chapter 13 cases, the impact of this provision would be to prevent "strip down" of the affected secured claim. As a result, a greater portion of the debtors’ contributions to the Chapter 13 plan would go to pay the secured claim, and a smaller amount would be paid to unsecured creditors. For example, an automobile purchased six months before a bankruptcy may have substantially depreciated. If the automobile was purchased at a high interest rate with a long amortization, the amount owing on the car at the time of the bankruptcy may be close to the original purchase price. If the debtor missed one or more payments, the debt may exceed the original purchase price. The proposal would require that the debtor, in order to retain the automobile, pay the total amount due, rather than what the car was worth. Assuming that the debtor plan makes less than full payment of all claims, the effect is to increase the amount paid on the auto loan and reduce the amount paid to other creditors.

    Alternatives. Current law allows both Chapter 7 and Chapter 13 cases to be dismissed for lack of good faith. The Code could be amended to provide that a case shall be dismissed for lack of good faith where a debtor is shown to have made a purchase on secured credit with the intent of filing bankruptcy shortly thereafter.

    §129 ( "Fair valuation of collateral") (see H.R. 2500, §111).

    The changes. This provision of the proposed bill would amend the claim bifurcation provision of the Bankruptcy Code (§506(a)) to provide that collateral in Chapter 7 and 13 cases is always valued at the cost to replace the property, without deducting the costs of sale or marketing, and that this replacement cost, for property "acquired for personal, family, or household purpose" is "the price a retail merchant would charge for property of that kind."

    The impact. The impact of this proposal differs, depending on whether it is applied in Chapter 7 or in Chapter 13. In Chapter 7, the most common reason for bifurcating a claim is in redemption: a debtor is allowed, in Chapter 7, to retain personal property that cannot be sold for the benefit of unsecured creditors (because there is no equity in the property, or because it is exempt), by paying any creditors secured by the property the amount of their allowed secured claims. In this way, instead of obtaining the property, as they would by repossession, the secured creditors receive the value of the property, which may be less than the total amount owed. To the extent that the creditors receive less than the total amount they are owed, they are given an unsecured claim for the difference. Under current law, there is no explicit direction as to how to value the collateral being retained by the debtor. However, since redemption is a substitution for return of the collateral, there is no apparent reason why secured creditors should receive, in a redemption, any more than they would receive if they did repossess the collateral. Valuing the collateral at the price it would cost the debtor to replace it gives an arbitrary increase in collateral value to the secured creditor, with the amount of the increase depending on how expensive it would be for the debtor to replace the property involved. Using retail price as the measure for replacement cost exacerbates this problem, since, as the Supreme Court noted in its recent Rash decision, retail price may include "items such as warranties, inventory storage, and reconditioning," that are in no sense part of the collateral that secures a creditor’s claim. Associates Commercial Corp. v. Rash, 117 S.Ct. 1879, 1886 n.6 (1997). Finally, in the context of redemption, the creditor has no risk of nonpayment, and so there is no reason for any increase in the amount of the secured claim to compensate for risk of nonpayment. Chapter 7 cases involving a distribution

    In Chapter 13, the principal reason for bifurcation is in "stripping down" liens to the value of the collateral and paying the reduced secured claim over the course of the plan. Here, the impact of bifurcation is to divide the plan payments between secured and unsecured creditors. The debtor must either pay all claims in full (including the unsecured portion of a secured claim) or else must pay all disposable or "net" income into the plan. To the extent that a secured claim is valued at a higher level, less of the plan payments will go to unsecured creditors. So, in this context, "fairness" requires a balancing of the rights of secured and unsecured creditors. Again, the value of collateral to a secured creditor is best measured in terms of what that creditor could get for the collateral. To the extent that the creditor could only obtain part of what is owed from the collateral, the creditor is best seen as unsecured, just like the other unsecured creditors, regardless of how much it might cost the debtor to replace the property. In contrast to redemption, however, the secured creditor in Chapter 13 does not receive immediate payment of its claim, and so the creditor does have a risk of nonpayment. This can be addressed by amending the Code to provide that payments of secured claims in Chapter 13 plans should carry an interest rate sufficient to offset the risk of nonpayment.

    On the other hand, in both Chapter 7 and Chapter 13 cases, this provision may have the effect of reducing secured creditor recovery in situations where the collateral is repossessed. A creditor who repossesses collateral after the case is filed would be given a secured claim for the retail value of the collateral, even though the creditor could not obtain retail value in disposing of the collateral. The artificially high secured claim would, in turn, reduce the unsecured claim for the creditor would receive a distribution.

    A final difficulty with the proposal is that many items of collateral (unlike automobiles) do not have an established retail market as used items. For example, a creditor may be secured by a five year old washing machine. There are unlikely to be readily ascertainable retail markets for such machines. The proposal would leave no guidance as to the proper valuation method in this situation.

    Alternative. To create a fair valuation of collateral, the Code could be amended to provide that a secured creditor receive a secured claim in the amount that the creditor could establish that it would receive using any method of sale available to the creditor. If the claim is not paid immediately, the creditor should receive an interest rate on the secured claim sufficient to offset the risk of nonpayment. A similar standard of valuation has been proposed by the National Bankruptcy Review Commission. Final Report at 243-58.

    §130 ( "Protection of holders of claims secured by debtor’s principal residence") (see H.R. 2500, §120).

    The changes. Section 130 of H.R. 3150 would (1) provide that a claim is not subject to modification if it is secured "primarily" (rather than "only") by a lien on property used as the debtor’s principal residence at any time during the 180 days prior to the bankruptcy, (2) define "debtor’s principal residence," and (3) exclude continuances of mortgage foreclosures from the operation of the automatic stay.

    The impact. These changes largely resolve conflicts in the case law respecting the treatment of home mortgages in Chapter 13. Section 1322(b)(2) provides that, generally, secured claims can be modified in Chapter 13. This allows the plan to pay, as a secured claim, only the value of the collateral. To protect lenders of home mortgages, the right to modify is denied when the lender is secured only by a mortgage on the debtor’s principal residence. Some decisions have held that a multi-unit building would constitute security other than the debtor’s principal residence, or that a mobile home would not be a residence. The proposed change would include loans on such property within the scope of the protection. Similarly, there have been reports of situations in which debtors have vacated their homes shortly before filing Chapter 13 cases, so as to remove the protection given to the mortgage lender. The proposal negates such a tactic by applying the protection to homes used as the debtor’s principal residence during a 180 day period prior to the bankruptcy.

    A final issue regarding the application of the non-modification provision has to do with other security issued in connection with a home mortgage. Current law applies nonmodifiability where the claim is secured "only" by a lien on the debtor’s principal residence. Questions have arisen as to whether security incident to a mortgage (such as an assignment of rents) results in the loss of nonmodifiability. The proposal deals with these questions by requiring only that the claim be primarily secured by a homestead mortgage. This change may be overbroad. Debtors sometimes give home mortgages as additional security in connection with a business loan—clearly not the kind of loan for which the special protection was found necessary—and the business lenders could argue (particularly if the business fails) that the home mortgage was their "primary" security.

    The remaining change made by this section involves the automatic stay. Some decisions have held that, in order to avoid violation of the automatic stay, a lender with a foreclosure pending at the time of a bankruptcy filing would have to dismiss the proceeding. Then, if the automatic stay were terminated, the lender would be required to serve all required notices and otherwise recommence the proceeding. The proposal would allow, instead, a simple continuance of the proceeding as of the time of the bankruptcy filing, so as to allow immediate recommencement in the event of termination of the stay.

    Alternative. Instead of providing for nonmodifiability whenever a homestead is the "primary" security for a loan, the needs of mortgage lenders could be addressed by a provision applying nonmodifiability to any loan secured only by a mortgage and by interests associated with the mortgage.

    Subtitle C ( "Adequate Protections for Secured Lenders")

    §141 ( "Debts incurred to pay nondischargeable debt") (see H.R. 2500, §106).

    The changes. Current §523(a)(14) provides that debts incurred to pay nondischargeable tax obligations are nondischargeable. This provision would expand §523(a)(14) to apply to all nondischargeable debt and would further provide that the debt to pay nondischargeable debt would have the same priority as the debt it was incurred to pay.

    The impact. The impact of this proposal could be an arbitrary imposition of nondischargeability. The provision is not limited to debts incurred fraudulently, which are already nondischargeable under §523(a)(2). Thus, this proposal would apply to debts incurred in good faith, and would render them nondischargeable based simply on how the debtor chose to use the borrowed funds. If the debtor used borrowed funds to pay rent, and other funds to pay child support, the debtor would have no nondischargeable debt. But if the debtor used the same borrowed funds to pay child support, and the other funds to pay rent, the borrowed funds would be a nondischargeable debt, required to be paid as a priority.

    Moreover, the provision presents substantial tracing problems. Section 523(a)(14) has had little impact thus far, perhaps because of the difficulty in tracing the source of cash used to pay taxes. It would similarly be difficult to trace the source of cash used by a debtor to pay nondischargeable obligations, such as child support, whenever these obligations were paid from an account into which the debtor deposited both borrowed funds and funds received from other sources.

    §142 ( "Credit extensions on the eve of bankruptcy presumed nondischargeable") (see H.R. 2500, §107).

    The changes. Current §523(a)(2)(C) provides that if a debtor borrows more than $1000 from a single creditor for items that are not needed for the support of the debtor or the debtor’s dependents, or takes cash advances of more than $1000, within 60 days of the filing of a bankruptcy, the debt is presumed to have been obtained by fraud. In keeping with the consensus reflected in In re Anastas, 94 F.3d 1280, 1285 (9th Cir. 1996), this would mean that the debtor is presumed to have incurred the debt without intending to repay it. The proposed change would expand this presumption to all consumer debts incurred within 90 days preceding the bankruptcy. [Note: the proposed language continues to include the phrase "consumer debts owed to a single creditor." In view of the fact that there is no longer a minimum borrowing requirement for invoking the exception, this phrase serves no purpose and may be confusing—e.g., creating the impression that only one creditor could assert the presumption.]

    The impact. The impact of the presumption, under current law, would be to require debtors to carry the burden of establishing, in response to a creditor complaint alleging fraud, that they did intend to repay each debt incurred by them within three months of the bankruptcy filing. The expanded presumption would have an impact far beyond the credit card matters to which the presumption now applies, applying, for example to medical debts, grocery bills, and rent obligations. The impact of this provision would be increased by §143, which makes debts arising from fraud nondischargeable in Chapter 13. Finally, §145, discussed below, would change the standard for fraud in the use of credit cards, significantly increasing the burden of the debtor under §142.

    Alternatives. The present law could be amended to make clear that the misconduct leading to nondischargeability is incurring debt with an intent not to repay the debt. With this understanding, other circumstances might be set out in which debt incurred shortly before bankruptcy is presumed to be nondischargeable: for example, debt incurred to finance casino gambling, or debt incurred in excess of some percentage of the debtor’s ordinary expenses.

    §143 ( "Fraudulent debts are nondischargeable in Chapter 13 cases") (see H.R. 2500, §104).

    The changes. This section would limit the superdischarge available in Chapter 13 by excluding from that discharge debts incurred by fraud (as defined by §523(a)(2) of the Code); by fraud or defalcation while acting as a fiduciary, embezzlement, or larceny (as defined by §523(a)(4)); and intentional torts (as defined by §523(a)(6)). [Note: the rationale of this section would require that debts covered by §523(a)(3)(B) also be nondischargeable in Chapter 13. Subparagraph (a)(3)(B) governs debts nondischargeable under §523(a)(2), (4), and (6), as to which notice was not given to the creditor in time to file a timely complaint to determine dischargeability.]

    The impact. This provision would increase the recovery of certain creditors after the completion of a Chapter 13 case. However, the provision would also largely eliminate the superdischarge of Chapter 13, thus removing a major incentive for filing Chapter 13 cases, and increasing the need for court hearings.

    The largest number of nondischargeability complaints brought before bankruptcy courts in recent years has been on account of alleged fraud by debtors in the use of credit cards. The courts have struggled with the application of the fraud provisions of §523(a)(2) of the Code to credit card debt, but a consensus has emerged that the use of a credit card is fraudulent if the debtor had an actual intent not to repay the credit card charge at the time the card was used. See In re Anastas, 94 F.3d 1280, 1285 (9th Cir. 1996). This, in turn, presents a question of fact that can require a trial. Rather than incur the expense of such a trial, a debtor may, under current law, seek relief under Chapter 13, and, if the plan is successfully completed, the debtor will be discharged from the credit card debt regardless of the circumstances under which it was obtained. Under the proposal, the question of the debtor’s intent (and the dischargeability of the debt) would remain in Chapter 13, thus providing no incentive for the debtor to choose that chapter, and presenting the courts with the potential for more hearings on the dischargeability of credit card debt. Similar incentives to file Chapter 13 exist when the debtor has engaged in conduct that might give rise to claims for breach of fiduciary duty or intentional torts. All of these incentives to file Chapter 13 are removed by this provision. It can thus be expected to increase the incentives to file Chapter 7—discharging all other debts without payment—leaving only the questionable debt to be dealt with outside of bankruptcy.

    §144 ( "Applying the codebtor stay only when it protects the debtor") (see H.R. 2500, §118; S. 1301, §305).

    The changes. Under present law, if a Chapter 13 debtor is liable with another party on a particular debt, the creditor is automatically stayed from taking action against the other party, but the creditor may obtain relief from this codebtor stay if the codebtor received the consideration for the claim. Section 144 of H.R. 3150 would change this situation by providing that the codebtor stay would never go into effect if the debtor did not receive the consideration, so that the creditor, in that circumstance, could take action against the codebtor or property not in the possession of the debtor. The section also provides for termination of the codebtor stay as to any rented property that the debtor’s plan proposes to abandon or surrender.

    The impact. Contrary to the title of this section of the proposed bill, the codebtor stay in Chapter 13 never protects the debtor. Actions against the debtor are stopped by the automatic stay invoked in all chapters of the Code. Rather, the codebtor stay allows the Chapter 13 debtors to pay, through the plan, debts for which they are primarily responsible, and protects codebtors who did not receive the benefit of the debt (that is, true accommodation parties) from collection actions. Under current law, if the creditor believes that the nondebtor obligor was the one who really obtained the benefit of the debt, the creditor may seek relief from the codebtor stay to allow action to be brought against the codebtor (and property owned by the codebtor). The proposed change states that the codebtor stay never goes into effect when the codebtor received the benefit of the transaction. When the debtor and another party jointly incur a liability (like a joint loan, or a cosigned loan), it may not be clear which of the parties received the benefit of the transaction. Current law protects true accommodation parties by requiring that the creditor seek court permission before acting against them on the belief that they were the ones receiving the benefit of the transaction. The change would allow creditors to take action without court permission, and require that debtors seek sanctions for violation of the stay if the debtor was the actual beneficiary. It is not clear which approach is most efficient. The issue is not a common one.

    There is no apparent reason why a surrender of leased property should eliminate the need for the codebtor stay. Where a nondebtor signed a personal property lease as an accommodation to the debtor, the debtor would—under current law—retain the right to pay whatever obligations arose from the lease in full through the plan, regardless of whether the debtor kept the leased property. In such a situation, the party who signed the lease as an accommodation should continue to be protected from collection actions while the debtor was making plan payments.

    §145 ( "Credit extensions without a reasonable expectation of repayment made nondischargeable") (new)

    The changes. Current law deals with misuse of credit cards as a type of fraud, and, accordingly, the courts have generally held that misuse of a credit card is only nondischargeable if the debtor did not intend to repay the charges made before filing bankruptcy. Thus, a debtor who uses a credit card foolishly, but in good faith, is able to obtain a discharge of the resulting debt. See In re Anastas, 94 F.3d 1280, 1285 (9th Cir. 1996) (applying this interpretation). Section 145 of H.R. 3150 would change this rule to provide that if the debtor used a credit card "without a reasonable expectation or ability to repay," the resulting debt is nondischargeable. In this way, the debtor’s financial situation would be reviewed as of the time the credit card was used, and, if a reasonable person would have concluded that the debtor was unlikely to be able to repay the debt, the debt would be nondischargeable.

    The section makes a second change not related to its title, dealing with false written statements about the debtor’s financial condition. Current law makes such statements the basis for nondischargeability only when, among other things, the debtor intends to deceive the creditor. The proposal would change this standard of intent to one of negligence, allowing a finding of nondischargeability if the debtor did not take reasonable steps to assure that the statement was accurate.

    The impact. This proposal would make a major change in dischargeability law. In general, debts have been held nondischargeable under the Bankruptcy Code in only two situations: (1) where the debt is one that must be repaid for the good of society, such as taxes and family support, and (2) where the debtor has engaged in intentional wrongful conduct. Negligence, except in situations involving fiduciary duties, has not been a ground for nondischargeability. This proposal would institute a negligence standard for fraud, both in the use of credit cards and in the completion of financial statements.

    The change with respect to credit card debt is the most significant, because so many of the nondischargeability cases now before the courts involve this issue. The impact of the change is to render nondischargeable all use of credit cards beyond the reasonable ability of the debtors to repay.

    The impact of the proposed change is magnified by two of the other changes proposed by H.R. 3150: the presumption of nondischargeability that would be created by §142, and the extension of nondischargeability to Chapter 13, proposed by §143. The combined effect of these provisions is to render all use of credit cards within 90 days of bankruptcy nondischargeable, in both Chapter 7 and Chapter 13, unless the debtor can prove that there was a reasonable prospect for repaying the charges.

    Subtitle E ( "Adequate Protections for Lessors")

    §161 ( "Giving debtors the ability to keep leased personal property by assumption") (see H.R. 2500, §116).

    The changes. This section would make two principal changes to the Bankruptcy Code. First, it would remove from the estate (i.e., abandon) all leased personal property as to which the lease is not assumed. In Chapter 7, this abandonment would occur when the lease is rejected by the trustee (which occurs automatically, under existing law, if the trustee does not assume the lease within 60 days of the filing of a voluntary case). [Note: the section states that "the leased property is no longer property of the estate and the stay under section 362(a) of this title is automatically terminated." This language is redundant, since §362(c)(1) already provides that the stay terminates as to property of the estate when the property is no longer property of the estate. By including the extra language terminating the stay, this provision might lead to confusion, for example, the erroneous belief that the stay was terminated as to personal actions against the debtor arising out of the lease.] In Chapter 13, the abandonment would occur if the lease was not assumed in the plan and the codebtor stay would also terminate on lease rejection.

    The second effect of the section is to permit the equivalent of reaffirmations with respect to leased property through assumption of the leases, and to eliminate the automatic stay as it would apply to discussions regarding such assumptions. Under the procedure set out by the section, the debtor would have to initiate discussions regarding assumption of a lease through a written notification.

    The impact. The provisions regarding abandonment of leased property make explicit the implication that leased property as to which the lease is rejected is no longer part of the bankruptcy estate.

    The provisions regarding assumption of leases by the debtor in Chapter 7 may require additional safeguards. Reaffirmations of debt have been a sensitive subject under the Bankruptcy Code, since they involve debtors repaying debts that otherwise would be discharged. To prevent overreaching by creditors in this regard, the Code presently contains a number of safeguards applicable to reaffirmation, including information that must be given to the debtor, determinations by debtor’s counsel that the reaffirmation is in the debtor’s best interest, and court authorization of reaffirmations for unrepresented debtors. Unless similar protections were enacted in connection with assumed leases (with cure of past due indebtedness) creditor overreaching could be a similar problem.

    §162 ( "Adequate protection of lessors and purchase money secured lenders";) (see H.R. 2500, §212).

    The changes. This section of the proposed bill would create a new provision in Chapter 13, requiring payments to secured creditors and lessors of personal property. These payments would be in the amounts and frequency specified by the applicable contract unless the debtor sought a court order reducing the amounts and frequency. However, the court would be required to order payments no less than monthly in an amount no less than the depreciation of the property involved. These payments would be required to continue until the creditor began receiving "actual payments" under the Chapter 13 plan.

    The section would also clarify the right of creditors to retain possession of the debtor’s property, if it was properly obtained before the bankruptcy was filed, until the creditor receives the first adequate protection payment required by the section.

    Finally, the section requires that debtors in Chapter 13 must provide proof of insurance of leased property and collateral within 60 days of the filing of the bankruptcy.

    The impact. Secured creditors are entitled to seek adequate protection, pending plan confirmation, under existing law, and are entitled to relief from the automatic stay if adequate protection is not provided. This provision would give secured creditors a presumptive right to more than adequate protection payments, because the underlying contract (for example, a mortgage or an auto note or lease) generally provides for payments at a level greater than necessary to offset depreciation. The debtor would be required to present a motion to reduce the presumptive payments to the actual level of depreciation (if any). That would involve significant additional cost in most Chapter 13 cases.

    Under existing law, it may be unclear whether a creditor in rightful possession of a debtor’s property at the outset of a bankruptcy case must return the property in the absence of adequate protection. The proposal would make it clear that adequate protection is required.

    The requirement for periodic proof of insurance may be an unnecessary burden on debtors, since creditors are generally informed by insurers as to any lapse in coverage. Moreover, if the creditor is not assured of such notice, the creditor would have to take action to ascertain the status of the insurance before 60 days had elapsed from the date of the bankruptcy filing. Proof of insurance by the debtor at the conclusion of the 60 day period would add little protection to the creditor.

    §163 ( "Adequate Protection for Lessors") (new).

    The changes. Despite its caption, this section deals with an exception to the automatic stay. Under current law, lessors of nonresidential real estate (for example, shopping center lessors) may proceed with eviction proceedings after the lessee files a bankruptcy case, without violating the automatic stay, if the lease has terminated by expiration of its stated term prior to the bankruptcy filing. Section 163 of H.R. 3150 would expand this exception to cover all rented real estate. Thus, landlords would be allowed to evict Chapter 13 debtors from their apartments, without obtaining relief from the automatic stay, if the leases expired prior to the bankruptcy filing.

    The impact. There is no reason for the automatic stay to apply to an expired residential lease. A lease can only be assumed by a debtor in Chapter 13 if it is unexpired, pursuant to §§365(a) and 1322(b)(7). However, a debtor and landlord may well be in dispute about whether a lease has expired. Many leases have automatic renewal terms, contingent on notice being given or the lease not being in default. If there is a dispute about lease expiration, then, under current law, the landlord would be required to obtain relief from the automatic stay before going forward with an eviction proceeding in state court. See, e.g., Robinson v. Chicago Housing Authority, 54 F.3d 316 (7th Cir. 1995) (affirming an order granting relief from the stay to pursue eviction). Under the proposed change, the landlord, in the event of such a dispute, would be able to go forward with the eviction, requiring the Chapter 13 debtor—believing that the lease was still in effect—both to defend the eviction proceeding and to bring a proceeding in bankruptcy court to have the landlord found in violation of the automatic stay. If the debtor prevailed, fees and costs would be awarded, pursuant to §362(h), but the debtor may have difficulty in the first instance in obtaining the funds to pursue proceedings in both courts. Although this is not a situation that arises frequently, it may be preferable to continue to require that evictions in situations of residential leases be subject to the automatic stay.

    On the other hand, the proposed exception could be applied in Chapter 7 cases without harm to the rights of the debtor, since Chapter 7 debtors have no right to assume defaulted leases.

    Alternative. The expanded exception could be applied in Chapter 7 cases only.

    Subtitle F ( "Bankruptcy Relief Less Frequently Available for Repeat Filers")

    §171 ( "Extended period between bankruptcy discharge") (see H.R. 2500, §121).

    The changes. Current law allows a Chapter 7 discharge to be entered only once in six years. The proposal would change this to a 10 year interval. Current law imposes no limit on Chapter 13 discharges, although the discharge can only be entered at the completion of a plan, and most plans require a three to five year period to complete under current law. The proposal would require that a Chapter 13 discharge not be granted if the debtor received any bankruptcy discharge within the five year period prior to filing the Chapter 13 case.

    The impact. These proposals would render large numbers of debtors unable to obtain any bankruptcy relief for an extended period of time, and would substantially reduce the incentives for using Chapter 13.

    It is entirely possible for individuals to require bankruptcy relief on more than one occasion with a span of a few years. Job loss, medical problems, and divorce can each cause financial difficulties that an individual cannot overcome. Under current law, the individual can obtain a Chapter 7 discharge to address these problems only once in six years, but could submit to a Chapter 13 repayment plan and obtain relief within the six year period. The availability of such a discharge is one of the major incentives for the use of Chapter 13. That possibility is removed by the proposed provision, leaving the individual with no means of requiring creditors to accept pro rata payment of the debtor’s available funds. The result would be the "race to the courthouse" that bankruptcy was intended to avoid, with the more aggressive creditors getting the larger share of wage garnishments and judgment lien foreclosures. The incentive for creditors to cooperate with consumer counseling services in these situations would also be greatly reduced, since the debtor would not have the option of bankruptcy in the event of noncooperation, and noncooperating creditors would have an advantage over those who did cooperate.

    Alternative. The required period between Chapter 7 discharges could be extended without imposing limits on Chapter 13 discharges.

    Subtitle G ( "Exemptions")

    §181 ( "Exemptions") (see H.R. 2500, §113).

    The changes. This section impacts the perceived problem of debtors changing their residence in order to obtain more favorable homestead exemptions. Current law applies the exemption law of the place where the debtor’s domicile was located for the largest part of the 180 days preceding the bankruptcy. Thus, a debtor could obtain a homestead exemption by establishing a domicile in a new state 91 days prior to filing a bankruptcy. The change would increase the 180 day period to 365 days, requiring that a debtor, seeking a homestead exemption in a new state, must establish a new domicile 183 days before filing bankruptcy.

    The impact. This proposal will likely have very little impact. Only a few, wealthy debtors are likely to change state of domicile in order to obtain larger exemptions, and those debtors are likely to be able to wait for six months before filing bankruptcy.

    Alternatives. The fundamental issue regarding exemptions is whether they should be more uniform, so that debtors do not receive significantly differing treatment in bankruptcy depending on their state of domicile. Greater uniformity would reduce the incentive for debtors to change domicile before filing bankruptcy petitions. Such a change in exemption law has been proposed by the National Bankruptcy Review Commission. Final Report at 117-44. H.R. 2500 proposes a new commission to study the question.

    Title II ( "Business Bankruptcy Provisions")

    Title III ( "Municipal Bankruptcy Provisions")

    These titles do not involve consumer bankruptcy issues and are therefore not treated in this analysis.

    Title IV ( "Bankruptcy Administration")

    Subtitle A ( "General Provisions")

    §401 ( "Adequate preparation time for creditors before the first meeting of creditors in individual cases") (see H.R. 2500, §204).

    The changes. This section would amend the Bankruptcy Code to provide that first meetings of creditors take place between 60 and 90 days after the filing of voluntary individual bankruptcy cases, unless the court orders an earlier meeting.

    The impact. Under current law, set out in Fed.R.Bankr.P. 2003(a), the first meeting of creditors must take place between 20 and 40 days after case filing in voluntary Chapter 7 and 11 cases, and between 20 and 50 days in a Chapter 13 case. The proposal would delay these times by more than a month. This may allow greater creditor involvement in consumer bankruptcy cases, but it would have the drawback, particularly in Chapter 13 cases, of delaying payouts to creditors.

    §402 ( "Creditor representation at first meeting of creditors") (see H.R. 2500, §205; S. 1301, §308).

    The changes. This provision would allow nonattorneys to represent creditors at creditor meetings.

    The impact. This proposal would have the potential for increasing creditor involvement in any areas where appearances by nonattorneys are currently prohibited.

    §403 ( "Filing proofs of claim") (see H.R. 2500, §209).

    The changes. This section changes the law that currently requires the filing of a proof of claim in order for a creditor to share in the distribution of payments in Chapter 7 and 13 cases. Under this provision, a proof of claim would be deemed filed as to all debts scheduled by the debtor as other than disputed, contingent, or unliquidated.

    The impact. Frequently, consumer debtors have poor records of what they owe. Accordingly, the debtors often schedule debts that either are not owed, or are owed in smaller amounts than scheduled. The requirement of a proof of claim by the creditor assures that an actual debt is paid in an appropriate amount. Treating all scheduled debts as proofs of claim may result in overpayments of claims, or payment of claims that are not owing, reducing the payments to creditors with actual, accurate claims.

    The requirements for filing proofs of claims, as well as the results of untimely filing, were extensively treated in the 1994 Bankruptcy Reform Act. This provision would undo what has only recently become settled law.

    §404 ( "Audit procedures") (see H.R. 2500, §202; S. 1301, §307).

    The changes. This section of the proposed bill would establish a system for random audits of the accuracy and completeness of schedules and other information required to be provided by debtors in bankruptcy. The proposal would require that at least 2% of all cases be audited "in accordance with generally accepted auditing standards . . . by independent certified public accountants or independent licensed public accountants." The proposal requires the Attorney General to establish procedures for fully funding the audits, but does not specify a source of funding. The report of each audit is to be filed with the court, the Attorney General, and the United States Attorney, and if the audit report discloses any material misstatement of income, expenses, or assets, notice of the misstatement is required to be given to creditors and to the United States Attorney for possible criminal investigation. [Note: the sentence of the proposal dealing with material misstatements requires rewriting to correct syntactical errors.]

    The impact. This proposal reflects a recommendation of the National Bankruptcy Review Commission (Final Report at 107-110), and would provide an incentive for debtors and their counsel to provide accurate and complete information. However, formal audits by licensed accountants would also generate substantial costs. With bankruptcy filings exceeding 1 million per annum, an audit cost of only $500 per case would impose an additional cost of at least $10 million per annum; at $1000 per case, a more likely figure given the poor record-keeping of many consumer debtors, the 1.4 million bankruptcies filed last year would generate an audit cost of $28 million. Since the proposal does not identify a source for funding the audits, the impact of the cost is uncertain. If the cost were treated as an administrative expense, creditors would pay for the audits in the form of reduced payments on their claims. A fairer way to pay for audits would be through the fees currently collected from debtors (at the time of filing) and creditors (seeking relief from the automatic stay), but to allow payment from current fees, the cost of the audits would have to be restrained.

    Additionally, the requirement that audit reports be filed in multiple locations will impose additional costs for document retention on offices inolved, and, depending on the detail of the reports, involve unnecessary intrusions on the debtors’ privacy.

    Alternatives. In order to reduce costs, audits could be conducted by trained employees of the United States trustee, rather than by licensed accountants, according to regulations established by the Executive Office of the United States Trustee, rather than generally accepted auditing standards. With costs controlled, the source of funding for the audits can be specified as the existing fees collected in bankruptcy cases, without an increase in those fees.

    §405 ( "Giving creditors fair notice in Chapter 7 and 13 cases") (see H.R. 2500, §206; S. 1301, §309).

    The changes. The primary change made by this section is a requirement that creditors be given notice of a bankruptcy filing at their preferred addresses. Under current law, if a creditor actually receives notice of a bankruptcy case, it may be liable for sanctions for willful violation of the automatic stay if it thereafter takes action to enforce its rights against collateral or otherwise collect a debt owed by the debtor. This provision would eliminate sanctions for violation of the stay (or failure to turn over property of the estate) in situations where notice of the bankruptcy was sent to an address of the creditor other than the last address it provided to the debtor for correspondence regarding the debtor’s account. This elimination of liability would only apply if (1) the creditor had a designated person or department for receiving bankruptcy notices, (2) the creditor had a reasonable procedure for directing bankruptcy notices to that person or department, and (3) despite the reasonable procedures, the creditor’s designated person or department did not receive the notice in time to prevent the collection activity from taking place.

    The impact. This proposal would eliminate sanctions for violation of the automatic stay in situations where notice of a bankruptcy was received by personnel of the creditor who were unable to prevent subsequent collection action. However, it would also complicate litigation regarding violations of the automatic stay. If a creditor took collection action after the bankruptcy case was filed, there would be questions subject to litigation concerning (1) the last address specified by the creditor in a communication, (2) whether the creditor had reasonable procedures in place for directing the communication to a particular person or department, and (3) whether that person or department received the notice in time to prevent the collection activity from taking place. Most of the information relating to these matters would be exclusively in the possession of the creditor, making it difficult for debtor’s counsel to determine whether an intentional violation of the automatic stay had occurred without substantial discovery. Lacking the resources to pursue such discovery, debtors might be unable or unwilling to pursue enforcement action.

    §406 ( "Timely filing and confirmation of plans in Chapter 13") (see H.R. 2500, §114; S. 1301, §304).

    The changes. This section would set a time limit for Chapter 13 debtors to file plans—30 days after the filing of the bankruptcy case. The section would also require that hearings on the confirmation of the plan take place within 45 days of the filing of the plan. In each situation, the court could order the deadline altered.

    The impact. Under current law, Fed.R.Bankr.P. 3015(b), a plan is required to be filed either with a Chapter 13 petition or within 15 days thereafter, unless extended by the court for cause. The proposal would increase the time in which a debtor would be allowed to file a plan. This, in turn, would delay payments into the plan, which are required by §1326(a) of the Code to commence within 30 days after the plan is filed. There is no current time limit for the hearing on confirmation, but some courts have determined to delay confirmation until after the deadline for filing claims has passed. The proposed change would require that these courts enter orders extending the time for hearing if this practice were to be continued. This section conflicts with other provisions of H.R. 3150. See the discussion in connection with §409, below.

    Alternatives. In order to effectuate timely confirmation of Chapter 13 plans, the 15 day time limit for plan filing might be enacted as part of the Code itself, rather than being part of the bankruptcy rules.

    §407 ( "Debtor to provide tax returns and other information") (see H.R. 2500, §210; S. 1301, §301).

    The changes. This section would add several items to the information that individual Chapter 7 and 13 debtors are required to provide in connection with a bankruptcy case, unless ordered otherwise by the court. These items include (but are not limited to) the following: (1) copies of any federal tax returns, including schedules and attachments, filed by the debtor during three years prior to the bankruptcy case; (2) copies of any tax returns and schedules filed during the pendency of the case, either for current tax years, or for the three years preceding the filing; (3) any amendments of the returns set out above; (4) evidence of payments made by any employer of the debtor during the 60 days prior to the filing of the case; and (5) a certificate regarding the debtor’s receipt of the proposed required notice regarding consumer credit counseling services. In addition, a Chapter 13 debtor would be required to file annually a statement of the debtor’s income and expenditures in the preceding year and the debtor’s monthly net income during that year, showing how calculated, disclosing the amount and sources of income, the identity of the persons responsible with the debtor for the support of any dependents, and any persons who contributed (and the amounts contributed) to the debtor’s household. Also, debtors would have the obligation to provide copies of their petition, schedules, statement of affairs, and any plan and plan amendments to any creditor on request of the creditor, and any copies of such filings made subsequent to the request. Tax returns would be filed with the United States trustee; the other information would be filed with the court. All of these filings, including the tax returns and amendments, would be available to any party in interest for inspection and copying.

    The impact. This section has the potential for making information available to trustees and creditors that may be significant in the administration of the debtor’s case. However, Fed.R.Bankr.P. 2004 currently allows information regarding the debtor’s financial condition—including tax returns—to be obtained, as required, with disclosure limited to the parties who need the information, and with the potential for court orders limiting further disclosure. The general disclosures required by the changes proposed here would impose two significant burdens not part of current law: (1) There would be a potentially difficult and expensive provision of information in every case, regardless of the need for the information. Since debtors in financial distress often fail to retain financial documentation, it is likely that they will not have ready access to their tax returns for the three years preceding the bankruptcy, or to their pay stubs for two months preceding bankruptcy. Similarly, during a bankruptcy, debtors are likely to have difficulty maintaining detailed records regarding their expenditures and sources of income. (2) The changes would involve a significant intrusion into the privacy of the debtors. Tax returns are not public documents, and are ordinarily disclosed in litigation only when they are particularly relevant to a dispute, and only to the parties with a need to review them. This provision would require debtors to make several years of their tax returns available for review by any creditor, and the creditors would be free to make whatever use they wished of the information contained in the returns, including compiling and disseminating it. Both the difficulty and cost of assembling the required information and the intrusion on privacy would act as substantial barriers to good faith bankruptcy filings.

    The requirement that debtors provide copies of petitions, schedules and plans to all creditors on request may encourage routine requests for such documents by creditors who do not require these documents for their participation in the bankruptcy case (current law requires notice to creditors of the essential events in the case), imposing additional expense on debtors and their counsel.

    The provision that the required information need not be supplied if the court orders to the contrary creates the potential for substantial variations in practice from court to court. Some judges may determine that certain of the information (or all of it) is not required unless requested by a creditor with cause; other judges may routinely deny any request by debtors to limit the information. No standards are supplied.

    Finally, the need to file all of the additional documents in each consumer case would impose a substantial additional cost on the clerks’ office and offices of the United States trustee.

    §408 ( "Dismissal for failure to file schedules timely or provide required information") (see H.R. 2500, §211; S. 1301, §312).

    The changes. This section creates a new ground for dismissal of Chapter 7 and 11 cases—failure to provide the information required by §407. Failure to file initial documents (including past tax returns and pay stubs) results in mandatory, automatic dismissal on the 46th day after filing, subject only to a timely request by the debtor for an extension of up to 15 days. The court is required to enter an order confirming the dismissal if requested by any party. Failure to file (or supply to creditors on their request) any subsequently required documents is also subject to mandatory dismissal, upon request of any party in interest. The deadline for compliance with a creditor request is to be set by the court within 10 days of the request, and may not exceed 30 days.

    The impact. The difficulty of complying with the proposed initial disclosures (of tax returns and pay stubs) is noted in the discussion of §407, above. Section 408 would impose automatic dismissal as a penalty for failure to comply with these disclosure requirements, without providing notice to the debtor of any deficiency in the filing. Although the debtor is given an opportunity to seek an additional 15 days to comply, no further extensions are authorized. Given that it may take more than 60 days to obtain copies of tax returns from the Internal Revenue Service, these provisions may result in dismissal of cases filed in good faith. In connection with enforcing the requirements for postpetition copies and tax information, the court is also given no discretion. It must order the information produced and dismiss the case if the order is not complied with. These provisions would discourage good faith filings at the outset, and may result in dismissal of cases that are filed and prosecuted in good faith.

    Rather than making debtors subject to such dismissal, some courts may generally order that the documents need not be filed, but, as noted above, in the discussion of §407, no standards are provided for orders of nonproduction, and practice among courts can be expected to vary widely.

    Alternative. The failure of a debtor to provide information ordered by a court to be produced to a creditor in connection with an examination pursuant to Fed.R.Bankr.P. 2004 could be specified as a ground for dismissal of both Chapter 7 and Chapter 13 cases.

    §409 ( "Adequate time to prepare for hearing on confirmation of the plan") (see H.R. 2500, §213; S. 1301, §313).

    The changes. This section provides that the hearing on confirmation of a Chapter 13 plan must take place no sooner than 20 days and no later than 45 days after the first meeting of creditors.

    The impact. H.R. 3150 is internally inconsistent in setting the time for the hearing on confirmation of a Chapter 13 plan. Section 406 requires that the hearing on confirmation take place within 45 days of plan filing, which may be no later than 30 days after the filing of the case. Thus, §406 requires that the confirmation hearing take place no later than 75 days after the bankruptcy filing. However, under Section 401, the earliest that the creditors’ meeting can take place is the 60th day after case filing, and §409 requires that the confirmation hearing take place no earlier than 20 days thereafter, or no earlier than the 80th day after filing. It is impossible to comply with both sets of provisions.

    Present law, which requires prompt filing of plans (within 15 days of the filing of a Chapter 13 case), and prompt creditor meetings (between 20 and 50 days after case filing), with no deadline for the confirmation hearing, allows (1) the creditor meeting to take place after the plan is filed, and (2) the creditor meeting to take place prior to confirmation. There does not appear to be any need to change these time frames. The different times provided for by the proposed bill would delay plan confirmation in many cases, without assuring more time for creditor review of the plan.

    Alternative. If a change is to be made in the time frames of current law, the various provisions now included in H.R. 3150 must be harmonized.

    §410 ( "Chapter 13 plans to have a 5-year duration in certain cases") (see H.R. 2500, §117).

    The changes. This section would increase the term of Chapter 13 plans from the present range of three to five years to a new range of five to seven years, for all debtors with total monthly income equal to at least 75% of the national median for their household size. The proposal would retain the three-to-five year range for those earning less than 75% of the applicable median. In each situation, plans lasting longer than the minimum plan term would require court approval. These provisions should be read in conjunction with §102 of the proposed bill, discussed above, which requires that all net income of the debtors be paid to general unsecured creditors for the minimum plan term.

    The section also amends §1329 of the Code, which governs modified plans. Although an original plan is allowed, with court approval, to have a duration two years beyond the minimum term, the amendment would prohibit this extension for modified plans.

    The impact. Consistent with §102 of H.R. 3150, this section would have the effect of lengthening the minimum Chapter 13 plan term from 3 to 5 years for most Chapter 13 debtors. This increase in minimum plan length may result in increased payments to creditors, but only if the plans are completed. Increased plan length may discourage use of Chapter 13 by debtors who have the choice of Chapter 7, and may decrease successful plan completion by those who do choose Chapter 13.

    Extending plans beyond the minimum term is sometimes in the debtor’s interest—in order to cure large mortgage arrearages or retire nondischargeable debt. There is no apparent reason why this extension should be prohibited in modified plans.

    §411 ( "Sense of the Congress regarding expansion of Rule 9011 of the Federal Rules of Bankruptcy Procedure") (new).

    The changes. Fed.R.Bankr.P. 9011 is the bankruptcy analog to Rule 11 of the Federal Rules of Civil Procedure. It requires the signature of the attorney (for a represented party) or of the party (if unrepresented) on documents filed with the court, and provides that this signature constitutes a certificate that the document is, among other things, well grounded in fact—based on the signer’s knowledge, information, and belief, formed after reasonable inquiry. Currently, Rule 9011 does not apply to schedules, apparently with the understanding that debtors’ attorneys are not economically able to independently verify the accuracy of the information supplied by their clients. This section suggests that the Rule be modified to apply to all filings, specifically including schedules.

    The impact. Requiring independent verification by debtors’ attorneys of all of the schedule information required of their clients would delay bankruptcy filings and increase the cost of legal services, thus discouraging good faith filings. In light of the auditing requirement proposed both by this bill and by the National Bankruptcy Review Commission, it is questionable that attorney verification of schedules is needed to assure accuracy. Any determination of the need for such a change in the law could be made after the initial results of the audits become available.

    §412 ( "Jurisdiction of Courts of Appeals") (new)

    The changes. Under present law, appeals of decisions of bankruptcy courts are heard by the district courts or by Bankruptcy Appellate Panels, composed of bankruptcy judges. This section would grant jurisdiction over such appeals to the Circuit Courts of Appeals.

    The impact. The current system of appeals generates appellate decisions that are largely without binding precedential impact. Decisions of the Courts of Appeals would be binding on all courts within the circuit, promoting intercircuit uniformity.

    Subtitle B ( "Data Provisions")

    §441 ( "Improved bankruptcy statistics") (see H.R. 2500, §201: S. 1301, §306).

    The changes. This section would require the Director of the Executive Office for United States Trustees to compile bankruptcy data in specified categories and require the Administrative Office of the United States Courts to specify the form of the data and make it public.

    The impact. Although this provision would be costly to implement, it has the potential for making useful information available to those interested in the functioning of the bankruptcy system. The National Bankruptcy Review Commission (Final Report at 921-43) recommended that a similar program of data collection and reporting be implemented. One potential problem in the proposed legislation is in its specification of matters for data collection and reporting. The Review Commission suggested a pilot program to develop effective programs, and this might be preferable to establishing categories for data collection by legislation. As an example of the problem with legislative specification, the proposal includes a requirement that data be collected and reported as to "the number of [Chapter 13] cases in which a final order was entered determining the value of property securing a claim less than the claim." Such a report would likely yield little useful information, since in many situations of the cramdown of secured claims the parties negotiate an appropriate bifurcation, with no court order entered.

    Alternatives. It may be preferable to implement the Review Commission’s recommendation of a pilot program to determine effective categories and methods of data collection and reporting.

    §442 ( "Bankruptcy data") (see H.R. 2500, §203)

    The changes. This proposal would require the Attorney General to issue regulations for uniform reporting of bankruptcy cases on standard forms, designed to facilitate both physical and electronic access to the information contained in the reports. Detailed contents of the reports are specified.

    The impact. A consistent reporting system would provide many benefits, and has been recommended by the National Bankruptcy Review Commission as part of a national bankruptcy filing system (Final Report at 105-07).

    Alternatives. It may be preferable to allow the details of any reporting system to be developed by the office administering the system, rather than specifying them in the statute.

    §443 ( "Sense of the Congress regarding availability of bankruptcy data") (see H.R. 2500, §203).

    The changes. This proposal effectively recommends that Congress establish a national bankruptcy filing system.

    The impact. A nationwide reporting system would provide many benefits, and has been recommended by the National Bankruptcy Review Commission (Final Report at 105-07).

    Title V ( "Tax Provisions")

    Most of the sections of Title V do not involve consumer bankruptcy issues and are therefore not treated in this analysis.

    §502 ( "Enforcement of child and spousal support") (new)

    The changes. This section adds additional language to a provision of Section 522(c) that excepts certain tax and family support obligations from the general rule that exempt property is not liable for debts. See In re Davis, 105 F.3d 1017, 1022 (5th Cir.1997) (allowing enforcement of child support against property exempt under state law).

    The impact. Although the proposed language is apparently intended to clarify the meaning of the statutory provision, it does so by creating an exception to the exception already in the statute, and may therefore engender additional confusion.

    §503 ( "Effective notice to government") (new)

    The changes. This section specifies that all notices from a debtor to a governmental agency (as well as the original scheduling of the agency as a creditor) must contain detailed information regarding the nature of the agency and its claim. For example, a real estate tax claim is required to be identified by real estate parcel number. The clerk of court is required to maintain a register of "safe harbor" mailing addresses that may be used by debtors. The Advisory Committee on Bankruptcy Rules of the Judicial Conference is required to propose "enhanced rules" for providing notice to governmental agencies, incorporating the provisions earlier set out in the section. Notices not in compliance with the proposed requirements would have no effect unless, among other things, the debtor showed either that notice was sent to the safe harbor address, or both that no safe harbor address had been specified and that there was actual notice to a responsible officer of the appropriate agency. If notice of the commencement of the case was not given in compliance with the requirements of the section, governmental violations of the automatic stay and turnover provisions of the Code would not result in any sanction.

    The impact. The provision would provide surer notice to governmental agencies. Some of the detail required, however, may unnecessarily increase the cost of case filing, and litigation can be anticipated on issues of whether notices were in compliance with the requirements. See the discussion in connection with §405, above.

    §508 ( "Chapter 13 discharge of fraudulent and other taxes") (new)

    The changes. This section would make the tax obligations that are defined by §523(a)(1) of the Code nondischargeable in Chapter 13 cases as well as in Chapter 7 cases.

    The impact. Together with §143, this section of H.R. 3150 has the effect of largely eliminating the superdischarge of Chapter 13. See the discussion of this issue in connection with §143, above.

    §514 ( "Tardily filed priority tax claims") (new)

    The changes. The Bankruptcy Code was amended in 1994 to provide that tardily filed tax claims are entitled to priority in Chapter 7 cases until the time that the trustee commences distribution. This section would provide, instead, that tardily filed tax claims are entitled to priority until the court approves the trustee’s final report and accounting.

    The impact. This section would create severe problems of administration for trustees. The section would apply in situations where the trustee had already made payments to creditors in a Chapter 7 case, but before the trustee’s final report had been approved. In this situation, the section provides that a late-filed priority tax claim would retain its priority. As a result, the trustee would have to pay the tax claim ahead of other claims of lower priority, even though distributions were already made on account of those claims. Accordingly, the trustee would have to attempt recovery of the previously distributed funds, generating substantial additional administrative expense and consequently reducing the overall distribution. There is no apparent justification for this result.

    §517 ( "Requirement to file tax returns to confirm Chapter 13 plans") (new).

    The changes. This section would impose on Chapter 13 debtors the obligation to file, as a condition for confirmation, all prepetition tax returns. Deadlines are specified for the filing of the returns (at least 120 days from the filing of the bankruptcy case), and failure to comply is specified as a ground for conversion or dismissal of the case. The taxing body is given 60 days after the filing of a return to submit a timely claim for the tax involved in the return. Finally, it is suggested that the Federal Rules of Bankruptcy Procedure be amended to allow objections to confirmation to be made by a taxing body "on or before 60 days after" the debtor files all of the required tax returns.

    The impact. These provisions are largely reasonable, and will assist the debtor and the taxing bodies in resolving past due tax obligations. However, the suggested change in the bankruptcy rules further complicates the already very confused issue of when a confirmation hearing is supposed to take place under the provisions of H.R. 3150. See the discussion in connection with §409, above. In order to allow the suggested objection based on the filing of a tax return 120 days after the bankruptcy filing, confirmation hearings would have to be scheduled six months after the filing of the case.

    Title VI ( "Miscellaneous")

    This title does not involve consumer bankruptcy issues and is therefore not treated in this analysis.

    Description:

    To amend title 11 of the United States Code, and for other purposes.
    Conference Report on H.R. 3150—Major Consumer Provisions




    Prepared for:
    the American Bankruptcy Institute


    Web posted and Copyright ©

    October 9, 1998
    American Bankruptcy Institute.

    Prepared by:

    Hon. Eugene R. Wedoff

    United States Bankruptcy Court

    Northern District of Illinois

    Chicago, Illinois

    See Issue 4: Additional Content and Commentary have been inserted.

    H.R. 3150 was passed by the House of Representatives on June 10, 1998; S. 1301 was passed by the
    Senate (as an amendment to H.R. 3150) on September 23, 1998. Both bills provided for extensive—but
    conflicting—changes in consumer bankruptcy law. ABI has published several analyses of the consumer
    provisions of these bills, at various stages of their consideration. The most recent analysis of the House bill can
    be found at http://www.abiworld.org/legis/bills/98julhr3150.html. The most recent analysis of the Senate bill
    is at http://www.abiworld.org/legis/bills/98julnew1301a.html.

    On October 7, a conference report on H.R. 3150 was released, modifying many of the provisions of the
    two bills. To help assess the potential impact of these changes on consumer bankruptcy law, the following chart
    lists several major issues covered by the legislation as passed by the House and Senate, and discusses the
    treatment of these issues by the Conference Report.


    Issue Senate bill House bill
    1. Means testing §§101-102 A Chapter 7 case would be
    subject to dismissal or conversion to
    Chapter 13 (on the debtor's request) if
    the debtor could pay 20% of general
    unsecured claims through a Chapter 13
    plan.

    Any party in interest would be allowed
    to move for such dismissal or
    conversion, unless the debtor's income
    was below a specified level. Where the
    debtor's household was four or less, the
    threshold would be the national median
    for a household of the same size. Where
    the debtor's household was larger than
    four, the threshold would be the national
    median for a household of four,
    increased by $583 for each member of
    the debtor's household beyond four.

    §101 A debtor would be ineligible for
    Chapter 7 relief where (1) the debtor's
    household income is above a national
    median for same size household, and (2)
    the income—after deduction of (a)
    expenses allowed according to IRS
    collection standards, (b) extraordinary
    expenses shown by the debtor, and (c)
    amounts necessary to pay secured and
    priority debts—is both greater than $50
    per month and sufficient to pay 20% of
    general unsecured claims over a five-year
    period. Trustees would be required to
    report on ability to repay in all Chapter
    7 cases.

    §103 Any party in interest would be
    allowed to challenge any debtor's
    eligibility based on ability to repay.

    §105 Debtors ineligible for Chapter 7
    relief under the means-testing of §101 of
    the bill would be allowed to file under
    Chapter 11.




    Conference Report—§§101-102.


    Content:
    The mechanism for means-testing would be that of the Senate bill—motions under §707(b) would be changed to
    allow dismissal or conversion (at the debtor's option) in cases of simple abuse (instead of "substantial" abuse) of Chapter
    7—rather than the eligibility requirement of the House bill. However, the motions would be required to be filed in many cases,
    and judicial discretion to deny the motions would be strictly limited.

    • Reflecting the House formula, abuse under §707(b) would be presumed if, during a 5-year period, the debtor would
      have sufficient income to pay at least $5000 ($83.33 per month) toward general unsecured claims or to repay at least 25% of
      those claims. The debtor's ability to pay general unsecured claims would be calculated by deducting three categories of
      expenses from the debtor's current monthly income—defined on the basis of the debtor's average monthly income for 180
      days prior to filing—(1) expenses allowed under IRS collection standards; (2) payments on secured claims that would become
      due during the 5-year period, divided by 60; and (3) all of the debtor's priority debt, again divided by 60.
    • The only way for a debtor to rebut the presumption of abuse would be to show "extraordinary circumstances that
      require additional expenses or adjustment of current monthly total income." Such a showing, in turn, would require detailed
      itemizations and explanations sworn to by both the debtor and the debtor's attorney. The extraordinary
      circumstances—together with the standard three deductions—would have to reduce the debtor's current monthly income to a
      level that would not allow payment of the minimum amounts of general unsecured claims (at least $5000 over 5 years,
      amounting to at least 25% of general unsecured claims).
    • As under the House bill, any panel trustee would be required to analyze each case to determine whether the debtor's
      schedules reflected the presumptive ability to repay debt. If this analysis reflected grounds for a §707(b) presumption, the
      trustee would be required to file the motion, unless the debtor's family income was less than a specified minimum (based on
      average household incomes).
    • Parties in interest would be allowed to bring §707(b) motions, but only in those circumstances where a panel trustee
      would be required to bring such motions. In cases where the debtor's income was below the specified minimum, only the
      judge, United States Trustee, bankruptcy administrator or panel trustee could bring the motion.



    Commentary: The impact of the Conference Report is largely to adopt the means-testing mechanism proposed by the House
    bill, which relies principally on IRS collection standards to assess reasonable expense levels for debtors, and calculates
    repayment ability over a 5-year period. However, the Conference Report introduces a feature substantially different from the
    earlier test—rather than limiting Chapter 7 relief to debtors who have an inability to repay a certain amount of their debt, the
    Conference Report would deny Chapter 7 relief to any debtor with $83.33 in disposable income per month, regardless of the
    amount of outstanding debt. For example, a debtor with medical bills totalling $200,000, and disposable income (under the
    formula) of $90 per month, would be found to have made an abusive Chapter 7 filing, even though less than 3% of the
    unsecured debt could be paid in a 5-year Chapter 13 plan. Conversely, debtors with very small amounts of disposable income
    could be denied Chapter 7 relief if their debts were also small. For example, a debtor with disposable income of only $20 per
    month could be denied Chapter 7 relief unless the unsecured debts scheduled exceeded $7200.

    Several problems with the use of the IRS standards are pointed out in the analysis of the House bill cited above: for
    example, the IRS standards themselves include a category ("other necessary expenses") covering the sort of individualized
    expenses that also be seen as arising from "extraordinary circumstances." The standards do not specify any particular
    allowance for such expenses, and thus trustees would have to assess reasonableness on a case by case basis. If an expense
    arose from "extraordinary circumstances," detailed scheduling (under oath from the debtor and the debtor's attorney) would be
    required. Trustees would therefore have to determine how any given expense (such as for medical care) not covered by the
    other IRS categories should be categorized.

    Secured debt presents another serious problem under the formula adopted by the Conference Report. The House bill
    provided that payments of secured debt should be excluded from the IRS allowances. This provision had a sensible basis—the
    IRS expense allowances are intended to cover all housing and transportation expenses, including the cost of acquiring a dwelling
    or automobile. Therefore, if a debtor was given a separate expense allowance for repaying a mortgage or car loan, there would
    be double counting of the expense. However, it is not possible to deduct mortgage or car payments from the IRS allowances,
    because IRS standards establish single allowances for all of the expenses connected with housing (such as insurance,
    maintenance, and real estate taxes) and all of the expenses connected with transportation (such as parking and fuel). The
    Conference Report accordingly allows separate deductions of the IRS allowance and of secured debt payments, but this creates
    the problem of double expense allowances in all situations of secured debt. The Conference Report formula therefore
    discriminates substantially against those who rent either their housing or their automobiles. Such renters will receive only the
    expense allowance provided by the IRS standards (supplemented by any showing of extraordinary circumstances). Owners of
    cars or houses, in contrast, would receive not only the IRS allowance, but the full amount of their mortgage and auto loan
    payments as well, unlimited in amount.

    The fact that allowed expenses can be increased by incurring secured debt provides a ready means of avoiding the
    proposed means test. A debtor who would otherwise have disposable income of as much as $400 per month could trade in an
    old car for a new one, and the resulting increase in secured indebtedness could easily reduce the disposable income to a number
    that would not result in dismissal of the Chapter 7 case. An even easier method of avoiding the test would be for a debtor to
    declare an intent to make charitable contributions. Section 4 of the Religious Liberty and Charitable Donation Protection Act
    of 1998, enacted earlier this year, allows debtors to contribute up to 15% of their gross income to charity without those
    contributions being considered in making a determination under §707(b). Thus, a debtor with an income of $60,000 could
    remove $500 per month in disposable income by declaring an intent to make the maximum charitable contributions.



    Issue Senate bill House bill
    2. Abusive Chapter

    7 petitions and

    §707(b) motions

    §102 Debtor's attorneys would be
    required to reimburse panel trustees for
    all costs of prosecuting a successful
    motion to dismiss or convert under
    §707(b) of the Code, wherever the court
    found the filing of the case "not
    substantially justified." If the court
    found a violation of Rule 9011, it would
    be required to impose a civil penalty
    against the debtor's attorney in favor of
    the United States trustee or the case
    trustee. Costs could be imposed against
    the proponent of a §707(b) motion only
    if (1) the motion was not substantially
    justified; or (2) the motion was brought
    "solely for the purpose of coercing the
    debtor into waiving a right guaranteed . .
    . under the Bankruptcy Code;" and (3)
    the moving party was not a panel
    trustee, the United States trustee, or a
    party in interest with an aggregate claim
    against the estate of less than $1000.
    §103 The debtor would be required to
    pay the fees and costs of the United
    States trustee or Chapter 7 trustee who
    prevailed in a motion to dismiss or
    convert under § 707(b), unless the award
    of such costs would be an unreasonable
    hardship on the debtor. If the court
    found a violation of Rule 9011, it would
    be required to impose a civil penalty
    against the debtor's attorney in favor of
    the United States trustee or the case
    trustee. A creditor who brought an
    unsuccessful motion under §707(b)
    would be required to pay the debtor's
    fees and costs if the court found that the
    motion was not substantially justified,
    absent special circumstances making
    such an award unjust.







    Conference Report—§101.


    Content:
    The provisions of the Senate bill were adopted.


    Commentary:
    The potential for an award of sanctions against debtors' counsel may have a chilling effect on representation of
    debtors. Creditors with claims of less than $1000 may bring entirely groundless §707(b) motions without being liable to pay
    the costs of the debtor in responding. This immunization would allow major creditors to file §707(b) motions, without
    potential liability, in any case where their claims were small.


    Issue Senate bill House bill
    3. Chapter 13 plan
    length
    No change is made in current law, which
    set out a minimum plan term of three
    years.
    §§102, 409 Where the debtor's
    household income is above the national
    median for the same size household, the
    minimum plan term would be five years.




    Conference Report—§606.


    Content:
    For debtors whose income equals or exceeds a specified amount, generally based on national median household
    income: (a) five years is the maximum term of the plan, (b) a plan cannot be amended to provide for payments extended
    beyond "the applicable commitment period under section 1325(b)(1)(B)(ii)," and (c) the "duration period" would be five years.
    For debtors whose income is below the specified amount, three years would be the maximum plan term unless the court found
    cause to extend the term to no more than five years (the current law as to all Chapter 13 debtors), and the "duration period"
    would be three years.

    Commentary: The provisions of the Conference Report are confused. There is no §1325(b)(1)(B)(ii) under current law, and
    the Conference Report does not appear to add such a section. There is also no provision of the Conference Report defining
    "duration period" or specifying its relevance. The provision regarding "duration period" is placed at the end of §1329 of the
    Code, which deals with plans modified after confirmation, and so would not appear to require a minimum five-year plan for
    any debtor. If the Conference Report did require minimum five-year plans for certain, it would make the completion of
    Chapter 13 plans more difficult for these debtors, increasing incidents of default, and giving the debtors an incentive to choose
    Chapter 7 over Chapter 13.


    Issue Senate bill House bill
    4. Limitation of the
    Chapter 13
    discharge
    §314 Debts covered by §523(a)(6)
    would be nondischargeable in
    Chapter 13 only if they involved
    injuries resulting in personal injury
    or death. Debts under §523(a)(2) and
    (4) would be nondischargeable in
    Chapter 13 as well as Chapter 7.

    §327 The limitations on the
    nondischargeability of property
    settlements under §523(a)(15) would
    be removed, but the
    nondischargeability would continue
    to apply only in Chapter 7.

    No change is made to current
    §523(a)(1), which applies only in
    Chapter 7.

    §143 All debts covered by §523(a)(6)
    (willful and malicious injury)—as
    well as §523(a)(2) and (4)— would be
    nondischargeable in Chapter 13 as
    well as in Chapter 7.

    §146 Property settlements in divorce
    and separation cases (now covered by
    § 523(a)(15) and nondischargeable
    only in Chapter 7) would be made
    part of §523(a)(5), and so would be
    nondischargeable in Chapter 13 as
    well as Chapter 7.

    §508 All debts covered by §523(a)(1)
    (certain tax obligations) would be
    nondischargeable in Chapter 13 as
    well as in Chapter 7.




    Conference Report—§§129, 807, 1113.


    Content:
    All debts covered by §523(a)(1) (certain tax obligations), (a)(2) (fraud), (a)(3)(B) (unlisted debts requiring dischargeability determinations in bankruptcy court), and (a)(4) (breach of fiduciary duty) would be nondischargeable in Chapter 13 as well as in
    Chapter 7. All debts covered by §523(a)(15) would remain the same, but the provision would be clarified to apply only to claims of a spouse, former spouse or child of the debtor.)


    Commentary:
    The "superdischarge" of Chapter 13 has the effect of encouraging debtors with debts that might be
    nondischargeable in Chapter 7 to choose Chapter 13 as a means of discharging those debts and obtaining a fresh start. This has
    the corollary result of reducing litigation over dischargeability. The Conference Report preserves more of the superdischarge
    that either the House or Senate bill, and thus retains more of the positive effects of that discharge. However, the Conference Report would exclude from the Chapter 13 discharge debts arising from fraud—the most common ground for claims of nondischargeability, and the one involved in most claims of credit card nondischargeability. Under this change in the law, debtors subject to nondischargeability claims under §523(a)(2) would be encouraged to file Chapter 7 rather than Chapter 13, and litigation over dischargeability in Chapter 13 would increase substantially.


    Issue Senate bill House bill
    5. Presumption of

    fraud
    §316 Fraud would be presumed under
    §523(a)(2) as to all debts incurred
    within 90 days of the order for relief
    that are (1) in an aggregate amount
    of more than $400 to a single
    creditor, and (2) for goods and
    services not reasonably necessary for
    the support of the debtor or a
    dependent child of the debtor.
    §142 Fraud would be presumed for
    all debts incurred within 90 days of
    an order for relief, except for
    purchases of "necessaries" that do
    not exceed an aggregate of $250 to a
    single creditor.




    Conference Report—§135.


    Content:
    All credit card debt aggregating more than $250 in cash advances or $250 in "luxury goods or services" during the 90
    days preceding a voluntary bankruptcy filing would be presumed nondischargeable under §523(a)(2). "Luxury goods or
    services" is not defined, but the section specifies that the phrase "does not include goods or services reasonably necessary for
    the support or maintenance of the debtor or a dependent of the debtor."



    Commentary:
    The presumption of fraud in the Conference Report is potentially much broader than the presumption in either
    of the passed bills, since it aggregates all purchases and all cash advances. Thus, under either of the bills, a single, small
    "luxury" purchase from an individual creditor (for example, the purchase of flowers for the debtor's spouse) would never be
    presumed fraudulent. But if several of such small purchases were made from different creditors over a 90-day period, the
    Conference Report would result in a presumption of fraud. However, this is only a potential result, due to the ambiguity in
    the description of "luxury goods or services." Although the Conference Report clearly excludes "necessities" from the scope of
    "luxury goods," it leaves open the possibility that some purchases (like flowers for a spouse), although not "necessary" for
    support, would still be common enough, and inexpensive enough, not to be considered "luxuries." The absence of a definition
    here could lead to substantial litigation.



    Issue Senate bill House bill
    6. Valuation of
    secured claims

    §302 Secured claims incurred within 90
    days of bankruptcy would not be
    bifurcated.

    No bifurcation of secured claims would
    take place in Chapter 13.

    In situations where claims were still
    bifurcated, no change would be made in
    the valuation of secured claims.

    §128 Secured claims incurred within 180
    days of bankruptcy would not be
    bifurcated

    No change would be made in current law
    respecting bifurcation of claims in
    Chapter 13

    §129 All secured claims would be valued
    on the basis of the debtor's cost of
    replacement, without deduction for costs
    of sale. For household and personal
    goods, this would be retail price.




    Conference Report—§§124-125.


    Content:
    Secured claims for the purchase of personal property acquired by an individual debtor within 5 years of the
    bankruptcy filing would not be bifurcated in any chapter of the Code. Where bifurcation did occur in Chapter 7 and 13 cases,
    the secured claim would be valued on basis of the debtor's cost of replacement, without deduction for costs of sale. For
    household and personal goods, this would be retail price.


    Commentary:
    The overall impact of the Conference Report is (1) to encourage debtors to surrender collateral in both Chapter
    7 and 13, and (2) to allow secured creditors to obtain artificially high payments in Chapter 13, at the expense of unsecured
    creditors.

    Surrender of collateral would be encouraged, because, unless the debtor purchased the collateral more than five years
    prior to the bankruptcy, the debtor would have to pay the full amount outstanding on the purchase in order to retain the
    collateral, even if the collateral was worth much less that the outstanding balance. For example, the debtor may have purchased
    a used car, or a new refrigerator, on credit, with a high rate of interest. If the debtor missed several payments before filing the
    bankruptcy case, the amount owed on the car or refrigerator could greatly exceed its actual value. Nevertheless, in order to
    redeem the property in Chapter 7 or to retain it in Chapter 13, §124 of the Conference Report would require the debtor to pay
    the full outstanding balance. In such circumstances, it would often be in the debtor's best interest to return the collateral, and
    attempt to purchase a replacement.

    Where the debtor chose to retain the property in Chapter 13, unsecured creditors would be disadvantaged in any case
    that did not have a 100% payout. This is because, in such a case, the payments made by the debtor in excess of the collateral
    value would otherwise have gone to the unsecured creditors. Valuing collateral at its retail price involves payment to secured
    creditors of more than they could obtain upon surrender or repossession of the collateral (since selling the property at retail
    would ordinarily involve substantial costs of sale). This provision, then, would also have the effect of diverting funds from
    unsecured to secured creditors in many Chapter 13 cases.


    Issue Senate bill House bill
    7. Adequate
    protection
    of secured claims
    pending Chapter
    13
    plan confirmation
    §319 Payments of adequate protection
    would be required, pending confirmation
    of a Chapter 13 plan, at times and in
    amounts determined by the court.
    §162 Payments of adequate protection
    would be required, pending confirmation
    of a Chapter 13 plan, at times and in
    amounts specified by the applicable
    contract, but the debtor would be
    allowed to seek a court order reducing
    the amounts and frequency.




    Conference Report—§137.

    Content: The provisions of the House bill were adopted.


    Commentary:
    By requiring adequate protection payments to be made in addition to preconfirmation plan payments, this
    provision would make Chapter 13 very difficult for many debtors. Plan payments are often intended to deal with secured
    claims, and are often required to exhaust the debtor's disposable income (pursuant to §1325(b) of the Code). Thus, pending
    confirmation it would often be impossible for debtors to make both plan payments (as required by §1326 of the Code) and
    adequate protection payments. Furthermore, contract payments are often in an amount greater than the depreciation of
    collateral withheld by the debtor, and so a presumption that adequate protection should be paid in the contract amount may be
    unreasonable. Requiring the debtor to seek a lower payment would increase the debtor's costs of proceeding in Chapter 13.


    Issue Senate bill House bill
    8. Timing of events
    in Chapter 13 cases

    §304(a) Debtors would be required to
    file a plan within 90 days of the case
    filing.

    No change is made to the current law
    (Fed.R.Bankr.P. 2003(a)) which requires
    that the meeting of creditors take place
    between 20 and 50 days after case filing.

    §304(b) Confirmation hearings for
    Chapter 13 plans would be held no later
    than 45 days after case filing unless the
    court ordered otherwise.

    §313 If a creditor objects to
    confirmation, the confirmation hearing
    may be held no earlier than 20 days after
    the meeting of creditors.

    No change is made to the current law
    (Fed.R.Bankr.P. 3015) which requires
    the debtor to file a Chapter 13 plan
    within 15 days of the case filing.

    §401 Meetings of creditors pursuant to
    §341 of the Bankruptcy Code would be
    required to take place in Chapter 13
    cases between 60 and 90 days after case
    filing.

    §408 Confirmation hearings for Chapter
    13 plans would be held between 20 and
    45 days after the meeting of creditors.
    Current law does not treat this issue.




    Conference Report—§605.


    Content:
    Debtors would be given 90 days after case filing to file a Chapter 13 plan; no change is made in the time for meetings
    of creditors; confirmation hearings would be held between 20 and 45 days after the meeting of creditors.

    Commentary: The timing specified by the Conference Report would cause substantial difficulty. By delaying plan filing for
    up to 90 days after case filing, the Report would allow plans to be filed after the usual time limit for the meeting of creditors
    under §341, which would then have to be continued. The notice of the meeting of creditors would often be unable to set out a
    summary of the plan, which would not have been filed. If the meeting of creditors is continued, a question will arise about
    whether the confirmation hearing must be held within 45 days of the first date set for the meeting, or whether that time limit
    should run from the continued date. Any delay in confirmation, which would be often necessitated by the proposed
    procedure, would result in a delay in payment to unsecured creditors, and a greater need for litigation regarding adequate
    protection payments to secured creditors pending plan confirmation.


    Issue Senate bill House bill
    9. Special treatment
    for support
    obligations
    §323 "Domestic support obligations"—
    entitled to a variety of protections—
    would include obligations arising both
    before and after the filing of the
    bankruptcy case, whether owed to a
    spouse, former spouse, child, or
    guardian of the child of the debtor, or to
    any governmental entity, as long as the
    obligation both was in the nature of
    support and arose from a specified
    agreement, decree, or process. The
    special treatments would include the
    following:

    §324 A first priority of distribution
    would be accorded to "domestic
    support obligations."

    §325 "Domestic support obligations"
    would be required to be current as a
    condition for confirmation of any plan
    under Chapter 11 or 13.

    §§326-27 The exceptions from the
    automatic stay set forth at §362(b)(2)
    and the exception from discharge set out
    in §523(a)(5) would apply to actions in
    connection with "domestic support
    obligations."

    §328 Exempted property would
    continue to be liable for domestic
    support obligations, under §522(c)(1),
    even if state law provided to the
    contrary.

    §329 Payment of domestic support
    obligations would be excepted from
    preference recoveries, pursuant to
    §547(c)(7).

    No change would be made in the scope
    of §523(a)(18), in its applicability, or its
    enforceability against exempt property.
    No certification of completed support
    payments would be required as a
    prerequisite for a standard Chapter 13
    discharge.

    §§ 145(d), 151 The support obligations
    entitled to first priority of distribution
    would be limited to "claims" (prepetition
    obligations), owed to a spouse, former
    spouse, or child of the debtor, and would
    not include assigned debts and debts to
    governmental entities. Support
    obligations owing to governmental
    entities (nondischargeable under
    §523(a)(18)) would be given an eighth
    level priority.

    §145 Support obligations would have to
    be paid as a prerequisite to confirmation
    in Chapter 12 cases, as well as Chapter
    11 and 13 cases.

    §523(a)(18) would be broadened by
    making interest on the covered debts
    nondischargeable and by allowing the
    states or municipalities to collect
    support obligations that are not governed
    by federal law.

    The broadened nondischargeability
    would apply in Chapter 13 as well as in
    Chapter 7.

    Exempt property of the debtor would
    continue to be liable for debts to state
    and local municipalities for support
    obligations that are nondischargeable
    under §523(a)(18).

    A standard (nonhardship) discharge in
    Chapters 12 and 13 would only be
    granted to a debtor obligated to make
    support payments if, at the time the
    debtor was otherwise entitled to a
    discharge, the debtor certified that all
    support obligations that became due
    after the bankruptcy filing had been paid.

    No change would be made in the
    definition of support obligations
    excepted from the automatic stay in
    §362(b)(2) or from discharge under
    §523(a)(5). No change would be made in
    the treatment of exempt property under
    §522(c) or in the exception from
    preference recovery in §547(c)(7).


    -

    Conference Report—§141-144, 146-147.


    Content:
    The provisions of the Senate bill were adopted.


    Commentary:
    The provision according support obligations priority over administrative expenses would make it difficult for a
    trustee to administer any case in which there may be support obligations, since any professional retained by the trustee would
    be at risk of nonpayment, even though some funds are available to the estate.


    Issue Senate bill House bill
    10. Nondischarge-
    ability of property
    divisions

    §327 Debts arising from property
    divisions in divorce or separation
    proceedings would be nondischargeable
    only in Chapter 7 cases, pursuant to
    §523(a)(15), as under current law, but
    the property division debt would be
    nondischargeable regardless of the
    debtor's ability to pay or the
    nondebtor's need for the payment.
    Also, the dischargeability of debts under
    § 523(a)(15) would no longer require
    bankruptcy court determination.
    §§146, 147 Debts arising from property
    divisions in divorce or separation
    proceedings would be included in
    §523(a)(5), and §523(a)(15) would be
    eliminated. This would have the effect
    of making all property division debts
    completely nondischargeable in both
    Chapter 7 and Chapter 13, regardless of
    the debtor's ability to pay or the
    nondebtor's need for the debt to be paid.




    Conference Report—§145, 1113.


    Content:
    The Conference Report contains conflicting provisions on this topic. Section 145 sets out the provision of the
    Senate Bill, making all property settlements in family cases nondischargeable regardless of ability and need, and removing
    exclusive bankruptcy jurisdiction. Section 1113 generally reaffirms the current language of §523(a)(15), and implicitly
    continues exclusive bankruptcy jurisdiction over §523(a)(15) by providing that, if a creditor does not receive notice of the
    bankruptcy in time to file a timely claim under §523(a)(15), the claim would be nondischargeable under §523(a)(3).

    Commentary: It would be difficult to determine which of the conflicting provisions should be enforced. There is no apparent
    reason why property settlements not needed for support should be made nondischargeable.


    Issue Senate bill House bill
    11. Disclosure of tax
    return
    information
    §301 Several items—including copies of
    any federal tax returns, with schedules
    and attachments, filed by the debtor
    during three years prior to the
    bankruptcy case— would be added to
    the information that individual Chapter
    7 and 13 debtors are required to provide,
    unless otherwise ordered by the court.
    These documents would be available for
    inspection and copying by any party in
    interest, but the Director of the
    Administrative Office of the United
    States Courts would be required to
    "establish procedures for safeguarding
    the confidentiality of any tax
    information."

    §312 If this information was not filed
    within 45 days of case commencement,
    the case would automatically be
    dismissed. However, the court could
    authorize an extension of the period for
    filing for up to 50 additional days.

    §406 The same additional items would
    have to be filed by the debtor, but the
    filed documents would be available for
    inspection and copying by any party in
    interest, with no provision for
    procedures to safeguard confidentiality
    of tax information.

    §407 Automatic dismissal for failure to
    file the required documents is also
    provided for, but the period of potential
    extension is limited to 15 days.




    Conference Report—§603-604.


    Content:
    The provisions of the Senate bill were adopted, except that the maximum extension would be 45 days rather than 50.


    Commentary:
    The Senate bill makes it less likely that a case would be automatically dismissed simply because the debtor did
    not maintain copies of tax returns and the IRS was unable to furnish copies within 45 days of the case filing. However, several
    problems with the provision remain: (1) the requirement to furnish tax returns (and the other required information) will impose
    an additional cost on debtors who do not have tax return copies and financial records available; (2) the requirement to file tax
    returns will impose an additional burden on the clerks of the bankruptcy courts; (3) automatic dismissal would take place even
    in cases where the trustee finds assets to administer, such as preferences and fraudulent conveyances, that creditors might have
    difficulty pursuing outside of bankruptcy; (4) it would be difficult for regulations to safeguard the confidentiality of tax returns
    in a manner consistent with the general requirement that they be made available to any party in interest for inspection and
    copying.


    Issue Senate bill House bill
    12. Audits §307 At least 0.2% of individual
    Chapter 7 and 13 cases—and schedules
    reflecting "greater than average variances
    from the statistical norm of the district
    in which the schedules were
    filed"—would be required to be audited
    by "qualified persons" according to
    procedures established by the Attorney
    General. No provision is made for
    payments of the expenses of the audits.
    §404 At least 1% of all individual
    Chapter 7 and 13 cases—and schedules
    reflecting "greater than average variances
    from the statistical norm of the district in
    which the schedules were filed"— would
    be required to be audited "in accordance
    with generally accepted auditing
    standards . . . by independent certified
    public accountants or independent
    licensed public accountants." The
    proposal requires the Attorney General
    to establish procedures for fully funding
    the audits, but does not specify a source
    of funding.




    Conference Report—§602.


    Content:
    Audits would be required in at least 0.4% of individual Chapter 7 and 13 cases, as well as schedules reflecting
    "greater than average variances from the statistical norm of the district in which the schedules were filed." The audits would be
    required to be performed "in accordance with generally accepted auditing standards [GAAS] . . . by independent certified
    public accountants or independent licensed public accountants." The U.S. trustee for each district would be authorized to
    contract for the auditing services, but no funds are provided for this purpose.


    Commentary:
    Audits by licensed professionals according to GAAS are likely to be extraordinarily expensive. Such formal
    audits are likely unnecessary to determine significant misstatements in debtors' petitions and schedules. The Senate formula
    would have been substantially less costly. The proposal is ambiguous in requiring audits of all schedules with "greater than
    average variances from the statistical norm of the district in which the schedules were filed." If "statistical norm" means the
    median, and the average variation is half the range from the high and low points to the median, then the proposal could require
    audits of half of all filed schedules: the lowest 25% and the highest 25%.



    Issue Senate bill House bill
    13. Credit counseling §321(a) Debtors would generally be
    ineligible for bankruptcy relief until they
    had first attempted to negotiate a
    voluntary repayment plan through a
    consumer credit counseling service
    approved by the United States trustee,
    with no limitations as to the type of
    counseling service that could be
    approved.

    Exceptions would be made for situations
    (1) in which the U.S. trustee or
    bankruptcy administrator found that
    credit counseling services were
    unavailable and (2) in which the debtor
    was unable to obtain credit counseling
    services within five days of making a
    request from an approved counselor.

    There would be no limitation on
    standing to bring a motion to dismiss
    based on the debtor's ineligibility under
    this section.

    §104 Debtors would generally be
    ineligible for bankruptcy relief until they
    had first attempted to negotiate a
    voluntary repayment plan through a
    consumer credit counseling service
    approved by the United States trustee,
    with approval withheld from any service
    that did not offer its program either
    without charge or at reduced charges in
    situations of hardship.

    Exception would be made (1) if the
    United States trustee found that there
    was no suitable credit counseling service
    available in the debtor's geographical
    area, or (2) if the debtor was made
    subject to a debt collection proceeding,
    involving a potential loss of property,
    "before the debtor could complete" the
    good-faith attempt.

    Only the United States trustee would be
    allowed to bring a motion for dismissal
    of the bankruptcy case on the ground
    that the debtor failed to meet these new
    eligibility and filing requirements.




    Conference Report—§302.


    Content:
    The provisions of the Senate bill were adopted, with provision for group briefings by the creditor counseling service,
    but requiring an initial budget analysis by the counseling service.

    Commentary: The requirements would add to the cost of bankruptcy relief, and the cost of existing credit counseling services.
    New credit counseling services can be expected to be formed, associated with debtor attorneys. Regulating and approving
    credit counselors would impose a substantial burden on the U.S. trustees.


    Issue Senate bill House bill
    14. Debtor education §321 A new exception to discharge
    would be applicable in Chapter 7 cases,
    for situations in which the debtor failed
    to complete a course in personal
    financial management administered or
    approved by the U.S. trustee. The
    court would be directed not to grant a
    Chapter 13 discharge to any debtor who
    failed to complete such a course. An
    exception would be made for districts in
    which the U.S. trustee or bankruptcy
    administrator found that suitable
    courses were unavailable.
    §112 The Executive Office of the U.S.
    Trustee would be required (1) to
    develop a program to educate debtors on
    the management of their finances, (2) to
    test the program for one year in three
    judicial districts, (3) to evaluate the
    effectiveness of the program during that
    period, and (4) to submit a report of the
    evaluation to Congress within three
    months of the conclusion of the
    evaluation. The test program would be
    made available, on request, to both
    Chapter 7 and 13 debtors, and, in the
    test districts, bankruptcy courts could
    require financial management training as a
    condition to discharge.




    Conference Report—§104, 302.

    Content: The provisions of both bill were adopted.


    Commentary:
    Requiring completion of an approved course of instruction in personal financial management as a condition for
    discharge would present several problems: (1) it would apply to individuals who could not benefit from such a course, such as
    financial professionals who had encountered financial problems (such as medical expenses) unconnected to failures in personal
    budgeting or the mentally impaired; (2) there is no provision for payment for the courses, and Chapter 13 debtors would
    ordinarily lack disposable income to pay for them; (3) substantial resources would have to be expended by the U.S. trustee in
    order to administer a program for approving and regulating educational facilities; (4) it is difficult to see why a complete
    educational program would be put into effect before the results of the pilot program are reported.



    Issue Senate bill House bill
    15. Homestead

    exemptions
    §§212, 320. A $100,000 cap would be
    placed on homestead exemptions and a
    finding made that such a cap is
    necessary for meaningful bankruptcy
    reform.

    No change would be made in the
    availability of state exemptions after a
    debtor's change of domicile.

    No cap would be placed on homestead
    exemptions.

    §181 Debtors who changed their state of
    domicile within one year of bankruptcy
    would apparently be required to employ
    federal exemptions, rather than the
    exemptions of either state of domicile.




    Conference Report—§126.


    Content:
    The provisions of the House bill were adopted, amended to require that a debtor reside in a state for 730 days before
    being allowed to claim the exemption law of that state.


    Commentary:
    The proposal does nothing to address abuse of the bankruptcy system by existing residents of states with
    unlimited homestead exemptions. Such individuals may amass substantial estates in homestead property, and obtain a
    bankruptcy discharge without having to surrender any of that property. The proposal would discourage some debtors from
    changing their state of domicile for the purpose of obtaining higher exemptions. However, it would encourage many others to
    make such moves. Since no state's exemption law would apply until a debtor had resided in the state for two years, the
    applicable exemption law would be the federal exemptions. These exemptions are more generous than the laws of many states,
    and debtors from states with exemptions lower than the federal exemptions would be encouraged to move to any new state
    prior to filing bankruptcy.


    Issue Senate bill House bill
    16. Bankruptcy

    appeals
    §602 Appeals of bankruptcy court
    decisions could be taken to the Circuit
    Courts of Appeals if the district court
    did not file a decision within 30 days of
    the filing of the appeal.
    §411 Bankruptcy court decisions would
    be directly appealable to the Circuit
    Courts of Appeals.




    Conference Report—no provision regarding bankruptcy appeals is included in the report.


    Commentary:
    Although both bills contained provisions for expedited appeals from bankruptcy courts to the courts of
    appeals, the Conference Report fails to address the issue. Direct appeal would have the benefit of reducing the cost of
    obtaining binding precedent in bankruptcy cases.


    Issue Senate bill House bill
    17. Effective date §408 The amendments contained in Title
    IV of the bill ("Financial instruments")
    would apply to cases commenced "or
    appointments made" after the date of
    enactment.

    §734 The amendments contained in Title
    VII of the bill ("Technical corrections")
    would (1) "take effect on the date of
    enactment of this Act," but (2) "apply
    only with respect to cases commenced. .
    . on or after the date of enactment of
    this Act."

    No effective date is specified




    Conference Report—§1201.


    Content:
    Unless otherwise specifically provided, the amendments would become effective 180 days after enactment, and
    would not apply to cases pending on that date.



    Commentary:
    Because of the many changes in the law, the delay in the effective date would be critical to allow for study and
    preparation of forms and procedures necessary to comply with the new provisions.

    Description:

    To amend title 11 of the United States Code, and for other purposes.
    An Analysis of the Consumer Bankruptcy Provisions of H.R. 3150

    Proposed Bankruptcy Reform Legislation

    Written by:

    Hon. Eugene R. Wedoff

    United States Bankruptcy Court

    Northern District of Illinois

    Chicago, Illinois



    Prepared for the American Bankruptcy Institute

    Web posted and Copyright © July 16,
    1998, American Bankruptcy Institute.

    H.R. 3150, passed on June 10, 1998 by the House of Representatives, proposes major
    changes to the consumer provisions of the Bankruptcy Code (Title 11, U.S.C.). An analysis of the consumer provisions of the
    bill, as originally proposed in February, 1998,
    has previously been published by ABI.
    On May 18, 1998, the bill was amended by the House Judiciary Committee, and, as amended,
    favorably reported. The bill was further amended prior to its passage by the House. In
    order to allow an understanding of the bill as passed, the original analysis has been
    completely revised. However, the current analysis continues to follow the format of the
    original paper: first, identifying each of the changes that the bill would make in
    the current consumer law; second, assessing the impact that these changes would
    have in the operation of the law; and third, suggesting alternative approaches,
    where appropriate, to achieving the goals of the legislation.

    A similar bill, S. 1301, has been favorably reported by the Senate Judiciary Committee.
    Where a section of H.R. 3150 covers the same subject matter as a section of S. 1301, a
    reference to S. 1301 is included in the current analysis.

    Introduction to current consumer bankruptcy law.

    A description of the operation of current consumer bankruptcy law—which may be
    helpful in understanding the changes proposed in H.R. 3150—is available through the
    following link: Introduction to
    Proposed Bankruptcy Reform.

    Summary: major effects of the consumer bankruptcy provisions of H.R. 3150.

    As discussed in the section-by-section analysis that follows, H.R. 3150 appears
    designed to reduce bankruptcy filings and increase payments to creditors in bankruptcy.
    However, the bill contains a number of provisions that may impair the overall
    effectiveness of the consumer bankruptcy system. The major changes in consumer bankruptcy
    law that would be effected by H.R. 3150 include the following:

    1. Debts for family support obligations would be accorded the first priority in
    distribution, ahead of the administrative expenses of the bankruptcy case. In Chapter 13,
    each plan would have to provide for the payment of family support obligations before all
    other unsecured claims, including expenses of administration. §145. Property settlements
    not required for support would be made nondischargeable debts in both Chapter 7 and
    Chapter 13 cases. §146.

    2. Debtors would generally be ineligible for bankruptcy relief until they had first
    attempted to negotiate a voluntary repayment plan through a consumer credit counseling
    service approved by the United States trustee for the district in which the bankruptcy
    case would be filed. §104. After a debtor received a bankruptcy discharge, the debtor
    would be ineligible for any bankruptcy relief for a period of five years, and ineligible
    for Chapter 7 relief for a period of 10 years, without consideration of good faith or
    economic situation. §171.

    3. Chapter 7 relief would be denied to a class of debtors, based on ability to pay a
    specified portion of their debt. Debtors with relatively large debt would remain eligible
    for Chapter 7 relief, while those with smaller debt would be ineligible. Testing for
    eligibility—incorporating IRS collection standards of difficult
    applicability—would be required for all debtors whose household income was at least
    equal to a national median, and Chapter 7 trustees would be required to investigate and
    file a report on eligibility in each case. §101. Charitable contributions would be
    allowed to offset income available to pay debts, and trustees would generally not be able
    to recover charitable contributions as fraudulent conveyances. §118. Any party in
    interest would be allowed to challenge the debtor’s eligibility. §103.

    4. For debtors whose household income was at least equal to a national median, Chapter
    13 would be changed by increasing the minimum plan term to 5 years. The superdischarge in
    Chapter 13 would largely be eliminated. §§102, 146, 409, 508. Debtors in Chapter 13
    would be allowed during their bankruptcy cases to pay up to 15% of their gross annual
    income to charities. §118.

    5. Debtors would be notified about alternatives to bankruptcy, and of their obligations
    in filing bankruptcy. These obligations would include submission of tax returns to the
    United States trustee (with mandatory disclosure to any interested party), and filing of
    detailed information regarding income, expenses, and assets, subject to formal audit.
    Failure to file this information would result in automatic dismissal. §§111, 404, 406,
    407.

    6. In both Chapter 7 and Chapter 13 cases, secured creditors would receive secured
    claims in an amount no less than the retail value of the collateral that secures the
    claim, and, in some circumstances, the full amount of the claim, regardless of collateral
    value. §§ 128, 129, 130, 162. Relief from stay would be granted in circumstances of
    repeated bankruptcy filings without regard to equity available for distribution to
    creditors generally. § 121. Condominium associations would be given a nondischargeable
    debt for fees that accrue after bankruptcy regardless of whether the debtor was occupying
    the premises. §148.

    7. All debts incurred by a debtor within 90 days of the bankruptcy filing would be
    presumed to have been incurred by fraud, and all fraudulently incurred debts would be
    nondischargeable in both Chapter 7 and Chapter 13 cases. §§142, 143.

    8. Bankruptcy court decisions would be appealable directly to the circuit courts of
    appeals. §412.

    9. Detailed provisions are set out regarding centralized collection and dissemination
    of bankruptcy data. §§441-43.

    10. An unlimited exemption would be provided for tax-exempt retirement funds. §119.
    Debtors who changed their state of domicile within one year of bankruptcy would apparently
    be required to employ federal exemptions, rather than the exemptions of either state of
    domicile, and certain prepetition exchanges of nonexempt for exempt property would be
    disallowed. §§181, 182.

    The consumer bankruptcy provisions of H.R. 3150: specific proposals.

    More than fifty of the sections of H.R. 3150 affect consumer bankruptcy cases. These
    provisions are included in three of the bill’s titles. Title I ("Consumer
    Bankruptcy Provisions"), Title IV ("Bankruptcy Administration"), and Title
    V ("Tax Provisions"). This analysis deals with each of these sections in the
    order of presentation; cross-references indicate areas in which one proposal affects
    another. An indication is also given where the substance of the proposal is similar to a
    provision of S. 1301. Sections that have been added, or substantially changed from the
    original version of the bill, are marked by an asterisk.

    Title I ("Consumer bankruptcy provisions")

    Subtitle A ("Needs-Based Bankruptcy")

    *§101 ("Needs based bankruptcy") (see S. 1301, §102)

    Changes. This section of the bill would institute "means-testing" for
    Chapter 7 relief, eliminating the choice of Chapter 7 bankruptcy for debtors who can pay a
    defined portion of their future income to general unsecured creditors. Subsection 101(3)
    of the bill would add a new provision to §109(b) of the Code. The new provision would
    prohibit an individual from being a debtor under Chapter 7 if the individual had
    "income available to pay creditors." The remainder of §101 sets up a procedure
    for determining "income available to pay creditors" and a mechanism for
    implementing the denial of Chapter 7 relief to debtors who have such income.

    Means-testing. Whether a debtor has "income available to pay
    creditors," and thus is ineligible for Chapter 7 relief, involves a three-step
    determination. The first step is to compute the debtor’s "current monthly total
    income." This consists of the debtor’s pretax (gross) income, from all sources,
    averaged over the six months preceding the bankruptcy filing. It is to include "any
    amount paid by anyone other than the debtor . . . on a regular basis to the household
    expenses of the debtor and the debtor’s dependents."

    In the second step, the debtor’s total monthly income is reduced by three
    "automatic" categories of payments to obtain "projected monthly net
    income," i.e., the amount available to pay general unsecured claims. The three
    payment categories are: (1) general living expenses for the debtor and the debtor’s
    dependents—excluding repayment of debt—according to standards established by the
    Internal Revenue Service for purposes of collecting unpaid tax obligations; (2) all of the
    payments on secured debt that will come due during the five years after filing, divided by
    60 (to obtain a monthly average); and (3) all of the priority debt owed by the debtor,
    again divided by 60.

    Finally, in the third step, projected monthly net income may be further reduced by a
    "personalized" category of "extraordinary circumstances," involving
    either loss of income or additional expenses exceeding the "automatic"
    categories. Such extraordinary circumstances must be itemized in a detailed sworn
    statement, attested to by the debtor and the debtor’s counsel.

    A debtor will be found to have "income available to pay creditors"—and
    hence be ineligible for Chapter 7 relief— if three tests are met. First, the
    debtor’s "current monthly total income" must be at least as much as the
    national median for a household of the same size as the debtor’s household and any
    smaller household, as established by the Census Bureau. Second, the debtor’s
    "projected monthly net income" must be greater than $50. Third, the projected
    monthly net income must be "sufficient to repay twenty per cent or more of unsecured
    non-priority claims during a five-year repayment plan."

    Implementation. Section 101 of the bill contains two mechanisms for implementing
    means testing. First, Chapter 7 trustees are given the additional duty of investigating
    and verifying the debtor’s projected monthly net income and filing a report with the
    court as to whether the debtor is disqualified for Chapter 7 relief under the "income
    available" standard. If the report finds that the debtor is not eligible for relief,
    the trustee is required "to provide a copy of such report to the parties in
    interest."

    Second, if the debtor asserts extraordinary expenses, any party may object to the
    statement within 60 days after the debtor makes the disclosures required by § 521 of the
    Code (as expanded by §407 of the bill, discussed below), and if such an objection is
    made, the bankruptcy court is to determine the matter, with the debtor having the burden
    of proof.

    A third implementation of means-testing is contained in §103 of H.R. 3150. As
    discussed below, this provision would amend §707(b) of the Code to allow creditors to
    seek dismissal or conversion of Chapter 7 cases that they believe fail the means test.

    Chapter 13. Finally, §101(6) of H.R. 3150 sets out a provision unrelated to
    means-testing. This final change would impose on Chapter 13 trustees the additional
    responsibility of investigating and verifying the debtor’s monthly net income, and
    filing annual reports with the court as to whether the amounts paid under the
    debtor’s plan should be modified because of changes in the debtor’s net income.

    Impact. Means-testing in general.The means-testing incorporated in §101
    of H.R. 3150 would effect a major change in bankruptcy policy. That policy has
    traditionally allowed debtors in financial difficulty to obtain an immediate fresh start
    in exchange for surrendering their nonexempt assets. Accordingly, current § 707(b) denies
    Chapter 7 relief only where this relief would be a "substantial abuse" of the
    provisions of Chapter 7, and it provides that there is a presumption in favor of granting
    the relief sought by the debtor. The means-testing provisions of H.R. 3150 would change
    this, denying an immediate fresh start to a category of debtors in genuine financial
    difficulty—unable to pay their current bills from available income—because their
    future income is sufficient to pay 20 percent of their debt over five years. Thus, at a
    given income level, those who have accumulated relatively small amounts of debt would be
    denied Chapter 7 relief, while those who have accumulated relatively large amounts would
    remain eligible. It can be anticipated that this change would decrease the number of
    Chapter 7 bankruptcies, with a corresponding increase in cases under Chapters 11 or 13 or
    in nonbankruptcy resolutions of consumer debts. In this way, means-testing may lead to
    greater payments to creditors. But it may also have unintended consequences. For example,
    at the present time, many debtors are able to avoid bankruptcy by working out voluntary
    arrangements with creditors through credit counseling services. The willingness of
    creditors to cooperate in such voluntary arrangements may be influenced by the fact that
    the debtors otherwise have the option of Chapter 7 bankruptcy. If that option is removed,
    the creditors may be less willing to enter into the voluntary arrangements. Means-testing
    may also increase home foreclosure rates, since debtors now able to remove other debt in
    Chapter 7 would be denied that option, and may be ineligible for Chapter 13 or unable to
    complete a Chapter 13 plan.

    However, regardless of the general desirability of means testing for Chapter 7 relief,
    the means testing prescribed in §101 of H.R. 3150 presents substantial difficulties, both
    in terms of reasonableness and practicality. Indeed, some of the practical
    difficulties—involving the application of the IRS collection standards—would
    make this testing difficult, if not impossible, to apply in many situations.

    Determining "current monthly total income." The formula established by
    H.R. 3150 for determining a debtor’s "current monthly total income" would
    present substantial difficulty whenever income is earned by another member of the
    debtor’s household, such as a nondebtor spouse or an adult child. The bill states
    that any amount "paid by anyone other than the debtor . . . on a regular basis to the
    household expenses of the debtor or the debtor’s dependents" should be counted
    as part of the debtor’s income. Under this standard, it might be thought that all of
    the income of a nondebtor household member should be counted, since all of that
    person’s income, in some sense, supports the household. However, if the nondebtor
    does not make "regular payments," attributable to identifiable expenses, it may
    be that the standard does not apply. For example, a spouse’s payments into a savings
    account or investment plan might well be found not to be amounts "paid to household
    expenses." Interpreted in this way, the means test would require a detailed analysis
    of the income and expenditures of each member of the debtor’s household.

    The threshold for means-testing.Median household income, varying with size of
    the household, is used in the proposal to establish a threshold below which there is no
    need to examine income on an individualized basis: an individual whose total household
    income is less than the median income, as determined by the Census Bureau, for a household
    of the same or smaller size, would not be disqualified from Chapter 7 relief regardless of
    the household expenses. However, there are two difficulties with the use of Census Bureau
    medians. First, the information may be outdated. For any given year, the proposal states
    that household income is based on the most recent Census Bureau figures available as of
    January 1. As of January 1 of any year, the Census Bureau only has information available
    for the second year before that date. Thus, 1996 income figures are presently the most
    recent. In this way, the threshold under the proposal compares a debtor’s current
    income to the median income that existed up to two years earlier. In times of high
    inflation, this would substantially increase the number of cases subject to individual
    scrutiny. (Similarly, the six-month average used to determine the debtor’s current
    income will result in an artificially high income figure whenever the debtor’s income
    has declined shortly before the bankruptcy filing.)

    The second problem has to do with household size. The proposal employs median household
    income, varying with the size of the household, with the apparent intent of allowing a
    higher threshold income for larger households. In reality, however, median household
    income changes erratically with household size. The median income for a single individual
    (in 1996, the last year for which Census Bureau figures are currently available) was
    $18,426, less than twice the federal poverty level of $9,260. But median income for a
    household of two was $39,039, more than three times the poverty level of $12,480. The
    median income continues to increase with household size for households of three and four
    persons, but household income decreases for families of five and six persons. The
    median family income for a household of seven persons was $45,241 in 1996—less than
    the median income for a family of three, and again less than twice the poverty
    level—and there are no increases in median income for households greater than seven.
    The bill attempts to address this anomalous situation by setting the threshold for means
    testing at the highest median income for households equal to or smaller than the
    debtor’s household. Even under this standard, however, the threshold does not
    increase as family size increases above four. Thus, for single individuals and individuals
    in large households, the bill is much more likely to require individualized scrutiny than
    for individuals in households of two to four persons, and the threshold has no consistent
    relationship to the economic need of the individuals filing for bankruptcy relief. (Income
    figures are drawn from U.S. Bureau of the Census, P60-197, Money Income in the United
    States: 1996,
    Table 1 (1997). Poverty figures are from the Annual Update of the HHS
    Poverty Guidelines, 63 Fed.Reg. 9235, 9236 (1998).)

    The means-testing process—IRS collection standards. For those debtors whose
    income is above the threshold, §101 of H.R. 3150 prescribes a two-part means test for
    determining how much of the debtors’ projected monthly income during the five-year
    period after the bankruptcy filing is "net income," available to pay general
    unsecured debt. In the first part of the means-testing process, a debtor’s projected
    total monthly income is reduced by a set of "automatic" deductions: (1) monthly
    expenses allowances defined by Internal Revenue Service collection standards, (2) monthly
    payments on secured debt, and (3) monthly payments on priority debt. To avoid double
    deductions, §101 specifies that payment of debt should be excluded from the IRS
    allowances. In the second part of the process, further deductions are allowed where the
    debtor can establish extraordinary expenses. The balance that remains after the two sets
    of deductions is the "projected monthly net income" available to pay general
    unsecured debt.

    There are several problems with this process—resulting primarily from the
    incorporation of the IRS standards—that render it unworkable or inequitable. The IRS
    collection standards are set out in Volume 2 of the Internal Revenue Manual
    ("Manual") §5323 (CCH 1995), and incorporate a number of exhibits also set out
    in the Manual (Exhibits 5300-45 to 5300-51). More recent versions of some of the exhibits
    may be found at the IRS website. As reflected in §101, 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 (Manual §5323.432); local standards, covering housing and transportation
    (Manual §5323.433); and other necessary expenses, covering taxes, health care,
    court-ordered payments, involuntary wage deductions, accounting and legal fees, and
    secured debt, with provision for other necessary expenses (Manual, §5323.434).

    The difficulties in applying the IRS standards within the procedures of §101 include
    the following:

    The IRS standards are not automatic. The Manual defines the "other
    necessary expenses" category as including any expense necessary to "provide for
    a taxpayer’s and his or her family’s health and welfare and/or the production of
    income." Manual § 5323.12. The "other necessary expense" category thus
    includes all necessary expenses (such as costs of health care) that do not fall within the
    national and local standards. Id.For all such expenses, the Manual requires a
    discretionary determination of reasonable amounts for the expense: "Since there are
    no nationally or locally established standards for determining reasonable amounts, the
    [Internal Revenue] Service employee responsible for the case must determine whether the
    expense is necessary and the amount is reasonable." Id.Thus, review of a
    debtor’s schedules—presumably by the Chapter 7 trustee—will be necessary
    whenever a debtor lists "other necessary expenses" under the IRS standards.

    There is no way to distinguish between the"other necessary expenses"
    category of the IRS standards and the category of "extraordinary circumstances that
    require allowance for additional expenses" established by §101 of H.R. 3150.
    Section
    101 makes a substantial distinction between expenses covered by the IRS standards and
    those arising from "extraordinary circumstances." If an expense is within the
    IRS category, §101 simply provides for its deduction from the debtor’s income. But
    if an expense arises from "extraordinary circumstances," then the debtor must
    provide detailed explanations of the expense, subscribed to by counsel, and subject to
    challenge by the trustee and creditors. However, as noted above, the IRS category includes
    any necessary expense not otherwise treated by the Manual, specifically including health
    care, and hence would appear to cover many expenses that could be considered
    "extraordinary."

    There is no way to determine what portion of the IRS allowances reflect
    payment of secured debt.
    The means-testing proposed in §101 deducts from the
    debtor’s household income all monthly payments made on account of secured and
    priority claims, and so, to the extent that the IRS standards allow deduction for debt
    payments, §101 provides that payments for debt should be excluded from the IRS
    allowances. In many situations, however, this exclusion will be impossible. The IRS local
    standards specify a single monthly allowance for all housing expenses, including mortgage
    or rent, property taxes, interest, parking, maintenance and repair, insurance, condominium
    fees and all utilities—including heating and cooking fuel, electricity, and
    telephone. Manual, Exhibit 5300-46. Thus, for example, the current IRS local standard for
    the District of Columbia allows total monthly housing expenses, for a family of four or
    more, in the amount of $1397, while a household of two in rural Illinois is allowed less
    than $500. (See web listings at
    <www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-dc.html> and
    <www.irs.ustreas.gov/prod/ind_ info/col _stds/cfs-il.html >.) This single housing
    allowance is intended to include any mortgage and property tax payments—which would
    be payments of secured claims—but there is no way to separate an allowance for those
    claims from the total housing allowance.

    Similarly, the IRS’s local standard provides a single monthly allowance covering
    all transportation expenses, including payment for vehicles (either by purchase or lease),
    insurance, maintenance, fuel, registration, vehicle inspection, parking fees, tolls,
    drivers’ licenses, and public transportation costs. The current monthly
    transportation expense allowed for the District of Columbia, for a debtor with two cars,
    is $357, while a debtor with one car in Buffalo is allowed $179. (See website listings at
    <www.irs.ustreas.gov/prod/ind_info/coll_stds/cfs-trans.html>.) Again, for a debtor
    with auto loans, some part of these totals would be attributable to payments on the loan,
    but it is not possible to determine what part.

    For both housing and transportation expenses, it might be thought that there could
    simply be an exclusion from the IRS standard in the amount of whatever mortgage or car
    loan payments are actually being made by the debtor. That approach, however, cannot be
    used in any situation where the debtor’s secured debt payments approach or exceed the
    IRS allowance, since excluding the secured debt payment would leave insufficient allowance
    for the other expenses included in the category.

    The means-testing process would impose burdens disproportionately on debtors
    without secured debt.
    The means-testing of §101 excludes secured debt payment from
    projected monthly net income, and so mortgage and auto loan payments are automatically
    deducted from income available to pay creditors, even if they are much higher than average
    for the community in which the debtor resides. However, rental payments are not secured
    debt, and so would only be excluded to the extent that they were part of the standard
    levels of expense established by the IRS. Housing expenses in particular vary widely from
    community to community within a metropolitan area, yet the IRS allowances are based on
    county wide figures. Thus, the proposal would require all debtors in higher than average
    rental communities to declare and prove "extraordinary" expenses, with the
    potential for litigation concerning the extent to which bankruptcy courts should allow as
    "extraordinary expenses" rental payments at a level higher than that determined
    by the IRS.

    Similarly, a debtor could buy a new car on credit without affecting the means-testing
    of §101, but if the debtor leased a car with payments that caused the IRS transportation
    allowance to be exceeded, there would again be a need to declare an extraordinary expense
    in order to retain the car.

    Finally, costs of rental housing may rise very quickly in a given area, but, as with
    Census Bureau data, the IRS standards will necessarily lag. Thus, debtors in rental
    housing may be required to establish "extraordinary circumstances" simply to
    continue to rent an average apartment for their area.

    The means-test leaves unresolved recurring questions regarding the
    appropriateness of various categories of expense.
    Currently, questions about the
    reasonableness and necessity of expenses claimed by a debtor arise under §1325(b) of the
    Code, which requires that Chapter 13 debtors contribute to their repayment plans any
    income not "reasonably necessary" for their support and the support of their
    dependents. In applying this standard, the courts have struggled to determine whether
    debtors should be allowed to claim expenses for private school tuition, religious and
    other charitable contributions, and care of elderly relatives or others whom the debtor
    may not be legally obligated to support. See 2 Keith M. Lundin, Chapter 13
    Bankruptcy §§5.36-5.37 (1994 & Supp. 1997). The IRS collection standards make clear
    that private school tuition and charitable contributions are generally not allowed
    as "other necessary expenses," and that care for the elderly, invalid, or
    handicapped only "is necessary if there is no recourse except for a taxpayer to pay
    the expense." Manual, Exhibit 5300-46. Section 118 of H.R. 3150, discussed below,
    deals with the issue of charitable contributions, and generally provides that tax
    deductible contributions that the debtor "has made, or continues to make" cannot
    be used by the court as a factor in dismissing a Chapter 7 case under §707(b) of the
    Code. Nevertheless, the debtor would presumably have to list all planned charitable
    contributions as extraordinary expenses, and whether the expense should be allowed might
    depend on whether the proposed contributions were a "continuation" of the
    debtor’s prior practice. Questions regarding private school tuition and the costs of
    caring for relatives would continue to be open. Thus, a debtor seeking to make any of
    these payments would be required to list them as extraordinary expenses, with the
    potential for litigation.

    Costs of the proposed means-testing.Largely because of the difficulties outlined
    above, the means-testing proposed by §101 can be expected to generate substantial
    additional cost:

    (1) A substantial burden would be placed on the Internal Revenue Service to maintain
    current expense standards, for each distinct economic area in the country. These
    determinations by the IRS may well require formal rulemaking procedures. While the
    Internal Revenue Manual, under current law, is simply an intra-agency document giving
    direction to IRS employees, §101 would transform the collection standards into an
    administrative rule. (The definition of "rule" in the Administrative Procedure
    Act, 5 U.S.C. § 551(5), includes "an agency statement of general . . . applicability
    and future effect designed to implement . . . law or policy.")

    (2) An increased burden would be placed on bankruptcy professionals.

    • The proposal requires Chapter 7 trustees to investigate and report on the
    debtor’s net income in each Chapter 7 case. The vast majority of Chapter 7 cases
    involve no assets for distribution to creditors, and hence only a nominal fee for the
    trustee. The new investigation and report will substantially add to the work required of
    trustees in no-asset cases, with no provision for additional compensation. The trustees
    will also have to review the appropriateness of any expenses claimed by the debtor under
    the IRS’s "other necessary expenses" category.

    • The investigation and reporting requirements for Chapter 13 would increase the
    costs of the Chapter 13 trustee, reducing the portion of plan contributions available to
    creditors.

    • The bill would require debtors’ counsel to swear to the accuracy of any
    extraordinary expenses claimed by a Chapter 7 debtor. Unless this oath is simply based on
    the statement of the debtor (in which case it would add nothing to the debtor’s
    oath), this requirement would impose on debtors’ counsel the obligation of
    independently verifying all of the extraordinary expenses claimed by the debtor, thus
    increasing the cost of the bankruptcy and the time required to file the case.

    (3) The proposal would lead to increased "bankruptcy planning." The formula
    employed for determining net monthly income is subject to manipulation by debtors. Most
    obviously, because secured debt is excluded from projected monthly net income, a debtor
    can reduce the income available to pay debts simply by taking on additional secured debt.
    For example, assume that a debtor with $30,000 in unsecured, nonpriority debt owns a
    three-year old car with no outstanding car loan, and that the debtor has $300 in monthly
    net income as defined in the proposed bill. Over five years, that income would total
    $18,000, well over 20% of the unsecured debt. However, if the debtor trades in the
    three-year old car for a new one, and finances $12,000 for three years at 5% interest, the
    debtor will need to make payments on the secured car loan of about $13,000, reducing the
    total "net income" over the five years after filing to about $5000, less than
    20% of the unsecured debt. Similarly, a debtor with projected income that is slightly over
    20% of outstanding unsecured debt could increase the amount of that debt to arrive at a
    point where disposable income is less than 20%. Debtors may be able to manipulate income,
    by terminating second jobs, reducing hours, or changing employment. Finally, debtors may
    be able to eliminate "excess" income by proposing to make substantial charitable
    contributions.

    (4) The proposal would lead to greater court involvement in Chapter 7 cases. The court
    will be required to hear any disputes regarding "other necessary expenses," or
    extraordinary income, as well as any questions of good faith arising out of the kind of
    bankruptcy planning discussed above. These hearings will generate additional expense for
    the courts and the parties involved in them.

    Alternative.(1) The Bankruptcy Code has limited the availability of Chapter 7
    relief in situations of improperly incurred debt by creating exceptions to discharge in
    Chapter 7. To obtain relief from the improperly incurred debt, the debtor is then required
    to complete a Chapter 13 plan. Rather than making Chapter 7 relief unavailable to a large
    class of debtors (many of whom will have incurred their debt in good faith), it may be
    preferable to define the type of debt (such as excessive credit card debt) that is
    improper, and make that debt nondischargeable in Chapter 7, regardless of the disposable
    income currently available to the debtor.

    (2) Alternatively, if there are to be thresholds for denial of Chapter 7 relief based
    on household income, those thresholds should be based on some formula (such as a multiple
    of poverty level) that is not tied to median household income.

    (3) Any denial of relief in Chapter 7 should be based on the presence of substantial
    income that is not needed to meet current expenses, regardless of the level of debt to be
    repaid, thus eliminating the incentive for manipulation of indebtedness.

    §102 ("Adequate income shall be committed to a plan that pays unsecured
    creditors")

    Changes. Section 102 of H.R. 3150 proposes essentially two major changes in the
    operation of Chapter 13.

    Plan length. First, §102 imposes an increased minimum plan length for many
    debtors. Instead of the current three-year minimum, §102 imposes a five-year minimum plan
    length on all debtors whose "current total monthly income" exceeds the threshold
    established in §101—that is, monthly income equal to or greater than the highest
    national median for a household of the same size as the debtor’s household or any
    smaller household, as established by the Census Bureau. If the debtor’s total income
    is less than the applicable national median, the three year minimum is retained. (These
    provisions are elaborated in §409 of the bill, which sets out maximum plan lengths of two
    years in addition to the minimum plan length set forth here.)

    Minimum payments to unsecured creditors. The second major change proposed by
    §102 replaces the current "disposable income test" of Chapter 13 with a
    two-part formula requiring minimum payments on unsecured nonpriority debt. Under the first
    part of the formula, the plan must provide for payments of at least $50 per month to
    unsecured nonpriority creditors who are not insiders. The second part of the formula
    defines "monthly net income" for purposes of a Chapter 13 plan, and creates a
    mechanism for requiring that "the total amount of monthly net income" is paid to
    unsecured nonpriority creditors during the minimum plan period, less only expenses of
    administering the case.

    The definition of "monthly net income" created by §102 is similar to
    "projected monthly net income" established under §101—it starts with
    "current total monthly income" and deducts expense allowances pursuant to
    Internal Revenue Service collection standards, with the potential for adjustment if the
    debtor has extraordinary expenses or loss of income.

    To assure that all monthly net income is paid through a plan to unsecured nonpriority
    creditors (and administrative claimants), §102 requires that the debtor itemize
    extraordinary expenses or loss of income in a statement sworn to by the debtor and the
    debtor’s attorney. The debtor’s statement of extraordinary expenses would be
    subject to objection by the trustee or any party in interest, and the prevailing party in
    a hearing on the objection could be awarded fees and costs. If the debtor files such a
    statement, the statement would have to be refiled, to reflect current conditions, no less
    than annually during the duration of the plan. All Chapter 13 plans would also be required
    to provide that future net monthly income will be paid as reasonably determined by the
    Chapter 13 trustee, with at least annual reviews to determine whether net income has
    increased or decreased.

    Impact. Three substantial impacts that can be anticipated as a result of the
    changes made in §102 of the bill:

    Plan length. The new five-year minimum plan length would be arbitrarily imposed,
    depending on household size. As discussed above, in connection with §101, median income
    varies erratically with the number of persons in the household. Single individuals would
    be required, using currently available census figures, to propose a five-year minimum plan
    whenever their gross annual income was at least $18,426, but the trigger point for a
    married couple would be $39,039. Individuals in a household of four would not face the
    five-year minimum until their household income reached $53,704; but that threshold would
    continue to apply to all households of greater size. For example, a five-year minimum plan
    would be required of a couple with three children of their own and four foster children,
    even though their income exceeded the $53,704 threshold only because of payments received
    on account of the foster children.

    Where the five-year minimum plan length is imposed, it may increase payments to general
    unsecured creditors; however, the longer length can be expected to increase the number of
    cases that fail for default in payment. A five-year minimum term may also have the effect
    of discouraging any Chapter 13 filing, giving debtors additional incentive for
    prebankruptcy planning to meet the proposed new filing requirements for Chapter 7. As
    discussed above in connection with §101, these limitations may be met by increasing debt
    and decreasing income prior to filing, and by proposing to make large charitable
    contributions.

    The substitution of "net income" for "disposable" income.Current
    law requires Chapter 13 debtors to contribute all of their disposable income to the
    Chapter 13 plan, and, after payment of secured and priority claims, this income would be
    used to pay general unsecured creditors. Disposable income is defined very generally in
    the Code (§1325(b)(2)), and courts have varied in their interpretation of the term. The
    proposed change would require that all of a debtor’s "net" income be used
    to pay general unsecured creditors. Because secured priority claims are deducted from the
    calculation of net income, the principal difference introduced by the proposed legislation
    is that standard expense allowances would be determined, in the first instance, by the
    IRS—rather than by the courts—subject to individualized exceptions, reviewed
    annually. This process could reduce the arbitrariness associated with the disposable
    income test; for this reason, some use of general guidelines for determining appropriate
    levels of Chapter 13 plan contributions has been recommended by the National Bankruptcy
    Review Commission. National Bankr. Review Comm’n, Bankruptcy: The Next Twenty Years
    262-73 (1997) ("Final Report"). However, the application of the IRS standards is
    very uncertain (if not impossible) in many situations, for the reasons listed in the
    discussion of §101, above, and can be expected to generate substantial cost and
    litigation.

    Minimum monthly payments of $50 to general unsecured claims of noninsiders. The
    $50 minimum payment to general unsecured creditors, proposed by §102, applies to all
    Chapter 13 debtors, even those who have no net income, or less than $50 in net income.
    This minimum payment may make Chapter 13 unavailable, or at least discourage its use, by
    lower income debtors.

    The situation of low or nonexistent net income is common in Chapter 13—for
    example, debtors emerging from a divorce may have very great difficulty in making both
    required support payments and mortgage payments. In order to save their homes or
    automobiles, Chapter 13 debtors are often willing to attempt to live on substantially less
    than what would be considered an appropriate level of expense for necessities. Plans
    proposing food budgets of $100 for a family of four are not uncommon, with all or almost
    all of the plan payments going to secured or priority creditors. The $50 minimum for
    unsecured debt may render such marginal plans completely impossible.

    A second problem exists for lower income debtors who owe unsecured debts both to family
    members and others. Section 102 would require that the first $50 of every monthly payment
    go to the nonfamily members (since family members are insiders). The $50 minimum thus
    provides substantial incentive for debtors with low net income to choose Chapter 7, where
    all of their debts will be discharged, so that they can repay debts owing to family
    members voluntarily.

    Alternative. As suggested by the National Bankruptcy Review Commission, the
    objective of obtaining payment for general unsecured creditors might be advanced by
    requiring that payments proposed for general unsecured claims in a Chapter 13 plan be made
    in equal installments throughout the plan, rather than paid only after secured and
    priority claims. See Final Report at 262.

    *§103 ("Definition of inappropriate use") (see S. 1301, §102)

    Changes. This section makes seven changes to §707(b) of the Bankruptcy Code.
    Section 707(b) currently provides for dismissal of Chapter 7 cases that constitute a
    "substantial abuse" of the provisions of Chapter 7, only on motion of the court
    or the United States trustee. Section 103 of H.R. 3150 would—

    (1) change the operative term from "substantial abuse" to "inappropriate
    use";

    (2) require a finding of "inappropriate use" if the debtor is disqualified
    from Chapter 7 filing by the "ability to pay" provisions of §101, discussed
    above, or if "the totality of circumstances of the debtor’s financial situation
    demonstrates such inappropriate use";

    (3) allow creditors and Chapter 7 trustees to bring motions to dismiss Chapter 7 cases
    based on substantial abuse;

    (4) allow conversion to Chapter 13, with the debtor’s consent, as an alternative
    to dismissal of the bankruptcy case;

    (5) require the court to award fees and costs against a creditor who brought a motion
    seeking dismissal for inappropriate use, if the court found that the allegations of the
    motion were not substantially justified, unless special circumstances would make the award
    unjust;

    (6) require the court to award fees and costs against the debtor if the United States
    trustee or the Chapter 7 trustee prevailed in a §707(b) motion, unless awarding such fees
    and costs would impose an unreasonable hardship on the debtor;

    (7) restate, in the Bankruptcy Code itself, the requirement of reasonable
    investigation, currently contained in Fed.R.Bankr.P. 9011, applying to court filings
    signed by an attorney; the statutory restatement would apply only to debtors’
    attorneys and would be extended to cover schedules and statements of financial affairs; if
    the court found a violation of the requirement, the court would be required to impose a
    civil penalty on the debtor’s counsel, payable to the Chapter 7 trustee or the United
    States trustee.

    Impact. Most of the proposed changes simply provide a means of enforcing the
    limitation on Chapter 7 relief proposed in §101 of the proposed bill. Current law limits
    the right to bring §707(b) motions, based on the understanding that debtors should
    generally be able to choose to obtain an immediate fresh start when they are in financial
    difficulty, and this understanding would be changed by §101, as discussed above. If
    creditors are allowed to bring motions for substantial abuse, the fee shifting provision
    may help to reduce creditor motions brought merely to exert leverage on debtors. Just as
    current law does not define "substantial abuse," the proposed change would
    retain a large degree of discretion by allowing courts to grant relief based on the
    "totality of circumstances." The option of conversion to Chapter 13 would
    usually exist under present law, pursuant to §706(a), which generally gives a Chapter 7
    debtor the option of converting the case to Chapter 13 "at any time" (however,
    it is not clear why an option of conversion to Chapter 11 is not also noted).

    The remaining provisions of §103, however, would create unbalanced burdens on debtors
    and their counsel. In any "inappropriate use" motion brought by a trustee (or
    the United States trustee) there would be a presumptive award of fees to the movant if the
    motion was granted, but no award of fees to the debtor if the motion was denied. This
    would create a powerful incentive on the debtor not to litigate any trustee motion, an
    impact aggravated by the provision of §116, discussed below, that would deny fees to the
    debtor’s attorney in any case in which a §707(b) motion was granted. Similarly,
    mandatory penalties are imposed only on debtor’s counsel in connection with court
    filings that are not properly investigated. If there is to be such a statutory "Rule
    11" provision, there is no apparent reason why it should not apply to creditors’
    counsel as well as to counsel for debtors. The impact of the proposal is to require
    debtors’ counsel to verify all of the financial information submitted by their
    clients, which can be expected to increase the cost of bankruptcy filings. See §410,
    below, which suggests (contrary to the statutory amendment made here) that Fed.R. 9011 be
    amended to impose additional duties on debtors’ counsel).

    Alternative. Any fee shifting provisions in connection with trustee motions
    under this section should apply equally to both parties; any statutory enactment of the
    investigation requirements of Rule 9011 should apply to all parties. The option of
    conversion to Chapter 11 should be specified in connection with successful motions for
    inappropriate use. (See §105, below, indicating that debtors ineligible for Chapter 7
    under the means-testing of § 101 should be allowed to file Chapter 11 cases.)

    *§104 ("Debtor participation in credit counseling program") (see S. 1301,
    §321)

    Changes.This section would impose a new eligibility requirement, under §109 of
    the Bankruptcy Code, on all individual debtors—as a condition of eligibility for
    bankruptcy, the debtor would have to make a good-faith attempt to create a debt repayment
    plan through a credit counseling service. The service would have to be registered with the
    district court (as provided for in §111 of the bill, discussed below), and would have to
    be approved by the United States trustee for the district in which the petition is filed,
    with approval withheld from any service that did not offer its program either without
    charge or at reduced charges in situations of hardship. The requirement of a good-faith
    attempt to create a debt repayment plan would be inapplicable (1) if the United States
    trustee found that there was no suitable credit counseling service available in the
    debtor’s geographical area, or (2) if the debtor was made subject to a debt
    collection proceeding, involving a potential loss of property, "before the debtor
    could complete" the good-faith attempt. The debtor would be required to file with the
    court a certificate of the credit counseling service which the debtor contacted, or a
    verified statement as to why the debtor was not required to attempt to create a debt
    repayment plan through such a service. If the debtor entered into a debt repayment plan,
    the plan would also have to be filed. If the debtor filed the bankruptcy without an effort
    at repayment because of pending debt collection activity, the debtor would be required to
    attempt to negotiate a voluntary repayment, after the bankruptcy filing, outside of the
    judicial process. Only the United States trustee would be allowed to bring a motion for
    dismissal of the bankruptcy case on the ground that the debtor failed to meet these new
    eligibility and filing requirements.

    Impact. To understand the effect of the changes proposed in this section, it is
    necessary to understand how consumer credit counseling service (CCCS) interacts with
    bankruptcy under the existing law. There is currently a network of 1,300 local non-profit
    CCCS organizations, joined under the National Foundation for Consumer Credit (NFCC). As
    described in the NFCC’s website, these
    organizations are funded by creditors, and generally attempt to negotiate 100% repayment
    plans with creditors. The benefit to the debtors under these plans is a voluntary
    reduction or elimination of finance charges during the repayment term, coupled with the
    potential for reinstatement of credit. The organizations generally charge no fee or a
    small fee to the debtors. Under existing law, NFCC members have been successful in
    attracting debtor interest; according to the "In Trouble?" page of its website,
    NFCC members received inquiries from over 1.8 million consumers in 1997 (a substantially
    greater number than the filings of consumer bankruptcy cases). However, NFCC members are
    not the only CCCS providers. In any given area, there may be a substantial number of debt
    consolidators, financial advisors, and "credit repairers," providing a variety
    of services with a range of charges. (The 1998-99 Ameritech Chicago Consumer Yellow Pages
    lists over 30 such organizations under the heading "Credit & Debt
    Counseling," including "Emma’s Accounting & Credit Counseling
    Services" and "Lawyers United for Debt Relief.")

    The impact of the change in law proposed by this section would fall first on the United
    States trustees. They would be required to engage in a program of approving debt
    counsellors from a list maintained by the clerk’s office. Apart from requiring that
    the organization be "nonprofit" (pursuant to §111 of the bill) and that its
    charges are limited, the bill provides no standards for trustee approval. Thus, the United
    States trustee would be required to engage in rule making to set such standards, and then
    engage in an ongoing approval process. Finally, the United States trustee would bear the
    entire responsibility for enforcing the new debtor’s obligations, including
    monitoring of files, investigations of good faith, and presentation of motions in
    appropriate circumstances. The cost of such a multi-level program on the United States
    trustees would be very large.

    The second impact of the change would be on debtors and the CCCS industry. Debtors
    would be required to consult with a CCCS organization in many circumstances, and to submit
    additional court filings verifying their compliance. This would impose additional costs on
    debtors (at least in terms of time expended), but might result in the completion of a
    larger number of 100% debt repayment plans effected through NFCC members or similar CCCS
    organizations—the apparent intent of the legislation. However, there may be a number
    of other, unintended consequences. First, NFCC members could have many debtors consult
    with them, on advice of counsel, even though the debtors had no ability to effect
    repayment plans of the sort administered by these organizations. This could substantially
    increase the operating expenses of NFCC members. Second, it can be expected that new
    nonprofit CCCS organizations would be formed that were allied with providers of bankruptcy
    services. These organizations would propose repayment plans of less than 100%, and if
    creditors did not accept the proposed terms, the organizations would provide the
    certificate of good faith required by the statute.

    The third impact would be on the courts, which would be required to adjudicate any
    disputes regarding (1) the approval of a CCCS organization, (2) the availability of a
    suitable CCCS organization to a particular debtor, (3) the good faith of a debtor in
    proposing a repayment plan, (4) the existence of debt collection activity excusing
    prebankruptcy attempts at voluntary repayment, and (5) the sufficiency of any postpetition
    attempts at voluntary repayment.

    Alternative. Instead of mandating CCCS as a condition for bankruptcy filing,
    incentives might be given to the debtor to voluntarily consult with CCCS providers. For
    example, §202 of S. 1301 provides debtors with a defense to certain nondischargeability
    complaints based on the plaintiff’s refusal to negotiate a voluntary repayment plan.

    *§105 ("Who may be a debtor under Chapter 11")

    Changes. This section would amend the eligibility requirements for Chapter 11.
    Currently, Chapter 11 is only available to individuals who meet the requirements for a
    Chapter 7 filing. As amended, the eligibility requirements for Chapter 11 would extend to
    individuals who are disqualified from Chapter 7 by reason of the means-testing proposed in
    §101, discussed above.

    Impact. This section would accomplish its apparent intent—debtors whose
    income and debt level disqualified them from Chapter 7 under the means-testing of §101
    would remain eligible to file a Chapter 11 case.

    Subtitle B ("Adequate Protections for Consumers")

    §111 ("Notice of alternatives") (see S. 1301, §301)

    Changes. The major change involved in §111 is to assure that each consumer
    bankruptcy debtor is given a written notice that both discusses the option of consumer
    credit counseling and lists credit counseling services with offices in the district in
    which the bankruptcy is filed or with toll-free telephone numbers serving the district.
    The list would be prescribed by the United States trustee and questions about whether a
    particular counseling service should be included in the list would be determined by the
    court.

    Impact. This proposal can result in relevant information being made available to
    debtors, although it is likely that debtors consulting an attorney will place more weight
    on the attorney’s advice than on the information in a form given to them by the
    attorney. The proposal would probably have the greatest impact on pro se filers.
    Difficulties may exist in describing the services available from credit counselors, at
    least if the description includes any comparison of credit counseling and bankruptcy in
    satisfying debt or in maintaining or reestablishing credit. The need to administer the
    list of credit counselors will involve additional cost to the United States trustee, as
    discussed in connection with §104, above.

    §112 ("Debtor Financial Management Training Test Program") (see S. 1301,
    §321)

    Changes. This section of H.R. 3150 would require the Executive Office of the
    United States Trustee (1) to develop a program to educate debtors on the management of
    their finances, (2) to test the program for one year in three judicial districts, (3) to
    evaluate the effectiveness of the program during that period, and (4) to submit a report
    of the evaluation to Congress within three months of the conclusion of the evaluation. The
    test program is to be made available, on request, to both Chapter 7 and 13 debtors, and,
    in the test districts, bankruptcy courts could require financial management training as a
    condition to discharge.

    Impact. Debtor financial education was a recommendation of the National
    Bankruptcy Review Commission, but the Commission did not recommend any methodology for
    implementing it. See Final Report at 114-16. There are two potential problems with
    the methodology suggested here. First, one year may not be a long enough time to assess
    the effectiveness of any 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. None of these
    bench marks can be assessed after one year. Second, the power to compel debtor education
    as a condition for discharge is accorded without specifying the circumstances in which it
    should be exercised, with the potential for widely varying application. Some judges might
    require debtor education in all consumer cases, while others never require it. Compulsory
    education in pilot districts also would be subject to constitutional challenge, as
    nonuniform bankruptcy legislation. See Railway Labor Executives' Assn. v. Gibbons,

    455 U.S. 457, 469-71 (1982) (invalidating bankruptcy legislation that applied to a single
    railroad).

    Alternative. A study could be conducted of the effectiveness of the existing
    debtor education programs, based on their past experience. Compulsory education should be
    imposed only after an education program is available nationwide, and should be imposed
    only in situations defined by law.

    §113 ("Definitions")

    §114 ("Disclosures")

    §115 ("Debtor’s Bill of Rights")

    §116 ("Enforcement")

    Changes. These four sections of H.R. 3150 set up a new system for regulating the
    providers of consumer bankruptcy services. Section 113 defines the term "debt relief
    counseling agency" to include both lawyers and non-lawyer providers of consumer
    bankruptcy goods or services, and the remaining sections establish regulations bearing on
    these providers. Section 114 would place a new §526 in the Bankruptcy Code, imposing a
    set of disclosure obligations on consumer bankruptcy providers. The disclosure would
    include (1) the availability of consumer credit counseling services, (2) the need for a
    truthful listing of assets and income in bankruptcy, subject to audit and criminal
    sanctions, (3) the obligation of the provider to issue a contract specifying the services
    that will be provided and their cost, together with a specification of the services that
    might be needed, and (4) directions on how to complete bankruptcy schedules. Copies of the
    first two of these notices would be required to be maintained by the provider for two
    years after the notice is given. [Note: originally the bill provided that the notice would
    have to be maintained for two years after a discharge is received whenever that was longer
    than the time from which the notice was given. The current version of §114 is garbled in
    this respect, containing the phrase "after the later of the date on which the
    notice is given," but no longer containing the discharge date as a point from which
    the two year retention period should be measured.]

    Section 115 would add a new §527 to the Code, with further regulation of consumer
    bankruptcy providers. It would require a written contract for bankruptcy-related services,
    with a copy for the client, and specify that the advertising of consumer bankruptcy
    providers include a conspicuous disclosure that they are engaged in bankruptcy filing.
    Finally the section would prohibit consumer bankruptcy providers 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.

    Section 116 would enforce the new regulations on consumer bankruptcy providers. It
    provides debtors may not waive the provisions of new §§ 526 and 527. The section would
    further impose sanctions on consumer bankruptcy providers who engage in prohibited
    conduct. There is a mandatory sanction of loss of all fees previously paid by the debtor,
    and a potential sanction of being required to continue the representation of the debtor
    without further fees. The prohibited activities include intentional or negligent failure
    to comply with any applicable requirement of the Code or the Federal Rules of Bankruptcy
    Procedure applicable to consumer bankruptcy providers, and providing assistance to a
    debtor whose case is dismissed or converted under §707(b), or dismissed for failure to
    file bankruptcy papers. The section would allow enforcement of the provisions of §526
    both by (1) officials of state government, in either federal or state court, with actual
    damages awarded to the debtors affected, and with the consumer bankruptcy provider
    required to pay the costs and fees of any successful enforcement action and (2) by the
    bankruptcy court, on its own motion or the motion of the United States trustee, with
    potential injunctive relief and civil penalties. Finally, the section specifies that its
    provisions do not supersede any state regulation of consumer bankruptcy services except to
    the extent of any inconsistency.

    Impact. It is questionable whether the proposed regulation would have any
    significant positive impact on the provision of bankruptcy services. The likely impact of
    the new regulations imposed by H.R. 3150 on the providers of consumer bankruptcy services
    can be divided into three classes.

    First, some of the requirements merely reiterate existing obligations or good
    practices. In this category are the obligations (1) to provide written contracts
    specifying the services to be performed and their cost and (2) to perform the promised
    services. (Fees and services of petition preparers and attorneys are presently regulated
    by §§ 110, 329, and 330 of the Code.)

    Second, some of the requirements appear to impose unnecessary costs on the providers.
    For example, the requirement to retain copies of each notice provided to a client or
    prospective client for at least two years involves substantial cost with no apparent
    benefit. Similarly, the requirement of "conspicuous notices" in all
    advertisements would impose unnecessary costs in connection with classified advertisements
    and telephone directories.

    Third, some of the regulations may have a chilling effect on the provision of consumer
    bankruptcy services. For example, the automatic denial of fees in any case dismissed under
    §707(b) can be expected to discourage attorneys from filing Chapter 7 cases in situations
    where eligibility for Chapter 7 relief was questionable, particularly since, in any
    successful motion brought by a trustee under §707(b) there is a presumptive award of
    costs and fees to the trustee (see the discussion of §103, above). Similarly, automatic
    denial of fees in cases dismissed for failure to file documents may discourage attorneys
    from filing cases whenever the debtor’s obligation or ability to produce documents is
    doubtful. Finally, the provision that a provider may never counsel borrowing to pay for
    bankruptcy fees is overbroad, prohibiting appropriate advice necessary to permit a
    bankruptcy filing. 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.

    Alternative. Where it is found that providers of consumer bankruptcy services
    are engaged in specific misconduct that is not adequately addressed by existing law, the
    current provisions of the Code can be amended to sanction that misconduct. For example, if
    it is found that bankruptcy providers are misrepresenting their services as not involving
    bankruptcy, that misconduct could be specified as a ground for refund of fees under §329
    of the Code (with punitive damages, if appropriate).

    *§117 ("Sense of the Congress") (see S. 1301, §321)

    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.

    *§118 ("Charitable contributions") (see S. 1244,
    The Religious Liberty and Charitable Donation Protection Act of 1997, signed into law on
    June 19, 1998)

    Changes. This section, in substantially the same language as S. 1244, would make
    three changes in bankruptcy law as it affects charitable contributions (for each of the
    changes, "charitable contributions" are defined as cash or financial instrument
    contributions to tax exempt organizations):

    (1) Fraudulent transfer law. The section would amend §§548 and 544 of the
    Bankruptcy Code so as to preclude avoidance of certain charitable contributions as
    fraudulent transfers. Fraudulent transfer law generally operates against two distinct
    types of transfers—those which the debtor makes with an "actual intent" to
    hinder, delay or defraud creditors, and those which are found "constructively"
    fraudulent because they are made without a return of reasonably equivalent value at a time
    when the debtor was in defined financial difficulty. Section 548 of the Code gives the
    trustee the power to avoid either type of transfer made within one year of the bankruptcy
    filing. Section 118 of H.R. 3150 would continue to allow avoidance of charitable
    contributions under §548 of the Code if the contribution was made with actual intent to
    hinder, delay or defraud, but would prohibit recovery of constructively fraudulent
    charitable contributions whenever the questioned contribution (1) together with the
    debtor’s other charitable contributions did not exceed 15% of the debtor’s gross
    annual income for the year in which the transfer was made, or (2) was "consistent
    with the debtor’s practices in making charitable contributions."

    Section 544 of the Code allows a trustee to pursue any remedy for fraudulent transfers
    that a creditor of the estate would have under state law, and hence allows recovery of
    transfers made prior to the one-year cut off of §548. Section 118 of H.R. 3150 would make
    §544 inapplicable to any charitable contribution that would be excluded from the
    constructive fraud provisions of §548.

    (2) Section 707(b).As amended by §103 of H.R. 3150, §707(b) of the Code would
    provide dismissal (or at the debtor’s option, conversion to Chapter 13) of any
    Chapter 7 case found to be an "inappropriate use" of Chapter 7. In determining
    inappropriate use, the court would be directed to consider whether the debtor was
    disqualified by an ability to pay creditors—as defined under §101 of H.R.
    3150—and to consider "the totality of the circumstances." However, § 118
    would prohibit the court from considering, in any determination of inappropriate use, any
    charitable contribution (as generally defined), without limitation as to amount or prior
    practice of the debtor, that the debtor "has made or continues to make."

    (3) "Monthly net income" in Chapter 13. Section 102 of H.R. 3150,
    discussed above, would require Chapter 13 debtors to contribute all of their "monthly
    net income," for the duration of their plans, to the payment of unsecured,
    nonpriority claims. Monthly net income, in turn, would be determined according to Internal
    Revenue Service collection standards, modified by a debtor’s showing of extraordinary
    circumstances resulting in loss of income or additional expenses. Section 119 of H.R. 3150
    would provide that charitable contributions not exceeding 15% of a debtor’s gross
    income for the year of the contributions, would be considered "additional expenses of
    the debtor required by extraordinary circumstances," and hence excluded from monthly
    net income, irrespective of the debtor’s prior practice in charitable contributions.

    Impact. The apparent intent of Section 118 is to protect good faith charitable
    contributions from attack as fraudulent transfers, and to allow such contributions to be
    made without affecting the application the debtor’s entitlement to relief under
    either Chapter 7 or Chapter 13. The section would accomplish that intent, but would also
    allow charitable contributions to be made in bad faith, simply as an alternative to paying
    creditors. Specifically:

    (1) A charitable contribution made by a debtor with actual intent to defraud creditors
    would apparently be protected against avoidance by a trustee under §544 of the Code.
    Although intentionally fraudulent as to creditors, such a transfer would still be excluded
    from the constructive fraud provision of §548, and §544 would be made
    inapplicable to all transfers so excluded. This appears to be a drafting error.

    (2) Debtors anticipating a Chapter 7 filing would be able to liquidate nonexempt assets
    and donate the proceeds to charities of their choice, rather than allow a Chapter 7
    trustee to liquidate the assets for the benefit of creditors, without that conduct being a
    basis for dismissal under §707(b) of the Code. Moreover, a debtor could commence a
    practice of making large charitable contributions shortly before filing a Chapter 7 case,
    and then announce an intent to "continue" making these contributions after the
    filing. The contributions so declared could not be considered in determining that the
    debtor had the ability to pay creditors or that the totality of circumstances merited
    dismissal under §707(b). Accordingly, debtors with substantial income otherwise available
    to pay creditors, and thus ineligible for Chapter 7 relief under the means-test of §101,
    could render themselves eligible by declaring an intent to continue making large
    charitable contributions. After obtaining a discharge in Chapter 7, such debtors would be
    under no enforceable obligation to actually make the declared contributions.

    (3) Chapter 13 debtors, regardless of their prior practice in charitable contributions,
    would be given the option of donating up to 15% of their gross income to charities of
    their choice, excluding that income from the monthly net income that would be payable to
    creditors. Since monthly net income excludes payments on secured and priority debt (see
    the discussion of §102, above), monthly net income for many Chapter 13 debtors would be
    less than 15% of their gross annual income. Such debtors would be required to contribute
    only $50 per month to creditors (the minimum payment under §102), with the balance of
    their otherwise net income paid to charity. For example, a debtor with an annual income of
    $120,000 ($10,000 per month), might have monthly tax, mortgage and car loan payments of
    $6,000, other living expenses of $1000 (the IRS national standards allow $958), and
    alimony payments of $1500—a total of $8500 in monthly expenses. Such a debtor would
    be expected under §102 to contribute the remaining $1500 to payment of general unsecured
    creditors for a five year period, allowing repayment of $90,000. However, the debtor would
    be able to exclude $1500 per month from monthly net income under the 15% charitable
    contribution allowance. Thus, the debtor would have the option of contributing all but $50
    per month to any tax exempt charity, so that the amount of unsecured, nonpriority debt
    repaid would be $3000.

    Alternative. Charitable contributions made with actual intent to defraud
    creditors should remain avoidable under § 544. Both prepetition and postpetition
    charitable contributions should be considered under §707(b) if they are not in keeping
    with a practice established by the debtor before the bankruptcy filing and not in
    anticipation of the filing. Similarly, in Chapter 13, charitable contributions should be
    deducted from "monthly net income" (or "disposable income" as defined
    under current law) only where the contributions are in keeping with such a prebankruptcy
    practice of the debtor.

    *§119 ("Reinforce the fresh start") (see S. 1301, §414)

    Changes. Section 119 makes three unrelated changes to the Bankruptcy Code:

    (1) Section 523(a)(17).Section 523(a)(17) was added to the Code by the Prison
    Litigation Reform Act of 1995, and creates an exception to discharge for "fees
    imposed by a court for the filing of a case, motion, complaint, or appeal . . . regardless
    of an assertion of poverty . . . or the debtor’s status as a prisoner." Section
    119 of H.R. 3150 would limit the application of the exception to fees imposed on
    prisoners.

    (2) Exemption of retirement funds.Section 119 would provide a separate ground
    for exemption, applicable in bankruptcy regardless of whether a state opted out of federal
    exemptions, for all "retirement funds to the extent exempt from taxation under
    section 401, 403, 408, 414, 457, or 501(a) of the Internal Revenue Code of 1986."

    (3) Definition of utility under §366.Section 119 would define utility, for
    purposes of §366 of the Code, as including "any provider of gas, electric,
    telephone, telecommunication, cable television, satellite communication, water, or sewer
    service," regardless of whether the service was a regulated monopoly.

    Impact. (1) Section 523(a)(17), despite its origin in the Prison Litigation
    Reform Act, was so broadly worded that it could arguably apply to any award of costs
    imposed by a court. It appears that the few decisions considering the issue have given a
    limited construction to the provision. See South Bend Community School Corp v.
    Eggleston,
    215 B.R. 1012, 1016-18 (N.D.Ind. 1997) (limiting the provision to awards
    against prisoners). Nevertheless, the clarification proposed in this section of the bill
    would be helpful in effectuating the original intent of the exception.

    (2) Funds in retirement accounts may be excluded from distributions in a bankruptcy
    case on several grounds. First, the funds may be excluded from the bankruptcy estate,
    pursuant to §541(c)(2), which deals with restrictive trusts. In Patterson v. Shumate,
    504 U.S. 753, 112 S.Ct. 2242 (1992), the Supreme Court applied §541(c)(2) to exclude
    ERISA pension plans from the estate. Second, retirement funds might be exempted under
    state law, applicable under §522(b)(2). Third, the funds might be exempted under the
    federal exemption set forth in §522(d)(10)(E). However, as to all of these theories,
    questions have been raised in the courts, particularly with respect to Individual
    Retirement Accounts. See Andrew M. Campbell, Annotation, Individual Retirement Accounts
    as Exempt Property in Bankruptcy,
    133 A.L.R. Fed. 1 (1996). The apparent intent of
    Section 119 is to generally render all IRAs and employer retirement plans fully
    exemptible. However, there may be ambiguities in the language employed in the statute that
    would limit its effectiveness. The phrase "to the extent exempt from taxation"
    could mean (1) that the contributions were not taxable when made, (2) that current
    earnings of the account are not subject to taxation, or (3) that distributions from the
    account are not subject to taxation. An IRA, for example, may contain pretax contributions
    that would be subject to taxation if withdrawn.

    An unlimited exemption for tax-exempt retirement funds may provide an incentive for
    debtors to transfer nonexempt assets into retirement accounts in preparation for
    bankruptcy filing, preventing those funds from being paid to creditors. See the discussion
    of such prebankruptcy exchanges of nonexempt for exempt property in connection with §182,
    below.

    (3) Section 366 of the Code requires utilities to provide service to debtors who have
    filed bankruptcy, as long as the debtors provide adequate assurance of payment for the
    postbankruptcy services. Part of the reason for the enactment of this section was that
    utilities were usually monopolies in any given area, so that a debtor would not easily be
    able to obtain an alternate source of service. (This is in contrast to other suppliers of
    goods and services to whom the debtor might owe money, such as doctors or furniture
    stores. These suppliers would not be required to do business with the debtor
    postbankruptcy, because the debtor would be able to find other suppliers of the same goods
    and services.) With the deregulation of many utilities, there is frequently the
    possibility that more than one utility operates in a given area. In such circumstances, a
    utility may argue that it should not be bound by §366—that it should be allowed to
    cease doing business with the debtor, with the debtor obligated to deal with a competing
    utility. Section 119 would preclude this argument, by expressly making §366 applicable to
    traditional utilities regardless of their monopoly status.

    *§119A ("Discharge of debts arising from tobacco-related debts")

    Changes. Section 119A would provide that an exception to discharge in Chapter 11
    cases for debts arising from legal proceedings related to a consumer’s purchase or
    consumption of tobacco products, based on allegations of false pretenses, a false
    representation or actual fraud.

    Impact. This section has no application to consumer bankruptcy cases. Rather, it
    would prevent tobacco companies from using Chapter 11 to deal with mass torts arising from
    purchase and consumption of their products, since any liability arising from a legal
    proceeding in which fraud was alleged could not be discharged as part of any plan.
    (Chapter 11 has been used for similar product liability torts, notably by manufacturers of
    asbestos, for which the Code now contains special provisions effectuating Chapter 11
    discharges. See 11 U.S.C. §524(g) and (h).)

    Subtitle C ("Adequate Protections for Secured Lenders").

    *§121 ("Discouraging bad faith repeat filings") (see S. 1301,
    §303).

    Changes. This section provides:

    (1) that the automatic stay would terminate after 30 days in situations where a
    bankruptcy case is filed within one year of the closing of an earlier case filed by or
    against the same debtor, which case was dismissed;

    (2) that the automatic stay would never go into effect in situations where a bankruptcy
    case is filed within one year of the closing of two or more cases filed by or against the
    same debtor, which cases were dismissed, again, unless a party in interest demonstrates
    that the filing of the last case was in good faith; and

    (3) that bankruptcy courts would have discretion to enter orders granting relief from
    the stay "in rem," providing that the automatic stay will not apply in
    subsequent cases filed by the same debtor or in cases filed by other parties with
    specified knowledge of the order, including constructive notice of orders recorded in the
    applicable real property records.

    Impact. The role of the automatic stay differs substantially in Chapter 7 and in
    Chapter 13. In Chapter 7, the stay has the effect of allowing a trustee to determine
    whether property of the debtor should be liquidated for the benefit of creditors. For
    example, a home that is about to be sold in a foreclosure sale, might, in the
    trustee’s judgment, be able to be sold by a broker for a higher price, sufficient to
    pay the mortgage and have a surplus for distribution to unsecured creditors. The automatic
    stay prevents a foreclosure from taking place in a situation like this, while allowing the
    mortgagee to seek relief from the stay by showing that there is in fact no equity in the
    property. In Chapter 13, the automatic stay has the effect of allowing a debtor to propose
    and carry out a plan that deals with secured claims in such a way that the debtor is
    allowed to retain the collateral, even if there is no equity. A debtor who has no ability
    to deal with a secured claim properly in Chapter 13 may nevertheless file repeated
    bankruptcy cases in order to prevent a foreclosure or repossession from going forward, by
    invoking the automatic stay repeatedly. The proposal seeks to limit debtors’ ability
    to use this tactic, and many of its features would be helpful. However, the proposed
    changes do not reflect the different roles that the automatic stay plays in Chapter 7 and
    Chapter 13, and thus may have unintended consequences.

    In Chapter 7 cases, regardless of whether there were prior dismissed cases, the issue
    involved in application of the automatic stay should be limited to the question of equity.
    To allow the automatic stay to remain in effect, a Chapter 7 trustee should simply be
    required to show that there is equity in the property at issue; the good faith of the
    debtor in filing the case is not relevant. To see the problem with the proposal in this
    connection, consider the following example: a debtor with limited income has taken out a
    home equity loan on the family home, and cannot keep up with the payments. The lender
    files a foreclosure action, and the debtor seeks to save the home in Chapter 13, but fails
    to make plan payments, so that the bankruptcy case is dismissed and the foreclosure action
    is recommenced. This time, again to stop the foreclosure, the debtor files a Chapter 7
    case. There is considerable equity in the home. Under the proposal, there is a presumption
    (since the debtor failed to make plan payments) that the second case is filed in bad
    faith, and if the Chapter 7 trustee wants to keep the automatic stay in effect beyond 30
    days, the proposal would require the trustee to establish, by clear and convincing
    evidence, that the case was filed in good faith. If the trustee is unable to do so, the
    foreclosure will go forward, and the estate will lose the higher value that could have
    been obtained in a brokered sale.

    On the other hand, the good faith standards set out in the proposal are reasonably
    applicable to Chapter 13 cases, requiring that any party in interest establish the
    debtor’s good faith for repeatedly invoking the automatic stay in Chapter 13.

    The impact of the "in rem" provision is difficult to determine, because no
    standards are set out for the entry of in rem orders. These orders would be most
    appropriate as applied to property in which there was no equity, and as to which there had
    been a pattern of bankruptcy filings. In such situations, the orders could help to prevent
    debtor abuse. In other situations, the orders might again prevent sales by Chapter 7
    trustees to the benefit of unsecured creditors. Also, the proposal does not state whether
    the court would be authorized to vacate an in rem order in a subsequent case upon a
    showing that the case was filed in good faith. Absent such specification, there may
    substantial litigation to determine the issue.

    Alternative. The automatic stay should remain in effect in Chapter 7 cases upon
    a request by the trustee, within a reasonable time after the filing of the case, for a
    hearing on the question of equity. In rem orders for relief from stay should be limited to
    situations in which there is no equity in the property and in which the property has been
    the subject of more than one bankruptcy filing.

    *§122 ("Definition of household goods and antiques") (see S. 1301, §317)

    Changes. Section 122 of H.R. 3150 would add a definition for "household
    goods" to the definitions of §101 of the Code. "Household goods" are a
    category of debtors’ assets that may be exempted under §522(d), and as to which
    certain liens may be avoided under § 522(f). The proposal would define "household
    goods" by incorporating the definition that appears in 16 C.F.R. §444.1(i). That
    regulation of the Federal Trade Commission defines "household goods" as:

    Clothing, furniture, appliances, one radio and one television, linens, china, crockery,
    kitchenware, and personal effects (including wedding rings) of the consumer and his or her
    dependents, provided that the following are not included within the scope of the term
    "household goods": (1) Works of art; (2) Electronic entertainment equipment
    (except one television and one radio); (3) Items acquired as antiques; and (4) Jewelry
    (except wedding rings).

    The definition would also include "any tangible personal property reasonably
    necessary for the maintenance and support of a dependent child."

    Impact. Section 522(f) allows the avoidance of nonpurchase money, nonpossessory
    liens on certain items of exempt household property. The idea underlying this provision is
    that when a lender extends credit on the basis of used household goods in the possession
    of the debtor, it is unlikely that there would be any substantial resale value in the
    collateral, and that the lender is primarily relying on the difficulty that the debtor
    would face in replacing the items. The Bankruptcy Code made the determination that such
    liens should not be enforced. Section 122 of H.R. 3150 apparently intends to limit the
    type of household property as to which nonpossessory, nonpurchase money security interests
    may be avoided. The Trade Commission definition of household goods would exclude such
    common items as home computers, CD players, speaker systems, earrings, and framed prints.
    If so, it would be unduly restrictive. To some extent, the limitations of the FTC
    definition would not restrict § 522(f), because "household goods" is only one
    of the categories of personal property as to which liens may be avoided under that
    subsection. Other categories include "household furnishings," and
    "jewelry." A major impact of the change may be to give rise to new litigation as
    to whether particular items not within the FTC definition of "household goods"
    constitute "household furnishings." It would similarly require litigation to
    determine whether particular items of property (for example, a home computer) are
    "reasonably necessary" for the support of a dependent child. Debtors in
    bankruptcy are unlikely to have the resources to engage in such litigation, and there are
    no provisions in H.R. 3150 for fee shifting in the event that the debtor prevails in a
    dispute over the definition of household goods. Thus, creditors with nonpurchase money
    security interests in personal property of the debtor would have substantial leverage if
    they chose to object to a lien avoidance motion on the ground that the collateral was not
    "household goods."

    Alternative. In order to protect nonpurchase money lenders who genuinely rely on
    the value of the debtor’s personal property in extending credit, Section 522(f) could
    be amended to exclude from lien avoidance any items of personal property not within the
    FTC definition whose resale value exceeds a specified amount (for example, $1000).

    *§ 123 ("Debtor retention of personal property security")

    Changes. Some courts have held that debtors in Chapter 7 may redeem personal
    property in installments. The proposed change would require that redemption take place by
    payment in full at the time of redemption. In addition, this section proposes that if the
    debtor does not either redeem personal property that is collateral for a claim, or enter
    into a reaffirmation agreement with respect to the property, then the property will be
    deemed abandoned by the Chapter 7 trustee, so that the creditor may repossess the property
    or take other action allowed by nonbankruptcy law. This abandonment would not take place
    if the court determined, on motion of the trustee, and after notice and hearing, that the
    property in question was of consequential value or benefit to the estate.

    Impact. For property in which there is no equity for the estate, the impact of
    the proposal would be to create an appropriate incentive in favor of Chapter 13 filings
    whenever a debtor wished to retain property that could not be redeemed, and as to which a
    reaffirmation agreement could not be negotiated. For property in which there is equity,
    the proposal allows the trustee an opportunity to retain the property, so that it can be
    sold for the benefit of the estate.

    *§124 ("Relief from stay when the debtor does not complete intended surrender
    of consumer debt collateral") (see S. 1301, §318)

    Changes. Section 521(2) of the Bankruptcy Code currently requires Chapter 7
    debtors to make an election as to their property which serves as collateral for consumer
    debts: they must indicate that they intend to retain or surrender the property, and
    "if applicable" state that the property is claimed exempt, that the debtor
    intends to redeem the property, or that the debtor intends to reaffirm the debts secured
    by the property. The law further indicates that the debtor is obligated to carry out the
    specified choice within 45 days of filing its notice of the election as to the property
    involved. Section 124 of H.R. 3150 would make a number of changes in the operation of this
    provision:

    (1) The section would be made applicable to all collateral, not merely collateral
    securing consumer debts.

    (2) The time for performing the election would be changed from 45 days after the filing
    of the notice to 30 days after the first date set for the meeting of creditors under
    section 341(a).

    (3) The option for retaining the property and claiming it as exempt is eliminated, so
    that the only options given the debtor for collateral are: (1) surrender, (2) redemption,
    and (3) reaffirmation or lease assumption.

    (4) A failure by the debtor to timely perform its election would result in termination
    of the automatic stay as to the property involved unless (1) the debtor chose
    reaffirmation and the creditor refused to reaffirm on the original contract terms, or (2)
    the court determined, on motion of the trustee, and after notice and hearing, that the
    property in question was of consequential value or benefit to the estate.

    (5) If the automatic stay terminates pursuant to the above provisions, it is specified
    that the creditor should be allowed to proceed with any state law remedies for default
    based on the filing of the bankruptcy. Thus, the fact that the debtor was current in
    payments would not be grounds to prohibit repossession or foreclosure if state law allowed
    these remedies based on the filing of a bankruptcy. This provision would not be applicable
    as to property for which a lien was avoided in the bankruptcy case.

    Impact. Current law has no enforcement mechanism for § 521(2), and §124 of
    H.R. 3150 provides the most reasonable enforcement mechanism—relief from the
    automatic stay. Similarly, expressly allowing repossession based on the bankruptcy filing
    (if permitted by state law) addresses the creditor’s concern that the collateral will
    not be maintained once the debtor is no longer personally liable for any deficiency.
    Moreover, the section allows a trustee to retain for the estate property that has equity
    above the creditor’s lien.

    However, the proposal would interfere with the debtor’s option to retain exempt
    property without reaffirmation or redemption. Debtors are allowed by § 522(f) of the Code
    to avoid liens on certain exempt personal property secured by nonpossessory, nonpurchase
    money security interests. A requirement that the debtor surrender such property, redeem
    it, or reaffirm debt as to the property would contradict this lien avoidance provision.
    Under the proposal, the automatic stay would terminate as to property exempted under
    §522(f) when the debtor failed to redeem the property or reaffirm the debt, even though
    no discharge had yet been granted the debtor. The debtor would presumably have a defense
    of lien avoidance if the creditor pursued state law remedies as to the property in
    question, but there is no reason why the automatic stay should not remain in effect so as
    to prohibit such actions from being brought.

    Alternative. Debtors should retain the option of keeping property subject to
    lien avoidance under § 522(f).

    §125 ("Giving secured creditors fair treatment in Chapter 13") (see S.
    1301, §302)

    Changes. Current case law interpreting Chapter 13 is in disagreement about the
    time at which a lien should be deemed released under a plan. This provision would resolve
    the dispute by amending §1325 of the Code to state that a lien can only be released at
    the time the debtor is discharged under section 1328, or until the claim secured by the
    lien is fully paid, whichever is earlier. The provision also states that, in the event of
    conversion or dismissal of a Chapter 13 case, the lien would remain to the extent
    recognized under nonbankruptcy law.

    Impact. This change would primarily affect automobile loans. Frequently an auto
    loan in a Chapter 13 case is in an amount greater than the value of the automobile. In
    such a case, the debtor is allowed to pay the value of the car in satisfaction of the
    secured claim, with the balance of the claim treated as unsecured. The plan may provide
    that as soon as the secured portion of the claim is satisfied, the creditor is required to
    release its lien. Thereafter, the debtor may fail to complete the plan, so that the
    creditor does not receive full payment of the unsecured portion of its claim. This
    provision would allow the creditor to retain its lien to secure payment of that unsecured
    portion.

    The provision contradicts the bankruptcy policy requiring equal treatment of creditors.
    To the extent that a secured creditor has a claim not supported by collateral value, the
    Bankruptcy Code treats the creditor’s claim as unsecured, and entitled to the same
    treatment as other unsecured claims. This provision would allow the unsecured portion of a
    secured claim a preferential position—even though the value of its secured claim was
    paid, the creditor would be able to take action against property of the debtor to enforce
    its unsecured claim, a right that no other unsecured creditor would have.

    The effect of conversion or dismissal of a Chapter 13 case is treated in separate
    provisions of the Bankruptcy Code, §§348 and 349. See §127 of H.R. 3150, discussed
    below. If changes are made regarding the effect of conversion or dismissal and not placed
    in those sections, there will be a question as to which section controls.

    Alternative. Payments on account of unsecured claims could be required to be
    made in equal installments throughout a plan, so that the unsecured portion of a
    bifurcated claim is paid during the same time that the secured portion is paid, and all
    unsecured claims are treated in the same way. Changes in the effect of conversion or
    dismissal should be made in §§348 and 349 of the Code.

    §126 ("Prompt relief from stay in individual cases") (see S. 1301, §311)

    Changes. This section would provide that in individual bankruptcy cases under
    Chapters 7, 11, or 13, the automatic stay would terminate 60 days after a request for
    relief from the stay, unless (1) the court denies the motion, or (2) all parties in
    interest agree to a continuance of the stay beyond that time, or (3) the court makes a
    finding that continuance of the stay is required by compelling circumstances.

    Impact. This provision does not substantially change existing law, which
    requires that all motions for relief from stay be heard initially within 30 days, and that
    if the initial hearing is not final, the final hearing must commence within 30 days after
    the conclusion of the preliminary hearing. This section would only apply in cases of
    hearings lasting more than one day, which are very unusual in consumer cases. Both present
    law and the proposal allow extensions by the court for compelling circumstances.

    §127 ("Stopping abusive conversions from Chapter 13") (see S. 1301,
    §310)

    Changes. This section of the proposed legislation has two parts. First, under
    §348(f) of the Bankruptcy Code, when a debtor converts a Chapter 13 case to a case under
    Chapter 7, the valuation of allowed secured claims is carried over from the Chapter 13
    case to Chapter 7, with the amount of the secured claim reduced by whatever payments were
    made on account of that claim to the secured creditor. Section 127 of H.R. 3150 would
    change this result, providing that to the extent any amount remains owing to the secured
    creditor at the time of the conversion, the entire amount owed will be secured by the
    collateral. Second, the section provides that, to the extent that any default in payments
    is not fully cured, the default "shall have the effect given under applicable
    nonbankruptcy law." [Note: This section of H.R. 3150 contains a drafting error.
    Section 348(f) of the Bankruptcy Code applies to all cases converted from Chapter
    13 to other chapters of the Code. Section 127 of H.R. 3150 is intended to leave the terms
    of §348(f) in place as they apply to Chapter 13 cases converted to Chapter 11 or 12, and
    then set out new terms, in a new subsection 348(f)(C), for cases converted from Chapter 13
    to Chapter 7. Thus, the new subsection should have been introduced by the phrase
    "with respect to cases converted to Chapter 7." Instead, the new subsection is
    introduced by the redundant and confusing phrase "with respect to cases converted
    from Chapter 13." There is also a typographical error in the enrolled text of the
    bill, referring to the valuation of the claim made for purposes of the case "under
    chapter of this title" instead of "under chapter 13 of this title."]

    Impact. The first proposed change has a very narrow impact. In Chapter 7,
    pursuant to the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410
    (1992), a debtor cannot simply pay the secured portion of any secured creditor’s
    claim and retain the collateral. Rather, a Chapter 7 debtor can only exercise this right
    in the context of a redemption, pursuant to §722 of the Code. Section 722 allows a debtor
    to pay the amount of the "allowed secured claim" in order to redeem
    "tangible personal property intended primarily for personal, family or household use,
    from a lien securing a dischargeable consumer debt, if the property is exempted . . . or
    has been abandoned." When a case is converted from Chapter 13 to Chapter 7, a
    question may arise as to how much is required to be paid by the debtor in order to redeem
    tangible personal property, such as an automobile. Current law provides that the amount of
    the secured claim, fixed during the Chapter 13 case at the value of the collateral,
    continues to be the amount of the secured claim for purposes of the case on conversion to
    Chapter 7, and that any payments made on account of the secured claim during the Chapter
    13 case reduce the claim on conversion. For example, if the debtor owed $10,000 on a car
    loan at the outset of a Chapter 13 case, and the car was valued by the court at $7,000,
    the lender would have had a secured claim of $7,000 in the Chapter 13 case and an
    unsecured claim of $3,000. If the debtor paid $2,000 on the secured claim through the
    Chapter 13 plan, and then converted the case, current law would provide that, on
    conversion, the lender had a secured claim of $5,000 (the original $7,000 claim reduced by
    the $2,000 payment). Thus, if the debtor wished to redeem the automobile in Chapter 7, the
    price for redemption would be $5,000, even if the car was worth more than that amount at
    the time of redemption. Under the proposed change, the intent appears to be that the
    creditor would have an $8,000 claim secured by the automobile (the total claim of $10,000
    less the $2,000 paid during the Chapter 13 plan). In order to redeem, the debtor would
    then have to pay the entire value of the automobile, up to $8,000. In this way, the
    secured creditor could receive, as a price for redemption, a total compensation greater
    than the value of the collateral at the time of the filing of the case.

    The second provision of the section, dealing with the cure of default, is unclear.
    Under nonbankruptcy law, a default gives secured creditors certain rights to the
    collateral, which may include immediate repossession or commencement of a foreclosure
    action. In a Chapter 7 bankruptcy, those rights are automatically stayed, subject to the
    creditor’s right to seek relief from the stay. It may be that this provision is
    intended to terminate the automatic stay in a case converted from Chapter 13 to Chapter 7
    whenever there is an uncured default. If so, the provision would violate the principle
    that the Chapter 7 trustees are allowed to sell property in which there is equity, for the
    benefit of all creditors. This would not appear to be a reasonable provision, but no other
    meaning is apparent.

    Alternative. Bad faith conversion from Chapter 13 is currently penalized by
    §348(f)(2), which provides that the Chapter 7 trustee in the converted case may liquidate
    all of the nonexempt property in the possession of the debtor at the time of conversion.
    This penalty could be made more effective by uniform exemption laws. Another alternative
    would be to allow denial of conversion in situations of bad faith.

    §128 ("Restraining abusive purchases on secured credit") (see S. 1301,
    §302)

    Changes. This section of the proposed bill would change the bifurcation of any
    secured claim resulting from the debtor’s incurring secured credit within 180 days of
    the bankruptcy filing. Instead of the secured creditor having a secured claim only to the
    extent of the value of its collateral, with an unsecured claim for the difference, the
    secured creditor would be given a secured claim in the amount of the entire indebtedness
    outstanding at the time the bankruptcy was filed. If the creditor is also secured by other
    property, purchased more than 180 days prior to the bankruptcy, the claim would be
    bifurcated, but the resulting secured claim could not be less than the debt outstanding as
    a result of the purchase made within the 180 day period.

    Impact. The section is not limited to situations of bad faith purchases—it
    applies in any case in which the debtor files bankruptcy after making a credit purchase.
    For example, if a debtor purchased an automobile in January, was laid off in February, and
    filed bankruptcy in May, this provision would result in a change in the operation of the
    Bankruptcy Code with respect to the claim secured by the automobile. In Chapter 7, one
    impact of this provision is to increase the cost of redemption. Instead of paying the
    value of the collateral at the time of redemption, the debtor would be required to pay the
    entire outstanding indebtedness. Another impact is to reduce the recovery of the secured
    creditor in any Chapter 7 case where there is a distribution. Under existing law, any
    secured creditor would be viewed as having a secured claim to the extent of the value of
    the collateral, and an unsecured claim for the difference between the value of the
    collateral and the total claim. Thus, in the example given above, if $25,000 was the
    outstanding loan balance, and the car valued at $20,000, current law would allow the
    creditor both to repossess the car and have a $5000 unsecured claim, payable through sale
    of the debtor’s other assets. Under the proposal, the creditor’s claim would be
    treated as fully secured, and repossession would be the sole recovery.

    In Chapter 13 cases, the impact of this provision would be to prevent "strip
    down" of the affected secured claim. As a result, a greater portion of the
    debtors’ contributions to the Chapter 13 plan would go to pay the secured claim, and
    a smaller amount would be paid to unsecured creditors. For example, an automobile
    purchased six months before a bankruptcy may have substantially depreciated. If the
    automobile was purchased at a high interest rate with a long amortization, the amount
    owing on the car at the time of the bankruptcy may be close to the original purchase
    price. If the debtor missed one or more payments, the debt may exceed the original
    purchase price. The proposal would require that the debtor, in order to retain the
    automobile, pay the total amount due, rather than what the car was worth. Assuming that
    the debtor’s plan makes less than full payment of all claims, the effect is to
    increase the amount paid on the auto loan and reduce the amount paid to other creditors.

    Alternative. Current law allows both Chapter 7 and Chapter 13 cases to be
    dismissed for lack of good faith. The Code could be amended to provide that a case shall
    be dismissed for lack of good faith where a debtor is shown to have made a purchase on
    secured credit with the intent of filing bankruptcy shortly thereafter.

    §129 ("Fair valuation of collateral") (see S. 1301, §302)

    Changes. This provision of the proposed bill would amend the claim bifurcation
    provision of the Bankruptcy Code (§ 506(a)) to provide that collateral in Chapter 7 and
    13 cases is always valued at the cost to replace the property, without deducting the costs
    of sale or marketing, and that this replacement cost, for property "acquired for
    personal, family, or household purpose" is "the price a retail merchant would
    charge for property of that kind."

    Impact. The impact of this proposal differs, depending on whether it is applied
    in Chapter 7 or in Chapter 13. In Chapter 7, the most common reason for bifurcating a
    claim is in redemption: a debtor is allowed, in Chapter 7, to retain personal property
    that cannot be sold for the benefit of unsecured creditors (because there is no equity in
    the property, or because it is exempt), by paying any creditors secured by the property
    the amount of their allowed secured claims. In this way, instead of obtaining the
    property, as they would by repossession, the secured creditors receive the value of the
    property, which may be less than the total amount owed. To the extent that the creditors
    receive less than the total amount they are owed, they are given an unsecured claim for
    the difference. Under current law, there is no explicit direction as to how to value the
    collateral being retained by the debtor. However, since redemption is a substitution for
    return of the collateral, there is no apparent reason why secured creditors should
    receive, in a redemption, any more than they would receive if they did repossess the
    collateral. Valuing the collateral at the price it would cost the debtor to replace it
    gives an arbitrary increase in collateral value to the secured creditor, with the amount
    of the increase depending on how expensive it would be for the debtor to replace the
    property involved. Using retail price as the measure for replacement cost exacerbates this
    problem, since, as the Supreme Court noted in its recent Rash decision, retail
    price may include "items such as warranties, inventory storage, and
    reconditioning," that are in no sense part of the collateral that secures a
    creditor’s claim. Associates Commercial Corp. v. Rash, 117 S.Ct. 1879, 1886
    n.6 (1997). Finally, in the context of redemption, the creditor has no risk of nonpayment,
    and so there is no reason for any increase in the amount of the secured claim to
    compensate for risk of nonpayment.

    In Chapter 13, the principal reason for bifurcation is in "stripping down"
    liens to the value of the collateral and paying the reduced secured claim over the course
    of the plan. Here, the impact of bifurcation is to divide the plan payments between
    secured and unsecured creditors. The debtor must either pay all claims in full (including
    the unsecured portion of a secured claim) or else must pay all disposable or
    "net" income into the plan. To the extent that a secured claim is valued at a
    higher level, less of the plan payments will go to unsecured creditors. So, in this
    context, "fairness" requires a balancing of the rights of secured and unsecured
    creditors. Again, the value of collateral to a secured creditor is best measured in terms
    of what that creditor could get for the collateral. To the extent that the creditor could
    only obtain part of what is owed from the collateral, the creditor is best seen as
    unsecured, just like the other unsecured creditors, regardless of how much it might cost
    the debtor to replace the property. In contrast to redemption, however, the secured
    creditor in Chapter 13 does not receive immediate payment of its claim, and so the
    creditor does have a risk of nonpayment. This can be addressed by amending the Code to
    provide that payments of secured claims in Chapter 13 plans should carry an interest rate
    sufficient to offset the risk of nonpayment.

    In either Chapter 7 or Chapter 13, the interests of secured creditors would be harmed
    by a requirement of retail valuation whenever the collateral is repossessed. In such
    situations, where the value of the collateral is less than the amount of the
    creditor’s claim, the creditor is given an unsecured claim for the deficiency. By
    requiring retail valuation of collateral, even where the creditor cannot obtain retail
    price, §129 of H.R. 3150 would artificially lower the creditor’s unsecured
    deficiency claim.

    A final difficulty with the proposal is that many items of collateral (unlike
    automobiles) do not have an established retail market for used items. For example, a
    creditor may be secured by a five year old washing machine. There are unlikely to be
    readily ascertainable retail markets for such machines. The proposal would leave no
    guidance as to the proper valuation method in this situation.

    Alternative. To create a fair valuation of collateral, the Code could be amended
    to provide that a secured creditor receive a secured claim in the amount that the creditor
    could establish that it would receive using any method of sale available to the creditor.
    If the claim is not paid immediately, the creditor should receive an interest rate on the
    secured claim sufficient to offset the risk of nonpayment. A similar standard of valuation
    has been proposed by the National Bankruptcy Review Commission. Final Report at 243-58.

    §130 ("Protection of holders of claims secured by debtor’s principal
    residence")

    Changes. Section 130 of H.R. 3150 would (1) provide that a claim is not subject
    to modification if it is secured "primarily" (rather than "only") by a
    lien on property used as the debtor’s principal residence at any time during the 180
    days prior to the bankruptcy, (2) define "debtor’s principal residence,"
    and (3) exclude continuances of mortgage foreclosures from the operation of the automatic
    stay.

    Impact. These changes largely resolve conflicts in the case law respecting the
    treatment of home mortgages in Chapter 13. Section 1322(b)(2) provides that, generally,
    secured claims can be modified in Chapter 13. This allows the plan to pay, as a secured
    claim, only the value of the collateral. To protect lenders of home mortgages, the right
    to modify is denied when the lender is secured only by a mortgage on the debtor’s
    principal residence. Some decisions have held that a multi-unit building would constitute
    security other than the debtor’s principal residence, or that a mobile home would not
    be a residence. The proposed change would include loans on such property within the scope
    of the protection. Similarly, there have been reports of situations in which debtors have
    vacated their homes shortly before filing Chapter 13 cases, so as to remove the protection
    given to the mortgage lender. The proposal negates such a tactic by applying the
    protection to homes used as the debtor’s principal residence during a 180 day period
    prior to the bankruptcy.

    A final issue regarding the application of the non-modification provision has to do
    with other security issued in connection with a home mortgage. Current law applies
    nonmodifiability where the claim is secured "only" by a lien on the
    debtor’s principal residence. Questions have arisen as to whether security incident
    to a mortgage (such as an assignment of rents) result in the loss of nonmodifiability. The
    proposal deals with these questions by requiring only that the claim be primarily secured
    by a homestead mortgage. This change may be overbroad. Debtors may give home mortgages as
    additional security in connection with a business loan—clearly not the kind of loan
    for which the special protection was found necessary—and the business lenders could
    argue (particularly if the business fails) that the home mortgage was their
    "primary" security.

    The remaining change made by this section involves the automatic stay. Some decisions
    have held that, in order to avoid violation of the automatic stay, a lender with a
    foreclosure pending at the time of a bankruptcy filing would have to dismiss the
    proceeding. Then, if the automatic stay were terminated, the lender would be required to
    serve all required notices and otherwise recommence the proceeding. The proposal would
    allow, instead, a simple continuance of the proceeding as of the time of the bankruptcy
    filing, so as to allow immediate recommencement in the event of termination of the stay.

    Alternative. Instead of providing for nonmodifiability whenever a homestead is
    the "primary" security for a loan, the needs of mortgage lenders could be
    addressed by a provision applying nonmodifiability to any loan secured only by a mortgage
    and by interests associated with the mortgage.

    *§131 ("Aircraft equipment and vessels")

    Changes. This section deals with the application of the automatic stay to
    certain aircraft equipment in Chapter 11 cases. It has no application to consumer cases,
    and there is no apparent reason why the section was placed in Title I ("Consumer
    Bankruptcy Provisions") of H.R. 3150.

    Subtitle D ("Adequate Protections for Unsecured Lenders")

    *§141 ("Debts incurred to pay nondischargeable debt") (see S. 1301,
    §315)

    Changes. Current § 523(a)(14) provides that debts incurred to pay
    nondischargeable tax obligations are nondischargeable. Section 141 of H.R. 3150 would
    create a new exception to discharge—523(a)(19)—applying the concept of §
    523(a)(14) to all nondischargeable debt, with one exception: if the debtor was
    either a "single custodial parent" at the time of the bankruptcy filing, or if
    the debtor owed child support or alimony payments at the time of the bankruptcy filing,
    then the debt incurred to pay a nondischargeable debt would remain dischargeable unless
    the creditor was able "to demonstrate that the debtor intentionally incurred the debt
    to pay the debt which is nondischargeable." Section 141 would further provide for a
    new class of priority claims, consisting of the following: "remaining allowed
    unsecured claims for debts that are nondischargeable under section 523(a)(19), but which
    shall be payable under this paragraph in the higher order of priority (if any) as the
    respective claims paid by incurring such debt."

    Impact. The primary impact of this proposal would be an arbitrary imposition of
    nondischargeability. The provision is not limited to debts incurred fraudulently, which
    are already nondischargeable under § 523(a)(2). Thus, this proposal would apply to debts
    incurred in good faith, and would render them nondischargeable based simply on how the
    debtor chose to use the borrowed funds. For example, if the debtor used borrowed funds to
    pay rent, and other funds to repay a student loan, the debtor would have no
    nondischargeable debt. But if the debtor used the same borrowed funds to pay the student
    loan, and the other funds to pay rent, the debt for the borrowed funds would be
    nondischargeable.

    The exception to the new ground for nondischargeability is highly ambiguous, and,
    depending on its interpretation, will either be very broad or largely inapplicable. Single
    parents, and any debtor owing support payments at the time of bankruptcy filing, would
    only be liable under the new exception if the creditor could show that they
    "intentionally incurred" the debt to pay the otherwise nondischargeable debt.
    This intent requirement could be interpreted to mean simply that the debtor intended to
    borrow the money used to pay the nondischargeable debt—that is, that the debt was not
    incurred inadvertently, such as by automatic payment of a checking account overdraft.
    Under this reading, the exception would rarely apply, since most debtors intend the
    borrowing that they engage in. Another possible reading of the intent requirement would be
    that the debtor was aware that the debt being paid was nondischargeable in bankruptcy.
    Creditors would rarely be able to make such a showing. Regardless of the interpretation,
    however, there appears to be little rationale for the exception. There is no apparent
    reason why a single parent—as opposed to a married parent—should be accorded
    special protection in repaying student loans. Nor should the status of owing support
    payments at the time of bankruptcy be relevant. Indeed, a debtor with support obligations
    is given an incentive to withhold those payments prior to filing bankruptcy in order to
    take advantage of the exception.

    Moreover, the provision presents substantial tracing problems. Section 523(a)(14) has
    had little impact thus far, perhaps because of the difficulty in tracing the source of
    cash used to pay taxes. It would similarly be difficult to trace the source of cash used
    by a debtor to pay nondischargeable obligations, such as child support, whenever these
    obligations were paid from an account into which the debtor deposited both borrowed funds
    and funds received from other sources.

    Finally, the new class of priority claims presents two distinct difficulties. First,
    the language describing the new priority, as quoted above, is very difficult to
    understand. The intent may be to allow a priority, at the lowest level, for claims
    nondischargeable under the new §523(a)(19), but only if the claim satisfied through the
    nondischargeable debt was itself a priority claim, and with multiple nondischargeable
    priority claims arising under §523(a)(19) paid in the order of the priority of the
    satisfied claims. However, the section is also capable of being read to apply to all
    claims nondischargeable under §523(a)(19). Second, under either reading, the effect of
    the new priority provision may be to make completion of Chapter 13 cases involving alimony
    and support much more difficult. In Chapter 13, all priority debt must be paid, in full,
    through the plan. Debts incurred to pay support obligations may well be nondischargeable
    under the proposed §523(a)(19)—either because the debtor was current with support
    obligations at the time of the bankruptcy filing, or because the debtor
    "intended" to borrow the funds needed to make the support payments. If so, the
    nondischargeable debt would be a priority claim, that the debtor would have to pay in
    full, together with current support payments, during the pendency of the Chapter 13 case.

    *§142 ("Credit extensions on the eve of bankruptcy presumed
    nondischargeable") (see S. 1301, §316)

    Changes. Current § 523(a)(2)(C) provides that if a debtor borrows more than
    $1000 from a single creditor for items that are not needed for the support of the debtor
    or the debtor’s dependents, or takes cash advances of more than $1000, within 60 days
    of the filing of a bankruptcy, the debt is presumed to have been obtained by fraud. In
    keeping with the consensus reflected in In re Anastas, 94 F.3d 1280, 1285 (9th Cir.
    1996), this would mean that the debtor is presumed to have incurred the debt without
    intending to repay it. The proposed change would expand this presumption to all consumer
    debts incurred within 90 days preceding the bankruptcy, except for "debts incurred
    for necessaries that do not exceed $250 in the aggregate" to a single creditor.

    Impact. The impact of the presumption is to require debtors to carry the burden
    of establishing, in a creditor complaint alleging fraud, that they did intend to repay
    each debt incurred by them within three months of the bankruptcy filing. The expanded
    presumption would have an impact far beyond the credit card matters to which the
    presumption now applies, applying, for example to medical debts, grocery bills, and rent
    obligations. The exception would result in arbitrary application of the presumption: if
    the debtor used a single credit card to pay for "necessaries," the $250
    aggregate would be quickly exceeded. On the other hand, the use of multiple credit cards
    could extend the exception substantially.

    The impact of the presumption of nondischargeability would be increased by §143, which
    makes debts arising from fraud nondischargeable in Chapter 13.

    Alternative. The present law could be amended to make clear that the misconduct
    leading to nondischargeability is incurring debt with an intent not to repay the debt.
    With this understanding, other circumstances might be set out in which debt incurred
    shortly before bankruptcy is presumed to be nondischargeable: for example, debt incurred
    to finance casino gambling, or debt incurred in excess of some percentage of the
    debtor’s ordinary expenses.

    *§143 ("Fraudulent debts are nondischargeable in Chapter 13 cases") (see
    S. 1301, §314)

    Changes. This section would limit the superdischarge available in Chapter 13,
    excluding from the Chapter 13 discharge debts incurred (1) by fraud (as defined by §
    523(a)(2) of the Code); (2) by fraud or defalcation while acting as a fiduciary,
    embezzlement, or larceny (as defined by § 523(a)(4)); and (3) by willful and malicious
    injury (as defined by §523(a)(6)). Also excluded from discharge in Chapter 13 would be
    debts covered by § 523(a)(3)(B), which applies to debts nondischargeable under
    §523(a)(2), (4), and (6), as to which notice was not given to the creditor in time to
    file a timely complaint to determine dischargeability.

    Impact. This provision would increase the recovery of certain creditors after
    the completion of a Chapter 13 case. However, the provision would also largely eliminate
    the superdischarge of Chapter 13, thus removing a major incentive for filing Chapter 13
    cases, and would increase the need for court hearings.

    The largest number of nondischargeability complaints brought before bankruptcy courts
    in recent years has been on account of alleged fraud by debtors in the use of credit
    cards. The courts have struggled with the application of the fraud provisions of §
    523(a)(2) of the Code to credit card debt, but a consensus is emerging that the use of a
    credit card is fraudulent if the debtor had an actual intent not to repay the credit card
    charge at the time the card was used. See In re Anastas, 94 F.3d 1280, 1285 (9th
    Cir. 1996). This, in turn, presents a question of fact that can require a trial. Rather
    than incur the expense of such a trial, a debtor may, under current law, seek relief under
    Chapter 13, and, if the plan is successfully completed, the debtor will be discharged from
    the credit card debt regardless of the circumstances under which it was obtained. Under
    the proposal, the question of the debtor’s intent (and the dischargeability of the
    debt) would remain in Chapter 13, thus providing no incentive for the debtor to choose
    that chapter, and presenting the courts with the potential for more hearings on the
    dischargeability of credit card debt. Similar incentives to file Chapter 13 exist when the
    debtor has engaged in conduct that might give rise to claims for breach of fiduciary duty
    or intentional torts. All of these incentives to file Chapter 13 are removed by this
    provision. It can thus be expected to increase the incentives to file Chapter
    7—discharging all other debts without payment—leaving only the questionable debt
    to be dealt with outside of bankruptcy.

    *§144 ("Applying the codebtor stay only when it protects the debtor")
    (see S. 1301, § 305).

    Changes. Under present law, if a Chapter 13 debtor is liable with another party
    on a particular debt, the creditor is automatically stayed from taking action against the
    other party, but the creditor may obtain relief from this codebtor stay if the codebtor
    received the consideration for the claim. Section 144 of H.R. 3150 would change this
    situation by providing that the codebtor stay would never go into effect if the debtor did
    not receive the consideration, so that the creditor, in that circumstance, could take
    action against the codebtor or property not in the possession of the debtor. An exception
    would be made for joint obligations arising out of a "separation agreement, divorce
    decree, or other order of a court of record." For such obligations, when the debtor
    is primarily liable, the creditor would still need to obtain relief from the codebtor stay
    before proceeding against the codebtor. The section also provides for termination of the
    codebtor stay as to any rented property that the debtor’s plan proposes to abandon or
    surrender.

    Impact. Contrary to the title of this section of the proposed bill, the codebtor
    stay in Chapter 13 never protects the debtor. Actions against the debtor are stopped by
    the automatic stay invoked in all chapters of the Code. Rather, the codebtor stay allows
    the Chapter 13 debtors to pay, through the plan, debts for which they are primarily
    responsible, and protects codebtors who did not receive the benefit of the debt (that is,
    true accommodation parties) from collection actions. Under current law, if the creditor
    believes that the nondebtor obligor was the one who really obtained the benefit of the
    debt, the creditor may seek relief from the codebtor stay to allow action to be brought
    against the codebtor (and property owned by the codebtor). The proposed change states that
    the codebtor stay never goes into effect when the codebtor received the benefit of the
    transaction. When the debtor and another party jointly incur a liability (like a joint
    loan, or a cosigned loan), it may not be clear which of the parties received the benefit
    of the transaction. Current law protects true accommodation parties by requiring that the
    creditor seek court permission before acting against them on the belief that they were the
    ones receiving the benefit of the transaction. The change would allow creditors to take
    action without court permission, and require that debtors seek sanctions for violation of
    the stay if the debtor was the actual beneficiary. The issue is not a common one, but
    given the limited resources of debtors in Chapter 13, current law, requiring that
    creditors move for relief from stay, is probably more efficient, since it allows a court
    determination of any dispute prior to enforcement action.

    The exception for debts affected by divorce decrees does not remove the right of the
    creditor to pursue a nondebtor spouse on a joint obligation for which the spouse received
    the original consideration. It merely requires that the creditor seek relief from the
    codebtor stay on that basis, as under current law.

    There is no apparent reason why a surrender of leased property should eliminate the
    need for the codebtor stay. Where a nondebtor signed a personal property lease as an
    accommodation to the debtor, the debtor would—under current law—retain the right
    to pay whatever obligations arose from the lease in full through the plan, regardless of
    whether the debtor kept the leased property. In such a situation, the party who signed the
    lease as an accommodation should continue to be protected from collection actions while
    the debtor was making plan payments.

    *§145 ("Debts for alimony, maintenance, and support") (see S. 1301,
    §§323-26)

    Changes. Section 145 of H.R. 3150 would make nine distinct changes in bankruptcy
    law as it bears on family support obligations:

    (1) Section 523(a)(18) of the Code currently makes nondischargeable in Chapter 7
    certain debts owed to states and municipalities on account of support obligations. This
    ground for dischargeability would be broadened by making interest on the covered debts
    nondischargeable and by allowing the states or municipalities to collect support
    obligations that are not governed by federal law. Finally, the broadened
    nondischargeability would apply in Chapter 13 as well as in Chapter 7.

    (2) The automatic stay would be made inapplicable to (a) wage deduction orders entered
    by a state, pursuant to federal law, to enforce debtors’ support obligations, and (b)
    a state’s withholding, suspension, or restriction of debtors’ driver’s
    licenses, professional and occupational licenses, or recreational and sporting licenses,
    pursuant to federal law, to enforce overdue support. [Note: in connection with license
    suspension, the bill makes reference to "section 466(a)(15) of the Social Security
    Act," rather than the applicable §466(a)(16).]

    (3) Exempt property of the debtor would continue to be liable for the debts to state
    and local municipalities for support obligations that are nondischargeable under §
    523(a)(18).

    (4) A first priority in payment—ahead of administrative claims—would be
    accorded to support obligations, as defined under current law, and renumbered by §151 of
    H.R. 3150, discussed below.

    (5) Debts nondischargeable under §523(a)(18) (support obligations owing to states and
    municipalities) would be accorded priority status, at a lower (eighth) level of priority.

    (6) Chapter 13 plans would be allowed to provide for the payment of support obligations
    prior to the payment of any other priority claim. [Note: this provision apparently may be
    intended to amend §1322(a)(1), which deals with mandatory plan provisions. However, the
    provision, as it appears in §145(e) of H.R. 3150, states that it is amending §1322(b)(1)
    of the Code, which deals with permissive plan provisions.]

    (7) In order for any plan to be confirmed in Chapters 11, 12, and 13, a debtor
    obligated to make support payments would be required to have paid all support obligations
    that became due after the bankruptcy filing.

    (8) A standard (nonhardship) discharge in Chapters 12 and 13 would only be granted to a
    debtor obligated to make support payments if, at the time the debtor was otherwise
    entitled to a discharge, the debtor certified that all support obligations that became due
    after the bankruptcy filing had been paid.

    (9) A provision of the Social Security Act dealing with the nondischargeability of
    support obligations to states and municipalities would be amended to conform to the
    amended version of §523(a)(18).

    Impact. The provisions of this section would have a major impact on the
    bankruptcies of debtors who owe support obligations, with the apparent intent of providing
    greater assurance that obligations will be paid. Several of the provisions, however, may
    impede payment of support obligations.

    (1) By changing the scope of §523(a)(18) to include interest, the bill increases the
    payments that a debtor is required to make to a party other than the supported spouse or
    child. More significantly, by making these obligations to pay the government
    nondischargeable in Chapter 13, this section extends the overall policy of H.R. 3150 in
    eliminating the Chapter 13 superdischarge. As discussed above, in connection with §143,
    this can be expected to create additional incentives for debtors to choose Chapter 7
    instead of Chapter 13, and increase litigation regarding the debtor’s qualifications
    for Chapter 7.

    (2) In order to make payments to a Chapter 13 plan, debtors generally need to receive
    their full paychecks, and be able to use their automobiles. By making the automatic stay
    inapplicable to the enforcement of support obligations through wage deduction and license
    suspension, H.R. 3150 would deprive certain debtors whose wages or licenses have been
    withheld from obtaining automatic relief at the beginning of a bankruptcy case. Where a
    state has withheld wages or suspended a license to enforce support obligations, the debtor
    would have to file an adversary proceeding for injunctive relief in order to stop the
    enforcement activity. Such a procedural requirement would add substantially to the cost of
    Chapter 13 for the parties and the court, and provide little additional protection for the
    debtor’s dependents, since the state can, under current law, seek relief from the
    stay if it appeared that the bankruptcy was filed in bad faith.

    (3) The provision regarding exemption would only apply in situations where federal law
    provided a more extensive set of exemptions than the state law would provide to a debtor
    who owed support obligations. In such situations, the impact of the change in exemption
    law would be to substitute state exemption law for federal law whenever the state was
    attempting to collect support obligations nondischargeable under §523(a)(18). Although
    this situation is unlikely to be common, the change would have the effect of increasing
    support collections where it did arise. (Note that states can accomplish the same result
    under current law by opting out of the federal exemptions.)

    (4) The reordering of support obligations to the first priority in bankruptcy violates
    a core bankruptcy concept—that the costs of administration must be paid first. If
    this is not done, there would be a powerful disincentive for any party to work in the
    bankruptcy process. The change in priorities would apply most directly in Chapter 7 cases,
    where a trustee is required to review the debtor’s filings (including, under H.R.
    3150, an assessment of the debtor’s eligibility for Chapter 7 relief), conduct an
    examination of the debtor, and reduce the debtor’s assets to cash for the benefit of
    creditors. In any case involving unpaid support obligations, the trustee would face the
    prospect of performing all of this work without compensation. Other professionals, such as
    appraisers, brokers, and auctioneers, would be affected in the same way. The likely
    result, if this provision were enacted, is that Chapter 7 cases involving support
    obligations would not be properly administered, with the result that all
    creditors—including support creditors—are paid less, rather than more, from the
    debtors’ available assets.

    (5) In Chapter 13, all priority debt must be paid, in full, during the term of the
    Chapter 13 plan. Therefore, the greater the amount of priority debt, the more difficult it
    is for a Chapter 13 debtor to complete a plan successfully. Section 145 of H.R. 3150
    creates a new class of priority debt—support obligations to states and municipalities
    that are nondischargeable under §523(a)(18)—and so requires that these governmental
    obligations be repaid in full through any Chapter 13 plan. To the extent that this makes
    it difficult for debtors to complete Chapter 13 successfully, it will result in increased
    incentives for debtors to choose Chapter 7, with the potential for lower payments to
    creditors as a whole.

    (6) The provision that support obligations in Chapter 13 may be paid before any other
    priority claims would have no substantial effect on current law. Section 1322(a)(2) of the
    Code requires that a Chapter 13 plan "provide for the full payment, in deferred cash
    payments" of all priority claims, unless the holder agrees to different treatment,
    but there is no requirement that priority claims be paid in any particular order, or at
    any particular time. See In re Ferguson, 134 B.R. 689, 696 (Bankr.S.D.Fla. 1991)
    (the deferred payments required by Section 1322(a)(2) are not required to be equal monthly
    payments over the life of the plan, but "may be paid in periodic intervals over the
    life of the plan as determined by the individual debtor"). Thus, it appears current
    law would allow a Chapter 13 plan to pay support obligations ahead of other unsecured
    claims. It is possible that another priority creditor could assert that such a plan
    involved unfair discrimination under §1322(b)(1), although there appear to be no reported
    cases applying unfair discrimination analysis to competing priority claims. However, since
    §145 of H.R. 3150 already provides that support payments should be given higher priority
    (see point (4) above), discrimination in favor of support payments would plainly be
    permissible. Thus, permissive payment of support obligations before other priority
    claims would not require special authorization.

    Any real impact would only occur, if, as suggested above, the priority payment of
    support obligations was made mandatory. However, a requirement that support obligations in
    Chapter 13 be paid before any other priority claims would have the effect of subordinating
    administrative claims. This would contradict the general policy of paying administrative
    claims first. The greatest impact of such a provision would be on debtors’ attorneys.
    Under current law, these attorneys frequently agree to provide legal services without
    advance payment to Chapter 13 debtors, looking to be paid their fees as an administrative
    expense in the Chapter 13 case itself. If they are not allowed to be paid until after all
    past due support payments are made, attorneys will likely be unwilling to represent
    Chapter 13 debtors without full advance payment. This would cause Chapter 13 debtors with
    support obligations to be delayed in filing their bankruptcy cases, and such delays can
    have serious consequences, such as the loss of a home to foreclosure. Moreover, such a
    provision might often delay prebankruptcy support payments, as debtors withhold their
    support payments in order to accumulate legal fees for their attorneys.

    (7) It is reasonable to require that debtors be current in their postpetition support
    payments as a condition for confirmation of a plan. Support obligations are simply one of
    a number of current payments (such as mortgage and utility bills) that a debtor must be
    able to maintain while making plan payments. If a debtor falls behind in current support
    obligations after filing the bankruptcy case, it is unlikely that the debtor would be able
    to complete a plan.

    (8) Withholding a discharge in Chapter 12 and 13 from a debtor who has fallen behind in
    current support obligations will likely have the positive effect of discouraging debtors
    from withholding support obligations in order to make plan payments. If a debtor is
    unable, because of unanticipated difficulties to make both plan payments and support
    obligations, it would be more appropriate for the debtor to seek to amend the plan to
    provide for lower payments or to seek a hardship discharge than to fail to make the
    current support payments.

    (9) Federal law should certainly avoid having inconsistent statutes dealing with the
    same subject matter, and so it is appropriate for any provision of the Social Security Act
    dealing with dischargeability in bankruptcy to be consistent with the terms of the
    Bankruptcy Code. However, rather than have identical provisions in the two statutes, it
    would be preferable to place all of the exceptions to discharge in the Code itself,
    avoiding the potential for inconsistency.

    Alternative. The changes proposed by this section should be limited to (1)
    requiring payment of postbankruptcy support payments as a condition of plan confirmation
    and discharge, and (2) changing the dischargeability provision of the Social Security Act
    to merely incorporate by reference, rather than restate, any applicable provision of the
    Bankruptcy Code.

    *§146 ("Nondischargeability of certain debts for alimony, maintenance, and
    support") (see S. 1301, §327)

    Changes. Current bankruptcy law makes a distinction between two types of awards
    arising in cases of divorce and separation: support obligations—that is,
    payments that are intended for the support of the debtor’s dependents—are always
    nondischargeable, in both Chapter 7 and Chapter 13, pursuant to § 523(a)(5), regardless
    of the manner in which the payments are described in a divorce or separation decree; on
    the other hand, property settlements—that is, payments made to divide the
    commonly owned assets of the parties to the divorce or separation, when these payments are
    not intended as support—are nondischargeable only in Chapter 7 cases, pursuant to
    §523(a)(15), and only if the relative financial positions of the parties make the payment
    equitable (that is, where it would be more of a burden on the nondebtor spouse to be
    deprived of the property settlement payment than it would be a burden on the debtor to
    make the payment). Section 146 of H.R. 3150 would erase this distinction, making all
    property settlements, as well as support payments, completely nondischargeable in Chapter
    7 and Chapter 13, by including property settlements within the scope of §523(a)(5).

    Impact. The proposal has the potential for requiring larger payments to
    nondebtor spouses, but it would also create substantial unfairness to other creditors, and
    further erode the superdischarge of Chapter 13.

    Where a payment in a divorce or separation decree is not intended for support, the
    nondebtor spouse who is entitled to the payment has no greater equitable claim than any
    other creditor. Suppose that a debtor and the debtor’s former spouse jointly owned a
    piece of investment property worth $50,000, which the debtor is allowed to keep in
    exchange for a promise to pay $25,000 to the nondebtor spouse. At the same time, the
    debtor is liable for negligently injuring a pedestrian in an auto accident, again owing
    $25,000. There is no reason why the claim of the nondebtor spouse should be accorded any
    greater right to payment in bankruptcy than the claim of the pedestrian. Only if the
    property settlement is needed for support is the greater right to payment appropriate, but
    current bankruptcy law recognizes the nondischargeability of nominal property settlements
    actually needed for support.

    Moreover, as discussed in connection with §151, below, the priority accorded support
    obligations under H.R. 3150, is a continuation of present law—limited to actual
    support, not including property settlements. Thus, it is quite possible that a Chapter 13
    debtor would be precluded from paying property settlements in a Chapter 13 case at a
    higher rate than other unsecured, nonpriority debt, pursuant to the unfair discrimination
    provision of §1322(b)(1). See McCullough v. Brown, 162 B.R. 506 (N.D.Ill.
    1993). This would result in a Chapter 13 debtor completing the plan and still owing
    substantial amounts in nondischargeable property settlement obligations.

    The impact of making genuine property settlements completely nondischargeable in
    Chapter 13 is thus, once again, to provide a strong incentive for debtors to choose
    Chapter 7 over Chapter 13, and, in this way, reduce the overall payments made to
    creditors, and increase the likelihood of litigation over the debtor’s eligibility
    for Chapter 7.

    *§147 ("Other exceptions to discharge") (see S. 1301, §327)

    Changes. Section 147 would eliminate from the Code current § 523(a)(15), which
    deals with property settlements in divorce and separation proceedings. This elimination is
    consistent with the placement of property settlements in §523(a)(5), as provided in §146
    of H.R. 3150, discussed above.

    One other change is made in § 147 of H.R. 3150—an expansion of the exception from
    discharge set out in §523(a)(7). Currently, this exception applies to debts for "a
    fine, penalty, or forfeiture" payable to a governmental entity, and not as
    compensation for actual loss. This list would be supplemented by adding "an order of
    disgorgement or restitution obtained by a governmental unit" to the other categories
    of awards.

    Impact. The impact of the proposed change in the dischargeability of property
    settlements is discussed above, in connection with §146.

    The proposed change to §523(a)(7) is somewhat problematic. Section 523(a)(7)
    distinguishes between situations in which a governmental entity receives an award from the
    debtor that is basically punitive—a fine or penalty for some misconduct—from
    situations in which there is an award of compensation. To the extent that a governmental
    body is simply owed money by a debtor (for example, the debt resulting from a
    contractor’s negligent construction work), there is no reason why the debt should be
    treated differently than debts owing to other creditors. "Disgorgement " and,
    more particularly, "restitution" may imply some sort of compensation, and, to
    that extent, should not be included in §523(a)(7). However, the proposed language retains
    the limitation presently included in § 523(a)(7) that the debt in question must not be
    "compensation for actual pecuniary loss." Accordingly, with the change limited
    to noncompensatory "disgorgement" and "restitution" awards, the
    proposal would be an appropriate extension of the present law.

    *§148 ("Fees arising from certain ownership interests")

    Changes. Section 523(a)(16) provides for the nondischargeability of certain
    debts arising from postbankruptcy condominium assessments and similar charges. Section 148
    of H.R. 3150 would expand the scope of § 523(a)(16) by removing two of its limitations.
    First, the section would no longer be restricted to dwelling units, but would also apply
    to fees arising from shares in a cooperative corporation or a "lot in a homeowners
    association." Second, fees would be nondischargeable not only for the postbankruptcy
    periods in which the debtor or a renter occupied the property, but for any postpetition
    period during which the debtor or trustee had any interest in the dwelling unit, corporate
    share, or lot. Finally, §148 would amend §365 of the Code to provide that the debts made
    nondischargeable under §523(a)(16) could not be considered executory contracts.

    Impact. The impact of § 148 of H.R. 3150 is to increase the recovery of fees
    that become due to condominiums, cooperatives, or similar membership associations after
    the filing of a bankruptcy petition in Chapter 7. Current law limits the
    nondischargeability of such fees to those incurred while a dwelling unit is occupied by
    the debtor or a renter of the debtor, on the theory that the debtors should pay for the
    use of the property that provides them with a benefit. The proposed change would create a
    nondischargeable debt for all postbankruptcy fees incurred until the membership
    association gained full control and ownership of the property involved, regardless of
    whether it was occupied by the debtor or a renter of the debtor, and would assure that
    payment of the postbankruptcy fees could not be limited by rejecting the contract giving
    rise to the fees as an executory contract. The argument in favor of this change is that
    membership associations incur costs (for insurance and maintenance) regardless of the
    debtor’s use of the property, and that the debtor should be responsible for these
    costs. On the other hand, mortgage holders also incur costs for insurance and maintenance
    of property securing their claims in bankruptcy, but they are generally required to look
    to the property to satisfy their costs. The current law is a compromise between the view
    that condominium fees are a fully dischargeable prepetition debt (like personal liability
    on a mortgage) and the position advanced by the current bill, which fully advances the
    position of membership associations. To the extent that the associations are able to
    assert claims against a debtor after discharge in Chapter 7, they will be competing with
    other nondischargeable debt, including support obligations.

    *§149 ("Protection of child support and alimony")

    Changes. Section 149 of H.R. 3150 would add a new §529 to the Code, directing
    the manner in which state law should provide for collection of debts that are excepted
    from discharge in bankruptcy, and imposing obligations on the holders of certain
    nondischargeable claims to transfer to others any funds that they collect on account of
    these claims. The section appears to contain a drafting error. The specific changes are as
    follows:

    (1) Priority claims for support, as defined by current law, would be given a priority
    in state collection proceedings over claims that were excepted from a debtor’s
    discharge under paragraphs (2), (4) or (19) of §523.

    (2) This priority would not apply to security interests supporting the creditor’s
    nondischargeable claim unless the interest arose after the date of the filing of the
    petition.

    (3) If, despite the required priority of state collection proceedings, a creditor
    holding a claim excepted from discharge under paragraphs (2), (4), or (19) nevertheless
    receives some payment on account of its claim prior to payment of the debtor’s
    outstanding support obligations, the creditor must "not later than 20 days after
    receiving such payment . . . distribute such payment . . . ratably to individuals who then
    hold debts [for support] entitled to priority." [Note: there is an apparent drafting
    error in the text at this point, referring to § 523(a)(14) instead of (19). It is
    presumably the new nondischargeability provisions of §523(a)(19)—discussed in
    connection with §141, above—that this section intends to subordinate to support
    obligations, rather than the existing provisions of §523(a)(14).]

    (4) In an apparent contradiction of the twenty day limit previously stated, the new
    section would also provide that "[n]ot later than 2 years after receiving such
    payment. . . such creditor shall make the distribution required by this section to all
    individuals whose identity is known to such creditor at the time of the
    distribution."

    Impact. This new section is likely to be ineffective in assuring collection of
    support obligations prior to other nondischargeable debt following a debtor’s
    discharge, for several reasons.

    First, only formal state collection proceedings would be regulated. Informal collection
    procedures—such as letters and telephone calls from collection agencies—would
    not be regulated, and can be expected to continue.

    Second, even in formal state collection proceedings only certain types of
    nondischargeable debt would be subordinated to a debtor’s support obligations. Tax
    liabilities (§523(a)(1)), debts arising from failure to provide notice (§523(a)(3)(B)),
    debts from willful and malicious injury (§523(a)(6)), student loan debts (§523(a)(8)),
    and the expanded set of debts arising from condominium ownership (§523(a)(16), see §148,
    above), would all be allowed to have whatever priority of collection a state wished to
    accord them, and if creditors holding these claims obtained payment through informal
    means, they would have no obligation under the new section to transfer that payment to
    support claimants.

    Third, even those creditors who would be bound by the new section might be able to
    receive payment ahead of support claimants, as long as the support claimants were not owed
    money at the time of the payment to the creditor, although the statute is ambiguous on
    this point. An alternative reading might be that the creditor would be required to turn
    over any funds collected from the debtor, for a period of up to two years after the
    collection, to support claimants who, at any point during that two year period, were owed
    support payments from the debtor. But even under this reading, the support claimants would
    (1) have to discover the payment to the creditor on account of the nondischargeable debt
    (and distinguish it from payments on debts incurred after the discharge), (2) be aware of
    the right that would be accorded by the new law, (3) make demand upon the creditor
    obligated to turn over the collected proceeds, and (4) pursue the creditor in state
    court—with no right to collect fees in the event of a successful recovery. Few
    support claimants can be expected to engage in this process.

    . *§150 ("Adequate protection for investors")

    Changes. This section would modify the provisions of the automatic stay to allow
    for regulatory activity by self-regulatory bodies of stock exchanges to continue after the
    commencement of a bankruptcy case. This section would have no application in consumer
    cases, and would generally apply in the bankruptcies of members of stock exchanges whose
    activities were under investigation.

    *§151 ("Higher priority for debts for alimony, maintenance, and support")

    Changes. This section would merely renumber the existing provision for priority
    of support obligations from §507(a)(7) to §507(a)(3). The actual change in priority
    effected by H.R. 3150 is set forth in §145, discussed above. That change—to first
    priority—could have been accomplished with no change in numbering, making §151
    unnecessary.

    Subtitle E ("Adequate Protections for Lessors")

    §161 ("Giving debtors the ability to keep leased personal property by
    assumption")

    Changes. This section would make two principal changes to the Bankruptcy Code.
    First, it would remove from the estate (i.e., abandon) all leased personal property as to
    which the lease is not assumed. In Chapter 7, this abandonment would occur when the lease
    is rejected by the trustee (which occurs automatically, under existing law, if the trustee
    does not assume the lease within 60 days of the filing of a voluntary case). [Note: the
    section states that "the leased property is no longer property of the estate and the
    stay under section 362(a) of this title is automatically terminated." This language
    is redundant, since § 362(c)(1) already provides that the stay terminates as to property
    of the estate when the property is no longer property of the estate. By including the
    extra language terminating the stay, this provision might lead to confusion, for example,
    the erroneous belief that the stay was terminated as to personal actions against the
    debtor arising out of the lease.] In Chapters 11 and 13, the rejection and abandonment
    would occur if the lease was not assumed in the plan, and in Chapter 13 the codebtor stay
    would terminate.

    The second effect of the section is to permit the equivalent of reaffirmations with
    respect to leased property through assumption of the leases, and to eliminate the
    automatic stay as it would apply to discussions regarding such assumptions. Under the
    procedure set out by the section, the debtor would have to initiate discussions regarding
    assumption of a lease through a written notification.

    Impact. The provisions regarding abandonment of leased property make explicit
    the implication that leased property as to which the lease is rejected is no longer part
    of the bankruptcy estate.

    The provisions regarding assumption of leases by the debtor in Chapter 7 may require
    additional safeguards. Reaffirmations of debt have been a sensitive subject under the
    Bankruptcy Code, since they involve debtors repaying debts that otherwise would be
    discharged. To prevent overreaching by creditors in this regard, the Code presently
    contains a number of safeguards applicable to reaffirmation, including information that
    must be given to the debtor, determinations by debtor’s counsel that the
    reaffirmation is in the debtor’s best interest, and court authorization of
    reaffirmations for unrepresented debtors. Unless similar protections were enacted in
    connection with assumed leases (with cure of past due indebtedness), creditor overreaching
    could be a similar problem.

    §162 ("Adequate protection of lessors and purchase money secured
    lenders") (see S. 1301, §319)

    Changes. This section of the proposed bill would create a new provision in
    Chapter 13, requiring payments to secured creditors and lessors of personal property.
    These payments would be in the amounts and frequency specified by the applicable contract
    unless the debtor sought a court order reducing the amounts and frequency. However, the
    court would be required to order payments no less than monthly in an amount no less than
    the depreciation of the property involved. These payments would be required to continue
    until the creditor began receiving "actual payments" under the Chapter 13 plan.

    The section would also clarify the right of creditors to retain possession of the
    debtor’s property, if it was properly obtained before the bankruptcy was filed, until
    the creditor receives the first adequate protection payment required by the section.

    Finally, the section requires that debtors in Chapter 13 must provide proof of
    insurance of leased property and collateral within 60 days of the filing of the
    bankruptcy.

    Impact. Secured creditors are entitled to seek adequate protection, pending plan
    confirmation, under existing law, and are entitled to relief from the automatic stay if
    adequate protection is not provided. This provision would give secured creditors a
    presumptive right to more than adequate protection payments, because the underlying
    contract (for example, a mortgage or an auto note or lease) generally provides for
    payments at a level greater than necessary to offset depreciation. The debtor would be
    required to present a motion to reduce the presumptive payments to the actual level of
    depreciation (if any). That will involve significant additional cost in most Chapter 13
    cases.

    Under existing law, it may be unclear whether a creditor in rightful possession of a
    debtor’s property at the outset of a bankruptcy case must return the property in the
    absence of adequate protection. The proposal would make it clear that adequate protection
    is required.

    The requirement for periodic proof of insurance is an unnecessary burden on debtors,
    since creditors are generally informed by insurers as to any lapse in coverage. Moreover,
    if the creditor does not receive this information, the creditor would have to take action
    to ascertain the status of the insurance within the first 60 days of the bankruptcy case.
    Proof of insurance by the debtor at the conclusion of the 60-day period would add no
    protection to the creditor.

    §163 ("Adequate Protection for Lessors") (see S. 1301, § 409)

    Changes. Despite its caption, this section deals with an exception to the
    automatic stay. Under current law, lessors of nonresidential real estate (for example,
    shopping center lessors) may proceed with eviction proceedings after the lessee files a
    bankruptcy case, without violating the automatic stay, once the lease has terminated by
    expiration of its stated term. Section 163 of H.R. 3150 would expand the exception to
    cover all rented real estate. Thus, landlords would be allowed to evict Chapter 13 debtors
    from their apartments, without obtaining relief from the automatic stay, as soon as the
    leases terminate.

    Impact. There is no reason for the automatic stay to apply to an residential
    lease that has genuinely expired according to its stated term. A lease can only be assumed
    by a debtor in Chapter 13 if it is unexpired, pursuant to §§ 365(a) and 1322(b)(7).
    However, a debtor and landlord may well be in dispute about whether a lease has expired.
    Many leases have automatic renewal terms, contingent on notice being given or the lease
    not being in default. If there is a dispute about lease expiration, then, under current
    law, the landlord would be required to obtain relief from the automatic stay before going
    forward with an eviction proceeding in state court. See, e.g., Robinson v.
    Chicago Housing Authority,
    54 F.3d 316 (7th Cir. 1995) (affirming an order granting
    relief from the stay to pursue eviction). Under the proposed change, the landlord, in the
    event of such a dispute, would be able to go forward with the eviction, requiring the
    Chapter 13 debtor—believing that the lease was still in effect—both to defend
    the eviction proceeding and to bring a proceeding in bankruptcy court to have the landlord
    found in violation of the automatic stay. If the debtor prevailed, fees and costs would be
    awarded, pursuant to §362(h), but the problem for the debtor is in obtaining the funds to
    pursue proceedings in both courts. Although this situation may not arise frequently, it
    may be preferable to continue to require that evictions in situations of residential
    leases be subject to the automatic stay.

    On the other hand, the proposed exception could be applied in Chapter 7 cases without
    harm to the rights of the debtor, since Chapter 7 debtors have no right to assume
    defaulted leases.

    Alternative. The expanded exception could be applied in Chapter 7 cases only.

    Subtitle F ("Bankruptcy Relief Less Frequently Available for Repeat
    Filers")

    §171 ("Extended period between bankruptcy discharge")

    Changes. Current law allows a Chapter 7 discharge to be entered only once in six
    years. The proposal would change this to a 10 year interval. Current law imposes no limit
    on Chapter 13 discharges, although the discharge can only be entered at the completion of
    a plan, and most plans require a three to five year period to complete under current law.
    The proposal would require that a Chapter 13 discharge not be granted if the debtor
    received any bankruptcy discharge within the five-year period prior to filing the Chapter
    13 case.

    Impact. These proposals would render large numbers of debtors unable to obtain
    any bankruptcy relief for an extended period of time, and would substantially reduce the
    incentives for using Chapter 13.

    It is entirely possible for individuals to require bankruptcy relief on more than one
    occasion within a span of a few years. Job loss, medical problems, and divorce can each
    cause financial difficulties that an individual cannot overcome. Under current law, the
    individual can obtain a Chapter 7 discharge to address these problems only once in six
    years, but could submit to a Chapter 13 repayment plan and obtain relief within the six
    year period. The availability of such a discharge is one of the major incentives for the
    use of Chapter 13. That possibility is removed under present law, leaving the individual
    with no means of requiring creditors to accept pro rata payment of the debtor’s
    available funds. The result would be the "race to the courthouse" that
    bankruptcy was intended to avoid, with the more aggressive creditors getting the larger
    share of wage garnishments and judgment lien foreclosures. The incentive for creditors to
    cooperate with consumer counseling services in these situations would also be greatly
    reduced, since the debtor would not have the option of bankruptcy in the event of
    noncooperation, and other noncooperating creditors will have an advantage over those who
    did cooperate.

    Alternative. The required period between Chapter 7 discharges could be extended
    without imposing limits on Chapter 13 discharges.

    Subtitle G ("Exemptions")

    *§181 ("Exemptions")

    Changes. This section impacts the perceived problem of debtors changing their
    residence in order to obtain more favorable homestead exemptions. Current law applies the
    homestead exemption law of the place where the debtor’s domicile was located for the
    "longer portion" of the 180 days preceding the bankruptcy. Thus, a debtor could
    obtain a homestead exemption by establishing a domicile in a new state 91 days prior to
    filing a bankruptcy. The change would increase the 180 day period to 365 days, and remove
    the provision regarding the "longer portion."

    Impact. The problem dealt with by this section is a minor one—only a few,
    wealthy debtors are likely to change state of domicile in order to obtain larger
    exemptions. Nevertheless, it is ironic that the impact of the new section may be to
    encourage changes of domicile to obtain larger exemptions. Under the proposed law, if a
    debtor changes his or her state of domicile during the year before the bankruptcy filing,
    no state would have been the debtor’s domicile for that 365-day period, and hence,
    apparently, the debtor would be required to use the federal exemptions. Since federal
    exemptions are higher than those of many states, and since a change of domicile only
    shortly before the bankruptcy would be effective to avoid state exemption law, debtors in
    low-exemption states would be encouraged to move to a neighboring state just prior to
    filing bankruptcy, so as to obtain the higher federal exemptions.

    Alternative. The fundamental issue regarding exemptions is whether they should
    be more uniform, so that debtors do not receive significantly differing treatment in
    bankruptcy depending on their state of domicile. Greater uniformity would reduce the
    incentive for debtors to change domicile before filing bankruptcy petitions, and such a
    change in exemption law has been proposed by the National Bankruptcy Review Commission.
    Final Report at 117-44. H.R. 2500 proposes a new commission to study the question.

    *§182 ("Limitation")

    Changes. This section addresses another potential abuse of exemptions—the
    conversion of nonexempt property to exempt property prior to filing bankruptcy. The
    section provides, in effect, that if the debtor uses the proceeds of any disposition of
    nonexempt property to obtain value in an exempt residence or burial plot, within one year
    of the bankruptcy, then that portion of the value of the residence or burial plot
    attributable to the disposition of the nonexempt property may not be exempted. This
    limitation on the value of residence and burial plot exemptions is only made applicable to
    state exemption law, not to the federal exemptions.

    Impact. This section would likely affect only those ignorant of its terms, and
    may have a negative effect in undoing conversions of nonexempt property into exempt
    property. Debtors who wish to engage in such conversions will not likely be deterred by
    the new section, because of the many forms of exempt property that are not affected,
    including insurance policies, and, most significantly, the unlimited exemption for
    retirement accounts created by §119, discussed above. On the other hand, debtors ignorant
    of this provision might engage in home improvements in complete good faith, and have the
    value of the improvements deducted from their homestead exemptions. Finally, by specifying
    limited circumstances in which conversions from nonexempt to exempt property will be
    disallowed, this section may imply that all other such conversions are permissible.

    Alternative. If the issue is to be addressed, there should be a generally
    applicable rule distinguishing permissible from impermissible "bankruptcy
    planning." Such a rule might be based on activity outside the debtor’s usual
    practice (such as a large, lump sum contribution to a retirement account) within a year of
    the bankruptcy filing.

    Title II ("Business Bankruptcy Provisions")

    Title III ("Municipal Bankruptcy Provisions")

    These titles do not involve consumer bankruptcy issues and are therefore not treated in
    this analysis.

    Title IV ("Bankruptcy Administration")

    Subtitle A ("General Provisions")

    §401 ("Adequate preparation time for creditors before the first meeting of
    creditors in individual cases")

    Changes. This section would amend the Bankruptcy Code to provide that first
    meetings of creditors must take place between 60 and 90 days after the filing of voluntary
    individual bankruptcy cases, unless the court orders an earlier meeting.

    Impact. Under current law, set out in Fed.R.Bankr.P. 2003(a), the first meeting
    of creditors must take place between 20 and 40 days after case filing in voluntary Chapter
    7 and 11 cases, and between 20 and 50 days in a Chapter 13 case. The proposal would delay
    these times by more than a month. This may allow greater creditor involvement in consumer
    bankruptcy cases, but it would have the drawback, particularly in Chapter 13 cases, of
    delaying payouts to creditors.

    §402 ("Creditor representation at first meeting of creditors") (see S.
    1301, §308)

    Changes. This provision would allow nonattorneys to represent creditors at
    creditor meetings.

    Impact. This proposal would have the potential for increasing creditor
    involvement in any jurisdictions where appearances by nonattorneys are currently
    prohibited.

    §403 ("Filing proofs of claim")

    Changes. This section changes the law that currently requires the filing of a
    proof of claim in order for a creditor to share in the distribution of payments in Chapter
    7 and 13 cases. Under this provision, a proof of claim would be deemed filed as to all
    debts scheduled by the debtor as other than disputed, contingent, or unliquidated.

    Impact. Frequently, consumer debtors have poor records of what they owe.
    Accordingly, the debtors often schedule debts that either are not owed, or are owed in
    smaller amounts than scheduled. The requirement of a proof of claim by the creditor
    assures that an actual debt is paid in an appropriate amount. Treating all scheduled debts
    as proofs of claim may result in overpayments of claims, or payment of claims that are not
    owing, reducing the payments to creditors with actual, accurate claims.

    The requirements for filing proofs of claims, as well as the results of untimely
    filing, were extensively treated in the 1994 Bankruptcy Reform Act. This provision would
    undo what has only recently become settled law.

    *§404 ("Audit procedures") (see S. 1301, §307)

    Changes. This section of the proposed bill would establish a system for random
    audits of the accuracy and completeness of schedules and other information required to be
    provided by debtors in bankruptcy. The proposal would require that at least 1% of all
    cases be audited "in accordance with generally accepted auditing standards . . . by
    independent certified public accountants or independent licensed public accountants."
    The proposal requires the Attorney General to establish procedures for fully funding the
    audits, but does not specify a source of funding. The report of each audit is to be filed
    with the court, the Attorney General, and the United States Attorney, and if the audit
    report discloses any material misstatement of income, expenses, or assets, notice of the
    misstatement is required to be given to creditors and to the United States Attorney for
    possible criminal investigation. [Note: the sentence of the proposal dealing with material
    misstatements requires rewriting to correct syntactical errors.]

    Impact. This proposal reflects a recommendation of the National Bankruptcy
    Review Commission (Final Report at 107-110), and would provide an incentive for debtors
    and their counsel to provide accurate and complete information. However, formal audits by
    licensed accountants would also generate substantial costs. With bankruptcy filings
    exceeding 1 million per annum, an audit cost of only $500 per case would impose an
    additional cost of at least $5 million per annum; at $1000 per case, a more likely figure
    given the poor record-keeping of many consumer debtors, the 1.4 million bankruptcies filed
    last year would generate an audit cost of $14 million. Since the proposal does not
    identify a source for funding the audits, the impact of the cost is uncertain. If the cost
    were treated as an administrative expense, creditors would pay for the audits in the form
    of reduced payments on their claims. A fairer way to pay for audits would be through the
    fees currently collected from debtors (at the time of filing) and creditors (seeking
    relief from the automatic stay), but in order to allow payment from these current fees,
    the cost of the audits would have to be restrained.

    Additionally, the requirement that audit reports be filed will impose additional costs
    for document retention on clerk’s offices, and, depending on the detail of the
    reports, involve unnecessary intrusions on the debtors’ privacy.

    Alternative. In order to reduce costs, audits could be conducted by trained
    employees of the United States trustees, rather than by licensed accountants, according to
    regulations established by the Executive Office of the United States Trustee, rather than
    generally accepted auditing standards. With costs controlled, the source of funding for
    the audits can be specified as the existing fees collected in bankruptcy cases, without an
    increase in those fees.

    §405 ("Giving creditors fair notice in Chapter 7 and 13 cases") (see S.
    1301, §309)

    Changes. The primary change made by this section is a requirement that creditors
    be given notice of a bankruptcy filing at their preferred addresses. Under current law,
    creditors who actually receive notice of a bankruptcy case may be liable for sanctions for
    willful violation of the automatic stay if they thereafter take action to enforce their
    rights against collateral or otherwise attempt to collect a debt owed by the debtor. This
    provision would eliminate sanctions for violation of the stay (or failure to turn over
    property of the estate) in situations where notice of the bankruptcy was sent to an
    address of a creditor other than the last address the creditor provided to the debtor for
    correspondence regarding the debtor’s account. This elimination of liability would
    only apply if (1) the creditor had a designated person or department for receiving
    bankruptcy notices, (2) the creditor had a reasonable procedure for directing bankruptcy
    notices to that person or department, and (3) despite the reasonable procedures, the
    creditor’s designated person or department did not receive the notice in time to
    prevent the collection activity from taking place.

    Impact. This proposal would eliminate sanctions for violation of the automatic
    stay in situations where notice of a bankruptcy was received by personnel of the creditor
    who were unable to prevent subsequent collection action. However, it would also greatly
    complicate litigation regarding violations of the automatic stay. If a creditor took
    collection action after the bankruptcy case was filed, there would be questions subject to
    litigation concerning (1) the last address specified by the creditor in a communication,
    (2) whether the creditor had reasonable procedures in place for directing the
    communication to a particular person or department, and (3) whether that person or
    department received the notice in time to prevent the collection activity from taking
    place. Most of the information relating to these matters would be exclusively in the
    possession of the creditor, making it difficult for debtor’s counsel to determine
    whether an intentional violation of the automatic stay had occurred without substantial
    discovery. Lacking the resources to pursue such discovery, debtors might be unableo pursue
    enforcement action.

    §406 ("Debtor to provide tax returns and other information") (see S.
    1301, §301)

    Changes. This section would add several items to the information that individual
    Chapter 7 and 13 debtors are required to provide in connection with a bankruptcy case,
    unless ordered otherwise by the court. These items include (but are not limited to) the
    following: (1) copies of any federal tax returns, including schedules and attachments,
    filed by the debtor during the three years prior to the bankruptcy filing; (2) copies of
    any tax returns and schedules filed during the pendency of the bankruptcy case, either for
    current tax years, or for the three years preceding the bankrutpcy filing; (3) any
    amendments of the returns set out above; (4) evidence of payments made by any employer of
    the debtor during the 60 days prior to the filing of the case; and (5) a certificate
    regarding the debtor’s receipt of the proposed required notice regarding consumer
    counseling services. In addition, a Chapter 13 debtor would be required to file annually a
    statement of the debtor’s income and expenditures in the preceding year and the
    debtor’s monthly net income during that year, showing the method of calculation,
    disclosing the amount and sources of income, the identity of the persons responsible with
    the debtor for the support of any dependents, and any persons who contributed (and the
    amounts contributed) to the debtor’s household. Also, debtors would have the
    obligation to provide copies of their petition, schedules, statement of affairs, and any
    plan and plan amendments to any creditor on request of the creditor, and any copies of
    such filings made subsequent to the request. Tax returns would be filed with the United
    States trustee; the other information would be filed with the court. All of these filings,
    including the tax returns and amendments, would be available to any party in interest for
    inspection and copying, subject to court order.

    Impact. This section has the potential for making information available to
    trustees and creditors that may be significant in the administration of the debtor’s
    case. However, Fed.R.Bankr.P. 2004 currently allows information regarding the
    debtor’s financial condition—including tax returns—to be obtained, as
    required, with disclosure limited to the parties who need the information, and with the
    potential for court orders limiting further disclosure. The general disclosures required
    by the changes proposed here would impose two significant burdens not part of current law:

    (1) There would be a potentially difficult and expensive provision of information in
    every case, regardless of the need for the information. Since debtors in financial
    distress often fail to retain financial documentation, it is likely that they will not
    have ready access to their tax returns for the three years preceding the bankruptcy, or to
    their pay stubs for two months preceding bankruptcy. Similarly, during a bankruptcy,
    debtors are likely to have difficulty maintaining detailed records regarding their
    expenditures and sources of income.

    (2) The changes would involve a significant intrusion into the privacy of the debtors.
    Tax returns are not public documents, and are ordinarily disclosed in litigation only when
    they are particularly relevant to a dispute, and only to the parties with a need to review
    them. This provision would require debtors to make several years of their tax returns
    available for review by any creditor, and the creditors would be free to make whatever use
    they wished of the information contained in the returns, including compiling and
    disseminating it. Both the difficulty and cost of assembling the required information and
    the intrusion on privacy would act as substantial barriers to good faith bankruptcy
    filings.

    The requirement that debtors provide copies of petitions, schedules and plans to all
    creditors on request may encourage routine requests for such documents by creditors who do
    not require these documents for their participation in the bankruptcy case (current law
    requires notice to creditors of the essential events in the case), imposing additional
    expense on debtors and their counsel.

    The provision that the required information need not be supplied if the court orders to
    the contrary creates the potential for substantial variations in practice from court to
    court. Some judges may determine that certain of the information (or all of it) is not
    required unless requested by a creditor with cause; other judges may routinely deny any
    request by debtors to limit the information. No standards are supplied.

    Finally, the need to file all of the additional documents in each consumer case would
    impose a substantial additional cost on the clerks’ offices and the offices of the
    United States trustees.

    §407 ("Dismissal for failure to file schedules timely or provide required
    information") (see S. 1301, §312)

    Changes. This section creates a new ground for dismissal of Chapter 7 and 11
    cases—failure to provide the information required by §406. Failure to file initial
    documents (including past tax returns and pay stubs) results in mandatory, automatic
    dismissal on the 46th day after filing, subject only to a timely request by the debtor for
    an extension of up to 15 days. The court is required to enter an order confirming the
    dismissal if requested by any party. Failure to file (or supply to creditors on their
    request) any subsequently required documents is also subject to mandatory dismissal, upon
    request of any party in interest. The deadline for compliance with a creditor request is
    to be set by the court within 10 days of the request, and may not exceed 30 days.

    Impact. The difficulty of complying with the proposed initial disclosures (of
    tax returns and pay stubs) is noted in the commentary on §406, above. Section 407 would
    impose automatic dismissal as a penalty for failure to comply with these disclosure
    requirements, without providing notice to the debtor of any deficiency in the filing.
    Although the debtor is given an opportunity to seek an additional 15 days to comply, no
    further extensions are authorized. Given that it may take more than 60 days to obtain
    copies of tax returns from the Internal Revenue Service, these provisions may result in
    unavoidable dismissal of cases filed in good faith. In connection with enforcing the
    requirements for postpetition copies and tax information, the court is also given no
    discretion. It must order the information produced and dismiss the case if the order is
    not complied with. These provisions would discourage good faith filings at the outset, and
    may result in dismissal of cases that are filed and prosecuted in good faith.

    Rather than making debtors subject to such dismissal, some courts may generally order
    that the documents need not be filed, but, as noted above, in the discussion of §406, no
    standards are provided for orders of nonproduction, and practice among courts can be
    expected to vary widely.

    Alternative. The failure of a debtor to provide information ordered by a court
    to be produced to a creditor in connection with an examination pursuant to Fed.R.Bankr.P.
    2004 could be specified as a ground for dismissal of both Chapter 7 and Chapter 13 cases.

    §408 ("Adequate time to prepare for hearing on confirmation of the plan")
    (see S. 1301, §§304, 313)

    Changes. This section provides that the hearing on confirmation of a Chapter 13
    plan must take place no sooner than 20 days and no later than 45 days after the first
    meeting of creditors.

    Impact. Under Section 401 of H.R. 3150, discussed above, creditors’
    meetings must be convened between 60 and 90 days after case filing. Section 408 requires
    that the confirmation hearing take place between 20 and 45 days after the creditors’
    meeting, thus placing confirmation between 80 and 135 days after case filing. Present law
    (Fed.R.Bankr.P. 2003(a)) requires creditor meetings between 20 and 50 days after case
    filing, with no defined waiting period for the confirmation hearing, and so permits
    quicker confirmation of plans and payouts to creditors, but also allows much longer time
    to elapse before confirmation. Although the different times provided for by the proposed
    bill would delay plan confirmation in many cases, they do move toward uniformity.

    Alternative. The more uniform time for confirmation hearings specified by this
    section could be combined with the shorter time for creditor meetings currently specified
    by Fed.R.Bankr.P. 2003(a).

    *§409 ("Chapter 13 plans to have a 5-year duration in certain cases")

    Changes. This section would increase the term of Chapter 13 plans from the
    present range of three to five years to a new range of five to seven years, for all
    debtors with total monthly income equal to at least the national median for their
    household size or a smaller household. The proposal would retain the three-to-five year
    range for those earning less than the applicable medians. In each situation, plans lasting
    longer than the minimum plan term would require court approval. These provisions should be
    read in conjunction with §102 of the proposed bill, discussed above, which requires that
    all net income of the debtors be paid to general unsecured creditors for the minimum plan
    term.

    The section also amends §1329 of the Code, which governs modified plans. Although an
    original plan is allowed, with court approval, to have a duration two years beyond the
    minimum term, the amendment would prohibit this extension for modified plans.

    Impact. Consistent with §102 of H.R. 3150, this section would have the effect
    of lengthening the minimum Chapter 13 plan term from 3 to 5 years for many Chapter 13
    debtors. This increase in minimum plan length may result in increased payments to
    creditors, but only if the plans are completed. Increased plan length may discourage use
    of Chapter 13 by debtors who have the choice of Chapter 7, and may decrease successful
    plan completion by those who do choose Chapter 13.

    Extending plans beyond the minimum term is sometimes in the debtor’s
    interest—in order to cure large mortgage arrearages or retire nondischargeable debt.
    There is no apparent reason why this extension should be prohibited in modified plans.

    §410 ("Sense of the Congress regarding expansion of Rule 9011 of the Federal
    Rules of Bankruptcy Procedure")

    Changes. Fed.R.Bankr.P. 9011 is the bankruptcy analog to Rule 11 of the Federal
    Rules of Civil Procedure. It requires the signature of the attorney (for a represented
    party) or of the party (if unrepresented) on documents filed with the court, and provides
    that this signature constitutes a certificate that the document is, among other things,
    well grounded in fact—based on the signer’s knowledge, information, and belief,
    formed after reasonable inquiry. Currently, Rule 9011 does not apply to schedules,
    apparently with the understanding that debtor’s attorneys are not economically able
    to independently verify the accuracy of the information supplied by their clients. This
    section suggests that the Rule be modified to apply to all filings, specifically including
    schedules.

    Impact. Section 103 of H.R. 3150, discussed above, imposes by statute the change
    suggested in this section for Fed.R.Bankr.P. 9011. This section, apart from suggesting an
    investigatory obligation on pro se debtors, is therefore unnecessary. As discussed in
    connection with §103, requiring independent verification by debtors’ attorneys of
    all of the schedule information required of their clients would delay bankruptcy filings
    and increase the cost of legal services, thus discouraging good faith filings. In light of
    the auditing requirement proposed both by this bill and by the National Bankruptcy Review
    Commission, it is questionable that attorney verification of schedules is needed to assure
    accuracy.

    §411 ("Jurisdiction of Courts of Appeals") (new)

    Changes. Under present law, appeals of decisions of bankruptcy courts are heard
    by the district courts or by Bankruptcy Appellate Panels, composed of bankruptcy judges.
    This section would grant jurisdiction over such appeals to the Circuit Courts of Appeals.

    Impact. The current system of appeals generates appellate decisions that are
    largely without binding precedential impact. Decisions of the Courts of Appeals would be
    binding on all courts within the circuit, promoting intercircuit uniformity. Direct
    appeals would also eliminate one stage of adjudication in arriving at a decision from the
    Courts of Appeal, thus reducing costs for litigants who would appeal to those courts in
    any event.

    *§412 ("Establishment of official forms") (new)

    Changes. This section would require the Judicial Conference of the United States
    to establish official forms to facilitate compliance with the means-testing and other
    provisions of §§101 and 102, discussed above.

    Impact. The Judicial Conference regularly promulgates Official Bankruptcy Forms
    to reflect changes in law and technology, and hence a statutory directive is probably
    unnecessary

    *§413 ("Elimination of certain fees payable in Chapter 11 bankruptcy
    cases")

    Changes. Under current law, fees payable to the United States trustee are
    assessed in Chapter 11 cases, based on the level of funds disbursed, until the case is
    closed or converted. This section would reduce the time for fee payment by terminating
    payments upon confirmation. The change would be effective on October 1, 1999.

    Impact. The proposed change would reduce costs for Chapter 11 debtors and remove
    an incentive to prematurely close Chapter 11 cases in order to save fees.

    *§414 ("Study of bankruptcy impact of credit extended to dependent
    students")

    Changes. This section directs the Comptroller General to conduct a study and to
    submit a report, within one year of the bill’s enactment, of the impact of credit
    extension to dependent students in post-secondary educational institutions on the rate of
    bankruptcy filings.

    Impact. This study may have significance in determining the causes for the
    increase in bankruptcy filings experienced over the past several years. Other empirical
    studies, including an ABI-sponsored study on the extent of income available to pay
    creditors in Chapter 7 cases, are currently in progress. The results of such studies would
    be most helpful if they could be reviewed prior to the enactment of major bankruptcy
    legislation.

    Subtitle B ("Data Provisions")

    §441 ("Improved bankruptcy statistics") (see S. 1301, §306)

    Changes. This section would require the Director of the Executive Office for
    United States Trustees to compile bankruptcy data in specified categories and require the
    Administrative Office of the United States Courts to specify the form of the data and make
    it public.

    Impact. Although this provision would be costly to implement, it has the
    potential for making useful information available to those interested in the functioning
    of the bankruptcy system. The National Bankruptcy Review Commission (Final Report at
    921-43) recommended that a similar program of data collection and reporting be
    implemented. One potential problem in the proposed legislation is in its specification of
    matters for data collection and reporting. The Review Commission suggested a pilot program
    to develop effective programs, and this might be preferable to establishing categories for
    data collection by legislation. As an example of the problem with legislative
    specification, the proposal includes a requirement that data be collected and reported as
    to "the number of [Chapter 13] cases in which a final order was entered determining
    the value of property securing a claim less than the claim." Such a report would
    likely yield little useful information, since in many situations of the cramdown of
    secured claims the parties negotiate an appropriate bifurcation, with no court order
    entered.

    Alternative. It may be preferable to implement the Review Commission’s
    recommendation of a pilot program to determine effective categories and methods of data
    collection and reporting.

    §442 ("Bankruptcy data") (see S. 1301, §306)

    Changes. This proposal would require the Attorney General to issue regulations
    for uniform reporting of bankruptcy cases on standard forms, designed to facilitate both
    physical and electronic access to the information contained in the reports. Detailed
    contents of the reports are specified.

    Impact. A consistent reporting system would provide many benefits, and has been
    recommended by the National Bankruptcy Review Commission as part of a national bankruptcy
    filing system (Final Report at 105-07). As with the prior provision of the proposed bill,
    there may be some difficulty with the details it sets out.

    Alternative. It may be preferable to allow the details of any reporting system
    to be developed by the office administering the system.

    §443 ("Sense of the Congress regarding availability of bankruptcy data")

    Changes. This proposal effectively recommends that Congress establish a national
    bankruptcy filing system.

    Impact. A nationwide reporting system would provide many benefits, and has been
    recommended by the National Bankruptcy Review Commission (Final Report at 105-07).

    Title V ("Tax Provisions")

    Most of the sections of Title V do not involve consumer bankruptcy issues and are
    therefore not treated in this analysis.

    *§502 ("Enforcement of child and spousal support") (see S. 1301, §328)

    Changes. This section adds additional language to §522(c)(1) of the Code to
    confirm the rule in In re Davis, 105 F.3d 1017, 1022 (5th Cir.1997) (allowing
    enforcement of child support against property exempt under state law).

    Impact. The proposed language should serve to clarify the meaning of the
    statutory provision.

    §503 ("Effective notice to government")

    Changes. This section specifies that all notices from a debtor to a governmental
    agency (as well as the original scheduling of the agency as a creditor) contain detailed
    information regarding the nature of the agency and its claim. For example, a real estate
    tax claim is required to be identified by real estate parcel number. The clerk of court is
    required to maintain a register of "safe harbor" mailing addresses that may be
    used by debtors. The Advisory Committee on Bankruptcy Rules of the Judicial Conference is
    required to propose "enhanced rules" for providing notice to governmental
    agencies, incorporating the provisions set out earlier in the section. Notices not in
    compliance with the proposed requirements would have no effect unless, among other things,
    the debtor showed either that notice was sent to the safe harbor address, or both that no
    safe harbor address had been specified and that there was actual notice to a responsible
    officer of the appropriate agency. In particular, governmental violations of the automatic
    stay and turnover provisions of the Code could not result in any sanction if notice of the
    commencement of the case was not given in compliance with the requirements of the section.

    Impact. The provision would provide surer notice to governmental agencies. Some
    of the detail required, however, may unnecessarily increase the cost of case filing, and
    litigation can be anticipated on issues of whether notices were in compliance with the
    requirements. See the discussion in connection with §405, above.

    §508 ("Chapter 13 discharge of fraudulent and other taxes")

    Changes. This section would make the tax obligations that are defined by
    §523(a)(1) of the Code nondischargeable in Chapter 13 cases as well as in Chapter 7
    cases.

    Impact. Together with §143, this section of H.R. 3150 has the effect of largely
    eliminating the superdischarge of Chapter 13. See the discussion of this issue in
    connection with §143, above.

    §517 ("Requirement to file tax returns to confirm Chapter 13 plans")

    Changes. This section would impose on Chapter 13 debtors the obligation to file
    both past due and current tax returns, as a condition for confirmation. Deadlines are
    specified for the filing of the returns (at least 120 days from the filing of the
    bankruptcy case), and failure to comply is specified as a ground for conversion or
    dismissal of the case. The taxing body is given 60 days after the filing of a return to
    submit a timely claim for the tax involved in the return. Finally, it is suggested that
    the Federal Rules of Bankruptcy Procedure be amended to allow objections to confirmation
    to be made by a taxing body "on or before 60 days after" the debtor files all of
    the required tax returns.

    Impact. These provisions are largely reasonable, and will assist the debtor and
    the taxing bodies in resolving past due tax obligations. However, the suggested change in
    the bankruptcy rules further complicates the issue of when a confirmation hearing is
    supposed to take place under the provisions of H.R. 3150. See the discussion in connection
    with §408, above. In order to allow the suggested objection based on the filing of a tax
    return 120 days after the bankruptcy filing, confirmation hearings would have to be
    scheduled 180 days after the filing of the case, rather than the maximum of 135 days
    specified by §408.

    Title VI ("Miscellaneous")

    This title does not involve consumer bankruptcy issues and is therefore not treated in
    this analysis.

    Description:

    To amend title 11 of the United States Code to modify the application of chapter 7 relating to liquidation cases. (Introduced in House)

    Description:

    To amend title 11 of the United States Code to make debts to governmental units for the care and maintenance of minor children nondischargeable.
    Parental Responsibility and Taxpayer Protection Amendment of 1998
    (Introduced in House)

    HR 3711 IH

    105th CONGRESS

    2d Session

    H. R. 3711

    To amend title 11 of the United States Code to make debts to
    governmental units for the care and maintenance of minor children
    nondischargeable.

    IN THE HOUSE OF REPRESENTATIVES

    April 22, 1998

    Mr. SMITH of Michigan introduced the following bill; which was
    referred to the Committee on the Judiciary


    A BILL

    To amend title 11 of the United States Code to make debts to
    governmental units for the care and maintenance of minor children
    nondischargeable.

      Be it enacted by the Senate and House of Representatives of
      the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Parental Responsibility and
      Taxpayer Protection Amendment of 1998'.

    SEC. 2. AMENDMENT.

      Section 523(a) of title 11, United States Code, is
      amended--

        (1) in paragraph (17) by striking `or' at the
        end,

        (2) in paragraph (18) by striking the period at the end and
        inserting `; or', and

        (3) by adding at the end the following:

        `(19) to a governmental unit for a cost incurred for the
        care or maintenance of a minor child of the debtor.'.

    SEC. 3. APPLICABILITY OF AMENDMENT.

      The amendment made by section 2 shall not apply with respect to
      cases commenced under title 11 of the United States Code before the date
      of the enactment of this Act.
    Description:

    To amend title 11, United States Code, to limit the value of certain real and personal property that a debtor may elect to exempt under State or local law, and for other purposes.

    Description:

    To make improvements in the operation and administration of the Federal courts, and for other purposes.

    Description:

    To amend title 11 of the United States Code relating to bankruptcy.
    Consumer Lenders and Borrowers Bankruptcy Accountability Act of 1998
    (Introduced in House)


    SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

      (a) SHORT TITLE- This Act may be cited as the `Consumer Lenders
      and Borrowers Bankruptcy Accountability Act of 1998'.

      (b) TABLE OF CONTENTS- The table of contents is as
      follows:

        Sec. 1. Short title; table of contents.

        Sec. 2. Discouraging reckless lending practices.

        Sec. 3. Discouraging wage seizures which push people into
        bankruptcy.

        Sec. 4. Stop creditors' abuses of the bankruptcy
        system.

        Sec. 5. Improve debtors' understanding of bankruptcy options
        and alternatives.

        Sec. 6. Increase incentives for voluntary repayment
        plans.

        Sec. 7. Provide fair property exemptions and prevent
        high-rollers from abusing the system.

        Sec. 8. Prevent abuse of bankruptcy system by debtors who can
        afford to pay their debts.

        Sec. 9. Prevent abusive bankruptcy filings.

        Sec. 10. Improve accuracy of debtors' bankruptcy
        schedules.

        Sec. 11. Ensure proportionate and fair recoveries for
        creditors.

        Sec. 12. Prevent windfalls for undersecured
        creditors.

        Sec. 13. Reinforce the fresh start.

        Sec. 14. Clarifying amendments.

        Sec. 15. Applicability of amendments.

    SEC. 2. DISCOURAGING RECKLESS LENDING PRACTICES.

      (a) LIMITING CLAIMS ARISING FROM IRRESPONSIBLE LEADERSHIP
      PRACTICES- Section 502(b) of title 11, United States Code, is
      amended--

        (1) in paragraph (8) by striking `or' at the end,

        (2) in paragraph (9) by striking the period at the end and
        inserting a semicolon, and

        (3) by adding at the end the following:

        `(10) the claim is--

          `(A) based upon an extension to an individual of
          unsecured credit which caused, and which the claimant knew or should
          have known would cause, the debtor's aggregate unsecured debts to exceed
          40 percent of the debtor's annual gross income; or

          `(B) based on a secured debt if the creditor has
          violated section 129(h) of the Truth in Lending Act;

        `(11) the claim arises from a debt on which the creditor
        failed or refused to waive interest in an unsuccessful consumer credit
        counseling plan attempted by the debtor before filing bankruptcy (and
        the creditor shall bear the burden of proving its waiver of interest in
        such a plan);

        `(12) the claim arises from a debt incurred in or adjacent
        to a gambling facility, or a debt which the creditor knew or should have
        known was intended to be used by the debtor for gambling
        purposes;

        `(13) the claim arises from a consumer debt on which the
        annual percentage rate for the debt as defined by section 107 of the
        Truth in Lending Act increased by more than 5 percent in the 12-month
        period ending before the order for relief;

        `(14) the claim is not secured and arises from a consumer
        debt on which a billing statement provided by the creditor in the 1-year
        period ending on the date of the order for relief included an offer to
        accept a periodic payment which, if made on the due date for that
        periodic payment and each subsequent due date, would not amortize the
        principal amount due to the creditor at the then current rate of
        interest in a period of less than 15 years from the due date of the
        periodic payment; or

        `(15) the claim is made by a creditor, its agents, or
        assignees based on a debt with respect to which the creditor, its agents
        or assignees engaged in conduct which violated section 805, 806, 807, or
        808 of the Fair Credit Reporting Act whether or not such creditor is a
        debt collector as defined by section 803(6) of such Act. Civil liability
        against such creditor, agent or assignee under section 813 of such Act
        shall also be available whether or not such creditor is a debt collector
        as defined by section 803(6) of such Act.'.

      (b) CLARIFY THE DISCHARGEABILITY OF CREDIT CARD DEBT IN A WAY
      THAT PLACES SOME RESPONSIBILITY ON CREDITORS FOR IRRESPONSIBLE LENDING
      PRACTICES-

        (1) REQUIREMENTS- Section 523(a)(2) of title 11, United
        States Code, is amended--

          (A) in subparagraph (B) by striking `or' at the
          end,

          (B) in subparagraph (C) by striking the period at the
          end and inserting `; or', and

          (C) by adding at the end the following:

          `(D) except as provided in subparagraph (C), consumer
          debts under an open end credit plan (as defined section 103 of the Truth
          in Lending Act) are dischargeable unless--

            `(i) the creditor establishes the requirements of
            subparagraph (B) with respect to the consumer's credit application;
            or

            `(ii) the creditor establishes actual and
            reasonable reliance on an express fraudulent statement made by the
            debtor in connection with an extension of credit in excess of the amount
            available under the open end credit plan.'.

        (2) PROOF- Section 523 of title 11, United States Code, is
        amended by adding at the end the following:

      `(h) Proof of fraud under this section shall be made by clear
      and convincing evidence.'.

    SEC. 3. DISCOURAGING WAGE SEIZURES WHICH PUSH PEOPLE INTO
    BANKRUPTCY.

      Section 547 of title 11, United States Code, is amended--

        (1) in subsection (e)(3) by adding at the end the
        following:

      `In the case of wages or other income of an individual debtor, a
      transfer of the right to receive such income is not effective until the
      time that the income is to be paid to the debtor.'; and

        (2) by amending subsection (c)(8) to read as
        follows:

        `(8) that is a voluntary transfer of property that has an
        aggregate amount less than $600.'.

    SEC. 4. STOP CREDITORS' ABUSES OF THE BANKRUPTCY SYSTEM.

      (a) SANCTIONS FOR CREDITOR ABUSES OF THE BANKRUPTCY
      SYSTEM-

        (1) ALLOWANCE OF CLAIMS OR INTERESTS- Section 502 of title
        11, United States Code, is amended by adding at the end the
        following:

      `(k)(1) If, in a case of an individual debtor, following an
      objection filed by the debtor, a claim (other than a claim for a debt
      for alimony or child support) is disallowed or reduced by an amount
      representing more than 5 percent of the original filed claim or $500,
      whichever is less, the court shall award the debtor reasonable
      attorneys' fees and costs.

      `(2) If, in a case of an individual debtor, the court finds
      that the position of any claimant with respect to whom an objection is
      timely filed under this section is not substantially justified, the
      court shall also award damages in the amount of $5,000 and may, in
      appropriate circumstances, award punitive damages.'.

        (2) EXCEPTIONS TO DISCHARGE- Section 523(d) of title 11,
        United States Code, is amended to read as follows:

      `(d) If a creditor requests a determination of dischargeability
      of a consumer debt under this section (other than under paragraph (5) or
      (15) of subsection (a)), and such debt is discharged, the court shall
      award to the debtor reasonable attorneys' fees and costs. If the court
      finds that the position of any creditor proceeding under this section is
      not substantially justified, the court shall also award three times
      actual damages (but not less than $5,000) and, may, in appropriate
      circumstances, award punitive damages.'.

        (3) EFFECT OF DISCHARGE- Section 524 of title 11, United
        States Code, is amended by adding at the end the following:

      `(i) A creditor's failure to credit payments received under a
      plan confirmed under this title in the manner and amounts required by
      the plan shall be considered to be an act described in subsection (a)(2)
      or, if such failure occurs before the discharge, an act in violation of
      section 362(a) of this title.

      `(j)(1) A creditor may not charge a debtor or a debtor's
      account for attorney's fees or costs related to work performed in
      connection with a case under this title except to the extent that such
      fees are reasonable under the standards of section 330(a) of this title
      for actual, necessary services rendered, approved by the court, and
      consistent with applicable contracts and nonbankruptcy law.

      `(2) A charge made in violation of paragraph (1) shall be
      considered to be an act described in subsection (a)(2) or, if such
      charge occurs before the discharge, of section 362(a) of this
      title.

      `(k) An individual injured by any willful violation of
      discharge in a case under this title shall recover 3 times actual
      damages but not less than $5,000, plus costs and attorneys' fees, and,
      in appropriate circumstances, may recover punitive damages.'.

        (4) AUTOMATIC STAY- Section 362(h) of title 11, United
        States Code, is amended--

          (A) by striking `actual damages, including' and
          inserting `3 times actual damages (but not less than
          $5,000)',

          (B) by inserting `(1)' after `(h)', and

          (C) by adding at the end the following:

      `(2) If the court finds that the position of any creditor
      filing a motion for relief from a stay under this section is not
      substantially justified, the court shall award damages in the amount of
      3 times the debtor's actual damages (but not less than $5,000) plus
      costs and attorneys' fees.'.

        (5) ELIGIBILITY FOR RELIEF- Section 109 of title 11, United
        States Code, is amended by adding at the end the following:

      `(h) If a creditor files a motion to dismiss a case on the
      grounds that the debtor may not be a debtor under the chapter under
      which the case is pending and if such motion is denied or withdrawn, the
      court shall award the debtor a reasonable attorney's fee and costs. If
      the court finds that the position of any party filing a motion under
      this section is not substantially justified, the court shall award to
      the debtor damages in the amount of 3 times the debtor's actual damages
      incurred in opposing such motion (but not less than $5,000) and, in
      appropriate circumstances, may award punitive damages.'.

      (b) DISMISSAL- Section 707 of title 11, United States Code, is
      amended by adding at the end the following:

      `(c) If a creditor files a motion to dismiss a case under this
      section and such motion is denied or withdrawn, the court shall award
      the debtor a reasonable attorney's fee and costs. If the court finds
      that the position of any party filing a motion under this section is not
      substantially justified, the court shall award to the debtor damages in
      the amount of 3 times the debtor's actual damages (but not less than
      $5,000) and may, in appropriate circumstances, award punitive
      damages.'.

      (c) PROHIBIT REAFFIRMATIONS AND THREATS OF REPOSESSION AGAINST
      DEBTORS WHO ARE CURRENT IN THEIR PAYMENTS-

        (1) EFFECT OF DISCHARGE- Section 524 of title 11, United
        States Code, is amended--

          (A) in subsection (a)--

            (i) in paragraph (2) by striking `and' at the
            end,

            (ii) in paragraph (3) by striking the period at the
            end and inserting `; and', and

            (iii) by adding at the end the
            following:

        `(4) operates as an injunction against any act to enforce
        against property of the debtor any lien to the extent that lien secures
        any such debt, or to accelerate any such debt, based solely upon the
        commencement of a case under this title, the insolvency or financial
        condition of the debtor, or on appointment of or taking possession by a
        trustee in a case under this title, notwithstanding any provision in an
        agreement, transfer instrument, or applicable law, whether or not
        discharge of such debt is waived.',

          (B) in subsection (c) by striking `is enforceable' the
          first place it appears and all that follows through the period at the
          end, and inserting `is not enforceable, whether or not discharge of such
          debt is waived.', and

          (C) by striking subsection (d).

        (2) REDEMPTION- Section 722 of title 11, United States
        Code, is amended--

          (A) by--

            (i) striking `tangible' and all that follows
            through `use', and inserting `property, other than real property subject
            to a security interest', and

            (ii) by striking `dischargeable
            consumer',

          (B) by inserting `(a)' after `Sec. 722',
          and

          (C) by adding at the end the following:

      `(b) The debtor may pay the amount necessary to redeem the
      property under subsection (a) of this section in installments over such
      period, and on such terms, as the court may order.'.

    SEC. 5. IMPROVE DEBTORS' UNDERSTANDING OF BANKRUPTCY OPTIONS AND
    ALTERNATIVES.

      Section 521 of title 11, United States Code, is amended by
      adding at the end the following:

        `(6) With the petition for relief, an individual or joint
        debtor filing for relief under chapter 7 or chapter 13 shall file a
        statement acknowledging receipt of an explanation on an Official Form
        promulgated by the Judicial Conference of the United States of the
        relief available under both chapters, and of the relief which is
        provided by private credit counseling agencies. Such an explanation
        shall also include detailed information regarding the sources of funding
        for private credit counseling agencies.'.

    SEC. 6. INCREASE INCENTIVES FOR VOLUNTARY REPAYMENT PLANS.

      (a) AMENDMENT TO FAIR CREDIT REPORTING ACT- Section 605(a)(1)
      of the Fair Credit Reporting Act (15 U.S.C. 1681c(a)(1)) is amended to
      read as follows:

      `(1) Cases under--

        `(A) chapter 7 or 11 of title 11 of the United States Code
        that, from the date of entry of the order for relief antedate the report
        by more than 10 years;

        `(B) chapter 12 or 13 of title 11 of the United States Code
        in which a discharge has been entered, that, from the date of entry of
        the order for relief antedate the report by more than 5 years;

        `(C) chapter 12 or 13 of title 11 of the United States Code
        in which a discharge has not been entered, that, from the date of entry
        of the order for relief antedate the report by more than 10 years;
        and

        `(D) when information can no longer be reported based on
        subparagraph (B), no consumer reporting agency may make any consumer
        report containing any of the information provided for under paragraphs
        (1) through (6) which antedates the order for relief in the case covered
        by subparagraph (B).'.

      (b) EFFECTIVE IMPLEMENTATION OF CHAPTER 13 PLANS- Section 1325
      of title 11, United States Code, is amended by adding at the end the
      following:

      `(d) A court may not require as a condition of confirmation
      under subsection (a)(3), payments to holders of allowed unsecured claims
      that exceed the greater of the amount required under subsection (a)(4)
      or the amount required under subsection (b).'.

      (c) CLASSIFICATION OF CLAIMS IN CHAPTER 13- Section 1322(b)(1)
      of title 11, United States Code, is amended to read as follows:

        `(1) designate a class or classes of unsecured claims, as
        provided in section 1122 of this title, but may not discriminate
        unfairly against any class so designated; however, such plan may
        designate different treatment for claims for a debt of the debtor
        if--

          `(A) an individual is liable on such debt with the
          debtor; or

          `(B) such debt is of a kind excepted from discharge
          under section 1328(a) of this title;'.

      (d) 5-YEAR CHAPTER 13 PLANS- Section 1322(d) is amended to read
      as follows:

      `(d) The plan may not provide for payments over a period that
      is longer than 3 years, unless the debtor proposes a longer period, but
      the court may not approve a period that is longer than 5 years.'.

      (e) VALUATION OF SECURED CLAIM AT CONFIRMATION- Section 1327(a)
      of title 11, United States Code, is amended by adding at the end the
      following:

      `If a plan proposes to value property to determine a creditor's
      secured claim pursuant to section 506(a), and the creditor receives
      notice of proposed valuation and confirmation hearing, such value shall
      be established by the confirmed plan, whether or not the holder of the
      claim has filed a proof of claim. If the plan does not so provide, any
      party may obtain a determination of the amount of an allowed secured
      claim, either before or after the confirmation, whether or not the
      holder of the claim has filed a proof of claim.'.

      (f) PROTECTING CHAPTER 13 DEBTOR'S PROPERTY DURING CASE-
      Section 1306(c) of title 11, United States Code, is amended by adding at
      the end the following:

      `(c) During the pendency of a chapter 13 case, section 362
      shall protect property of the estate which has revested in the debtor to
      the same extent as it protects other property of the estate.'.

      (g) INCENTIVES FOR CONSENSUAL MODIFICATION OF MORTGAGES-
      Section 1322 of title 11, United States Code, is amended by adding at
      the end the following:

      `(f) Notwithstanding subsection (b)(2) and applicable
      nonbankruptcy law, the rights of a holder of a secured claim may be
      modified with the consent of the holder of the claim by capitalizing the
      amount of any default, and amortizing any balance over an agreed term
      not less than the existing term of the loan, at an interest rate
      equivalent to or below the interest rate in effect on that claim at the
      time of modification. If a modification agreement is filed with the
      court at the time it is made, relief from the automatic stay shall
      thereafter be granted pursuant to section 362(d)(1) of this title upon
      motion, if the debtor is more than 60 days delinquent pursuant to the
      agreement at the time of the hearing on the motion.'.

    SEC. 7. PROVIDE FAIR PROPERTY EXEMPTIONS AND PREVENT HIGH-ROLLERS
    FROM ABUSING THE SYSTEM.

      (a) PERMIT EFFECTIVE USE OF EXEMPTIONS- Section 522 of title
      11, United States Code, is amended by adding at the end the
      following:

      `(n) If, in the 1-year period ending on the date of the filing
      of the petition and while the debtor was insolvent, the debtor makes
      property exempt under subsection (b) by converting property to a form of
      property that is exempt in an unlimited amount, such property shall not
      be exempt under this section to the extent that the value of the
      debtor's interest in the property that is converted exceeds $100,000.
      Such conversion shall not otherwise be a basis for denying an exemption
      and shall not be the basis for denying the debtor other relief under
      this title.'.

      (b) ESTABLISH A MODEST FLOOR FOR EXEMPTIONS- Section 522(b)(1)
      of title 11, United States Code, is amended by striking `unless the
      State law that is applicable to the debtor under paragraph (2)(A)
      specifically does not so authorize'.

    SEC. 8. PREVENT ABUSE OF BANKRUPTCY SYSTEM BY DEBTORS WHO CAN
    AFFORD TO PAY THEIR DEBTS.


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                    Contents Display 
    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.
    Web posted
    and Copyright © June 25, 1997, American
    Bankruptcy Institute.

    Technical Corrections Bill Advances in House

    Editor's Note:

    The electronic version of the bill at Thomas will not
    reflect the changes described below for 2-3 days.

    On June 25, 1997, the House Subcommittee on Commercial and
    Administrative Law unanimously approved an amendment in the
    nature of a substitute bill to H.R. 764 by Rep. George Gekas (R-PA), the
    Chairman of the Subcommittee.

    While much of the bill's provisions are of a technical nature,
    there are several substantive law changes. Questions were raised
    about several provisions in H.R. 764 as introduced, and the new
    version seeks to address these concerns.

    The new bill would raise the cap on the special treatment for
    single asset real estate bankruptcies from the current $4 million
    to $15 million. The version of H.R. 764 as introduced removed
    the cap entirely.

    The new bill also seeks to clarify the provision on curing
    non-monetary defaults of leases of real property, or defaults of
    non-monetary provisions in executory contracts, in the wake of
    the 9th Circuit's Claremont opinion. The bill would
    strike current §365(b)(1)(D) and replace it with three
    subsections, (D), (E) and (F), as follows:

    "(D) the satisfaction of any penalty rate or penalty
    provision relating to a default arising from a failure to
    perform nonmonetary obligations under an executory contract
    or under an unexpired lease of real or personal property;

    "(E) the satisfaction of any provision (other than a
    penalty rate or penalty provision) relating to a default
    arising from any failure to perform nonmonetary obligations
    under an unexpired lease of real property, if it is
    impossible for the trustee to cure such default by
    performing nonmonetary acts at and after the time of
    assumption; or

    "(F) the satisfaction of any provision (other than a
    penalty rate or penalty provision) relating to a default
    arising from any failure to perform nonmonetary obligations
    under an executory contract, if it is impossible for the
    trustee to cure such default by performing nonmonetary acts
    at and after the time of assumption and if the court
    determines, based on the equities of the case, that
    paragraph (1) should not apply with respect to such
    default."

    Among its other provisions, the substitute seeks to address
    the so-called McConville problem by making clear that
    post-petition transfers immune from attack under sections 544 and
    549 of the Code would not be void or voidable as made in
    violation of the automatic stay, and makes a further
    clarification to the "Deprizio" amendment in the 1994 Reform Act.

    The bill adds "watercraft" and "aircraft" to the motor
    vehicles in §523, making losses arising from the operation
    of these while intoxicated nondischargeable.

    The changes made by the bill would apply only to cases
    commenced on or after the date of enactment of the Act.

    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.
    COMPARISON

    Bankruptcy Law Technical Corrections Acts of 1997 (H.R. 120 and
    H.R. 764)

    Written by:

    Roger M. Whelan

    and Virginia Maxwell Waller

    Shaw, Pittman, Potts & Trowbridge

    Web posted and Copyright ©
    January 28, 1997, American Bankruptcy Institute and Shaw, Pittman, Potts &
    Trowbridge.

    Section-by-Section Comparison
    H.R. 764 H.R. 120
    "Bankruptcy Amendments of 1997" "Bankruptcy Law Technical Corrections
    Act of 1997"
    Introduced by Rep. Hyde on Feb. 13, 1997 Introduced by Rep. Conyers on
    Jan. 7, 1997
    Section 1. Short Title. Section 1. Short
    Title.
    Section 2. Definitions. Section 2.
    Definitions.
    In Paragraph 51B of Section 101 of title 11, United States Code, everything after
    "thereto" is struck in place of a semicolon.
    No such language
    In each paragraph of Section 101 of title 11 of the United States Code, as amended in
    Sec. 2(4) of the bill, text is inserted which functions as a heading for the paragraph. Such text is
    comprised of the term defined in the paragraph and is printed in capital and small capital typeface
    and followed by a period and a 1 cm. dash.
    No such language
    No such language In paragraph 54 of section 101 of title 11 of the United
    States Code the words ", creation of a lien," is inserted after the words "security
    interest"
    Sec. 3. Adjustment of Dollar Amounts. Sec. 3. Adjustment
    of Dollar Amounts.
    Identical Language in both bills. Identical Language in both
    bills.
    Sec. 4. Compensation to Officers. Sec. 7. Compensation to
    Officers.
    Identical Language in both bills. See Section 7 in H.R. 120 Identical
    Language in both bills. See Section 4 in H.R. 764.
    Sec. 5. Effect of Conversion. Sec. 9. Effect of
    Conversion.
    Identical Language in both bills. See Section 9 in H.R. 120 Identical
    Language in both bills. See Section 5 in H.R. 764.
    Sec. 6. Executory Contracts and Unexpired Leases. Sec.
    11. Executory Contracts and Unexpired Leases.
    Identical Language in both bills. See Section 11 in H.R. 120 Identical
    Language in both bills. See Section 5 in H.R. 764.
    Sec.7. Allowance of Administrative Expenses. Sec.13.
    Allowance of Administrative Expenses.
    Identical Language in both bills. See Section 13 in H.R. 120 Identical
    Language in both bills. See Section 7 in H.R. 764.
    Sec. 8. Priorities. Sec. 14. Priorities.
    Identical Language in both bills. See Section 14 in H.R. 120 Identical
    Language in both bills. See Section 8 in H.R. 764.
    Sec. 9. Exemptions. Sec. 15.
    Exemptions.
    Identical Language in both bills. See Section 15 in H.R. 120 Identical
    Language in both bills. See Section 9 in H.R. 764.
    Sec. 10 Exceptions to Discharge. Sec. 16 Exceptions to
    Discharge.
    H.R. 764 amends paragraph 9 of Section 523 of title 11, United States Code, by
    inserting: ", watercraft, or aircraft" after the words "motor vehicle." H.R. 120 also contains
    additional language not contained in H.R. 764; see section 16 of H.R. 120.
    H.R. 120
    amends subsection (a)(17) of Section 523 of title 11, United States Code by striking "by a court"
    and inserting "on a prisoner by a Federal court" and by striking "section 1915(b) or(f)" and
    inserting "subsection (b) or (f)(2) of section 1915." Further, subsection (e) of Section 523 of title
    11, United States Code is amended by striking "a insured" and inserting "an insured."
    Sec. 11. Protection Against Discriminatory
    Treatment.
    Sec. 18. Protection Against Discriminatory
    Treatment.
    Identical Language in both bills. See Section 18 in H.R. 120 Identical
    Language in both bills. See Section 11 in H.R. 764.
    Sec. 12 Property of the Estate. Sec. 19 Property of the
    Estate.
    Identical Language in both bills. See Section 19 in H.R. 120 Identical
    Language in both bills. See Section 12 in H.R. 764.
    Sec. 13. Limitations on Avoiding Powers. Sec. 20.
    Limitations on Avoiding Powers.
    Identical Language in both bills. See Section 20 in H.R. 120 Identical
    Language in both bills. See Section 13 in H.R. 764.
    Sec. 14. Liability of Transferee of Avoided Transfer. Sec.
    21. Liability of Transferee of Avoided Transfer.
    Identical Language in both bills. See Section 21 in H.R. 120 Identical
    Language in both bills. See Section 14 in H.R. 764.
    Sec. 15 Setoff. Sec. 22 Setoff.
    Identical Language in both bills. See Section 22 in H.R. 120. Identical
    Language in both bills. See Section 15 in H.R. 764.
    Sec. 16 Disposition of Property of the Estate. Sec. 23
    Disposition of Property of the Estate.
    Identical Language in both bills. See Section 23 in H.R. 120. Identical
    Language in both bills. See Section 16 in H.R. 764.
    Sec. 17. General Provisions. Sec. 24. General
    Provisions.
    Identical Language in both bills. See Section 24 in H.R. 120. Identical
    Language in both bills. See Section 17 in H.R. 764.
    Sec. 18. Discharge. Sec. 31. Discharge.
    Identical Language in both bills. See Section 31 in H.R. 120. Identical
    Language in both bills. See Section 18 in H.R. 764.
    Sec. 19. Contents of Plan. Sec. 30. Contents of
    Plan.
    Identical Language in both bills. See Section 30 in H.R. 120. Identical
    Language in both bills. See Section 19 in H.R. 764.
    Sec. 20 Appointment of Trustee. Sec. 25 Appointment of
    Elected Trustee.
    Identical Language in both bills. See Section 25 in H.R. 120 Identical
    Language in both bills. See Section 20 in H.R. 764.
    Sec. 21 Knowing Disregard of Bankruptcy Law or
    Rule.
    Sec. 34 Knowing Disregard of Bankruptcy Law or
    Rule.
    Amends section 156(a) of title 18, United States Code by striking "case under this
    title" and inserting "case under title 11." See section 34 of H.R. 120 for companion
    section.
    No such language exists in H.R.120.
    No such language exists in H.R. 764. Amends section 156(a) of title 18,
    United States Code by inserting "(1) the term" before" 'bankruptcy'" in the first undesignated
    paragraph. In the same paragraph the period at the end of the paragraph is struck and the
    following is inserted: "; and." In the second undesignated paragraph of Section 156(a)
    of title 18, United States Code, the words "(2) the term" are inserted before the word
    "document." Lastly, the words "this title" are struck and replaced with: "title 11." See Sec. 21
    of H.R. 764.
    Sec. 22. Bankruptcy Cases and Proceedings. Sec. 32.
    Bankruptcy Cases and Proceedings.
    Identical Language in both bills. See Section 32 in H.R. 120 Identical
    Language in both bills. See Section 22 in H.R. 764.
    Sec. 23. Automatic Stay. Sec. 10. Automatic
    Stay.
    The language of this section is essentially similar to section 10 of H.R.
    120.
    The language of this section is essentially similar to section 23 of H.R.
    764.
    Sec. 24 Effective Date of Amendments. Sec. 35 Effective
    Date of Amendments.
    Except as provided by subsection (b) of the Act the effective date of the Act is the
    date of enactment.
    Except as provided by subsection (b) of the Act the effective date
    of the Act is the date of enactment.
    Sec. 5 Penalty for persons who negligently or fraudulently prepare
    bankruptcy petitions.
    No such language exists in H.R. 764. Section 110(j)(3) of title 11 of the
    United States Code is amended by striking "attorney's" and inserting the word "attorneys' ."
    Sec. 6 Eligibility to Serve as Trustee.
    No such language exists in H.R. 764. Paragraphs 1 and 2 of section
    321(a) of Title 11, United States Code, are amended by striking "7, 12," and inserting
    "12."
    Sec. 7 Employment of Professional Persons.
    No such language exists in H.R. 764. Subsection (b) of section 327 of
    title 11, United States Code, is amended by striking "section 721,," and inserting "721."
    Subsection (c) of section 327 of title 11, United States Code, is amended by striking "chapter 7"
    and all that follows through "or" the first place it appears, and inserting "chapter 7, 12
    or."
    No such language exists in H.R. 764. Subsection (d) of section 327 of
    title 11, United States Code, is amended by striking "act as attorney or accountant" and inserting
    "render professional services of the kind described in subsection (a)."
    No such language exists in H.R. 764. Section 328 (b) of title 11, United
    States Code, is amended by: 1)striking "serve as an attorney or accountant" and inserting "render
    professional services"; 2) by striking "such attorney or accountant" and inserting "a professional
    person who renders such services"; 3) by striking "attorney or accountant" and inserting
    "such professional person"; and 4) by striking "an attorney or accountant" and inserting
    "such a professional person."
    Sec. 6. Limitation on Compensation of Professional
    Persons.
    No such language exists in H.R. 764. Section 328(a) of title 11, United
    States Code, is amended in subsection (a) by inserting "on a fixed or percentage fee basis," after
    "hourly basis."
    Sec. 8. Special Tax Provisions.
    No such language exists in H.R. 764. Section 346(g)(1)(C) of title 11,
    United States Code, is amended by striking ",except" and all that follows through
    "1986."
    Section 12. Amendment to Table of Sections.
    No such language exists in H.R. 764. Item 556 of the table of sections
    for chapter 5 is amended to read: "556. Contractual right to liquidate a commodities contract or
    forward contract."
    Section 17. Effect of Discharge.
    No such language exists in H.R. 764. Section 524(a)(3) of title 11,
    United States Code, is amended by striking "section 523" and all that follows through "or that",
    and inserting "section 523, 1228(a)(1), or 1328(a)(1) of this title, or that."
    Sec. 4. Extension of Time.
    No such language exists in H.R. 764. Section 108(C)(2) of title 11 of the
    United States Code is amended by striking "922" and all that follows through "or", and inserting
    "922,1201, or." No such language exists in H.R. 764.
    Sec. 26. Abandonment of Railroad Line.
    No such language exists in H.R. 764. Section 1170(e)(1) of title 11,
    United States Code, is amended by striking "section 11347" and inserting "section
    11326(a)."
    Section 27. Contents of Plan.
    No such language exists in H.R. 764. Section 1172(c)(1) of title 11,
    United States Code, is amended by striking "section 11347" and inserting "section
    11326(a)."
    Section 28. Payments.
    No such language exists in H.R. 764. Section 1226(b)(2) of title 11,
    United States Code, is amended by striking "1202(C) of this title" and inserting "586(b) of title
    28" and by striking "1202(d) of this title" and inserting "586(e)(1)(B) of title 28."
    Section 29. Discharge.
    No such language exists in H.R. 764. Subsectinos (a) and of sections
    1228 of title 11, United States Code, are amended by striking "1222(B)(10)" each place it appears
    and inserting "1222(b)(9)."
    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.
    Comparison of H.R. 764

    with the Technical Amendments Title of S.1301

    Written by:

    Richard F. Weiner

    Attorney-at-Law





    Prepared for the American Bankruptcy Institute


    Web posted and Copyright ©
    February 3, 1998, American Bankruptcy Institute.


    H.R. 764 passed the House on November 12 and is pending in the Senate Judiciary Committee. S. 1301, introduced October 21 by Sens. Grassley (R-IA) and Durbin (D-IL), is also pending in the committee. This analysis compares the provisions in H.R. 764 to the "technical" provisions proposed in S. 1301, contained in Title IV.

    Section 401 of S. 1301, which amends the definitions section under §101, incorporates everything from §2 of H.R. 764 except under H.R. 764, §2 at (5)(B), the secured debt limit for "single asset real estate" is increased from the current $4,000,000 to $15,000,000 (as of the date of the filing of the petition). Section 401 of S. 1301, however, eliminates the current secured debt limit altogether (at Sec 401 (5)(B)). There is however a grammatical error in §401 at (5)(B) of the Senate version; it should read "by striking ‘having aggregate’ and all that follows…" rather than "by striking ‘thereto having aggregate’ and all that follows…." as it reads now.

    Section 402 of S. 1301 is identical to §3 of H.R. 764 (dealing with §104, "adjustment of dollar amounts"). Section 403 of S. 1301 is identical to Sec 4 of H.R. 764 (dealing with §108, "extension of time"). Section 404 of S. 1301 does not have a matching provision in the H.R. 764 ; it deletes, in §109, a reference to certain subsections in describing the types of small business investment companies that may be a debtor.

    Section 405 of S. 1301 is identical to Section 5 of H.R. 764 (dealing with §110, "petition preparer penalties"); §406 of S. 1301 matches §6 of H.R. 764 (dealing with §328, professional compensation).

    Section 7 of H.R. 764 (dealing with §330, "compensation of officers") contains an amendment not set out in S. 1301. S. 1301 should, I believe, contain this provision from H.R. 764 . Besides deleting an ‘(A)’ inadvertently placed next to ‘(3)’ at §330(a), §7 of H.R. 764 places the debtor’s attorney back into the position of being able to seek and obtain fees payable from the estate for his services that benefit the estate, after the clause which allowed this was taken out (maybe by error) of §330(a)(1) under the 1994 Reform Act. There are instances in Chapter 7 cases where the debtor’s attorney can be most helpful to the trustee in the administration of the estate. He or she should, in such instances, be entitled to payment of fees from the estate, in compensation for work in this regard.

    Section 407 of S. 1301 matches §8 of H.R. 764 (dealing with §346); §408 of S. 1301 matches §9 of H.R. 764(dealing with §348).

    Section 409 of S. 1301 matches §10 of H.R. 764 (dealing with §362); however provision (3) of both these sections, which set forth that the automatic stay is not applicable as to transfers that are not avoidable under §§544 and 549, by way of a proposed addition §362 at (b)(19), may be ill advised. A bona fide purchaser (BFP) of a post petition transfer of real property not avoidable under §549(c) (bankruptcy petition not recorded prior to the transfer) would not be hurt by the automatic stay (i.e. subject to penalty/damages/contempt thereunder) anyway since as a BFP, he was not aware of the pending bankruptcy. Some courts, I believe, take a position that a transfer prohibited under §362 is void but I do not think this position is correct (and certainly §362 could or should not be used to negate the effect of §549(c)). It is §549 that gives the power to the trustee (and the debtor vis-a-vis §522(h)) to avoid post petition transfers, rather than §362. If there is a post petition transfer of real property to a BFP after the petition is recorded the transfer would be avoidable by the trustee under §549 (the provision (3) would not apply) but the transferee should not be liable under §362 (as was not aware of the bankruptcy). As to §544, the only problem as to post petition transfers not avoidable under that provision relates to limitations of avoidance thereunder by way of post petition perfection under §546(b). There is however already in §362 at (b)(3) a provision that the automatic stay does not apply to transfers subject to such perfection under §546(b). This provision (3) needs further discussion and analysis.

    Section 410 of S. 1301 basically incorporates the language of §11(a) of H.R. 764 (dealing with §365) but with differences in layout and, importantly, meaning. Under Sec 11(a) of H.R. 764 the trustee has to, as a prerequisite to assumption under a lease/executory contract, compensate or provide adequate assurance of prompt compensation under §365(b)(1)(B) for a failure to perform a non-monetary obligation even though such failure may not be required to be cured as a pre-requisite for such assumption. Under §410 of S. 1301 however, because of the placement of the language (three paragraphs that are identical in both the Senate and House versions), if a non-monetary default need not be cured for such assumption, no compensation or adequate assurance thereof need be given to so assume. Section 11(b) of H.R. 764 (which is not contained in S. 1301) amends and is necessary to keep §1124(2) (impairment exceptions) consistent with the changes under §11(a) but not needed for consistency with the changes proposed under Sec 410 of S. 1301.

    Section 411 (dealing with §556), §412 (dealing with §503), §413(dealing with §507), §414 (dealing with §522) of S. 1301 are respectively in sequence identical to §§12 through 15 of H.R. 764 .

    Section 415 of S. 1301 is the same as Sec 16 of H.R. 764. These sections add language to §523(a)(15) to make sure it is understood that not only are debts to debtor’s spouse subject to being declared non-dischargeable thereunder but also debts to debtor’s children. There are a number of substantive problems and uncertainties with provision 523(a)(15) of the Bankruptcy Code that need to be addressed at some point but are too complex and time consuming to be dealt with here.

    Sec 416 of S. 1301 is the same as §17 of H.R. 764 . The provisions attempt to substitute wording in §524(a)(3) but effect no difference to the wording therein. I would, however, suggest a technical correction to §524(a)(3) by inserting ‘against debtor’s spouse after ‘allowable community claim.’ That subsection of §524 is only concerned with the community claims against the debtor’s spouse and a permanent injunction (subject to exceptions) against collection thereon from community property. The §524 injunction as to claims against the debtor is set out at §524(a)(1) and (2).

    Section 417 (dealing with §525), §418 (dealing with §541), §419 (dealing with §546) of S. 1301 are respectively in sequence identical to §§18 through 20 of H.R. 764 .

    Section 420 of S. 1301 is the same as §21 of H.R. 764 (dealing with §547) except §420 of the Senate Bill calls for an insertion of a proposed new (i) provision while §21 of the House Bill calls for an insertion of the same provision but designated (h) instead of (i). There would be no (h) under the Senate version; thus the (i) designation in the Senate version should be changed to (h).

    As to the merits of the proposed changes to §547 under §§420 and 21 of S. 1301 and H.R. 764 respectively: §550 of the Bankruptcy Code was amended in 1994 (by way of 550(c)) for the purpose of overruling the Deprizio decision by limiting preferential transfer ‘recovery,’ in such a setting, to be effective as against the insider guarantor only. There was however no matching amendment to §547 where ‘avoidance’ is the issue (rather than recovery thereafter). In the usual Deprizio-type situation, only the return of money was being sought and this might be thought of more in terms of recovery than by way of avoidance. These current bills seek (but only with respect to a security interest) to clarify that avoidance in a Deprizio setting by way of §547 of the Bankruptcy Code can only be as to the insider guarantor. Although the interplay between §§547 and 550 is not perfect, most in the bench and bar understand what is really meant under these Code sections taken together in a pertinent situation without implementation of the changes sought.

    The proposed changes to §547 mentioned above only address avoidance of a security interest in a Deprizio setting. This is most likely because a security interest might represent a typical occurrence of a debtor giving a lending institution a pre petition transfer of security (i.e. a mortgage) in lieu of money on account of a pre-existing debt, and 550(c) of the Bankruptcy Code might not be looked at by analogy in disallowing avoidance of the security interest as against the lender which is not now specifically set out in §547 thereof. Section 550(c) would prevent recovery of the security instrument itself from the lender so surely avoidance thereof under §547 against the lender would not be proper (at least that’s the argument- one has to look at both §§547 and 550 taken together to get the correct picture). A transfer of real property by deed deals with an intangible like a security interest (e.g. a mortgage) and the avoidability of same against a lender in a Deprizio setting (where a deed is conveyed to the lender rather than a security interest) is subject to the same problem (addressed above) as with the security interest transfer, except that situation is not addressed by the proposed changes to §547 of the Bankruptcy Code. Perhaps the correct way to proceed is for the wording ‘security interest given’ and ‘security interest,’ in the proposed §547(h) or (i), to be replaced at both places with the word ‘transfer.’ In such instance §550(c) is made redundant and should be deleted.

    Section 421 of S. 1301 is the same as §22 of H.R. 764 (deals with §549). Section 422 of S. 1301 has no counterpart in H.R. 764 . Section 423 (dealing with §553), §424 (dealing with §726), §425 (dealing with §901), §426 (dealing with §1104), §427 (dealing with §1170), §428 (dealing with §1172), §429 (dealing with §1228), §430 (dealing with §1322), and §431 (dealing with §1328) of S. 1301 are respectively in sequence identical to §§23 through 31 of H.R. 764 .

    Section 432 of S. 1301 is not contained in H.R. 764 and deals with a ten-year time extension relative to §302(d)(3) of the Bankruptcy, Judges, U.S. Trustees and Family Farmer Bankruptcy Act of 1986.

    Section 433 of S. 1301 is the same as §32 of H.R. 764 (dealing with §1334), §434 of S. 1301 is the same as §33 of H.R. 764 (dealing with §156(a) of Title 18), and §435 of S. 1301 is the same as §34 of H.R. 764 (dealing with effective dates of the Amendments).

    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.

    Description:

    To amend title 11, United States Code, to declare that donations to a religious group or entity, made by a debtor from a sense of religious obligation, such as tithes, shall be considered to have been made in exchange for a reasonably equivalent value.

    Description:

    To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

    Description:

    To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.
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    Religious Liberty and Charitable Donation Protection Act of 1998 (Engrossed as Agreed to or Passed by Senate)

    S 1244 ES

    105th CONGRESS

    2d Session

    S. 1244


    AN ACT

    To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

      Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Religious Liberty and Charitable Donation Protection Act of 1998'.

    SEC. 2. DEFINITIONS.

      Section 548(d) of title 11, United States Code, is amended by adding at the end the following:

      `(3) In this section, the term `charitable contribution' means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution--

        `(A) is made by a natural person; and

        `(B) consists of--

          `(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

          `(ii) cash.

      `(4) In this section, the term `qualified religious or charitable entity or organization' means--

        `(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

        `(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.'.

    SEC. 3. TREATMENT OF PRE-PETITION QUALIFIED CHARITABLE CONTRIBUTIONS.

      (a) IN GENERAL- Section 548(a) of title 11, United States Code, is amended--

        (1) by inserting `(1)' after `(a)';

        (2) by striking `(1) made' and inserting `(A) made';

        (3) by striking `(2)(A)' and inserting `(B)(i);

        (4) by striking `(B)(i)' and inserting `(ii)(I)';

        (5) by striking `(ii) was' and inserting `(II) was';

        (6) by striking `(iii)' and inserting `(III)'; and

        (7) by adding at the end the following:

      `(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which--

        `(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

        `(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.'.

      (b) TRUSTEE AS LIEN CREDITOR AND AS SUCCESSOR TO CERTAIN CREDITORS AND PURCHASERS- Section 544(b) of title 11, United States Code, is amended--

        (1) by striking `(b) The trustee' and inserting `(b)(1) Except as provided in paragraph (2), the trustee'; and

        (2) by adding at the end the following:

      `(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in section 548(d)(3)) that is not covered under section 548(a)(1)(B), by reason of section 548(a)(2). Any claim by any person to recover a transferred contribution described in the preceding sentence under Federal or State law in a Federal or State court shall be preempted by the commencement of the case.'.

      (c) CONFORMING AMENDMENTS- Section 546 of title 11, United States Code, is amended--

        (1) in subsection (e)--

          (A) by striking `548(a)(2)' and inserting `548(a)(1)(B)'; and

          (B) by striking `548(a)(1)' and inserting `548(a)(1)(A)';

        (2) in subsection (f)--

          (A) by striking `548(a)(2)' and inserting `548(a)(1)(B)'; and

          (B) by striking `548(a)(1)' and inserting `548(a)(1)(A)'; and

        (3) in subsection (g)--

          (A) by striking `section 548(a)(1)' each place it appears and inserting `section 548(a)(1)(A)'; and

          (B) by striking `548(a)(2)' and inserting `548(a)(1)(B)'.

    SEC. 4. TREATMENT OF POST-PETITION CHARITABLE CONTRIBUTIONS.

      (a) CONFIRMATION OF PLAN- Section 1325(b)(2)(A) of title 11, United States Code, is amended by inserting before the semicolon the following: `, including charitable contributions (that meet the definition of `charitable contribution' under section 548(d)(3)) to a qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)) in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made'.

      (b) DISMISSAL- Section 707(b) of title 11, United States Code, is amended by adding at the end the following: `In making a determination whether to dismiss a case under this section, the court may not take into consideration whether a debtor has made, or continues to make, charitable contributions (that meet the definition of `charitable contribution' under section 548(d)(3)) to any qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)).'.

    SEC. 5. APPLICABILITY.

      This Act and the amendments made by this Act shall apply to any case brought under an applicable provision of title 11, United States Code, that is pending or commenced on or after the date of enactment of this Act.

    SEC. 6. RULE OF CONSTRUCTION.

      Nothing in the amendments made by this Act is intended to limit the applicability of the Religious Freedom Restoration Act of 1993 (42 U.S.C. 2002bb et seq.).

    Passed the Senate May 13, 1998.

    Attest:

    Secretary.

    105th CONGRESS

    2d Session

    S. 1244

    AN ACT

    To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.



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    Description:

    To amend title 11, United States Code, to protect certain charitable contributions, and for other purposes.

    Description:

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.
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    Private Trustee Reform Act of 1997 (Introduced in House)

    HR 2592 IH

    105th CONGRESS

    1st Session

    H. R. 2592

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.

    IN THE HOUSE OF REPRESENTATIVES

    October 1, 1997

    Mr. GOODLATTE (for himself, Mr. SMITH of Texas, and Mr. BARR of Georgia) introduced the following bill; which was referred to the Committee on the Judiciary


    A BILL

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.

      Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Private Trustee Reform Act of 1997'.

    SEC. 2. PRIVATE TRUSTEES.

      (a) COMPENSATION OF OFFICERS- Section 330 of title 11, United States Code, is amended by adding at the end the following:

      `(e) Upon the motion of a trustee appointed under section 586(b) of title 28, and after an opportunity for an administrative hearing on the record, the court shall have the authority, notwithstanding section 326(b) of this title, to determine the actual, necessary expenses of such trustee. In determining actual, necessary expenses, the court shall consider all relevant factors, including--

        `(1) whether the expense will benefit the administration of cases by the trustee; and

        `(2) whether the expense is reasonable, based upon the customary and usual expenses incurred by fiduciaries providing services of comparable nature in matters other than cases under this title.'.

      (b) REMOVAL OF TRUSTEE OR EXAMINER- Section 324 of title 11, United States Code, is amended by adding at the end the following:

      `(c)(1) Notwithstanding any provision of section 586 of title 28, in the event the United States trustee decides to cease assigning cases to a trustee appointed under section 586(a) or (b) of title 28, the trustee, after an opportunity for an administrative hearing on the record, may seek judicial review of such decision. Upon review, the court may reverse the decision only if the United States trustee has acted unreasonably or without cause. The failure of the United States trustee to make a final administrative disposition of a trustee's request to reconsider the decision to cease assigning cases within thirty days of such request shall be deemed an exhaustion of all administrative remedies for purposes of this subsection.

      `(2) Notwithstanding any other provision of law, and pending the exhaustion of available administrative remedies or a judicial determination on the merits, the court may order injunctive relief in favor of the trustee.'.



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    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.
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    Private Trustee Reform Act of 1998 (Engrossed as Agreed to or Passed by House)

    105th CONGRESS

    2d Session

    H. R. 2592

    AN ACT

    To amend title 28 of the United States Code to provide trustees the right to seek administrative and judicial review of the refusal of a United States trustee to assign, and of certain actions of a United States trustee relating to expenses claimed relating to, cases under title 11 of the United States Code.

    HR 2592 EH

    105th CONGRESS

    2d Session

    H. R. 2592


    AN ACT

    To amend title 28 of the United States Code to provide trustees the right to seek administrative and judicial review of the refusal of a United States trustee to assign, and of certain actions of a United States trustee relating to expenses claimed relating to, cases under title 11 of the United States Code.

      Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Private Trustee Reform Act of 1998'.

    SEC. 2. SUSPENSION AND TERMINATION OF PANEL TRUSTEES AND STANDING TRUSTEES.

      Section 586(d) of title 28, United States Code, is amended--

        (1) by inserting `(1)' after `(d)'; and

        (2) by adding at the end the following:

      `(2) A trustee whose appointment to the panel or as a standing trustee is terminated or who ceases to be assigned to cases filed under title 11, United States Code, may obtain judicial review of the final agency decision by commencing an action in the United States district court for the district in which the panel member or standing trustee resides, after first exhausting all available administrative remedies, which if the trustee so elects, shall also include an administrative hearing on the record. Unless the trustee elects to have an administrative hearing on the record, the trustee shall be deemed to have exhausted all administrative remedies for purposes of this section if the agency fails to make a final agency decision within 90 days after the trustee requests administrative remedies. The Attorney General shall prescribe procedures to implement this paragraph.'.

    SEC. 3. EXPENSES OF STANDING TRUSTEES.

      Section 586(e) of title 28, United States Code, is amended by adding at the end the following:

      `(3) After first exhausting all available administrative remedies, an individual appointed under subsection (b) of this section may obtain judicial review of final agency action to deny a claim of actual, necessary expenses under this paragraph by commencing an action in the United States district court in the district where the individual resides.

      `(4) The Attorney General shall prescribe procedures to implement this subsection.'.

    SEC. 4. PROCEDURES FOR AND STANDARD OF REVIEW.

      Section 157 of title 28, United States Code, is amended--

        (1) by redesignating subsections (d) and (e) as subsections (e) and (f), respectively; and

        (2) by inserting after subsection (c) the following:

      `(d)(1) In conducting judicial review under section 586(d)(2) or section 586(e)(3) of this title, the district court shall determine whether to retain the case or to refer the case to a bankruptcy judge in the district. Any bankruptcy judge to whom a case is referred shall submit a recommendation for disposition to the district court based solely on a review of the administrative record before the agency, and a final order or judgment shall be entered by the district court after considering the bankruptcy judge's recommendation, and after reviewing those matters to which any party has timely and specifically objected. The decision of the agency shall be affirmed unless it is unreasonable and without cause based upon the administrative record before the agency.

      `(2)(A) The district courts of the United States shall have jurisdiction to review final agency decisions under subsection 586(d)(2) and final agency actions under subsection 586(e)(3).

      `(B) Bankruptcy judges are authorized to submit to such courts recommendations in accordance with paragraph (1).'.

    Passed the House of Representatives August 3, 1998.

    Attest:

    Clerk.



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    Description:

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.
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    Private Trustee Reform Act of 1997 (Reported in House)

    HR 2592 RH

    Union Calendar No. 370

    105th CONGRESS

    2d Session

    H. R. 2592

    [Report No. 105-663]

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.

    IN THE HOUSE OF REPRESENTATIVES

    October 1, 1997

    Mr. GOODLATTE (for himself, Mr. SMITH of Texas, and Mr. BARR of Georgia) introduced the following bill; which was referred to the Committee on the Judiciary

    July 31, 1998

    Additional sponsors: Mr. PARKER, Mr. NETHERCUTT, Mr. PICKERING, and Mr. Wicker

    July 31, 1998

    Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed

    [Strike out all after the enacting clause and insert the part printed in italic]


    A BILL

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.

      Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

    [Struck out->] SECTION 1. SHORT TITLE. [<-Struck out]

      [Struck out->] This Act may be cited as the `Private Trustee Reform Act of 1997'. [<-Struck out]

    [Struck out->] SEC. 2. PRIVATE TRUSTEES. [<-Struck out]

      [Struck out->] (a) COMPENSATION OF OFFICERS- Section 330 of title 11, United States Code, is amended by adding at the end the following: [<-Struck out]

      [Struck out->] `(e) Upon the motion of a trustee appointed under section 586(b) of title 28, and after an opportunity for an administrative hearing on the record, the court shall have the authority, notwithstanding section 326(b) of this title, to determine the actual, necessary expenses of such trustee. In determining actual, necessary expenses, the court shall consider all relevant factors, including-- [<-Struck out]

        [Struck out->] `(1) whether the expense will benefit the administration of cases by the trustee; and [<-Struck out]

        [Struck out->] `(2) whether the expense is reasonable, based upon the customary and usual expenses incurred by fiduciaries providing services of comparable nature in matters other than cases under this title.'. [<-Struck out]

      [Struck out->] (b) REMOVAL OF TRUSTEE OR EXAMINER- Section 324 of title 11, United States Code, is amended by adding at the end the following: [<-Struck out]

      [Struck out->] `(c)(1) Notwithstanding any provision of section 586 of title 28, in the event the United States trustee decides to cease assigning cases to a trustee appointed under section 586(a) or (b) of title 28, the trustee, after an opportunity for an administrative hearing on the record, may seek judicial review of such decision. Upon review, the court may reverse the decision only if the United States trustee has acted unreasonably or without cause. The failure of the United States trustee to make a final administrative disposition of a trustee's request to reconsider the decision to cease assigning cases within thirty days of such request shall be deemed an exhaustion of all administrative remedies for purposes of this subsection. [<-Struck out]

      [Struck out->] `(2) Notwithstanding any other provision of law, and pending the exhaustion of available administrative remedies or a judicial determination on the merits, the court may order injunctive relief in favor of the trustee.'. [<-Struck out]

    SECTION 1. SUSPENSION AND TERMINATION OF PANEL TRUSTEES AND STANDING TRUSTEES.

      Section 586(d) of title 28, United States Code, is amended--

        (1) by inserting `(1)' after `(d)', and

        (2) by adding at the end the following:

      `(2) A trustee whose appointment to the panel or as a standing trustee is terminated or who ceases to be assigned to cases filed under title 11 may obtain judicial review of the final agency decision by commencing an action in the United States district court for the district in which the panel member or standing trustee resides, after first exhausting all available administrative remedies, which if the trustee so elects, shall also include an administrative hearing on the record. Unless the trustee elects to have an administrative hearing on the record, the trustee shall be deemed to have exhausted all administrative remedies for purposes of this section if the agency fails to make a final agency decision within 90 days after the trustee requests administrative remedies. The Attorney General shall prescribe procedures to implement this paragraph.'.

    SEC. 2. EXPENSES OF STANDING TRUSTEES.

      Section 586(e) of title 28, United States Code, is amended by adding at the end the following:

      `(3) After first exhausting all available administrative remedies, an individual appointed under subsection (b) of this section may obtain judicial review of final agency action to deny a claim of actual, necessary expenses under this paragraph by commencing an action in the United States district court in the district where the individual resides.

      `(4) The Attorney General shall prescribe procedures to implement this subsection.'.

    SEC. 3. PROCEDURES FOR AND STANDARD OF REVIEW.

      Section 157 of title 28, United States Code, is amended--

        (1) by redesignating subsections (d) and (e) as subsections (e) and (f), respectively, and

        (2) by inserting after subsection (c) the following:

      `(d) In conducting judicial review under section 586(d)(2) or section 586(e)(3) of this title, the district court shall determine whether to retain the case or to refer the case to a bankruptcy judge or magistrate judge in the district: Provided, however, That in any district where fewer than 3 bankruptcy judges have been appointed under section 152(a) of this title, a referral shall only be made to a United States magistrate judge in the district. Any bankruptcy judge or magistrate judge to whom a case is referred shall submit a recommendation for disposition to the district court based solely on a review of the administrative record before the agency, and a final order or judgment shall be entered by the district court after considering the bankruptcy judge's or magistrate judge's recommendation, and after reviewing those matters to which any party has timely and specifically objected. The decision of the agency shall be affirmed unless it is unreasonable and without cause based upon the administrative record before the agency.'.

    Union Calendar No. 370

    105th CONGRESS

    2d Session

    H. R. 2592

    [Report No. 105-663]

    A BILL

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.


    July 31, 1998

    Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed



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    Description:

    To amend title 11 of the United States Code to provide private trustees the right to seek judicial review of United States trustee actions related to trustee expenses and trustee removal.
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    Private Trustee Reform Act of 1998 (Referred to Senate Committee after being Received from House)

    HR 2592 RFS

    105th CONGRESS

    2d Session

    H. R. 2592

    IN THE SENATE OF THE UNITED STATES

    August 31, 1998

    Received; read twice and referred to the Committee on the Judiciary


    AN ACT

    To amend title 28 of the United States Code to provide trustees the right to seek administrative and judicial review of the refusal of a United States trustee to assign, and of certain actions of a United States trustee relating to expenses claimed relating to, cases under title 11 of the United States Code.

      Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Private Trustee Reform Act of 1998'.

    SEC. 2. SUSPENSION AND TERMINATION OF PANEL TRUSTEES AND STANDING TRUSTEES.

      Section 586(d) of title 28, United States Code, is amended--

        (1) by inserting `(1)' after `(d)'; and

        (2) by adding at the end the following:

      `(2) A trustee whose appointment to the panel or as a standing trustee is terminated or who ceases to be assigned to cases filed under title 11, United States Code, may obtain judicial review of the final agency decision by commencing an action in the United States district court for the district in which the panel member or standing trustee resides, after first exhausting all available administrative remedies, which if the trustee so elects, shall also include an administrative hearing on the record. Unless the trustee elects to have an administrative hearing on the record, the trustee shall be deemed to have exhausted all administrative remedies for purposes of this section if the agency fails to make a final agency decision within 90 days after the trustee requests administrative remedies. The Attorney General shall prescribe procedures to implement this paragraph.'.

    SEC. 3. EXPENSES OF STANDING TRUSTEES.

      Section 586(e) of title 28, United States Code, is amended by adding at the end the following:

      `(3) After first exhausting all available administrative remedies, an individual appointed under subsection (b) of this section may obtain judicial review of final agency action to deny a claim of actual, necessary expenses under this paragraph by commencing an action in the United States district court in the district where the individual resides.

      `(4) The Attorney General shall prescribe procedures to implement this subsection.'.

    SEC. 4. PROCEDURES FOR AND STANDARD OF REVIEW.

      Section 157 of title 28, United States Code, is amended--

        (1) by redesignating subsections (d) and (e) as subsections (e) and (f), respectively; and

        (2) by inserting after subsection (c) the following:

      `(d)(1) In conducting judicial review under section 586(d)(2) or section 586(e)(3) of this title, the district court shall determine whether to retain the case or to refer the case to a bankruptcy judge in the district. Any bankruptcy judge to whom a case is referred shall submit a recommendation for disposition to the district court based solely on a review of the administrative record before the agency, and a final order or judgment shall be entered by the district court after considering the bankruptcy judge's recommendation, and after reviewing those matters to which any party has timely and specifically objected. The decision of the agency shall be affirmed unless it is unreasonable and without cause based upon the administrative record before the agency.

      `(2)(A) The district courts of the United States shall have jurisdiction to review final agency decisions under subsection 586(d)(2) and final agency actions under subsection 586(e)(3).

      `(B) Bankruptcy judges are authorized to submit to such courts recommendations in accordance with paragraph (1).'.

    Passed the House of Representatives August 3, 1998.

    Attest:

    ROBIN H. CARLE,

    Clerk.



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    Description:

    To amend title 11 of the United States Code.

    Description:

    To amend the Social Security Act with respect to limiting the use of automatic stays and discharge in bankruptcy proceedings for provider liability for health care fraud. (Introduced in House)

    Description:

    To amend the Truth in Lending Act to protect consumers from certain unreasonable practices of creditors which result in higher fees or rates of interest for credit cardholders, and for other purposes.

    Description:

    To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

    Description:

    To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

    Description:

    To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

    Description:

    To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

    Description:

    To amend title 28, United States Code, to authorize the appointment of additional bankruptcy judges, and for other purposes.

    Description:

    To establish a Commission on Structural Alternatives for the Federal Courts of Appeals. (Introduced in House)

    Description:

    To establish a Commission on Structural Alternatives for the Federal Courts of Appeals. (Introduced in House)

    Description:

    To establish a Commission on Structural Alternatives for the Federal Courts of Appeals. (Introduced in House)
    MEMORANDUM

    House Passes Bill Proposing to Study Appeals Court Boundaries

    On June 3, 1997, the House of Representatives passed H.R. 908, an act seeking to
    establish a Commission on Structural Alternatives for the Federal Courts of Appeals.

    The bill passed the House by a voice vote after a compromise that saw the number of
    members on the commission reduced from 13 to 10, its funding reduced from $1.3 million to
    $900,000 and the deadline for its recommendations shortened from two years to 18 months. The
    bill is the result of the belief by representatives from several Western states encompassed by the
    9th Circuit that the district is too large to work
    efficiently. Others want to see appeals decisions from their states removed from the control of
    California judges perceived as too liberal. These lawmakers wish to divide the circuit in two.

    The 9th Circuit is comprised of nine Western
    states: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.
    The Bankrutpcy Courts for the Districts of Guam and the Northern Mariana Islands also fall
    within the jurisdiction of the 9th Circuit.

    Chairman of the House Judiciary Committee's Courts and Intellectual Property Subcommittee
    Howard Coble (R-N.C.) introduced the bill on the House floor. Rep. Don Young (R-Alaska)
    and Rep. Rick Hill

    (R-Mont.) Both expressed concerns about the bill's scope, but supported the measure. Rep.
    Young
    stated his desire that the federal government simply divide the district, rather than studying it.

    The measure was approved by the House Judiciary Committee in March. A similar bill (S. 956 To
    establish a Commission on Structural Alternatives for the Federal Courts of Appeals.) Passed the
    Senate during the last session, but the House took no action.

    Description:

    To establish a Commission on Structural Alternatives for the Federal Courts of Appeals. (Introduced in House)

    Description:

    To establish a Commission on Structural Alternatives for the Federal Courts of Appeals. (Introduced in House)

    Description:

    To improve the administration of the Fair Debt Collection Practices Act.

    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.
    MEMORANDUM

    Bankruptcy Law Technical Corrections Act of 1997 (H.R. 120)

    Written by:

    Roger M. Whelan

    and Virginia Maxwell Waller

    Shaw, Pittman, Potts & Trowbridge

    Washington, D.C.

    Web posted and Copyright ©
    January 28, 1997, American Bankruptcy Institute

    and Shaw, Pittman, Potts &

    Trowbridge.


    The Bankruptcy Law Technical
    Corrections Act of 1997
    (the "Act"), introduced in the House on January 7, 1997, seeks to
    correct technical errors in the U.S. Bankruptcy Code resulting from the Bankruptcy Reform Act of
    1994
    (Pub. L. No. 103-394, 108 Stat. 4106). For example, colons replace dashes, commas
    are inserted as needed and incorrect references to other sections and incorrect numbering of Code
    subsections are corrected. In addition to the technical changes, the Act proposes to clarify certain
    sections and make other substantive changes. This article focuses on the substantive changes.
    Unfortunately, the Act also proposes several changes that appear to be unnecessary and will only
    serve to create more confusion. For example, the Act proposes to arbitrarily delete the word
    "section" that currently modifies "721, 1202 or 1108" in Section 327(b). It is unclear how a court
    should interpret this change. Further, the Act proposes that Section 327(c) begin, "In a case
    under chapter 7, 12 or 12 of this title." This change can only create confusion as to what change,
    if any, the House intended.

    The following is a summary of the proposed changes. Mere technical changes (commas, etc.)
    that do not affect the Bankruptcy Code provisions are not addressed.

    1. Bankruptcy Code Section 101 - Definitions: In addition to numerous
      technical changes (such as adding "The term" before each defined word, changing
      semicolons to periods and renumbering the subparagraphs in numerical sequence), the
      Act proposes to clarify that a family farm does not qualify as a "single asset real
      estate" case under Bankruptcy Code Section 101(51B).

      The House also seeks to specify that in 1994, when Congress overruled the
      Deprezio line of cases, Congress intended the new law to apply to transfers of
      liens in property. Thus, the Act clarifies that the definition of "transfer" in Section
      101(54) includes "creation of a lien."
    2. Bankruptcy Code Section 104- Adjustment of Dollar Amounts: The Act
      proposes to include Bankruptcy Code Section 522(f)(3) in the list of Bankruptcy Code
      sections where dollar amounts are increased every three years.
    3. Bankruptcy Code Section 108(c)(2): The Act proposes to replace language
      in Section 108(c)(2) with identical language -- "922, 1201 or " would be replaced with
      "922, 1201 or . . . ." It is unclear what the House intends to accomplish.
    4. Bankruptcy Code Section 321 - Eligibility to Serve as Trustee: The Act
      proposes to delete the requirement that a Chapter 7 trustee reside or have an office in
      the judicial district within which the bankruptcy case is pending. Thus, only Chapter
      12 and 13 trustees would be subject to a residency requirement.
    5. Bankruptcy Code Section 327 - Employment of Professional Persons: The
      Act proposes to change subsection (c) from "In a case under chapter 7, 11 or 12 of
      this title" to "In a case under chapter 7, 12 or 12 of this title." Presumably, the Act
      seeks to exclude professionals in Chapter 11 cases from the current rule that "a person
      is not disqualified for employment . . . solely because of such person's employment by
      or representation of a creditor." The logical inference from the conspicuous absence
      of Chapter 11 in Section 327(c) is that in a Chapter 11 case, employment by or
      representation of a creditor precludes employment as a professional of the estate.
      However, the revised Section 327(c) would undoubtedly create confusion.

      The Act also would also expand the ability of a trustee to assist the estate by
      modifying Section 327(d) to allow a trustee to act as an attorney, accountant
      appraiser, auctioneer or other professional person. Presently, Section 327(d) only
      allows the trustee to act as "attorney or accountant for the estate."

      Finally, the Act proposes to delete the word "section" in Section 327(b), such that
      Section 327(b) would read, "If the trustee is authorized to operate the business under
      721, 1202 or 1108 of this title . . . ." It is unclear what the House seeks to accomplish
      by this proposed change.

    6. Bankruptcy Code Section 328 - Limitation on Compensation of Professional
      Persons
      : Consistent with the expansion of the trustee's role in Section 327(d), the
      Act proposes to modify Bankruptcy Code Section 328(b) to read as follows:

      "If the court has authorized a trustee to render professional services
      for the estate
      under section 327(d) of this title, the court may allow compensation for the trustee's services
      as a professional person who renders such services only to the extent that the trustee
      performed services as such professional person for the estate and not for performance
      of of any of the trustee's duties that are generally performed by a trustee without the assistance
      of such a professional person for the estate."

      The Act also provides that fixed fee arrangements are permissible: Section 328(a) would
      provide that a professional may be employed on "any reasonable terms and conditions of
      employment, including on a retainer, on an hourly basis, on a fixed or percentage fee
      basis
      , or a contingent fee basis."

    7. Bankruptcy Code Section 330 - Compensation of Officers: The Act clarifies that
      the
      debtor's attorney may be compensated from estate assets by amending Section 330(a)(1) to
      include the debtor's attorney in the list of entities to whom a court may authorize payment of fees
      and reimbursement of expenses.
    8. Bankruptcy Code Section 346 - Special Tax Provisions: The Act
      proposes to amend Bankruptcy Code Section 346(g)(1)(C) to delete the exception
      that currently allows recognition of a gain or loss on a transfer under Internal Revenue
      Code of 1986 section 371 in Chapter 11 or 12 cases.
    9. Bankruptcy Code Section 348 - Effect of Conversion: The Act inserts
      clarifying language in Section 348(f)(2) as follows: "If the debtor converts a case
      under chapter 13 of this title to a case under another chapter under this title in bad
      faith, the property of the estate in the converted case shall consist of the
      property of the estate as of the date of conversion."
    10. Bankruptcy Code Section 362 - Automatic Stay: The Act inserts the following
      language in Section 362(b)(3) such that a bankruptcy does not operate as a stay: "of the collection
      of alimony, maintenance, or support from property that is not property of the estate or is
      taken with respect to a security interest that is created by a transfer to which section 547(c)(3) of
      this title applies
      ."

      The Act also replaces "individual" in Section 362(h) with "entity," thereby
      clarifying that a debtor that is an individual, corporation, partnership or other entities
      may recover punitive damages and shall recover actual damages for willful violations
      of the automatic stay. Thus, the Act eliminates the construction of Section 362(h) that
      prevents non-individual debtors from recovering for willful stay violations.
    11. Bankruptcy Code Section 365 - Executory Contracts and Unexpired Leases:

      A. Section 365(b): The 1994 amendments to the Bankruptcy Code
      amended Section 365(b) to provide that a trustee need not cure "a penalty rate or
      provision relating to a default arising from any failure by the debtor to perform
      nonmonetary obligations under the executory contract or unexpired lease." The
      amendment was intended to allow a trustee to assume a contract without curing
      penalty rates or penalty provisions. However, case law interpreted the word "penalty"
      in the 1994 amendments to modify only "rate," thereby allowing assumption of
      contracts without curing any nonmonetary defaults, regardless of whether the
      nonmonetary defaults were penalty provisions. See, e.g., In re Claremont
      Acquisition Corp.
      , 186 B.R. 977, 989-90 (C.D. Cal. 1995). The Act seeks to
      overrule this interpretation.

      However, it is unclear that the proposed modifications in the Act will accomplish
      this goal. The Act would replace Section 365(b)(2)(D) with the following two
      provisions:

      (D) the satisfaction of any penalty rate in any executory contract or unexpired lease; or

      (E) the satisfaction of any provision relating to a default arising from any failure by the
      debtor to perform nonmonetary obligations under any executory contract or unexpired lease
      other that an unexpired lease of personal property."

      Subsection (E) does not artfully accomplish the House's expressed intent of
      allowing a trustee to assume a contract without curing penalty provisions. Rather, the
      proposed language could be interpreted as supporting the holding of Claremont
      Acquisition and its progeny.

      B. Air Carriers: The Act strikes Section 365(c)(4), Sections 365(d)(5)
      through (9), and the portion of Section 365(f)(1) beginning with "except that,"
      which each relate to air carriers. These amendments merely reflect the fact that air
      carrier rejection provisions were repealed by prior "sunset" laws.

    12. Bankruptcy Code Section 503 - Allowance of Administrative Expenses: The Act
      amends Section 503(b)(4) to provide that the expenses of an attorney or accountant retained by a
      member of a committee appointed under Bankruptcy Code Section 1102 are not recoverable as
      administrative expenses. The Act inserts "subparagraph (A), (B), (C), (D) or (E) of" before
      "paragraph (3)" in Section 503(b)(4).
    13. Bankruptcy Code Section 507 - Priorities: The Act clarifies that only
      unsecured claims for alimony, maintenance or support of a spouse, former spouse
      or child of the debtor may receive priority treatment under Section 507(a)(7).

    14. Bankruptcy Code Section 522 - Exemptions: The Act replaces the language in
      Section 522(f)(1)(A)(ii)(II) to provide that the debtor may not avoid a judicial lien that secures a
      debt for alimony, maintenance or support of a spouse, former spouse or child of the debtor to the
      extent such debt

      (II) is for a liability that is designated as, and is actually in the nature of, alimony,
      maintenance, or support, unless such liability is actually in the nature of alimony,
      maintenance, or support.

    15. Bankruptcy Code Section 523 - Exceptions to Discharge: The Act
      proposes to make technical changes, corrections and clarifications to
      Bankruptcy Code Section 523, such as amending Section 523(a)(3) to
      include subsection (15) in the list of applicable sections and changing "a
      insured" to "an insured" in subsection (e). However, the Act is also
      somewhat confusing in proposing to move subsection (a)(15) to follow
      subsection (a)(14), which it already does.
    16. Bankruptcy Code Section 524 - Effect of Discharge: The Act proposes to
      replace language in Section 524(a)(3) with identical language -- "523, 1228 (a)(1),
      or 1328(a)(1) of this title, or that" would be replaced with "523, 1228 (a)(1), or
      1328(a)(1) of this title, or that." It is unclear what the House seeks to accomplish
      with this change.
    17. Bankruptcy Code Section 525 - Protection Against Discriminatory
      Treatment
      : The Act provides that the 1994 amendments to Bankruptcy Code
      Section 525(c) apply only to bar discrimination concerning student loans and
      grants because of prior bankruptcies.
    18. Bankruptcy Code Section 541 - Property of the Estate: The Act would
      amend Section 541(b)(4)(B)(ii), which relates to the interest of a debtor in liquid
      or gaseous hydrocarbons, by inserting "365 or" before "542."
    19. Bankruptcy Code Section 550 - Liability of Transferee of Avoided
      Transfer
      : The Act would modify section 550(c) as follows: "If a transfer made
      between 90 days and one year before the filing of the petition (1) is avoidable
      under section 547 of this title
      ; and (2) was made for the benefit of a creditor that at
      the time of such transfer was an insider; the trustee may not avoid under section
      547 such transfer, to the extent that such transfer was made for the benefit of a
      transferee that was not an insider at the time of such transfer, or recover under
      subsection (a) from a transferee that was not an insider at the time of such transfer.


      Section 547(b) is amended to conform by providing that "[e]xcept as provided in
      subsection (c) of this section or section 550(c) of this title, the trustee may avoid
      any transfer of an interest of the debtor in property . . . ."

    20. Bankruptcy Code Section 1104 - Appointment of Trustee or Examiner:
      The Act clarifies the procedure for electing private trustees in Chapter 11 cases.
      Thus, the Act would renumber Section 1104(b) as Section 1104(b)(1) and add the
      following as Section 1104(b)(2):

      "(A) If an eligible, disinterested trustee is elected at a meeting of creditors under
      paragraph (1), the United States trustee shall file a report certifying that election.
      Upon filing of a report under the preceding sentence --

      (i) the trustee elected under paragraph (1) shall be considered to have been
      selected and appointed for purposes of this section, and

      (ii) the service of and trustee appointed under subsection (d) shall terminate.

      (B) In the case of any dispute arising out of an election under subparagraph (A),
      the court shall resolve the dispute."

    21. Bankruptcy Code Section 1328 - Discharge: The Act amends Section 1328(a)(2)
      to
      allow discharge of debts except those: "of any kind specified in paragraph (5), (8), or (9) of
      section 523(a) [this is struck out: or 523(a)(9)] of this title." While the technical
      deletion of "or 523(a)(9)" is needed, it is unclear what change (if any) the House intends by
      replacing "the kind" with "any kind."
    Description:

    To amend title 11 of the United States Code to make nondischargeable a debt for death or injury caused by the debtor's operation of watercraft or aircraft while intoxicated.
    Boating and Aviation Operation Safety Act of 1997 (Introduced in
    House)

    HR 30 IH

    105th CONGRESS

    1st Session

    H. R. 30

    To amend title 11 of the United States Code to make
    nondischargeable a debt for death or injury caused by the debtor's
    operation of watercraft or aircraft while intoxicated.

    IN THE HOUSE OF REPRESENTATIVES

    January 7, 1997

    Mr. EHLERS introduced the following bill; which was referred to the
    Committee on the Judiciary


    A BILL

    To amend title 11 of the United States Code to make
    nondischargeable a debt for death or injury caused by the debtor's
    operation of watercraft or aircraft while intoxicated.

      Be it enacted by the Senate and House of Representatives of
      the United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

      This Act may be cited as the `Boating and Aviation Operation
      Safety Act of 1997'.

    SEC. 2. AMENDMENT.

      Section 523(a)(9) of title 11, United States Code, is amended
      by inserting `, watercraft, or aircraft' after `motor vehicle'.

    SEC. 3. EFFECTIVE DATE; APPLICATION OF AMENDMENT.

      (a) EFFECTIVE DATE- Except as provided in subsection (b), this
      Act and the amendment made by section 2 shall take effect on the date of
      the enactment of this Act.

      (b) APPLICATION OF AMENDMENT- The amendment made by section 2
      shall not apply with respect to cases commenced under title 11 of the
      United States Code before the date of the enactment of this Act.



    Description:

    To amend the Truth in Lending Act to require a credit card issuer to disclose, in any preapproved application, solicitation, or offer to open a credit card account under an open end consumer credit plan, each rate of interest that will actually apply to any credit extended under such plan, and for other purposes.

    Description:

    To amend section 101 of title 11 of the United States Code to modify the definition of single asset real estate and to make technical corrections.

    Description:

    To make technical corrections to title 11, United States Code, and for other purposes.