Bankruptcy Reform: A Recap
Report for Congress
Bankruptcy Reform:
A Recap
January 13, 2003
Robin Jeweler
Legislative Attorney
American Law Division
Congressional Research Service ˜ The Library of Congress
Bankruptcy Reform: A Recap
Summary
2003 will be the sixth year that Congress considers enacting a major overhaul
of consumer bankruptcy laws. Originally introduced in 1998, during the second
session of the 105th Congress, bankruptcy reform legislation came close to enactmentththth
in both the 106 and 107 Congresses. At the conclusion of the 106 Congress, a
conference report bill was passed by both the House and the Senate, but was pocketth
vetoed by President Clinton. Late in the 107 Congress, an informal compromise
between representatives of the House and the Senate over the “Schumer
Amendment” – a provision intended to prevent the discharge of liability for willful
violation of protective orders and violent protests against providers of “lawful
services,” including reproductive health services – proved unacceptable to the House.
Consequently, the conference report on H.R. 333, 107th Cong., 1st Sess. (2001), did
not come up for a vote in either chamber.
Since its introduction in 1998, the reform legislation has employed a complex
“means test” for prospective debtors to determine whether they may file under
chapter 7 governing liquidations. Failure to satisfy the means test is presumptive
abuse of chapter 7, and the disqualified debtor either must file for reorganization
under chapter 13, or refrain from filing. Likewise, since 1998, although the various
versions of bankruptcy reform have incorporated many amendments, all have
retained core features.
The legislation is broad and addresses many areas of bankruptcy practice beyond
consumer filings. Topics include small business bankruptcy, tax bankruptcy,
ancillary and cross-border cases, financial contract provisions, amendments to
chapter 12 governing family farmer reorganization, and health care and employee
benefits.
This report reviews many of the core consumer bankruptcy features that have
been common to most versions of bankruptcy reform legislation. It is based upon the
most recent legislative version, the conference report to H.R. 333, H.Rept. 107-617,
considered in the 108 Congress. It also provides, in chart form, a survey of selected
provisions.
Contents
Background ..............................................1
Jurisdictional Filing Requirements............................2
The Means Test...........................................2
New Regulations for Bankruptcy Attorneys.....................3
Nondischargeable Debt.....................................4
Child Support and Alimony..................................5
Chapter 13, Adjustment of Debts of an Individual With
Regular Income.......................................6
Survey of Selected Provisions................................7
Bankruptcy Reform: A Recap
Background. 2003 will be the sixth year that Congress considers enacting a
major overhaul of consumer bankruptcy laws. Originally introduced in 1998 duringth
the second session of the 105 Congress, bankruptcy reform legislation came close
to enactment in both the 106th and 107th Congresses. At the conclusion of the 106th
Congress, a conference report bill was passed by both the House and the Senate, but
was pocket vetoed by President Clinton. Late in the 107th Congress, an informal
compromise between representatives of the House and the Senate over the “Schumer
Amendment” – a provision intended to prevent the discharge of liability for willful
violation of protective orders and violent protests against providers of “lawful
services,” including reproductive health services – proved unacceptable to the1thst
House. Consequently, the conference report on H.R. 333, 107 Cong., 1 Sess.
(2001), did not come up for a vote in either chamber.2
Little has changed in the economic and legal landscape that has fueled both
support for and opposition to bankruptcy reform. Statistics to date for 2002 indicate
that personal bankruptcy filings are at an all time high.3 2002 also featured high
profile bankruptcy filings by major corporations, rising unemployment rates, and
rising health care costs.
The goal of proponents of consumer bankruptcy reform is to make filing more
difficult and thereby thwart “bankruptcies of convenience”; to revive the social
“stigma” of a bankruptcy filing; to prevent bankruptcy from being utilized as a
financial planning tool; to determine who can pay their indebtedness and to ensure
that they do; and, to maximize the distribution to both secured and unsecured
creditors.
Opponents argue that making it more difficult to file will undermine the
rehabilitative purpose of bankruptcy and have a disparate impact on financially less
sophisticated debtors, including single parents and families with children. They
continue to believe that there is insufficient evidence of pervasive abuse to warrant
major revisions to bankruptcy law.
1 For background on this provision, see CRS Report RS21276, Two Key Provisions in the
Bankruptcy Reform Act Conference Report: The Homestead Exemption and
Dischargeability of Liability for Violations of Laws Relating to the Provision of “Lawful
Goods and Services” by Robin Jeweler (Sept. 19, 2002).
2 H.Rept. 107-617, 107th Cong., 2d Sess. § 330 (2002), Bankruptcy Abuse Prevention and
Consumer Protection Act of 2002. The House, however, passed an amended version of H.R.
333 that omitted § 330, relating to the discharge of liability for violations of protective
orders and violent protest against lawful service providers.
3 Fed Court Bankruptcy Filings Up Again; AOUSC Reports 7.7 Percent Jump in FY 2002,
Since its introduction in 1998, the reform legislation has employed a complex
“means test” for prospective debtors to determine whether they may file under
chapter 7 governing liquidation.4 The legislation has never proposed applying the
pre-existing, less complicated and more discretionary standards for determining
“abuse” by prospective chapter 7 debtors employed by some bankruptcy courts,
namely, finding an ability to pay creditors sufficiently from future income.5
Although “ability to pay” may be considered by the court in limited circumstances
under the bill, the primary emphasis for a presumption of abuse is the means test,
which takes a formulaic approach to determining each debtor’s ability to pay past
indebtedness from future income.6 Failure to satisfy the means test is presumptive
abuse of chapter 7, and the disqualified debtor either must file for reorganization
under chapter 13, or refrain from filing.
Likewise, since the original bill’s introduction in 1998, the various versions of
bankruptcy reform have incorporated many amendments, but the legislation
nevertheless retains core features. This report reviews many of the consumer
bankruptcy reform features based upon the most recent legislative version, the
conference report to H.R. 333 from the 107th Congress. It provides, in chart form, a
survey of selected provisions.
Jurisdictional Filing Requirements. In order to file in bankruptcy, a
prospective debtor must receive credit counseling within six months prior to filing.
The counseling may take place through an individual or group briefing which may
be conducted in person, by phone, or over the Internet. Waivers may be available for7
various extenuating circumstances. A debtor’s case would also be dismissed by the
court for failure to file required information within 45 days of the filing.8
The Means Test. This test is intended to demonstrate whether a debtor
should be able to pay unsecured debt from future income. If the debtor’s income for
4 In a liquidation, the debtor pledges all of his or her pre-bankruptcy assets to pay off pre-
bankruptcy debts. In a consumer reorganization, the debtor pays off pre-bankruptcy debts
with post-bankruptcy income over a three to five year time period. Chapter 13 governs
consumer reorganization while chapter 11 governs business reorganization (although
individuals may file under chapter 11.) For general bankruptcy background, see CRS Rept.
Bankruptcy Code by Robin Jeweler.
5 Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. 1997); Zolg v. Kelly (In re Kelly), 841
F.2d 908 (9th Cir. 1988). See also Fonder v. United States, 974 F.2d 996 (8th Cir. 1992)(In
determining whether a debtor can fund a chapter 13 plan for purposes of dismissal of a
chapter 7 case as substantial abuse, the essential inquiry is whether the debtor has the ability
to repay creditors with future income sufficiently to make a chapter 7 filing a substantial
abuse; there is no requirement that a debtor be eligible for chapter 13 relief, and in some
cases, despite a substantial abuse dismissal, the debtor may not qualify under chapter 13.)
6 The bill directs the court to consider whether the petition was filed in bad faith or whether
“the totality of circumstances” demonstrates abuse only when the means test does not apply
or has been rebutted by the debtor.
7 H.Rept. 107-617 at § 106.
8 Id. at § 316.
six months preceding bankruptcy, minus living expenses, results in the debtor’s
having $166.67 per month in excess of living expenses, then abuse is presumed (and
the debtor may not file under chapter 7). If the debtor has $100 per month of excess
income, abuse is presumed if unsecured indebtedness is $24,000 or less; likewise for
income in excess of $150 per month with unsecured indebtedness of $36,000 or less.9
The centerpiece of the means test, however, is the new method for calculating
the debtor’s living expenses. The test does not look at the debtor’s actual expenses.
It applies hypothetical expenses based upon the Internal Revenue Service’s (IRS)
National Standards and Local Standards. The formula is complex and, in addition
to the National Standards, factors in other specific deductions which may be
allowable, e.g., child support and alimony, reasonable and necessary costs for the
care of chronically ill or disabled family members, actual costs of up to $1,500 per
year per child for costs to attend public or private school, and payments to secured
creditors. The debtor may also deduct an additional allowance of up to 5 percent of
the IRS National Standard for food and clothing, and actual expenses in categories
specified as Other Necessary Expenses issued by the IRS for the area in which the
debtor resides, including excess housing and utility costs. Thus, abuse is presumed
if a debtor’s real income measured against the combination of hypothetical and real
living expenses results in the monthly excess cited above.
All prospective debtors are subject to scrutiny under the means test, although
there is a safe harbor from a finding of abuse for individuals and families whose
income is less than the applicable median state income level.
The bill provides a variety of mechanisms for parties to challenge the debtor’s
eligibility to file in accordance with the means test. In many instances, attorneys fees
will be awarded to the prevailing party – either a creditor challenging the debtor’s
qualification or the debtor defending it.
New Regulations for Bankruptcy Attorneys. Another important feature
of the bill is the imposition of new controls on attorneys representing certain
consumer debtors. Among controls are the following:
!Increased requirements for investigation and verification of the
accuracy of the debtor’s financial information, and increased
sanctions if the debtor’s chapter 7 filing proves to be ineligible under
the means test. If a debtor loses a motion to have his chapter 7 case
dismissed or converted to chapter 13, the debtor’s attorney may have
to pay the bankruptcy trustee costs and attorneys’ fees. Further, an
9 Hon. Eugene Wedoff, Major effects of the consumer bankruptcy provisions of the 2002
Bankruptcy Legislation (H.R. 333 Conference Report) at
[http://www.abiworld.org/table.pdf]. The statutory language provides that the court shall
presume abuse “if the debtor’s current monthly income reduced by the amounts determined
under clauses (ii), (iii), and (iv), and multiplied by 60 is not the lesser of (I)25 percent of the
debtor’s nonpriority unsecured claims in the case, or $6,000, whichever is greater; or (II)
$10,000.”
attorney may be liable for civil penalties for a violation of Rule 901110
of the Federal Rules of Civil Procedure.
!Attorneys who represent or provide “bankruptcy assistance” to any
person whose debts are primarily consumer debts and who has less
than $150,000 of nonexempt property will come within the
definition of a “debt relief agency”11 and be subject to new
restrictions. Debt relief agencies are prohibited from advising a
potential debtor to incur more debt in contemplation of such person
filing a case under title 11, or to counsel a debtor to make a false or
misleading statement that, upon the exercise of reasonable care,12
should have been known to the attorney to be false or misleading.
!Attorneys who are debt relief agencies will be liable to a debtor for
the agency’s fees, actual damages, reasonable attorneys fees for the
challenger and legal costs if he or she provided assistance to a
debtor whose chapter 7 case is dismissed or converted to chapter 13.
!Debt relief agencies will be subject to the new disclosure
requirements governing advertising directed to the general public
and contracts entered into with assisted persons.13
Nondischargeable Debt. New categories of debt are made nondischargeable
under both chapters 7 and 13. Under current law, consumer debts of more than
$1075 for “luxury goods or services,” including cash advances and credit card
charges, incurred within 60 days of the filing are presumed to be fraudulent and are
nondischargeable.14 The bill broadens the category of presumptively fraudulent
transactions to those in excess of $550 for luxury goods or services owed to a single
creditor incurred within 90 days of the filing; and, for cash advances and credit card
charges for more than $750 incurred within 70 days of filing.
Other categories of nondischargeable debt include debts incurred to a third-
party, e.g., a credit card company, to pay a nondischargeable state or local tax. Such
charges to pay a federal tax are already nondischargeable under current law.15
Student loans, which are also nondischargeable under current law, are addressed by
broadening the definition of a “student loan.” In addition, new categories include
10 Fed. R. Civ. Proc. 9011 addresses the responsibility of the attorney with respect to written
material submitted to a court. The bill increases the attorney’s responsibility and legal
liability in a bankruptcy case.
11 H.Rept. 107-617 at § 226.
12 Id. at § 227. The potential of the restriction to interfere with the attorney-client
relationship as it may cover pre-bankruptcy planning is not considered herein.
13 Id. at §§ 228, 229.
14 11 U.S.C. § 523(a)(2)(C).
15 Id. at § 523(a)(14).
fines and penalties under federal election law and certain condominium fees. See
chart infra.
One category of nondischargeable debt intended to benefit the debtor is that for
loan repayments to the debtor’s retirement savings or thrift plan. The function of
nondischargeability is to permit a debtor who has borrowed from his or her
retirement savings plan to continue to repay the loan through employer withholding
despite the bankruptcy filing.
The most controversial category of nondischargeable debt was that for violence
against providers of “lawful services” – reproductive health services in an earlier
version of the legislation – and for intentional violations of protective orders and
injunctions. Questions have been raised repeatedly about the scope and legal effect
of this provision.16
Child Support and Alimony. Another contentious issue in the debate over
bankruptcy reform is the effect it would have on the ability of families to collect child
support and alimony, which are defined as “domestic support obligations.”17
Supporters of the legislation point to the fact that these payments are fully protected
under the legislation. Indeed, they are protected throughout the entire course of a1819
bankruptcy proceeding. Subtitle II B of the bill deals with priority child support.
The bill elevates domestic support obligations from seventh to first priority among
unsecured claims against the debtor. Under current law, the costs of administering
the bankruptcy proceeding, that is “administrative expenses,” hold first priority. This
means that these expenses are paid first from any available assets of the bankruptcy
estate. The conference report recognizes, however, the fact that the trustee’s
compensation is derived from marshaling the debtor’s assets and is treated as an
“administrative expense.” Because trustees cannot be expected to expend effort to
collect and distribute a debtor’s assets with no prospect of compensation, the
conference report creates a “superpriority” which will allow them to be paid before
domestic support creditors when they administer assets that are otherwise available
for domestic support.20
16 For a detailed explanation of the provision, see CRS Report RS21276, Two Key
Provisions in the Bankruptcy Reform Act Conference Report, by Robin Jeweler (Sept. 19,
2002). See also, Letter from Kenneth Starr to Hon. Steve Bartlett (Oct. 4, 2002) posted at
[http://www.abiworld.org/Opinion100402.pdf]. Cf. Republican Study Committee,
Discussion of Language Related to Protestors (Including Pro-Life Protestors) in the
Bankruptcy Conference Report (Aug. 28, 2002) posted at
[http://www.house.gov/ burton/RSC/ BankruptcyAbortQA.PDF].
17 H.Rept. 107-617 at § 211.
18 Support payments are generally protected under current law. Child support and alimony
are high priority unsecured claims and may not be discharged. 11 U.S.C. §§ 507(a)(7),
19 H.Rept. 107-617 at §§ 211-220.
20 Id.at § 212.
Additional features provide that a reorganization plan under chapters 11, 12 and
Domestic support obligations will be excepted from the automatic stay (which stops
all collection activities when a debtor files in bankruptcy).
New notice requirements are imposed on trustees in a chapter 7 case. A trustee
must advise a domestic support creditor of the right to use the services of a state child
support enforcement agency; he or she must report a domestic support claim to the
state child support agency, including the name and address of the creditor; and, if the
debtor receives a bankruptcy discharge (for non-support claims), the trustee must
report the debtor’s name, address and employer to the state enforcement agency.21
As the foregoing illustrates, domestic support payments are fully protected
against delay and discharge during and after bankruptcy proceedings. But critics of
the legislation still contend that single-parent families and children will be adversely
affected by the bill.22 Among other things, critics argue that making it more difficult
to get bankruptcy relief and making more categories of debt nondischargeable under
both chapters 7 and 13 will leave domestic support creditors in a worse position
outside of bankruptcy. Debtors who emerge from bankruptcy will have more
creditors holding nondischargeable claims. And, in the competition for post-
bankruptcy assets, or the assets of those who refrain from filing or go “underground,”
domestic creditors may fare more poorly than commercial creditors. Since state
support enforcement agencies will also stand in the shoes of a domestic support
creditor holding priority and nondischargeable domestic support claims, the debtor
may owe money to them as well.
Chapter 13, Adjustment of Debts of an Individual With Regular
Income. Chapter 13 of the Bankruptcy Code governs consumer reorganization.
Amendments to this chapter would be among the most far-reaching of the proposed
changes. The goal of channeling debtors into chapter 13 involuntarily is new to U.S.
Bankruptcy Code practice. Under current law, debtors may choose this chapter
voluntarily, often to take advantage of unique provisions such as the ability to cure
arrearages in and continue payment on a home mortgage. The debtor proposes a
reorganization plan which is generally performed over a three-year period, unless the
court approves an extension to five years, for cause.
Two major changes to this chapter are first, as discussed above, debtors who are
disqualified under the means test from filing under chapter 7 will have no choice but
to file under chapter 13 (or to refrain from filing). Second, debtors, many of whom
may have mandatory five-year plans, may be required to adhere to living budgets23
based upon the same IRS living standards employed in the means test.
21 Id. at § 219.
22 See, e.g.,Rebecca M. Burns, Killing Them With Kindness: How Congress Imperils Women
and Children in Bankruptcy Under the Facade of Protection, 76 AMER. BANKR. L.J. 203
(2002).
23 See CRS Report 98-318E, Bankruptcy Reform: IRS Living Expense Allowances for
Chapter 13 Debtors by Mark Jickling (March 7, 2001).
Currently, a chapter 13 debtor may be required to fund a reorganization plan
with projected disposable income for a three-year period. “Disposable income” is
defined in the Code as that reasonably necessary for the debtor’s support.24 The bill,
however, defines “reasonably necessary” disposable income by reference to the
means test standards. The bill expressly permits chapter 13 debtors to include health
insurance costs in a repayment plan if such expenses are reasonable and necessary.25
Requiring chapter 13 debtors to live in accordance with hypothetical cost of living
standards will be, like the means test itself, wholly new to bankruptcy practice.
Chapter 13 debtors will also be limited in the extent to which they may reduce
indebtedness on automobiles and consumer goods. Currently, a chapter 13 debtor is
permitted to bifurcate a secured claim for an automobile or other consumer good into
a secured and unsecured claim. The secured claim is valued at the fair market value
of the secured property, as opposed to the contract price of the item. The debtor must
repay the secured portion of the claim but may discharge the unsecured portion. A
debtor’s ability to split the claim – known as “lien stripping” – will be reduced by the
bill. Reducing the amount owed on claims will not be permitted with respect to
automobiles purchased within two and one-half years before filing, or for any other
item purchased within one year of filing. For any item the claim for which may still
be bifurcated, its value will no longer be fair market value, but will be its
replacement or retail price.
Thus, in addition to enlarging the categories of nondischargeable debt which
would apply to all debtors, the bill substantially curtails the scope of relief that is
currently permitted in chapter 13. Critics argue that the net result will not be a
greater repayment of creditor claims, but an exceedingly high failure rate for
reorganization plans by chapter 13 filers.
Survey of Selected Provisions. The legislation addresses many areas of
bankruptcy beyond consumer filings. Topics include small business bankruptcy, tax
bankruptcy, ancillary and cross-border cases, financial contract provisions,
amendments to chapter 12 governing family farmer reorganization, and health care
and employee benefits.
The chart below surveys selected provisions from the bankruptcy conference
report on H.R. 333, H.Rept. 107-617, 107th Cong., 2d Sess. (2002). This bill is likelyth
to be the basis for legislation considered in the 108 Congress.
24 Challenges to “reasonably necessary” expenses are determined by the bankruptcy court.
25 H.Rept. 107-617 at § 102.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Means test, 11 U.S.C. § § 704, 707:
Implementation Would amend 11 U.S.C. § 707 to permit creditors, the
trustee, or any party in interest to challenge a debtor’s
eligibility to file under chapter 7. If indicated, the U.S.
trustee must file a statement that the debtor’s case is a
presumed abuse of chapter 7. § 102.
Definition of “currentExcludes Social Security benefits; payments to victims of
monthly income”war crimes or crimes against humanity; and payments to
victims of international terrorism . § 102.
Presumed abuseDebtor presumed to be abusing chapter 7 if current
monthly income, excluding allowed deductions, secured
debt payments, and priority unsecured debt payments,
multiplied by 60, would permit a debtor to pay not less
than the lesser of (a) 25% of nonpriority unsecured debt or
$6,000 (or $100 a month), whichever is greater, or (b)
$10,000.
In addition to the means test, the court may find that the
debtor’s filing was in bad faith or that the totality of the
circumstances demonstrates abuse. § 102.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Calculation of permissibleExpenses to be calculated as specified under the National
monthly living expensesStandards and Local Standards, and the debtor’s actual
monthly expenses for the categories specified as Other
Necessary Expenses issued by the Internal Revenue
Service for the area in which the debtor resides. A debtor
may also subtract, if reasonably necessary, an allowance
of up to 5% of the IRS food and clothing categories.
Individualized expenses may include debts incurred to
protect the debtor’s family from domestic violence; actual
expenses for the care and support of nondependent,
elderly, ill or disabled household or family members;
private or public school tuition of up to $1,500 per year;
administrative expenses for chapter 13 candidates;
average monthly expenses for secured and priority debts;
actual expenses for housing and utilities, if reasonably
necessary; and, charitable contributions of up to 15% of26
gross income.
Dollar amounts will be adjusted at three-year intervals in
accordance with the Consumer Price Index. § 102.
To rebut the presumptionA debtor must demonstrate and justify “special
of abusecircumstances” in order to adjust current monthly income
determination. § 102.
Safe harbor exemptionOnly the judge, U.S. trustee or bankruptcy administrator
from the means testmay bring a substantial abuse motion if the debtor’s
current monthly income is less than the highest national or
the applicable State median family income.
No party may make a motion to convert the debtor to
chapter 13 if the debtor (and spouse combined) have a
monthly income equal to or less than the state median
household income reported by the Bureau of the Census.
The U.S. trustee may also decline to file a motion to
convert if the debtor’s monthly income is between 100%
and 150% of the national or applicable State median
income, and would permit a debtor to pay the lesser of (a)
25% of nonpriority unsecured debt or $6,000, whichever
is greater, or (b) $10,000. § 102.
26 Charitable contributions are permissible under current law, 11 U.S.C. § 707(b), and would
not be altered by the bill.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
IRS Living StandardsA chapter 13 debtor’s “disposable income” which may be
applicable to chapter 13directed to the repayment plan will be calculated in
reorganization planaccordance with IRS Living Standards if the debtor meets
the applicable means test for state median family income.
A chapter 13 debtor may deduct from plan payments the
costs of health insurance; domestic support obligations;
charitable contributions of up to 15% of gross income; and
expenses necessary to operate a business.
§ 102.
Attorney sanctions forIf a panel trustee brings a successful motion for dismissal
improper motion or conversion, counsel for the debtor may be liable to
reimburse the trustee for costs, attorneys’ fees, and
payment of a civil penalty if the court finds a violation of
Bankruptcy Rule 9011.
An attorney’s signature on the bankruptcy petition certifies
that the attorney has performed an investigation into the
circumstances that gave rise to the petition; that the
attorney has determined that the petition is well grounded
in fact and is warranted by existing law; and that the
attorney has no knowledge after an inquiry that the
information in accompanying schedules is incorrect. § 102.
Creditor sanctions for anThe court may award the debtor costs for contesting an
improper motionunsuccessful motion to convert if the court finds that the
motion violated Rule 9011, or was intended to coerce the
debtor into waiving rights under the Bankruptcy Code. A
creditor whose claim is less than $1000 is not liable for
sanctions. § 102
Dismissal of filings byA crime victim or party in interest may request dismissal
persons convicted ofof the voluntary bankruptcy case of the convicted
violent crimes or drugdebtor. The court must grant the dismissal unless the
traffickingfiling is necessary to satisfy a domestic support
obligation. § 102
Additional consumer provisions
Mandatory creditDebtor must undergo credit counseling within 180 days of
counselingfiling, and may not obtain a discharge until completion of
a personal financial management instructional course.
The jurisdictional filing requirement may be waived for 30
to 45 days if the debtor certifies exigent circumstances or
was denied service from an approved counseling agency.
The U.S. trustee or bankruptcy administrator for the
judicial district is directed to oversee and approve
nonprofit budget and credit counseling agencies. § 106
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Promotion of alternativeA creditor’s allowable claim may be reduced by 20% if a
dispute resolutioncourt finds that the creditor “unreasonably refused to
negotiate a reasonable alternative repayment schedule
proposed by an approved credit counseling agency that
provides repayment of at least 60% of the debt, and the
debtor can prove by “clear and convincing” evidence that
a creditor unreasonably refused to consider the offer.”
§ 201.
Reaffirmation agreementsImposes enhanced requirements for approval of a
reaffirmation agreement when the debtor is not
represented by counsel but exempts credit unions from
creditor disclosure requirements; requires U.S. Attorney
and FBI to investigate abusive reaffirmation practices. §
Preserving defensesAmends 11 U.S.C. § 363 to add a new subsection
against predatory lenderspreserving defenses that a party to a consumer credit
transaction may have if the contract is sold by a debtor in
bankruptcy. § 204.
GAO reaffirmation studyRequires a study of reaffirmation practices and a report to
Congress. § 205
Domestic support owed toWould move domestic support obligations to first priority,
individuals andwhich is currently allocated to administrative expenses of
government units madethe bankruptcy estate. Administrative expenses would
first prioritybecome second priority.
However, if a trustee is appointed under chapter 7, 11, 12,
or 13, the trustee’s expenses may be paid before domestic
support. § 212.
Trustee notification ofWould direct the trustee to notify a priority child support
child support claimrecipient of the existence of a state child support
holdersenforcement agency, and, upon discharge, the existence of
nondischargeable and reaffirmed debt. § 219.
Priority assigned to claimsA new § 507 tenth priority is created for unsecured claims
for liability incurred byfor liability incurred by a debtor from operating a vessel
the debtor DUIwhile under the influence of alcohol or drugs. Claims of
this nature are also nondischargeable. § 223.
Retirement savingsWould clarify and expand the law to provide that
exemption broadenedretirement accounts that are tax exempt under the Internal
Revenue Code are exempted from the debtor’s estate up to
a $1,000,000 cap, which may be increased if “the interests
of justice so require.” § 224
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Exemption for saving forSubject to certain IRS requirements, excludes funds up to
postsecondary education$5000 per specified beneficiary made within a year of
filing in an education individual retirement account and/or
any funds used to purchase a tuition credit or certificate
under a qualified state tuition program. §225
Protection of nonpublicProhibits the transfer by the debtor of personal customer
personal information andinformation unless approved by the court. Provides for the
consumer privacyappointment of a consumer privacy ombudsman if a debtor
ombudsmanwishes to sell or lease such information. §§ 231,232.
Prohibition on disclosureDebtor may not be required to disclose the name of a
of identify of minorminor child in public records. U.S. trustee or auditor may
childrenhave access to nonpublic records maintained by the court.
§ 233.
Lien stripping on securityChapter 13 debtors would not be permitted to bifurcate
interests in consumersecurity interests in an automobile purchased within 910
goods (cramdown)days (2½ years) before the filing; or in other consumer
goods purchased within 1 year of the filing. § 306.
Homestead exemptionDefinition of “debtor’s residence” includes mobile homes
or trailers. § 306.
Imposes lengthened residency requirements to qualify for
state exemption. § 307.
Reduces the value of the exemption if the value is
attributable to property that the debtor disposed of within
10 years of bankruptcy with the intent to hinder, delay or
defraud a creditor. § 308.
Debtors’ electing a state homestead exemption may not
exempt any interest acquired within 1215 days (3.3 years)
of filing which exceeds in the aggregate $125,000, unless
the value in excess of that amount occurs from a transfer
of residences within the same state. Exempts family
farmers from the limit. Limitations may not apply to
amounts reasonably necessary to support the debtor and
any dependents.
Imposes a firm $125,000 cap on individuals who are
convicted of specified felonies (including violations of
federal securities laws) or who commits criminal acts,
intentional torts, or willful or reckless misconduct that
caused serious physical injury or death within 5 years
preceding the bankruptcy filing. § 322.
Residential lease exceptedAdds new provisions permitting a landlord/lessor to
from the automatic staybypass the automatic stay to continue with a residential
eviction of a tenant/lessee. § 311
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Restrictions on chapter 7Extends time within which a debtor who has received a
and chapter 13 filings.chapter 7 discharge may not receive another from 6 to
Amends chapter 13 to disallow discharge if the debtor
filed under chapters 7, 11, or 12 within 4 years prior
to the 13 filing, or under chapter 13, within 2 years of
the subsequent filing. § 312.
Definition ofDefines household goods to include clothing,
“household goods”furniture, appliances, 1 radio, 1 television, 1 VCR,
other electronic entertainment equipment with a
market value of under $500, linens, china, crockery,
kitchenware, educational materials used by minor
dependent children, medical equipment and supplies,
furniture used exclusively by minors and disabled or
elderly dependents, personal effects, 1 personal
computer and antiques and jewelry with a value less
than $500. § 313.
Debtor’s duty toModifies debtor filing requirements under 11 U.S.C.
disclose tax filings.§ 521 to include federal tax returns. § 315.
Plan durationChapter 13 plans to have 5 year duration for families
whose monthly income is not less than the highest
state median family income. Families below the
highest state median income would have 3 year plans.
§ 318.
Wages withheld by anWithheld wages for contributions to employee benefit
employer forplans would be excluded from the debtor (employer’s)
contributions toestate. § 323.
employee benefit plans
Valuation of collateralA secured creditor’s allowable claim would be the
retail cost to replace the item without deduction for
costs of sale or marketing. Personal property’s
replacement value would be the price a retail
merchant would charge for like items. § 327.
Wages and benefitsMakes specified prepetition and postpetition wages
awarded as back payand benefits awarded as back pay a high-priority
administrative expense. § 329.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
AuditsThe Attorney General is directed to establish a
procedure to ensure random audits of no less than 1
out of every 250 individual filings; the U.S. trustee is
authorized to enter into contracts with auditors, and to
take action when misstatements in the debtor’s
petition and schedules are identified. § 603.
Nondischargeable consumer debts
Debts to governmentDefines “domestic support obligation” to include
units for domesticdebts owed to or recoverable by a governmental unit.
support§§ 211, 215.
Expanded definition ofAdds qualified educational loans as defined under §
student loan221 of the IRC to those educational loans that are
currently nondischargeable. § 220.
Loan repayments toMakes nondischargeable, i.e., allows an employer to
debtor’s retirementcontinue to withhold loan repayments to debtor’s
savings or thrift plansavings/retirement plan from debtor’s wages. §
Consumer debtsConsumer debts owed to a single creditor for more
presumed fraudulentthan $550 for “luxury goods” incurred within 90 days
of filing; and cash advances for more than $750 under
an open end credit plan within 70 days of filing are
presumed to be nondischargeable. § 310
Debts incurred to payDebts incurred to a third party to pay a tax to a state or
nondischargeable debtslocal government unit become nondischargeable. §
are nondischargeable314.
Violence againstMakes nondischargeable liability incurred from
providers or users ofviolations of law prohibiting intentional intimidation
lawful services (formerlyor violence to persons who provide or consume lawful
reproductive healthservices; damage or destruction of property that
services)provides lawful goods or services; or intentional
violations of protective orders or injunctions. § 330
Expanded definition ofExpands the types of post-petition condo and
nondischargeablehomeowners association fees that are
condominium andnondischargeable by omitting requirement that in
homeowners associationorder to be nondischargeable the debtor must reside in
feesthe residence postpetition. § 412.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
FEC penaltiesFines and penalties under federal election law are
nondischargeablemade nondischargeable. § 1235.
Consumer credit disclosure
Amendments to theTILA amended to require enhanced minimum
Truth in Lending Actpayment disclosures under an open end credit plan;
enhanced disclosures regarding the tax deductibility of
credit extensions which exceed the fair market value
of a dwelling for credit transactions secured by the
consumer’s dwelling; disclosures related to
introductory “teaser” rates; disclosures related to
Internet-based open end credit solicitations; and
disclosures related to late payment deadlines and
penalties. TILA would be amended to prohibit
termination of a credit account because the consumer
has not incurred finance charges. §§ 1301-1306.
Study of bankruptcyComptroller General directed to study bankruptcy
impact of creditimpact of credit extensions to students in
extended to dependentpostsecondary school. § 1308
students
Consumer credit studiesThe Board of Governors of the Federal Reserve would
be directed to study existing protections for
consumers for unauthorized use of a dual use debit
card. § 1307
Business bankruptcy
Avoidable preferencesAmends 11 U.S.C. § 547 to liberalize the rules for
defending against an avoidable transfer in the ordinary
course of business; creates a new preference exception
to aggregate transfers of less than $5,000. § 409.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
Small businessSubtitle B of Title IV has provisions defining a “small
bankruptcybusiness” for chapter 11 purposes as one with debts
under $2,000,000. The debtor’s period of exclusivity
to file a reorganization plan is 180 days. A plan and
disclosure statement must be filed within 300 days of
the initial filing.
A plan must be confirmed within 45 days of filing in
bankruptcy. § 438
Provisions require establishment of uniform
accounting and reporting standards for small
businesses. Grounds for appointment of a trustee and
the trustee’s general supervisory duties are expanded,
as are grounds for dismissal or conversion of the case.
§§ 431-442.
Trustee to appointAmends 11 U.S.C. § 1114 to provide that in the event
retiree committeesthat a retiree committee is appointed, the appointment of
members will be made by the U.S. Trustee, not the court.
§ 447.
Chapter 11 corporateConfirmation of a plan under chapter 11 would not
nondischargeabilitydischarge a corporate debtor from debts under 11 U.S.C.
§ 523(a)(2) that are owed to a domestic governmental unit
for property obtained by false pretenses or representations;
or owed to an individual under subchapter III of chapter 37
of Title 31, U.S.C.; or any debt for taxes for which the
debtor willfully attempted to evade or made a fraudulent
return. § 708.
Title X dealing withMakes chapter 12 permanent. Measure to be effective
chapter 12 family farmersupon enactment; includes jurisdictional debt limit in
amount subject to readjustment in accordance with CPI;
subordinates certain high priority unsecured claims owed
to the government to nonpriority claims. Measure to take
effect upon enactment, but will not apply to pending cases.
§§ 1001-1003.
Raises jurisdictional debt limit of family farmers to
$3,000,000 and lowers percentage requirement of income
derived from farming and expands the time frame for
measuring farm income from one to three years. §§ 1004,
Prohibits retroactive assessment of disposable income.
§ 1006
Amends chapter 12 to include “family fishermen.”
§ 1007.
Selected ProvisionsConference Report on H.R. 333, 107th Cong.,
General provisions
In forma pauperis filings Directs the Judicial Conference to prescribe procedures for
waiving bankruptcy fees for an individual debtor under
chapter 7 whose income is less than 150% of the official
poverty line and who is unable to pay the fee in
installments. § 418.
Bankruptcy judgeshipsCreates new temporary bankruptcy judgeships for
designated districts. § 1223.
Procedure to certifyEstablishes procedures to permit direct appeals from a
appeals from a bankruptcybankruptcy court to a court of appeals if the decision
court to a court ofinvolves a substantial question of law; a question requiring
appealsresolution of conflicting decisions; or, a matter of public
importance. §1233.
Involuntary BankruptcyMakes technical corrections made to 11 U.S.C. § 303
dealing with involuntary bankruptcy. Measure applies
upon enactment, but not to pending cases. § 1234.
Insolvent politicalOmitted.
committees prohibited
from filing in bankruptcy
(Senate provision § 1237)
“Lloyds of London”Omitted.
provision barring
enforcement of certain
foreign judgments (House
provision § 1310)
Title XIV. EmergencyOmitted.
Energy Assistance and
Conservation Measures
(House provisions §§
Title XVI. MiscellaneousOmitted.
Provisions
(House provisions §§
General effective dateSubject to express provisions otherwise, the new law will
take effect 180 days after enactment and will not apply to
cases commenced before the effective date. § 1401.