Dissenting Views on S.
256
Reform of the bankruptcy system, and the principle
that every debtor should repay as much of her debt as
she can reasonably afford, is a sound and uncontroversial
idea. Were the legislation reported by the Judiciary
Committee to bear any remote relationship to that laudable
goal, this legislation would be wholly uncontroversial.
Instead, by pressing legislation that is unbalanced
and tilted toward specific special interest groups,
the proponents of S. 256 have created a bill that would:
impose monumental costs on the parties in the bankruptcy
system, including the government; subject the “honest
but unfortunate debtor” to coercion and loss of
their legal rights; force businesses into unnecessary
liquidation; and favor certain creditors over others.
It is a stark fact that the bankruptcy filing rate
has almost doubled during the last decade. Nonetheless,
debtors filed just under 1.6 million bankruptcy cases
last year, a decline in total bankruptcy filings nationally
from 2003 of 3.8%. The bill’s sponsors view the
long-term increase as evidence of widespread abuse of
the bankruptcy system by people who otherwise would
be in a position to pay their debts. Bankruptcy, the
bill’s sponsor says, has become a system “where
deadbeats can get out of paying their debt scott-free
while honest Americans who play by the rules have to
foot the bill.”
The bankruptcy filing rate is a symptom. It is not the
cause. While some people abuse the bankruptcy system,
more than 90 percent of debtors file for bankruptcy
due to unemployment or underemployment, an illness or
accident, or divorce. The bulk of the remainder suffered
from other legitimate difficulties, including activation
for military service, being a victim of crime or natural
disasters, or a death in the family .... an independent
study on the subject found that less than four percent
of debtors who filed under Chapter 7 (where unsecured
debt is discharged) could possibly repay any of their
unsecured debt under Chapter 13.
Our concerns regarding this legislation are procedural
as well as substantive. The House Judiciary Committee
has held no hearings on this legislation in this Congress.
The Subcommittee on Commercial and Administrative Law
has not considered the bill. Additionally, Chairman
Sensenbrenner made it abundantly clear that, although
regular order would be followed, in Full Committee,
it would be regular order in name only. The votes, and
the result, were preordained. No amendments were permitted,
and none would receive consideration regardless of their
merit.
The single Senate Judiciary Committee hearing on S.
256 shed light on the major factor now driving people
into bankruptcy: increasingly high medical expenses.
A joint study of bankruptcy filings by researchers at
Harvard Medical School and Harvard Law School revealed
that roughly half of all bankruptcies filed in 2001
were caused, at least in part, by illness or medical
debts. Remarkably, 75 percent of bankruptcy filers with
medical expenses had health insurance at the onset of
their bankrupting illness. However, a significant number
experienced gaps in coverage and high out-of-pocket
costs, particularly for prescription drugs.
In the eight years since the credit industry first came
to Congress seeking relief from the rising rate of personal
bankruptcy filings, the extension of credit has not
been curtailed nor have the industry’s profits
been diminished due to bankruptcy filings. Instead,
credit card solicitations have doubled to five billion
a year. The bill still ignores the problem of the abuse
of consumers by credit card companies.
While bankruptcy filings have increased 17 percent
in the last eight years, credit card profits have increased
163 percent – from $11.5 billion to $30.2 billion.
The cost of late and other penalty fees assessed by
credit card companies have doubled in the last decade
and now are more quickly levied (payments arriving after
a certain hour on the due date are now considered late).
Even more damaging have been the accompanying penalty
rates. These rates jump from usually zero percent to
a range of 22-29 percent, are retroactive to the entire
balance, and, thanks to “universal default”
policies, now create a domino effect on the consumer’s
financial situation. Additionally, the average late
fee in 2003 for a late payment on a credit card was
$29.
Proponents of the legislation say that the bill will
put pressure only on the families that have the ability
to repay. In fact, the weight of the evidence demonstrates
that the legislation will increase the cost of bankruptcy
for every family, and it will decrease the protection
of bankruptcy for every family, regardless of income
or the cause of financial crisis. There are provisions
that will: force many honest debtors unnecessarily out
of chapter 7, make Chapter 13 impossible for many of
the debtors who file today, protect significant loopholes
for wealthy and well-advised debtors, raise the cost
of the system for all parties, turn the government into
a private collection agency for large creditors, and
force women trying to collect child support or alimony
to compete with credit card companies that will have
more of their debts declared non-dischargeable.
The simple reality is that time and changes in the American
economy have passed by the substance of this bill. Even
if it was a flawless bill when it first was introduced
eight years ago (and it was not), the events of the
past eight years have dramatically changed the landscape
in which we now consider it. The ability to file for
bankruptcy and to receive a fresh start provides crucial
aid to families overwhelmed by financial problems. This
bill would seriously compromise the bankruptcy protections
these families need.
This legislation is opposed by organizations and individuals
most concerned with the bankruptcy system, the rights
of consumers, the needs of single parents and children,
the elderly, working families, and civil rights.
Among the organizations that have opposed, or have
expressed serious concerns with
S. 256 and its predecessors since the 105th Congress
are:
(1) groups concerned with the rights of workers including:
AFL-CIO, Air Line Pilots Association, American Federation
of Labor and Congress of Industrial Organizations, American
Federation of State, County and Municipal Employees
(AFSCME), Transport Workers Union, Service Employees
International Union, Union of Needletrade Industrial
and Textile Employees (UNITE), United Food and Commercial
Workers International Union, United Mine Workers of
America, United Steelworkers of America, Communication
Workers of America, International Association of Machinist
and Aerospace Workers, International Brotherhood of
Boilermakers, Iron Shipbuilders, Blacksmiths and Forgers,
International Brotherhood of Electrical Workers, International
Brotherhood of Police Officers, International Brotherhood
of Teamsters, International Union UAW, Laborers International
Union of North America, National Association of Government
Employees, PACE International Union, and UNITEHERE;
(2) groups of non-partisan bankruptcy lawyers, judges,
academics, physicians and banks including: American
Association of University Women, American Bar Association,
American Federation of Teachers, Association of Enterprise
Organizations, Community Development Venture Capital
Association, Klee, Tuchin & Bogdanoff LLP, Latino
Community Credit Union, National Bankruptcy Conference,
National Community Capital Association, National Conference
of Bankruptcy Judges, National Association of Chapter
13 Trustees, National Association of Bankruptcy Trustees,
Commercial Law League of America, the American College
of Bankruptcy, and National Association of Consumer
Bankruptcy Attorneys, a group of 110 professors of bankruptcy
and commercial law, and a group of 1,700 physicians
from around the country wrote to Congress in opposition
to S. 256 because it would remove protections available
to patients ruined financially by medical expenses;
(3) groups concerned with the rights of women, children,
seniors, and victims of crimes and torts including:
Alliance for Retired Americans, Business and Professional
Women/USA, Children’s Foundation, Church Women
United, National Council of Jewish Women, National Council
of Women’s Organizations, National Organization
for Women, National Women’s Law Center, and OWL
– The Voice of Midlife and Older Women;
(4) groups concerned with consumer protection, civil
rights, and social justice including: American Friends
Service Committee, Association of Community Organization
for Reform Now (ACORN), Center for Community Change,
Commission on Social Action of Reform Judaism, Consumer
Federation of America, Consumers Union, Leadership Conference
on Civil Rights, Lutheran Office for Governmental Affairs
ELCA, NAACP, National Advocacy Center of the Sisters
of the Good Shepard, National Community Reinvestment
Coalition, National Consumer
Law Center, Neighborhood Assistance Corporation of America,
Network – a National Catholic Social Justice Lobby,
Public Justice Center, and U.S. Public Research Group.
Many of these concerns have been expressed since the
introduction of the precursor bills beginning with the
105th Congress. The reported bill is virtually identical
to the conference report on H.R. 333 in the 107th Congress
with the exception of an important provision that would
have prevented the discharge, or the abuse of the bankruptcy
system to hinder, delay and defraud creditors, of debts
arising from violations of the Freedom of Access to
Clinic Entrances Act. There is no reason for the deletion
of this amendment that reflects a compromise among Sen.
Charles Schumer, Sen. Orrin Hatch and Rep. Henry Hyde,
other than the conclusion of the bill’s sponsors
that protecting women’s constitutional rights
would interfere with the passage of this special-interest
legislation.
For all the foregoing reasons, and the reasons discussed
below, we dissent from this legislation.
Section I describes concerns about the lack of empirical
justification for this bill. Section II describes the
consumer provisions, including, most notably, the means
test. Section III discusses flaws in the small business
and single-asset real estate provisions, Section IV
turns to the tax sections of S. 256, and Section V looks
at corruption in the bankruptcy system. The following
is a table of contents summarizing this analysis: Table
of Contents
I. LACK OF EMPIRICAL JUSTIFICATION 8
II. CONSUMER PROVISIONS 13
A. Current Law and Proposed Changes 13
1. Means Testing 15
2. Exceptions to Discharge & Loan Bifurcations 18
3. Domestic Support 19
4. Other Anti-Debtor Provisions 20
B. Principal Problems with Proposed Changes 20
1. S. 256’s Means Testing is Arbitrary and Unworkable
in Practice
20
2. Means Testing Will be Costly and Bureaucratic 23
3. Means Testing and the Other Consumer Provisions Will
Harm Low-
and Middle-Income People 26
a. Concerns Regarding the Means Test 26
b. Other Concerns 27
4. The Consumer Provisions Will Have a Significant,
Adverse Impact on Women, Children, Minorities, Seniors,
Victims of Crimes and Severe Torts, Victims of Identity
Theft, and the Military 28
a. Women and Children 28
b. Minorities 34
c. Seniors 34
d. Victims of Crimes and Severe Torts 35
e. Victims of Identity Theft 36
f. Military 37
5. The Bill Does not Address Abuses of the Bankruptcy
System
by Creditors 40
III. BUSINESS AND SINGLE-ASSET REAL ESTATE PROVISIONS
44
A. Small Business Provisions 45
B. Single-Asset Real Estate Provisions 47
C. Failure to Safeguard Employee Rights and Stem Employer
Abuses 48
D. Other Business Concerns 49
IV. TAX PROVISIONS 51
V. CORRUPTION OF THE BANKRUPTCY SYSTEM 53
CONCLUSION 54
I. LACK OF EMPIRICAL JUSTIFICATION
One of the major reasons accounting for the differing
views regarding S. 256 relates to differing understandings
of the quantitative evidence of the causes, costs, and
effects of bankruptcy. S. 256’s proponents point
to (1) the fact that the United States has experienced
a dramatic growth in the number of personal bankruptcy
filings in the last decade and (2) credit industry-funded
studies by Professor Michael Staten of Georgetown University’s
Credit Research Center, Ernst & Young, and the WEFA
group that purport to demonstrate that the bankruptcy
laws allow many relatively high income individuals to
avoid debts they could otherwise pay and that this avoidance
imposes substantial costs on the economy. Proponents
of S. 256 point to the “opportunistic personal
filings” for bankruptcy and the declining stigma
associated with doing so to explain the increase in
filings.
Despite the earlier trend in higher numbers of bankruptcy
filings, the vast weight of studies have contradicted
the proponents’ rationales and have shown that
the filing rate is a symptom of financial difficulties.
Analysts with the Congressional Budget Office, the General
Accounting Office, and the Federal Deposit Insurance
Corporation all have called into question the conclusions
of those studies. These critiques focus on a number
of grounds, including numerous flaws in the analysis
and the assumptions underlying the studies. Moreover,
other analyses indicate that the rise in bankruptcies
is more properly attributable to a number of changes
unrelated to the bankruptcy laws, such as unexpected
medical costs, family crises like divorce, loss of high-paying
full-time jobs, and most notably, the deregulation of
credit card interest rates and the dramatic increase
in credit card solicitations and overall consumer debt.
Even a credit card industry official found that “[t]he
majority of bankruptcies in [its] file are on customers
who have been on the books for more than three years
and have had some significant change in their financial
condition.” It also has been shown that the average
income of persons filing for bankruptcy has declined
from the 1980's, further contradicting assertions of
widespread abuse by high-income individuals.
One of the most telling studies was performed by the
non-partisan American Bankruptcy Institute, which commissioned
Professors Marianne B. Culhane and Michaela M. White
of the Creighton University School of Law to conduct
a study independent of the credit industry. Professors
Culhane and White used for their study a database of
chapter 7 cases; the National Conference of Bankruptcy
Judges funded the compilation of the database. The study
estimated that 3.6% of the debtors in their sample had
sufficient income, after deducting allowable living
expenses, to pay all of their non-housing secured debts,
all of their unsecured priority debts, and at least
20% of their unsecured nonpriority debts. Moreover,
in making their calculations, Professors Culhane and
White assumed that 100% of the debtors in chapter 13
would complete a five-year repayment plan even though
more than 60% of voluntary chapter 13 plans currently
do not complete.
The American Bankruptcy Institute study also showed
that, while the credit industry estimates it may be
eligible recover $4 billion under the rigid standards
of the means test, creditors would receive at best $450
million in actual collections. These figures are significantly
lower than those of the Credit Research Center and VISA
– two studies funded by the credit industry –
and show that the credit industry may have overstated
the “problem” by as much as 500%. The Executive
Office of United States Trustees in the Justice Department
conducted a study that reached similar results, estimating
that passage of the legislation probably would have
netted creditors no more than 3% of the $400 per household
they claim to be losing.
Professor Staten, whose work for the credit industry
provided much of the empirical fodder for this legislation,
has observed that this legislation would only move about
5% of all chapter 7 cases into chapter 13, and that
the legislation would have no effect on the number of
bankruptcies.
Similarly, according to James Blaine, CEO of the NC
State Employees Credit Union, “Charge-offs, too,
are well under control at .46% of total loans (less
than 1%). In other words, 99.5% of credit union loans
are repaid as promised. According to NCUA 41.1% of credit
union charge-offs related to bankruptcy. Or said another
way, just .19% (less than 2/10th of 1%!) of total credit
union loans result in a bankruptcy loss. So taking a
the high estimate of 15% rate of abuse, he calculates
that total losses on loan portfolios are .0385% or less
than 3/100ths of 1% (.19% x 15% = .0285% (less than
3/100ths of 1%).”
Moreover, there is nothing in this bill to guarantee
that any savings realized from this bill will be passed
on to consumers. The bill does not require it and, quite
frankly, although real interest rates continue to hover
at record lows, very little of the benefit of these
low rates have been passed on to credit card borrowers.
Not surprisingly, there is no evidence that the credit
card industry would pass on any of the “savings”
from bankruptcy law changes to individual borrowers.
Instead the evidence shows that credit card companies,
tend to maintain high interest rates, even when their
own cost of credit declines. In at least some cases,
these patters appear to have been caused by unlawful
behavior on the part of the credit card industry.
An important study from Harvard University recently
found that over fifty percent of all individuals who
filed for bankruptcy did so as a result of some sort
of medical emergency or situation in the family. This
study also found that many of the debtors had gone without
some sort of privation in the preceding two years before
the debtor filed for bankruptcy. Such privations included
debtors going without: telephone service (40.3%), food
(19.4%), doctor or dental visits (53.6%), and filling
prescriptions(43%). This study provides further evidence
that certain societal problems are causing people to
have to file for bankruptcy.
Recently, Demos: A Network for Ideas and Action, released
a study contradicting the assumptions of this bill’s
proponents. The Demos study showed how the amount of
credit card debt per person has risen in the last 10
years. The study also showed how the increase in senior
citizens filing for bankruptcy has been the greatest
of any age group over the years. Credit card debt among
young Americans has increased dramatically in the 1990s.
The average young adult had over $4,000 in credit card
debt in 2001. The average American family experienced
a 53 percent increase in the amount of credit card debt
that they owed. The main reason that most Americans
have been incurring much more credit card debt is not
because of reckless consumption but because of the “growing
gap household earnings and the costs of essential goods
and services.” The Demos study also found that
one of the reasons for the rising credit card debt was
due to the effective deregulation of the credit card
industry and deceptive credit card industry practices
such as excessive late fees and aggressive marketing
in terms of solicitations. Late fees were the largest
jump in revenue for credit card companies increasing
from $1.7 billion in 1996 to $7.3 billion in 2002.
II. CONSUMER PROVISIONS
A. Current Law and Proposed Changes
Under current law, individuals facing financial difficulty
may seek a variety of forms of relief under the bankruptcy
laws, with chapter 7 (liquidation) being by far the
most common form of relief sought. Under this chapter,
debtors are required to forfeit all of their property
other than their “exempt” assets (i.e.,
assets deemed necessary for the debtor’s maintenance,
as determined under federal or state law, at the state’s
option) in exchange for receiving a discharge of their
unsecured debts. Creditors are entitled to receive any
net proceeds from the sale of the debtor’s nonexempt
property, subject to the statutory priority schedule.
The Bankruptcy Code does not permit the discharge of
certain debts whose payments are considered to be important
to society. Some of this debt is of the same nature
as priority debt (e.g., family support obligations and
taxes), but the law also exempts from discharge debts
incurred through the debtor’s misconduct, such
as debts arising from fraud and intentional injuries.
While the decision to seek relief under chapter 7
or chapter 13 is voluntary at the discretion of the
debtor, section 707(b) of the Bankruptcy Code grants
the court the discretion to deny relief where the filing
is found to be a “substantial abuse.” Under
section 707(b), however, there is a presumption in favor
of granting relief to the debtor. This stems in part
from the costs and potential hardships associated with
developing excessive barriers to chapter 7 eligibility,
the belief that the “honest but unfortunate debtor”
should be entitled to a “fresh start,” the
importance of encouraging risk-taking and entrepreneurship,
and avoiding situations where it is impossible for individuals
to escape aggressive creditor collection tactics. Section
707(b) is not the only provision in the Bankruptcy Code
that prevents individuals from misusing chapter 7. For
example, creditors may request that certain debts be
held nondischargeable under section 523(a), or that
the debtor be denied a discharge altogether under section
727.
A creditor may also seek dismissal of a debtor’s
petition for relief under chapter 7 under section 707(a),
or seek to examine the debtor under Bankruptcy Rule
2004, which allows the creditor to examine an entity
(including the debtor) as to acts, conduct, or property
or to the liabilities and financial conditions of the
debtor, or to any matter which may affect the administration
of a debtor’s estate, or to or to the debtor’s
right to a discharge.” The creditors’ lobby
has asserted that it is the job of the government to
expend funds to investigate a debtor, collect debts,
and assert a creditor’s rights under the Code
notwithstanding the legal right of a creditor to assert
those rights and powers under current law. In effect,
it is the position of the proponents of this legislation
that the government should assume the role of their
debt collector gratis.
A separate bankruptcy alternative available to individual
debtors is chapter 13, which was formerly known as a
wage earner’s plan. Under chapter 13, a debtor
is permitted to retain his or her property, but is required
to pay to creditors over a 3S5 year period out of future
income at least as much as the creditors would have
received under a chapter 7 liquidation, and is also
required to pay all priority debts in full. To accomplish
this, the debtor must propose a plan, administered by
a trustee, that pays creditors in full or that devotes
the debtor’s “disposable income” after
accounting for necessary support of the debtor, his
or her family, or a business. In order to encourage
the use of chapter 13 plans, which are currently voluntary,
Congress determined that persons who meet their chapter
13 obligations are entitled to a broader discharge of
their unpaid debts than is available under chapter 7.
In addition, debtors are permitted to retain property
whether or not the property is encumbered by liens and
the debtor committed a prepetition default, so long
as the chapter 13 plan cures any arrearages. In this
manner, debtors can use chapter 13 to save their homes
from foreclosure. In addition, in chapter 13 a debtor
is permitted to bifurcate a loan on personal property,
such as an automobile, into secured and unsecured portions
based on its present value, and treat only the secured
portion as a secured claim that must be paid in full
with interest. Chapter 13 plans must provide for the
payment of in full of all priority debts, such as taxes
and family support obligations. A debtor also has the
ability to cure defaults as part of her plan.
S. 256 would institute a number of major changes to
consumer bankruptcy, in general, and to chapter 7 and
13, in particular, that some have argued may reduce
the number of bankruptcy filings (but will not reduce
the number of cases of financial hardship), and that
will undoubtedly serve as procedural and legal impediments
to bankruptcy relief. These changes are purportedly
designed to increase pay-outs to non-priority unsecured
creditors, particularly credit card companies, as well
as to certain secured lenders, especially those extending
credit for automobile loans.
1. Means Testing
The most far-reaching change, set forth in section
102 of the bill, would institute a so-called “means
testing” approach to consumer bankruptcy. This
new standard could create a presumption of abuse of
the bankruptcy system and deny chapter 7 relief to debtors
who fail a “means test.”
The means test purportedly calculates the debtor’s
ability to repay her non-priority unsecured debts (such
as credit card debts) over a five year period. If the
debtor is found, using the means test formula, to be
able to pay non-priority creditors as little as $100
per month for five years, the bill would create a presumption
that the debtor is abusing chapter 7. In essence, the
sole purpose of the means test is to advance the position
of creditors who have made the riskiest debts, those
that, as a matter of public policy, have been placed
in line behind secured and priority creditors, such
as single parents holding claims for child support.
Instead of using the debtor’s actual or projected
income to calculate the debtor’s ability to repay,
the bill uses a fictitious “current monthly income,”
which, with certain exclusions, is the average of the
debtor’s income for the six months preceding the
filing of the case. Even if, as is frequently the case,
the debtor’s bankruptcy was triggered by the loss
of a job, or other precipitous loss in income due to
serious illness or mobilization for war, the means test
would attribute to the debtor the lost income for the
purposes of determining whether a debtor is abusing
chapter 7.
Similarly, instead of using the debtor’s actual
expenses to determine the ability to repay non-priority
unsecured debts, the bill relies on guidelines developed
by the Internal Revenue Service to aid in the collection
of tax debts.
Moreover, where the IRS has specific local expense
standards, those standards do not always provide adequately
for normal expenses. Ironically, Congress itself has
recognized the inadequacy of such collection standards.
The Internal Revenue Service Restructuring and Reform
Act of 1998 directs the IRS to “determine, on
the basis of the facts and circumstances of each taxpayer,
whether the use of the schedules . . . is appropriate”
and to ensure that they not be used “to result
in the taxpayer not having adequate means to provide
for basic living expenses.” However, neither that
law, nor S. 256, grants this safeguard in the bankruptcy
context.
Although the means test is only applicable above median
income, the contention that debtors with income below
the median would not be affected by the means test is
false.
The inflexible and fictitious calculations in the
means test are justified by proponents who point to
a provision that allows a debtor to alter the income
or expense assumptions of the means test by allowing
adjustments for “special circumstances that require
additional expenses or adjustments of current monthly
total income, for which there is no reasonable alternative.”
Under the revised 707(b), a debtor would have to provide
extensive documentation to the court, not to establish
the debtor’s actual financial condition, but to
rebut the presumption of abuse, which may be challenged
by the trustee or any creditor.
The bill also makes substantial changes to chapter
13 by substituting the IRS expense standards to calculate
disposable income for debtors earning over the median
income, rather than the existing standard that uses
the debtor’s actual expenses “reasonably
necessary for the maintenance and support of the debtor
or a dependant of the debtor. Although the bill does
allow certain specified adjustments to the IRS standards,
the formula remains inflexible and divorced from the
debtor’s actual circumstances.
The means test is also used to calculate a debtor’s
income and expenses for the purposes of confirming a
chapter 13 plan. Unlike the means test in chapter 7,
however, there is no provision for a debtor to seek
adjustments to current monthly income for “special
circumstances,” making the application of the
means test in chapter 13 even more inflexible and divorced
from reality. Unlike the means test in chapter 7, the
means test in chapter 13 applies to all debtors, with
no exceptions for those below the median income.
The bill also requires debtors to calculate the means
test using expenses over 5 years rather than 3 years,
and makes other changes to the way plans must be presented.
These changes will guarantee that, if the means test
pushes a debtor into chapter 13, the repayment capacity
assumptions, and new mandates, would make it even less
likely that a debtor would be able to complete a repayment
plan in chapter 13 – the ostensible purpose of
the means test in the first place. In view of the fact
that approximately two thirds of all voluntary chapter
13 plans under current law are not completed, it is
likely that even more debtors would be unable to confirm
or complete the now-mandatory chapter13. This legislation
also greatly curtails the broader discharge currently
available to debtors who have successfully completed
a chapter 13 plan, eliminating a significant inducement
for voluntary debtor participation in chapter 13.
2. Exceptions to Discharge & Loan Bifurcations
S. 256 would make significant additions to the types
of debts that a debtor may not discharge under chapters
7 or 13, and greatly curtail a debtor’s ability
to bifurcate a loan into secured and unsecured portions
based upon the value of the collateral.
Section 310 would create a presumption of non-dischargeability
for credit card debts of $500 or more in the aggregate
(as opposed to $1,225 under current law) or more owed
to a single creditor for “luxury goods or services”
incurred within 90 days prior to the bankruptcy filing
(as opposed to 60 days under current law). Additionally,
section 310 also makes presumptively nondischargeable
cash advances aggregating at least $750 incurred within
70 days before the order for relief, to one or more
creditors in an open-ended credit plan. This means that,
if a debtor uses several cards to purchase basic household
needs (there is no requirement that these cash advances
be used for luxury goods) over a 70 day period, even
if the debt to each creditor is a fraction of the $750
threshold, all the debts would be presumed fraudulently
incurred. Current law makes cash advances aggregating
more than $1,250 nondischargeable if they are incurred
within 90 days before the order for relief. Section
314 adds another exception to discharge when the “debtor
incurred the debt to pay a tax to a governmental unit
that would be nondischargeable.” Therefore, regardless
of the debtor’s intent, any debts incurred to
pay a nondischargeable tax debt would be nondischargeable.
This particular change will have a devastating impact
on taxpayers who, at the urging of taxing authorities,
pay their taxes electronically using a credit card.
The legislation would also largely eliminate the possibility
of loan bifurcations in chapter 13 cases. Under current
law a debtor is permitted to bifurcate a loan between
the secured and unsecured portions. The debt is treated
as a secured debt up to the allowed value of the property
securing the debt. The remainder of the debt is treated
as a non-priority unsecured debt. Section 306 of the
legislation prevents such bifurcations (including with
regard to interest and penalty provisions) with respect
to any loan for the purchase of a vehicle in the 910
days before bankruptcy, as well as all loans secured
by other property incurred within one year before bankruptcy.
3. Domestic Support
Sections 211S219 of the bill make a number of changes
to current law that are purportedly intended to enhance
the status of child support and alimony payments in
bankruptcy. These changes are presumably being made
in an effort to offset the considerable criticism the
legislation has received from children and family advocates.
Section 211 creates a new definition of “domestic
support obligation.” In addition to applying to
debts owed on account of child support and alimony,
which are already nondischargeable under current law,
the new definition includes alimony and child support
debts owed or recoverable to a governmental unit. This
definition is in turn relevant to new sections of the
Bankruptcy Code that give certain enhanced rights to
the holders of domestic support obligations in terms
of priorities, payments, automatic stay, preferences,
and foreclosure placing the rights of children and custodial
parents in conflict with the claims of governmental
entities.
Section 212 grants alimony and child care creditors
a first priority in bankruptcy (they are currently seventh,
although most of the higher priority debts are seen
rarely in consumer bankruptcy cases). Section 213 prevents
the confirmation of a reorganization plan unless the
debtor has paid all domestic support obligations. Section
214 provides that the automatic stay does not prevent
legal actions enforcing wage orders for domestic support
obligations and similar actions. Section 215 makes nondischargeable
all domestic support obligations, including obligations
owed to government support agencies. Section 216 permits
nondischargeable domestic support obligations to be
collected from property – notwithstanding state
laws making that property exempt from collection or
attachment – after bankruptcy. Section 217 makes
clear that a transfer that was a bona fide payment for
a domestic support obligation will not be considered
a fraudulent or preferential prepetition transfer. Section
218 specifies that alimony and child support payments
are not included in the definition of disposable income
in chapter 12 cases. Finally, section 219 of the bill
requires trustees to send written notice to recipients
of alimony and child support payments, and to the local
and state child support agencies, notifying them that
a debtor of such payments has filed for bankruptcy.
4. Other Anti-Debtor Provisions
The legislation makes a host of additional changes
to the consumer provisions of the bankruptcy laws. The
majority of the provisions are designed to increase
creditor pay outs and would greatly harm low- and middle-class
debtors. As Harvard Law Professor Elizabeth Warren testified,
the bill “has 217 sections that run for 239 pages”
and “virtually every consumer provision aims in
the same direction. The bill increases the cost of bankruptcy
protection for every family, regardless of income or
the cause of financial crisis, and it decreases the
protection of bankruptcy for every family, regardless
of income or the cause of financial crisis.” In
1999, then-Chairman Hyde himself noted that the bill
contained at least 75 provisions detrimental to debtors
and favorable to creditors. Among other things, the
bill extends the period permitted between ch. 7 filings
from the 6 years under current law to 8 years; expands
the ability of residential landlords to evict tenants
without seeking permission from the court; and significantly
narrows the definition of household goods exempt from
repossession in bankruptcy.
B. Principal Problems with Proposed Changes
1. S. 256’s Means Testing is Arbitrary and Unworkable
in Practice
The National Bankruptcy Review Commission’s
majority specifically rejected the so-called “means
testing” approach, observing:
The credit industry has sought means testing consistently
for at least 30 years, but Congress has consistently
refused to change the basic structure of the consumer
bankruptcy laws. . . . . Access to chapter 7 and to
chapter 13, the central feature of the consumer bankruptcy
system for nearly 60 years, should be preserved.
The 1973 Commission on Bankruptcy Laws similarly considered
and rejected industry calls for mandatory chapter 13's,
noting that Congress had itself rejected similar proposals
in 1967, and observed:
[B]usiness debtors are not subject to any limitation
on the availability of straight bankruptcy relief, including
discharge from debts, and it was pointed out that, quite
apart from bankruptcy, business debtors are able to
incorporate and to limit their liability to their investments
in corporate assets. To force unwilling wage earners
to devote their future earnings to payment of past debts
smacked to some of debt peonage, particularly when business
debtors could not be subjected to the same kind of regimen
under the Bankruptcy Act. . . . The Commission concluded
that forced participation by a debtor in a plan requiring
contributions out of future income has so little prospect
for success that it should not be adopted as a feature
of the bankruptcy system.
The principal problem with the means test is that
the rigid one-size-fits-all test used in determining
eligibility for chapter 7 and the operation of chapter
13 will often operate in an arbitrary fashion. Many
of these flaws were highlighted in 1999 by then-House
Judiciary Committee Chairman Henry Hyde when he unsuccessfully
sought to delete the use of the rigid IRS standards
and instead substitute a more fact-specific test based
on the court’s assessment of the debtor’s
actual reasonable and necessary expenses.
Rather than relying on the debtor’s actual costs
of living, the bill relies upon IRS collection standards,
which lay out no comprehensive or specific standards
for the deduction of living expenses. Part of the problem
arises from the fact that the IRS standards referenced
by the bill are not automatic in many cases. Although
the IRS does set forth national standards for some expenses,
such as food and clothing, and local standards for expenses
such as housing and transportation, it leaves the determination
of “other necessary expenses” to the discretion
of the relevant IRS employee.
The seemingly arbitrary allowances for such expenses
points to another problem with the means test under
S. 256 – its bias against debtors without secured
debts. The bill allows all secured debt payments to
be deducted from monthly income, but limits rental and
lease payments to the amount permitted by the IRS standards.
This means that persons renting apartments and leasing
cars may not be able to deduct the full amount of their
housing and transportation costs in bankruptcy, while
persons with mortgages and automobile debt will be able
to do so. There is no legitimate policy rationale for
this discrepancy, which appears to punish people who
rent and lease and nonetheless must resort to bankruptcy.
Also, it is important to note that the IRS collection
standards can change the manner in which the bankruptcy
laws are applied. The collection standards serve as
internal guidelines for the IRS; they are not regulations
that are subject to the Administrative Procedures Act.
As such, the IRS does not need to provide notice, or
seek public comment, when introducing new standards
or when changing the existing ones. If the bankruptcy
law was amended to incorporate the collection standards,
as S. 256 proposes, and the IRS were to change the collection
standards in the future, the alteration in the standards
would completely change how the Bankruptcy Code is applied.
In effect, S. 256 would delegate authority to the IRS
to amend the Bankruptcy Code without notice.
It is no answer to assert, as the legislation’s
proponents have done, that the “glitches”
in the collection standards can be resolved through
the bill’s allowance that “the presumption
of abuse may only be rebutted by demonstrating special
circumstances that justify additional expenses or adjustments
of current monthly income for which there is no reasonable
alternative.” This is a new standard with no clear
definition. It is unclear how the courts will apply
it. Establishing “special circumstances”
will be costly and burdensome. It is the debtor’s
burden to show special circumstances. The debtor must
present detailed documentation for expenses for adjustments
to income and a detailed explanation of the special
circumstances that make such expenses or adjustment
to income the only reasonable alternative for the debtor.
These requirements make it very difficult for debtors
to claim special circumstances, since many expenses
are paid in cash and cannot be documented. This risk
provides a tremendous disincentive for debtors to claim
special circumstances, let alone incur the legal costs
the debtor himself is required to pay to defend against
a creditor’s motion.
Penalties available against creditors who file abusive
motions under section 707(b) appear to provide the authority
for the court to impose only attorney’s fees and
costs, not the civil penalties available against debtors’
counsel. No penalties or fees could be imposed under
the revised 707(b) for motions brought by “small
businesses” with small claims, even if the court
finds that Bankruptcy Rule 9011 had been violated.
“Small business” is a deceptive term as
used in this section. For the purposes of sparing a
creditor sanctions under this section, a small business
is a unincorporated business, partnership, corporation,
association or organization that has fewer than 25 full-time
employees (including wholly owned subsidiaries) and
is engaged in commercial or business activity. A firm
engaged whose sole business involves purchasing debts
and attempting to collect on them in a in bankruptcy
cases would qualify under this definition of a “small
business,” and would not be subject even to the
lesser penalties imposed on creditors even if they violated
BR 9011. Conversely, debtors’ counsel are subject
to both costs and civil penalties, and must certify
that the client’s statement about her financial
circumstances are true.
There are also several serious interpretive problems
caused by the drafting of the means test, which combines
debt payment amounts with IRS allowances. For example,
it the language of the bill needs to make clear that
a debtor who has two payments remaining on a secured
car loan is allowed the IRS car ownership allowance
for the remaining 58 months. If not, the debtor may
have no funds to replace a car that is already seven
or eight years old at the outset of the five-year period
and is essential for a long commute to work during the
five-year term of the plan.
Finally, making chapter 13 the only avenue for bankruptcy
relief for some individuals and imposing the bill’s
strict income and expense tests will undoubtedly result
in an even smaller proportion of successful chapter
13 plans. It is also somewhat unrealistic to expect
many chapter 13 cases to result in successful completion
of repayment plans. The current chapter 13 completion
rate is less than one-third, for chapter 13 plans which
are voluntary and with disposable income tests are less
rigid than that proposed in this bill. Moreover, changes
to chapter 13, such as the curtailment of stripdown,
will make it more difficult for even debtors who file
for chapter 13 voluntarily to confirm or complete a
plan.
2. Means Testing Will be Costly and Bureaucratic
The bill’s attempt to impose rigid financial
criteria on debtors’ eligibility for chapter 7
and the operation of chapter 13 will impose substantial
new costs on the bankruptcy system – both the
portions paid for by private parties (through payment
for private chapter 7 and chapter 13 trustees and higher
attorneys’ fees) and the federal government (through
the bankruptcy courts and the U.S. Trustees Program).
Testifying about the costs to private trustees, the
National Association of Bankruptcy Trustees has complained:
[U]nder the bill, trustees must (1) review the debtor’s
income and expenses prior to five days before the section
341 hearing, (2) file a ‘certification’
that the debtor is qualified to be a chapter 7 debtor
at least five days before the section 341 hearing, (3)
filed motions to dismiss under section 707(b) where
the debtor’s disposable income would yield [specified
payments] to a chapter 13 trustee over a five-year plan.
This is a great deal of work for trustees who only receive
$60 in the typical chapter 7 case. In addition, the
plight of the trustee is multiplied when, even if he
is successful, he cannot count on any compensation.
The most recent CBO estimate of the bill’s cost
to the federal government is $392 million over the next
five years. An additional cost of $26 million is estimated
for additional judges necessary to administer the new
rules. The total net increase in discretionary spending
would be $146 million over the next five years since
the bill would treat approximately $246 million in fees
as an offset to the $392 million that it will cost the
federal government. The two intergovernmental mandates
would cost a combined $62 million but the unfunded mandate
on private entities would exceed the Unfunded Mandates
Reform Act (UMRA) threshold at $123 million. CBO’s
cost estimate for additional bankruptcy judges does
not include the additional judges that the Judicial
Conference estimates will be needed to apply current
law, much less the additional need for judges to implement
the costly and cumbersome changes in the bill. This
request is based on current needs, not on actual needs
if the bill passes. Hence the estimate of costs to the
judiciary must be considered unrealistically low. Part
of this cost-estimate derives from implementing the
complex and paperwork-heavy means-testing program. CBO
estimates it will cost some $150 million over the next
five years. However, this estimate may well be far too
low. For example, Henry E. Hildebrand, Chair of the
Legislative Committee of the National Association of
Chapter Thirteen Trustees estimated that:
Assuming that one out of nine cases filing for chapter
7 relief would be contested and further assuming that
the contest would require about two hours of pretrial
preparation and one hour of court time, the litigation
would require 276,000 additional hours, about 90,000
of which would occupy the court.
Another source of higher costs for the government is
the requirement that one in every 250 cases in each
federal district be randomly audited by independent
certified public accountants or independent-licensed
public accountants, at taxpayer expense under generally-accepted
auditing standards. CBO estimated it will cost the federal
government $66 million over five years to effectuate
this requirement. It is unclear whether such costs will
yield any comparable benefits. For example, the Honorable
William Houston Brown, a U.S. Bankruptcy Judge in the
Western District of Tennessee, testified on behalf of
the ABI that the audits required “are likely to
be very expensive, and such formal audits are likely
unnecessary to determine significant misstatements in
debtors' petitions and schedules.”
Other costs to the government under the bill include,
the costs of the U.S. Trustee certifying the availability
of credit counseling ($17 million over 5 years) and
requiring the U.S. Trustee to visit sites in chapter
11 cases ($12 million over 5 years).
Another concern is the many, many new opportunities
for litigation and confusion created by the bill. Judge
Randall Newsome testified on behalf of the National
Conference of Bankruptcy Judges that at least 16 potential
sources of litigation are contained in the means testing
provisions alone, and that another 42 litigation points
have been identified in the other consumer provisions,
noting that “[t]his is probably only the tip of
the iceberg.”
Costs imposed on the private sector will also be substantial.
The CBO said: “S. 256 would impose private-sector
mandates, as defined in UMRA [the Unfunded Mandates
Reform Act] on bankruptcy attorneys, creditors, bankruptcy
petition preparers, debt-relief agencies and credit
and charge-card companies. CBO estimates that the direct
costs of these mandates would exceed the annual threshold
established by UMRA ($123 million in 2005, adjusted
annually for inflation).”
Many of the costs and burdens on the private sector
are illustrated in the American Bar Association’s
(ABA) recent letter concerning S. 256. In particular,
the ABA expressed its concern regarding provisions in
the bill that would require attorneys to: (1) certify
the accuracy of factual allegations in the debtor’s
bankruptcy petition and schedules, under penalty of
harsh court sanctions; (2) certify the ability of the
debtor to make payments under a reaffirmation agreement;
and (3) identify themselves as “debt relief agencies”
subject to a host of new intrusive regulations.
As the ABA has explained,
The three general types of enhanced attorney liability
provisions outlined above, when taken together, will
have a substantial negative impact on the availability
of quality legal counsel in bankruptcy. As a result
of these burdensome and one-sided mandates on debtors’
attorneys, many attorneys who currently represent both
debtors and creditors will stop handling debtor cases
altogether rather than comply with these new regulations.
With fewer attorneys available to represent debtors,
many more debtors will be forced to file their bankruptcies
pro se, without first obtaining adequate advice regarding
the necessity or advisability of filing for bankruptcy.
Therefore, the enhanced attorney liability provisions
ultimately will have an adverse effect on debtors, creditors,
and the bankruptcy system as a whole.
3. Means Testing and the Other Consumer Provisions
Will Harm Low- and Middle-
Income People
a. Concerns Regarding the Means Test
It is incorrect to assume that the effect of S. 256’s
harmful provisions would be limited to individuals seeking
bankruptcy relief who earn more than the state median
income.
The definition of “current monthly income”
used in the means test measures a debtor’s income
based upon how much the debtor earned in the six months
prior to bankruptcy. If the debtor lost a good job in
month three and has been working at a low-wage job ever
since, the income from that good job, and help from
family members, would be counted as if that is what
his future income would be. The debtor would be expected
to pay out of income that may no longer exist. Also,
the means test will pick up a variety of revenue sources
– such as disaster assistance, and Veterans’
benefits – which will result in lower- and middle-income
individuals being cast as bankruptcy “abusers”
with income above the median.
In addition, due to the fact that S. 256, unlike current
law, will permit creditors and other parties-in-interest
to bring motions to dismiss or convert, more aggressive
and well-funded creditors will have extremely wide latitude
to use such motions as a tool for making bankruptcy
an expensive, protracted, and contentious process for
honest debtors, their families, and other creditors.
Creditors could use such motions as leverage to obtain
reaffirmation agreements so that their unsecured debts
survive bankruptcy. The inability to obtain bankruptcy
relief will force more families out of the above ground
economy and into a permanent state of unmanageable indebtedness.
b. Other Concerns
The bill makes nondischargeable a wider range of debts
including cash advances, and debts incurred for so-called
luxury goods, and debts incurred to pay nondischargeable
tax debts. These new exceptions from discharge obviate
many of the benefits that debtors may realize from filing
for bankruptcy, under chapter 7 or 13 and increase the
opportunity for creditor abuse. The provisions were
opposed by then-President Clinton. In a communication
to the Congress, that administration wrote that it is
“generally inappropriate to make post-bankruptcy
credit card debt a new category of nondischargeable
debt . . . . We remain skeptical that the current protections
against fraud and debt run-up prior to bankruptcy are
ineffective and that the additional debts made nondischargeable
by [S. 256] meet the standard of an overriding public
purpose.”
Consumer bankruptcy expert Henry Sommer also has explained
that such provisions:
increase the opportunity for creditors to file the
types of abusive fraud complaints which have been found
by many courts to be baseless and unjustified attempts
to coerce reaffirmations by debtors who cannot afford
to defend them. The new presumptions of nondischargeability
will fall mainly on low income debtors who are unsophisticated,
do not have the time, budget flexibility, or attorney
advice to plan their bankruptcy cases carefully, have
to file on short notice to prevent utility shutoffs
or other impending creditor actions and will not have
the funds to defend dischargeability complaints.”
The new ban on loan bifurcations for car loans less
than 910 days old will further erode the possibility
of obtaining a fresh start through bankruptcy. Automobiles
depreciate rapidly once they leave the showroom. Before
the loan is repaid, the value of the vehicle is often
less than the unpaid balance of the loan. By prohibiting
bifurcation, a lender with a secured loan that is underwater
would be unjustly enriched by being able to treat the
unsecured portion of that loan as fully secured to the
detriment of other unsecured creditors. Such a prohibition
on loan bifurcation is likely to render many chapter
13 plans unfeasible because a debtor may be able to
repay the entire secured value, but not the entire purchase
price of the car along with penalties. The provision
also permits the lender to come out of the bankruptcy
in a superior position than if it had foreclosed on
the loan under applicable non-bankruptcy law.
Several other consumer provisions also will impose
significant hardships on all debtors, regardless of
income level or degree of culpability. For example,
by allowing landlords to continue eviction or unlawful
detainer actions even after debtors have obtained an
automatic stay, the bill will force many battered women
and families with children and seniors out onto the
streets, without ever having an opportunity to use bankruptcy
to catch up on their rent.
Extending the permitted period between bankruptcy
discharges to eight years could prove a substantial
hardship to families in already unstable economic situations.
The bill’s narrow definition of exempt household
goods could allow creditors to threaten foreclosure
on household tools and children’s sporting equipment,
in order to obtain preferential treatment for itself.
This provision would work to the benefit of predatory
and subprime lenders that take a security in interest
in the borrower’s personal effects.
4. The Consumer Provisions Will Have a Significant,
Adverse Impact on Women,
Children, Minorities, Seniors, Victims of Crimes and
Severe Torts, Victims of Identity Theft, and the Military
a. Women and Children
S. 256 will have an adverse impact upon single mothers
and their children, both as debtors and as creditors.
On the debtor side, the means test, and all the additional
paperwork burdens, will make it far more difficult for
women to access the bankruptcy system. For example,
women whose average income was at the median during
the last 180 days, before the support checks stopped,
may be denied access to chapter 7 and forced into restrictive
chapter 13 repayment plans. Second, the bill does not
exempt child support or foster care payments from the
means test definition of disposable income. By eliminating
stripdown, the bill will also make it more difficult
for women to hold onto the car they need to get to work,
or the refrigerator or washing machine they need to
care for their families if a creditor claims a security
interest in such items. The new nondischargeability
categories also are problematic. It will be more difficult
for custodial parents to discharge basic credit card
debts. Even if a custodial parent filing for bankruptcy
obtained cash advances to purchase basic necessities
such as diapers or food, she could face litigation brought
by a credit card company objecting to the discharge
of the debt.
The bill will have a particularly adverse impact on
the payment of domestic support to women and children
as holders of claims for alimony and child support.
These concerns are by no means insignificant given that
an estimated 243,000-325,000 bankruptcy cases involved
child support and alimony orders during the most recent
years.
Under current law, alimony and child support are treated
as priority debt and are not subject to discharge. This
preferential treatment dates from as early as 1903 and
is based on Congress’s determination that the
payment of these debts is so important to society that
it should come ahead of most general creditors. Although
S. 256 does not revoke this special treatment, viewed
as a whole, the legislation will have the effect of
diminishing the likelihood of full payment of alimony
and child support. This arises as a result of several
features of the bill: its creation of significant new
categories of nondischargeable debt, the extension of
the length and onerousness of chapter 13 plans, and
the bill’s general limitations on the availability
of chapter 7 relief.
Each one of these changes will make it less likely
that a former spouse will be able to make his required
alimony and child support payments. First, by making
significant amounts of credit card debt nondischargeable,
more of these debts will survive bankruptcy. Since most
chapter 7 and 13 debtors do not have the ability to
repay most of their unsecured debts, financial pressure
on the debtor will continue after bankruptcy, decreasing
his ability to handle important support obligations.
Collectively considered, these changes will help foster
an environment where unsecured and credit card debt
is far more likely to compete against alimony and child
support obligations in the state law collection process.
As a Congressional Research Service Memorandum analyzing
an earlier version of this legislation concluded that
“child support and credit card obligations could
be ‘pitted against’ one another. . . . Both
the domestic creditor and the commercial credit card
creditor could pursue the debtor and attempt to collect
from post-petition assets, but not in the bankruptcy
court.”
Outside of the bankruptcy court is precisely the arena
where sophisticated credit card companies have the greatest
advantages. While federal bankruptcy court enforces
a strict set of priority and payment rules generally
seeking to provide equal treatment of creditors with
similar legal rights, state law collection is far more
akin to “survival of the fittest.” Whichever
creditor engages in the most aggressive tactic –
be it through repeated collection demands and letters,
cutting off access to future credit, garnishment of
wages or foreclose on assets – is most likely
to be repaid. As Marshall Wolf has written on behalf
of the Governing Counsel of the Family Law Section of
the American Bar Association, “if credit card
debt is added to the current list of items that are
now not dischargeable after a bankruptcy of a support
payer, the alimony and child support recipient will
be forced to compete with the well organized, well financed,
and obscenely profitable credit card companies to receive
payments from the limited income of the poor guy who
just went through a bankruptcy. It is not a fair fight
and it is one that women and children who rely on support
will lose.”
It is for these reasons that groups concerned with
the payment of alimony and child support have expressed
their strong opposition to the bill and its predecessors.
Professor Karen Gross of New York Law School stated
succinctly that “the proposed legislation does
not live up to its billing; it fails to protect women
and children adequately.” Joan Entmacher, on behalf
of the National Women’s Law Center, testified
that “the child support provisions of the bill
fail to ensure that the increased rights the bill would
give to commercial creditors do not come at the expense
of families owed support.”
Assertions by the legislation’s supporters that
any disadvantages to women and children under S. 256
are offset by supposedly pro-child support provisions
are not persuasive. It is useful to recall the context
in which these provisions were added. In the 105th Congress,
the bill’s proponents adamantly denied that the
bill created any problems with regard to alimony and
child support. Although the proponents have now changed
course, the child support and alimony provisions included
do not respond to the provisions in the bill causing
the problem – namely the provisions limiting the
ability of struggling, single mothers to file for bankruptcy;
enhancing the bankruptcy and post-bankruptcy status
of credit card debt; and making it more difficult for
debtors to eliminate debts and devote post-discharge
income to the payment of domestic support obligations.
In some instances, the new sections are counterproductive
in furthering the goal of payment of support obligations
to ex-spouses and children.
For example, section 211 provides a definition of
“domestic support obligation” that includes
funds owed to government units. If the government is
acting as the debt collector for a woman or child, this
is appropriate; the benefits of this inure to women
and children directly. However, if the government is
collecting for its own benefit (say, for example, the
woman recipient is on welfare and the government is
collecting arrearages to reduce a state or Federal deficit),
then the result is inappropriate and will put the government
collection agency in direct competition with single
mothers and children, particularly in chapter 13.
Section 212 purportedly increases to first priority
from seventh priority obligations for domestic support,
including debts owed to the government. It is misleading
to suggest that moving up to "first priority"
from "seventh priority" makes a significant
difference to a custodial parent seeking to collect
child support: the debts that have second through sixth
priorities almost never appear in consumer cases.
In most consumer cases, the place of a creditor in
the priority order is meaningless. In chapter 13, all
priority debts must be paid in full. In approximately
97% of all individual chapter 7 cases, the debtor has
no non-exempt assets and so is unable to pay any priority
or non-priority unsecured debts, regardless of their
placement in the priority order. Outside bankruptcy,
of course, the priorities in the Bankruptcy Code are
inapplicable and unenforceable. It is in state court,
after the case is over that the custodial parent must
compete with newly non-dischargeable credit card debts.
Being first priority is of no help.
Section 214 creates additional exceptions to the automatic
stay that, like other provisions in the bill, have the
potential of placing women and children at a disadvantage.
First, these provisions apply only to income withholding
orders issued by government agencies under the Social
Security Act, even though an estimated 40-50% of all
child support cases, and all alimony-only cases, are
enforced privately, not by government child support
agencies. Second, income withholding is helpful only
if such orders are placed against debtors with regular
income. Yet, in 1997, more than four out of ten cases
in state child support systems across the country lacked
a support order.
Section 216, which allows domestic support creditors
to levy otherwise exempt homesteads and other exempt
property, also does not go far enough. Like the other
provisions, it is effective only if a single custodial
parent goes to the time and expense of hiring an attorney
to enforce her new rights.
The bill also fails to address the abuse of the bankruptcy
system by individuals who systematically violate the
constitutional rights of women to safe, legal reproductive
health care, and the Freedom of Access to Clinic Entrances
Act.
Women and their health care providers must live with
the fear that violent and reckless individuals will
be able to terrorize and blockade abortion clinics,
and seek to eliminate their liability from that action
through the bankruptcy process. Although the current
bankruptcy laws prevent discharge for “willful
and malicious injuries,” some have questioned
whether the law applies to fines and judgements resulting
for barricading clinic entrances or violating court
orders that may fall short of that standard. At the
same time, notorious clinic bomber and “Operation
Rescue” found Randall Terry specifically filed
for bankruptcy in order to void a $1.6 million judgment
he owed to the National Organization for Women and Planned
Parenthood, and many of the notorious “Nuremberg
files” defendants have filed for bankruptcy.
Although a bankruptcy discharge has proved elusive
for these law-breakers, they have succeeded in abusing
the bankruptcy courts to hinder, delay and defraud the
women whose rights they have violated, imposing substantial
costs on them to collect lawful judgements. As NARAL
Pro-Choice America has written, “[d]ebtors whose
debts arise from their own clinic violence are not honest
debtors and should not be able to escape the financial
liabilities incurred by their illegal conduct.”
According to Maria Vullo, lead counsel for the plaintiffs
in Planned Parenthood of the Columbia/Willamette, Inc.
v. American Coalition of Life Activists, et al., No.
95-1671-JO (D. Or.), a case in which a Portland, Oregon
jury, on February 2, 1999, awarded $109 million under
FACE against the defendants for their illegal threats
against the plaintiffs’ lives, the defendants
in that case have abused the protection of the bankruptcy
courts in six districts to avoid paying those judgements.
Although none of the defendants have been able to obtain
a discharge in those cases,
In the now five years since the jury’s verdict,
my firm has committed enormous resources to enforcing
the judgment, including by representing the plaintiffs
in six different bankruptcy courts. In connection with
these bankruptcy proceedings, the defendants took the
position that the jury’s verdict is fully dischargeable
in bankruptcy, despite the “willful and malicious
injury” exception to discharge that currently
exists in the Bankruptcy Code. These filings, and the
relitigation that has followed, demonstrate the utmost
importance of an amendment to the U.S. Bankruptcy Code
. . . . My firm expended over 3,500 attorney hours in
litigating these bankruptcy proceedings, in addition
to the time spent by local counsel in each jurisdiction
and the substantial expense of filing fees, service
fees, and travel around the country.
Despite these abuses, the Senate rejected an amendment
offered by Senator Schumer, that would have dealt with
abuse of the bankruptcy system, not just with respect
to violations of the Freedom of Access to Clinic Entrances
Act, but any unlawful interference with the delivery
of lawful goods or services. Although the amendment
had been adopted by substantial margins by the Senate
in the past, opponents of the Schumer amendment argued
that, regardless of the merits, it should be defeated
in order to ensure passage of the larger bill.
In Committee, Rep. Nadler offered an amendment that
would have made non-dischargeable debts arising from
violations of federal or state civil rights laws. It
too was rejected. The Chairman of the Subcommittee,
Mr. Cannon, made a similarly practical, if non-substantive,
argument against the amendment:
This really, this amendment is just a revised version
of the Schumer amendment, which has been responsible
for scuttling the bankruptcy – passage of the
entire bankruptcy bill for some time now. And it was
defeated, this amendment was defeated in the Senate
last week by a vote of 46 yeas and 53 noes.
b. Minorities
S. 256 will have a disparate impact upon minorities.
The Leadership Conference on Civil Rights has warned
that “African American and Hispanic American homeowners
are 500 percent more likely than white homeowners to
find themselves in bankruptcy court largely due to discrimination
in home mortgage lending and housing purchases, and
to inequalities in hiring opportunities, wages, and
health insurance coverage.” We know this because
the economic struggle for Hispanic-American and African-American
homeowners is harder than for any other group. While
68% of whites own their own homes, only 44% of African
Americans and Hispanic Americans own their homes. Both
African-American and Hispanic-American families are
likely to commit a larger fraction of their take-home
pay for their mortgages, and their homes represent virtually
all their family wealth. Experience has also shown that
minorities are also particular targets of predatory
lenders. The LCCR also opposes this bill because it
does nothing about the abusive practices used by the
credit industry to saddle more people with debt. The
LCCR states: “[S.256] also fails to address one
of the key reasons that bankruptcy filings have increased
in recent years . . . the aggressive marketing of credit
cards to our most financially vulnerable citizens .
. . .”
c. Seniors
Similar concerns have been raised on behalf of seniors,
who could lose their retirement savings if forced into
chapter 13 plans. The National Council of Senior Citizens
has warned that legislation of this nature:
[This legislation] would have a harsh impact on a group
of people who are often subject to job loss or catastrophic
health costs; instead of ameliorating these problems,
this bill will only exacerbate them . . . . Since 1992,
more than a million people over the age of 50 have filed
for bankruptcy; in 2001, an estimated 450,000 older
Americans filed. This number is up from the 180,000
that did so in 2001. For seniors it is particularly
hard. If they are forced into prolonged repayment schedules,
they may not be able to maintain or accumulate savings
for retirement. As you know, approximately two-thirds
of voluntary Chapter 13 workout plans fail, and we believe
that retirement savings must be protected for that purpose.
Furthermore, the Alliance for Retired Americans also
opposes S. 256. They stated:
The fastest growing group of Americans filing for
bankruptcy is those over 65. This unfortunate situation
has been caused by skyrocketing health care costs that
can drain a lifetime of savings in a very short period
of time. In addition, many older Americans have seen
their pensions and retirement savings disappear as well.
The result has been that many older Americans cannot
enjoy financial security in their retirement through
no fault of their own. The legislation before the Senate
actually increases the burden on older Americans who
undergo financially difficult times through health care
costs or loss of retirement income . . . . And while
millions of older Americans have lost pension payments
and retirement savings due to corporate abuses during
the past five years, this legislation does nothing to
make them whole or prevent future abuses.
d. Victims of Crimes and Severe Torts
With regard to the concerns of victims’ groups,
it is important to note that current law reserves the
nondischargeability of debts for obligations arising
out of willful or malicious injury, death or personal
injury caused by the operation of a motor vehicle, or
criminal restitution payments. However, making more
credit card debt nondischargeable, encouraging more
reaffirmations of general unsecured debt, and discouraging
more financially troubled individuals from seeking debt
relief will place these individual creditors at a relative
disadvantage. As the National Organization for Victim
Assistance has written, “more exempted creditors
with rights to the same finite amount of resources means
lower payments to all. Inevitably, for victim-creditors,
that means either a smaller return on the restitution
owed, or a longer period of repayment, or both.”
The National Center for Victims of Crime has similarly
observed, “to equate contractual losses of a commercial
creditor with . . . personal obligations [for victim
claims as the legislation does] is to belittle their
importance and to directly reduce the likelihood that
crime victims will ever be financially restored, despite
obtaining an order of restitution or a civil judgment.”
Mothers Against Drunk Driving (“MADD”) has
also complained that if “individuals [whose lives]
have been shattered financially and emotionally by the
death or serious injury of their family members . .
. have to compete with credit card debt holders for
the limited post-discharge income of debtors available
[as the predecessor legislation requires], they may
themselves end up in bankruptcy.” MADD also noted
that in contrast to crash victims, “lending institutions
have the ability to provide some degree of protection
to themselves when they issue credit cards to individuals
and they are in a better financial position to absorb
losses, which to them is a cost of doing business.”
e. Victims of Identity Theft
S. 256 will also have a significant adverse impact on
a growing number of identity theft victims who are forced
into bankruptcy. In fact, the manager of the identity-theft
program at the Federal Trade Commission commented a
few years ago that not only can identity theft wreak
havoc on the credit of a victim, but it can even force
them into bankruptcy. Since then, the problem has grown
at epidemic rates, topping the list of consumer complaints
filed with the FTC for the last four years in a row.
In September 2003, the FTC released a comprehensive
survey concluding that a staggering 27.3 million Americans
have been victims of identity theft in the last five
years - costing consumers and businesses an estimated
$53 billion in 2002 alone.
Recent news is rife with reports of identity theft
scandals. Most notably, reports have revealed that identity
thieves posing as legitimate customers gained access
to ChoicePoint's database of 19 billion public records.
The company has acknowledged that hackers had access
to data on 145,000 people and that the stolen information
has since been used in at least 700 identity theft scams.
In recent weeks, databases belonging to Lexis/Nexis
were also compromised, with hackers stealing information
on at least 32,000 people. Even further, the University
of California, Berkeley has revealed that a laptop containing
the names and social security numbers of 100,000 people
was stolen just this month.
In all of these cases, criminals have an opportunity
to use victims’ identities to apply for credit
cards, acquire loans and make exorbitant purchases.
However S 256 creates an arbitrary means tests that
does nothing to distinguish between the creditor claims
related to crimes of identity theft and legitimate debt
incurred by the debtor. Even if more than 51 percent
of the creditor claims in bankruptcy are the result
of identity theft, the debtor will still be subject
to the unfair and arbitrary means test and forced out
of the protections of Chapter 7.
Congressman Schiff offered a narrowly tailored amendment
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