Fact Sheet

& Staff








Submitted by

The Honorable Edith H. Jones

Commissioner James I. Shepard

The assistance of Professor Richard E. Flint, Ms. Kelly J. Wilhelm, and Mr. Greg Kamen is gratefully acknowledged.

The Commission's information-gathering concerning consumer bankruptcy has revealed a desperate need for changes in the Bankruptcy Code and its administration. As the number of consumer bankruptcies reaches unprecedented levels, paradoxically during prosperous economic times, the bankruptcy system's shortcomings are increasingly obvious. First, the system lacks effective oversight or control over its integrity. Uncovering and penalizing abusive or fraudulent practices is haphazard, despite the duty of debtor and creditor attorneys, panel and Chapter 13 trustees, judges, U.S. trustees and bankruptcy administrators, and U.S. attorneys' offices to maintain integrity.

Second, there is growing perception that bankruptcy has become a first resort rather than a last measure for people who cannot keep up with their bills. Lenders everywhere are reporting an increase in the number of bankruptcy petitions filed by people who were current on their debt payments. This phenomenon implies that bankruptcy relief is too easy to obtain, that the moral stigma once attached to bankruptcy has eroded, and that debtors are insufficiently counseled both about personal financial management and about the use of bankruptcy.

Third, apart from the urgent issues raised by increased filings, the law itself has proven unclear, leading to uncertain results and inconsistencies among and within circuits and even individual districts.

Fourth, the Bankruptcy Code offers opportunities for unjustifiable debtor manipulation by various means, including abuses of the automatic stay to fend off eviction, repetitious filings, and over-generous exemptions.

Fifth, some creditor abuses have been reported, particularly with respect to reaffirmations and dischargeability claims, but no case has been made for imposing additional far-reaching changes in creditors' remedies because of such practices. The law sufficiently addresses creditor overreaching, particularly if debtors' counsel do their jobs.

The following proposals attempt (1) to enhance the integrity of the bankruptcy system, (2) to clarify the law, (3) to increase uniformity and decrease manipulation, and (4) to expose the shortcomings of key elements of the Consumer Framework espoused by five Commissioners.

We do not disagree with all of the recommendations in the Framework, however, although some of them clearly need to be reinforced. To facilitate comparing our position with that of the Framework, the Table of Contents substantially mirrors that in the Consumer Bankruptcy chapter and numbers the substantive recommendations consistently, as far as possible, with the Framework. Also, notes at the margin indicate whether our recommendations "agree" or "disagree" with the Framework, whether our proposal is "new" and not addressed by the Framework, or whether our proposal will "strengthen" a Framework recommendation.

To summarize our position vis-a-vis the Framework most briefly, the nine Commissioners agree on the need to

  • create a national filing system;

  • reinforce accountability and integrity in the bankruptcy system;

  • promote pre- and post-bankruptcy debtor education;

  • restrict abusive refilings;

  • reward debtors who successfully complete Chapter 13 plans.

The four dissenting Commissioners disagree most strongly with the Framework proposals that

  • do not go far enough to penalize or deter abuse;

  • grant excessively generous exemptions;

  • discourage Chapter 13 repayment plans and encourage Chapter 7 liquidations;

  • impose unnecessary restrictions on lenders in regard to reaffirmations, household goods, rent-to-own contracts and credit-card debt;

  • do not meaningfully restrict abusive refilings or misuse of the automatic stay to prevent evictions.

Adoption of all of the attached recommendations would be highly desirable, but we make no pretense that they are a "Framework," connoting interdependence or interrelatedness. Congress may approve some of these proposals and jettison or modify others.

Finally, in view of the close division among the Commissioners regarding consumer bankruptcy, we provide a general critique of the Framework because we strongly believe that its significant recommendations are misguided and unresponsive to the five basic conclusions stated above.



Table of Contents

I.   Executive Summary

II.   Detailed Recommendations

1.1.1   National Filing System AGREE BUT STRENGTHEN

Heightened Requirementsfor Accurate Information AGREE BUT STRENGTHEN

1.1.2   Random Audits AGREE

1.1.3   False Claims DISAGREE

1.1.4   Federal Rule of Bankruptcy Procedure 9011 AGREE

1.1A   Additional Measures to Enhance Integrity NEW

1.1.5   Financial Education AGREE

1.1B   Debtors' Attorney Fees NEW

Uniform Federal Exemptions DISAGREE

1.2.1   No Opt Out

1.2.2   Homestead Exemption

1.2.3   Non-Homestead Exemption and Lump Sum Property Exemption

1.2.4   Health Aids

1.2.5   Retirement Benefits

1.2.6   Rights to Payments

Reaffirmation Agreements and the Treatment of Secured Debt in Chapter 7

1.3.1 & 1.3.2   Reaffirmation Agreements DISAGREE/NEW PROPOSAL

1.3.3   Elimination of the "Ride Through" of Secured Debt AGREE

1.3.4   Purchase Money Security Interests in Household Goods of "Nominal" Value DISAGREE

1.3.5   Characterization of Rent-To-Own Agreements DISAGREE

Discharge, Exceptions to Discharge, and Objections to Discharge

1.4.1 &1.4.2   Credit Card Debt and Debt Incurred to Pay Federal Tax Obligations NO COMMENT(2589)

1.4.3   Dischargeability of Criminal Restitution Orders

1.4.4   Dischargeability of Student Loans

1.4.5   Issue Preclusive Effect of True Defaults

1.4.6   Vicarious Liability

1.4.7   Effect of Lack of Notice on Time for Discharge Objection NO COMMENT*

1.4.8   Settlement & Dismissal of Objections to Discharge

1.5A   Repayment Plans in Chapter 13 NEW

1.5.1   Home Mortgage Debt NEW

1.5.2   Other Secured Debt DISAGREE

a.   Valuation of Retained Collateral DISAGREE

b.   Interest Rate DISAGREE

1.5.5   Consequences of Non-Completion Presumptive Conversion to Chapter 7 in Chapter 13 DISAGREE/NEW PROPOSAL

Consequences of Repayment Under Chapter 13 Plans

1.5.7   Superdischarge NO COMMENT*

1.5.8   Credit Reporting of Plan Completion and Debtor Education Program AGREE

1.5.9   Credit Rehabilitation Programs AGREE

1.5B   Restriction on Successive Attempts to Obtain Bankruptcy Relief Automatic Stay DISAGREE/NEW PROPOSAL

1.5.6   In Rem Orders AGREE BUT STRENGTHEN

1.5.C   Affidavit Practice NEW

1.5.D   Eliminate Residential Leases from Section 362 NEW

III.   General Critique of the "Framework" NEW



Dissenting Commissioners' Recommendations for Reform of Consumer Bankruptcy Law

Heightened Requirements for Accurate Information

1.1.1    National Filing System.

A national filing registry should be established and maintained that would identify bankruptcy filings using social security numbers and other unique identifying numbers, such as driver's license numbers, as well as photo ID.

1.1.2    Random Audits.

The U.S. Trustee should supervise random audits to verify the accuracy of representations made in debtors' schedules. Cases would be selected for audit according to guidelines developed by the U.S. Trustee. A debtor's discharge could be revoked or other penalties imposed based on deficiencies uncovered in an audit.

1.1.3    False Claims Rule.

There is no need for redundant rules to deter false claims.

1.1.4    Federal Rule of Bankruptcy Procedure 9011.

Bankruptcy Rule 9011 should be revised to require an attorney's signature, subject to Rule 9011 sanctions, to the debtors' lists, schedules, statements of affairs and of intention, and amendments thereto.

1.1A   Additional Measures to Enhance Integrity.

In order to bolster the integrity of the system, the following specific reforms should be adopted:

  • limit debtors' benefits from late-filed amendments to schedules and statements of affairs;

  • require debtors to submit copies of the last three years' filed tax returns with their petitions;

  • make discharge contingent on a trustee certificate of cooperation and statement that all relevant tax returns and other documents have been furnished to the trustee;

  • require revocation of discharge if a random audit uncovers acts or omissions that justify this remedy;

  • bar or revoke discharge if the debtor has made "material false statements or omissions" that "affect or could affect" the trustee's administration or investigation of the assets of the estate; allow party who uncovers conduct barring discharge to obtain a non-dischargeable judgment for fees and costs;

  • require identification of account numbers of the debts owed to larger commercial entities.

1.1.5    Financial Education.

All debtors in Chapter 7 and Chapter 13 should have the opportunity to participate in a financial education program.

1.1B   Debtors' Attorneys' Fees.

Payment of consumer debtor attorneys' fees should be structured to remove attorneys' incentives to direct debtors' filing choices toward any particular chapter for fee-related reasons and to encourage more effective debtor counseling and representation.

1.2.1-1.2.6    Uniform Federal Exemptions.

The uniform federal exemption proposal by the five-member majority far exceeds exemptions of most states and is misguided.

Reaffirmation Agreements and the Treatment of Secured Debt in Chapter 7

1.3.1 & 1.3.2    Reaffirmation Agreements.

There is no need to limit the availability of reaffirmation agreements. We recommend, however, that all reaffirmation agreements be approved by the Court following a hearing. The evidence at the hearing must establish that the agreement is voluntary, does not impose an undue hardship upon the debtor, and is in the debtor's best financial interest .

1.3.3    Elimination of the "Ride Through" of Secured Debt.

Debtors should not be permitted to "ride-through" secured claims in bankruptcy and retain collateral via a de facto non-recourse loan so long as contract payments on the debt are made. Debtors must make a § 521 election to redeem, reaffirm, or surrender each asset subject to a security interest.

1.3.4    Purchase Money Security Interests in Household Goods of "Nominal" Value Should not be Voided.

These security interests should not be voided in bankruptcy.

1.3.5    Characterization of Rent-To-Own Agreements.

These agreements should not be specially regulated by bankruptcy but should be enforced according to state-law consequences.

1.4.1-1.4.6    Exceptions to Discharge. No Comment.

1.4.7-1.4.8    Objections to Discharge. No Comment.

1.5A   Repayment Plans in Chapter 13.

Chapter 13's fairness to all should be enhanced in the following ways:

  • payments under a Chapter 13 plan should be made simultaneously to secured and unsecured creditors for the life of the plan, as provided in the Framework;

  • specific approval of 5-year plans should be codified;

  • Chapter 13 plans should be reviewed annually and payments modified if a debtor's income goes up or down;

1.5.1    Home Mortgage Debt.

Section 1322(b)(2) should be clarified to state that no debt secured principally by a debtor's homestead may be stripped down.

1.5.2    Other Secured Debt.

a.   Valuation of Retained Collateral -- Building on Associates Commercial Corp. v. Rash,(2590) there should be a simple standard for valuing collateral and, consequently, lien interests: the mid-point between the wholesale and retail values of the collateral; the tax-assessed value of real property.

b.   Interest Rate -- The interest rate on cramdown should reflect the lender's risk of a forced loan to a Chapter 13 debtor. Presumptively, the contract rate of interest should apply.

1.5.5    Consequences of Non-completion in Chapter 13.

A default should be defined in Chapter 13 to include a debtor's missing two consecutive payments and failure to catch up within 15 days of the due date for the second payment.

If a debtor defaults on a Chapter 13 plan by missing payments or otherwise, and if the case is converted to Chapter 7 for this or any other reason, the debtor shall forfeit the unique benefits of Chapter 13. All liens which had been stripped will be reinstated to their prebankruptcy contract terms, all ability to cure will be lost, and any tax restructuring will be withdrawn.

Consequences of Repayment Under Chapter 13 Plans.

1.5.7   Superdischarge. No Comment.

1.5.8   Credit Reporting of Plan Completion and Debtor Education Program.

Debtors who complete voluntary debtor education programs should have that fact noted on their credit reports. Debtors who complete Chapter 13 repayment plans should have their bankruptcy filings reported differently from those who do not. The Fair Credit Reporting Act should be amended accordingly.

1.5.9    Credit Rehabilitation Programs.

Credit rehabilitation by means of incentive loan programs to debtors who have successfully completed a Chapter 13 plan should be encouraged.

Automatic Stay

1.5B   Restriction on Successive Attempts to Obtain Bankruptcy Relief.

We recommend the adoption of a simple rule to prevent repetitive filings by amending § 109 of the Bankruptcy Code to prohibit the availability of any relief for individuals under Title 11 for six years after either the dismissal or discharge of any previous case. We recommend a very limited exception to this absolute prohibition in exceptional cases.

1.5.6    In Rem Orders.

Bankruptcy courts should be empowered to issue in rem orders barring the application of a future automatic stay to identified property for a period of up to six years.

1.5C   Affidavit Practice.

Relief from the automatic stay should be available to secured creditors upon a sworn motion supported by appropriate affidavits without the necessity of preliminary and final hearings when no one contests the creditor's right to foreclose.

1.5D   Eliminate Residential Leases from Section 362.

The automatic stay provided in § 362 of the Bankruptcy Code should not apply to bar an owner of residential realty from evicting a tenant/debtor and retaking possession of the realty, when the lease or rental agreement under which the tenant/debtor took possession has terminated, whether by its own terms or because of eviction processes.

III.   General Critique of the Framework

The Consumer Bankruptcy Framework, and the process that led to its adoption, are seriously flawed.

II.   Recommendations for Reform of Consumer Bankruptcy Law

1.1.1   . National Filing System

A national filing registry should be established and maintained that would identify bankruptcy filers using social security numbers or other unique identifying information, such as driver's license numbers, as well as photographic identification.

Copies of photographic identification materials bearing each debtor's signature should be required to be attached to each petition; petitions lacking such identification should be rejected by the clerk and returned to the debtor(s) unfiled. In order to enhance the efficiency of the audit process and to assist the trustees in verifying information contained in the debtors' schedules, debtors should also be required to attach to the petition copies of each debtor's filed tax returns for the three most recent tax years and copies of the debtors' two most recent paychecks or other documentation of income. (2591)

The Commission is proposing several amendments to control consumer debtors' access to the bankruptcy system. To enforce these constraints, a reliable national, multi-year database of bankruptcy filings is essential. This proposal envisions substantial changes in the clerks offices' procedures to monitor filings. All debtors would be required to provide correct social security numbers, verifiable through the Social Security Administration database, and these numbers, together with physical identification such as photos as well as debtor names, would be used to cross-reference bankruptcy filings nationwide. Additional methods for implementing this proposal, including a mechanism to monitor the database and to facilitate error correction, could be developed by the court clerks.

1.1.2    Random Audits

The U.S. Trustee should supervise random audits to verify the accuracy of representations made in debtors' schedules. Cases would be selected for audit according to guidelines developed by the U.S. Trustee. A debtor's discharge could be revoked or other penalties imposed based on deficiencies uncovered in an audit.

The fairness of the entire bankruptcy process, both system-wide and in individual cases, depends on the accuracy of the information in the debtors' files. Creditors' decisions, trustee's actions, court determinations, and policymakers' decisions are all based on the representations debtors make in their schedules.

While Chapter 7 and Chapter 13 trustees currently attempt to review debtors' schedules and uncover errors or hidden assets, no formal auditing mechanism exists in the bankruptcy system. The Commission repeatedly heard testimony that the information reported in the debtors' schedules is often unreliable. (2592) This is one of several proposals to enhance the integrity of the system, to improve the quality of the data, and to encourage debtors as well as their attorneys to be more careful and forthright in completing all filed documents. The proposed audits would be initiated within a reasonable time, not to exceed one year, after the case is filed.

Chapter 7 and Chapter 13 trustees should be authorized to conduct the random audits and to receive additional compensation for the costs of performing this duty. The Executive Office for U.S. Trustees would develop initial guidelines for the audit process and would be further charged with the responsibility to adjust these guidelines as needed, depending on actual experience with the audit program.

In a case in which an audit has been performed, the filing deadlines for objecting to the debtor's discharge or the dischargeability of a debt should be tolled until sixty days following the completion of the audit, so that the trustee or another interested party would be able to act upon information developed by the audit. The auditor would be required to complete investigations within a reasonable time, subject to the U.S. Trustee guidelines. The auditor would report to the bankruptcy court and the U.S. Trustee inaccuracies in the schedules discovered during the audit.

Sections 727 and 1328 should be amended to provide that material inaccuracies (e.g., significant under-reporting of assets, falsely claiming exemptions) will result in the denial or revocation of discharge. In addition, such irregularities might subject the debtor to prosecution by the Department of Justice, depending on the seriousness of the inaccuracies or other circumstances. The debtor should be required to cooperate with the audit in any reasonable way necessary to the auditor; failure to cooperate will also justify denial of discharge.

1.1.3    False Claims -- Critique of Framework Proposal

The Framework proposal states:

Courts should be authorized to order creditors who file and fail to correct materially false claims in bankruptcy to pay costs and the debtors' attorneys fees involved in correcting the claim. If a creditor knowingly filed a false claim, the court could impose appropriate additional sanctions.

Noticeably absent from the Framework's proposal is any attempt to maintain the present balance between creditors and debtors as directed by Congress. Where is a fee shifting proposal in the event a creditor is successful in defending a false claim suit brought by a debtor?

Debtors already have an adequate remedy for false claims filed by creditors. The United States Code makes it a crime, punishable by fine and/or imprisonment, to "knowingly and fraudulently present[] any false claim for proof against the estate of a debtor . . . ."(2593) This information is even printed on the official proof of claim form. (2594) The same section of the United States Code makes it a crime for a debtor to "knowingly and fraudulently make a false declaration" in relation to his case. (2595) A review of the annotations to the Code following Section 152 and a Westlaw© search for citations to this section clearly establish that the problem of "false claims" arises overwhelmingly from debtors, not creditors. (2596) Yet, the Framework does not address this debtor abuse. The report of the dissenting Commissioners, however, contains several provisions which directly address this problem. Given the rhetoric of the Framework with regard to improving the integrity of the system, it is ironic that the true source of the problem was ignored. However, this oversight is consistent with the social-engineering agenda of the drafter(s) of the Framework. (2597) If creditors' false claims were a real -- as opposed to merely a perceived -- problem of significant proportion, the United States Trustee's office would have been overwhelmed by the handling of such offenses. However, no evidence was presented to the Commission to document such a problem during the extensive hearings conducted over the last year and a half.

As stated above, the debtor already has a remedy when a false claim involves a consumer debt. The debtor can use the provisions of the Fair Credit Billing Act, 15 U.S.C. § 1666 et seq. (which allows for a creditor to correct errors before any sanctions are imposed), and pursue an adversary proceeding under that statute, if he is not satisfied. Or, if a false claim is filed in a Chapter 13 case, the Chapter 13 Trustee may handle the matter. The Chapter 13 Trustee is required to address the issue of claims as part of his overall responsibility over a case. (2598) The debtor's counsel should report any improper claims to the trustee. If a complaint concerning the amount of a creditor's claim is valid, the Chapter 13 trustee should object to the claim. (2599) The issue is then joined, without the debtor incurring substantial expense.

The Chapter 7 trustee also has a statutory obligation to object to improper claims. (2600) Thus, if false claims are a real problem, it is because the players in the system are not doing their jobs. Given the present obligations upon trustees and debtor's counsel, together with the fact of the debtor's discharge, it is highly improbable that a debtor will have to "pay the excess."(2601) Finally, if the debtor seeks to reaffirm debt (including an obligation to "pay the excess"), either his attorney or the court should advise him not to reaffirm the improper portion of the debt.

The Framework's position supposes that the debtor should receive the benefits of the bankruptcy laws cost-free. There is no reason, however, why a debtor should not have to find himself a competent attorney and incur some costs in order to obtain the benefits of the law. In addition, debtor's counsel should be required to do their jobs in an ethical and proper fashion. Finally, it should be pointed out that the Commission has heard little on the subject of false creditors' claims; in contrast, it has repeatedly heard that debtors' schedules are generally incomplete and unreliable. In fact, one bankruptcy judge told the Commission that debtors' schedules were often "fiction." Why should this proposal be accepted in the absence of adequate consideration by the consumer working group? This proposal, like many proposals contained in the Framework, may be thought by its proponents to be debtor-friendly, but it is not consumer-friendly in the larger context of the active credit marketplace, of which the bankruptcy system is but a part.

1.1.4    Federal Rule of Bankruptcy Procedure 9011

Amend Rule 9011 to require an attorney signature to the debtor's lists, schedules, statements of affairs and of intention, and amendments thereto.

Debtors' counsel should take an active role in certifying the accuracy of the information contained in the debtors' schedules, statements of affairs, and amendments thereto. Attorneys presently are not required to sign these official court documents because the Rule 9011 certification requirements(2602) do not apply to them. (2603) Requiring attorneys to sign schedules, as they are required similarly to certify all other pleadings filed at court, would clarify their responsibility to inquire into the accuracy of the information, and will improve the quality of data in the bankruptcy files.

1.1A   Additional Measures to Enhance Integrity

In order to bolster the integrity of the system, the following specific reforms should be adopted:

  • limit debtors' benefits from late-filed amendments to schedules and statements of affairs;

  • require debtors to submit copies of the last three years' filed tax returns with their petitions;

  • make discharge contingent on a trustee certificate of cooperation and statement that all relevant tax returns and other documents have been furnished to the trustee;

  • require revocation of discharge if a random audit uncovers acts or omissions that justify this remedy;

  • bar or revoke discharge if the debtor has made "material false statements or omissions" that "affect or could affect" the trustee's administration or investigation of the assets of the estate; allow party who uncovers conduct barring discharge to obtain a non-dischargeable judgment for fees and costs;

  • require identification of account numbers of the debts owed to larger commercial entities.

A small percentage of debtors abuse the system in these ways, but the examples of abuse have attained notoriety and taint the public's and creditors' perceptions of the system. One creditor went so far as to describe the bankruptcy system as "legalized theft." (2604) Others have suggested that it can be a "haven for criminals" and creates significant opportunities to defraud creditors. (2605) This group of proposals tightens up the accuracy of the schedules and statements of affairs and facilitates notice to creditors by requiring a list of the debtor's account numbers.

Congress should amend the discharge provisions in § 727 and in § 1328 so that discharge is barred if a debtor has made material false statements or has omitted material information from his schedules and statements of affairs, when such misstatements and/or omissions affect or could affect the trustee's investigation of assets and administration of the estate. For these purposes, the law should make clear that amendments do not "cure" the misstatement. This is especially important because the Federal Rules of Bankruptcy Procedure limit the time within which objections to exemptions and objection to discharge complaints may be filed. (2606) Because amendments are currently liberally permitted to cure misinformation, some crafty debtors file carelessly or intentionally false schedules and statements, wait until more than sixty days after the first scheduled creditors' meeting, and amend the schedules to disclose assets once an objection to the discharge complaint has become untimely. The time limit for objecting to discharge or dischargeability would be extended, however, in cases subject to audit, as previously suggested.

Any party in interest should be permitted to object to the debtor's discharge on this basis. In the event a party successfully brings an action to bar the debtor's discharge on this basis, that party should be compensated for his litigation expenses. To prevent misuse of the fee-shifting, the law should also permit fee-shifting if a party brings an action challenging discharge without substantial justification.

1.1.5    Financial Education

All debtors in Chapter 7 and in Chapter 13 should have the opportunity to participate in a financial education program.

Representatives from many parts of the consumer bankruptcy system--creditors, debtors, trustees, and judges--agree that debtors need to better understand how to manage their finances. Because debtors certainly will continue to be involved in consumer credit transactions after discharge, the policy of the fresh start and interests of creditors and society at large are furthered if debtors have the chance to learn personal financial management skills.

Criticism of debtor education has focused only on the timing, funding, or scope of such programs, not on the underlying premise that education would be beneficial and should be widely available. While the Commission endorses the exploration of various means to fund education programs and test their effectiveness, it does not prescribe a specific method or approach to the programs. In fact, extensive testimony and submissions have been furnished regarding successful consumer credit counseling efforts and post-bankruptcy education programs. Private industry, banks, credit unions, credit card issuers, not-for-profit organizations and Chapter 13 trustees offer such educational opportunities now; it seems certain that the increased number of bankruptcy filings will encourage additional initiatives. Both academicians and business interests are encouraged to study debtor education programs and recommend improvements.

Further, debtor participation in existing private-sector education programs must be voluntary; our goal is to make such programs more widely available. However, nothing herein should be interpreted as discouraging a bankruptcy judge from requiring any particular debtor to participate in an education program in an appropriate case.

1.1B   Debtors' Attorney Fees

Payment of consumer debtor attorneys' fees should be structured to remove attorneys' incentives to direct debtors' filing choices toward any particular chapter for fee-related reasons and to encourage more effective debtor counseling and representation.

The Commission has not proposed any specific changes to the Bankruptcy Code or Federal Rules of Bankruptcy Procedure with respect to the allowance and priority of attorneys' fees in consumer bankruptcy cases. However, the Commission has identified problems in the system and some possible solutions. In considering fee reform, Congress should take care to balance the debtors' need for cost-effective bankruptcy representation against the real expenses to attorneys of providing thorough service.

One of the most significant factors currently influencing consumer debtors' choice between Chapter 7 and Chapter 13 is local legal culture, including the preferences and training of trustees, bankruptcy judges, credit counseling services, creditors and their attorneys, and debtors' attorneys. (2607) Critics suggest that the number of Chapter 13 filings relative to Chapter 7s is linked to the ability of debtors' attorneys to earn a higher fee in Chapter 13 cases than in Chapter 7 cases. (2608) Debtors' attorneys are also able, under current law, to take advantage of priority status for the payment of their fees in Chapter 13, such that in many cases attorney fees are paid from the first funds a debtor pays to the Chapter 13 trustee for distribution to creditors. Because a debtor's attorney is also a debtor's creditor, the attorney has a conflict of interest when counseling a debtor as to choice of chapter under which to file. In addition, because Chapter 13 cases often require more legal work and continuing involvement of the debtor's attorney than Chapter 7 cases,(2609) debtors may be left without effective representation after plan confirmation.

An egregious example of the ethical lapses possible is a bankruptcy "petition mill" attorney who was recently sanctioned in Houston, Texas. (2610) Among other lapses, firm paralegals often prepared schedules and documentation without serious investigation of the debtor's personal financial condition; copies of the debtor's signature were obtained to add to pleadings as needed; the disposable income schedules were manipulated to achieve desired payment levels; and debtors were left uninformed about progress in their cases.

In addition, criticism has been directed against debtors' attorneys in Chapter 7 cases. The most strident complaints are those of debtors who complain that their attorneys abandon them after they file the petition and schedules and attend the meeting of creditors. (2611) Debtors' attorneys respond that they make minimal services available to debtors at a low cost, and that they satisfy their ethical duty to inform their clients early in the process. Consequently, their low fees do not include the cost of representation in, for example, adversary proceedings or motions for relief from stay. Such additional services are frequently priced separately from the agreed fee for the bankruptcy filing.

One proposal for reforming the attorneys' fee payment structure would require that fees be paid incrementally through the entire duration of the Chapter 13 plan. Debtors' attorneys would then have a stake in ensuring that plans are feasible and that debtors complete plans. A second proposal would require that at least a portion of the fees be held back until after payments to creditors have commenced. Debtors' attorneys criticize both these proposals as requiring attorneys to provide services to debtors without clear expectation of receiving payment.

However, reformers should note that courts superintend the allowance of fees,(2612) and judges have the duty to police ethical violations and conflicts of interest between attorney and client. (2613) The proposed amendment to Federal Rule of Bankruptcy Procedure 9011 would give judges another source of information to allow more active supervision of debtors' attorneys by the courts. Ethical lapses by attorneys can and should be more vigilantly pursued by the courts and bar association grievance committees.

1.2.1-1.2.6    Uniform Federal Exemptions -- Critique of Framework Proposal

The Framework advocates uniform federal bankruptcy exemptions that will replace the current law in which states can opt-out and apply, as most do, their state exemptions. It also sets, among other things, a personal property exemption of $20,000 per debtor, a homestead exemption of at least $20,000 and up to $100,000, and a "non-homestead homestead" allowance of $15,000, and it permits qualified retirement funds to be exempt.

Less than two weeks before the Commission's report was completed, by a five-four vote, the Commission adopted a slightly modified version of the Uniform Federal Exemption proposal that had been approved in spring 1997 but later withdrawn. The only significant change from the proposal of last spring was to reduce the minimum homestead exemption from $30,000 to $20,000. This means that a couple seeking bankruptcy protection can, under the final Proposal, exempt $40,000 of personal property, equity in a home ranging from minimum $20,000 to maximum $100,000, and tax-qualified retirement funds.

Two features of this proposal are noteworthy. First, its manner of adoption is peculiar. At the Commission's last public meeting in August, there appeared to be substantial agreement that if uniform, non-opt-out exemptions were going to be recommended, the Commission need not propose certain dollar values or criteria for uniform federal exemptions. We knew that Congress would bargain over the specific provisions in any event. Commissioner Hartley's recommendation was therefore simply to propose uniform federal exemptions without any specific criteria. His proposal was to be included in a mail-in ballot.

To our surprise, when the ballot arrived, it contained two alternative exemption proposals, that of Commissioner Hartley and the alternative one that has now been adopted by a bare majority. Many of us had no forewarning that the second alternative would be offered. Indeed, we thought the Commission had declined to ask for specific dollar amounts on exemptions.

The other unfortunate feature of this exemption proposal is that it is too generous to debtors. As one credit union manager put it, this type of exemption schedule enables debtors to secure discharge from debts while holding onto considerably more assets than his average credit union customer. The proposal increases the $15,000 homestead exemption passed by Congress only three years ago, and its personal property allowance is much higher than those of all but two states. Responding to the Commission's first uniform exemption proposal, which differed only in the amount of the minimum homestead exemption, Chapter 7 trustees observed that the proposed exemptions were overly generous. Under current exemption standards, nearly 95% of consumer bankruptcies are "no-asset" filings. The trustees estimated that the spring proposal would transform nearly all consumer bankruptcies into no-asset filings by substantially increasing exemption levels. Likewise, the U.S. Treasury Department analyzed the impact of the spring exemption proposal and concluded that it would allow couples to exempt sufficient assets to maintain their net worth in the top 60-70% of American households -- even without considering retirement assets. The $40,000 in personal property exemptions, according to the Treasury Department, would raise the non-homestead exemption in 48 states; "the (bankruptcy-weighted) average non-homestead exemption level across the United States is only $10,000."(2614)

Because the final exemption proposal was adopted at the last-minute, neither trustees nor the federal government was afforded the opportunity to analyze its consequences. Nevertheless, it seems clear that the Framework's uniform exemptions remain extremely high compared to those available in most states, and they are much higher than those in the current federal exemptions. This exemption proposal most benefits the wealthier debtors who can and should afford to repay something to their creditors. It gives debtors a head start, not a fresh start.

Oddly, the Framework makes no attempt to prove that state exemption levels are currently inadequate. It simply describes state exemptions and says, contrary to the Treasury Department analysis, that this proposal lies in the mid-range of state laws. But there is no normative explanation for increasing exemption levels to benefit wealthier debtors. Historically, exemption laws had five purposes: (i) to provide a debtor enough money to survive; (ii) to protect a debtor's dignity and cultural and religious identify; (iii) to afford a means of financial rehabilitation; (iv) to protect the family unit from impoverishment; and (v) to spread the burden of the debtor's support from society to his or her creditors. (2615) The Framework proposal's broad generalities fail to connect these policies with its liberal exemption increases.

It is also highly likely that these liberal exemptions will translate into the filing of more Chapter 7 liquidation cases, as debtors with the ability to repay some part of their debts will find it expedient instead to shelter more assets in Chapter 7. A combination of more-liberal exemptions with the Framework's cramdown reaffirmations and tighter Chapter 13 requirement virtually assures that liquidation plans will become dominant.

The outer limits on these exemptions will perhaps discourage bankruptcy filings by people like celebrity debtors who would have previously taken advantage of some states' unlimited homestead exemptions. We all applaud that result. On the other hand, the final proposal will enable many more individuals to escape their contractual obligations while maintaining levels of wealth that the vast majority of the American public do not enjoy. The image of the bankruptcy process will be further tarnished by this exemption proposal.

9. Reaffirmation Agreements -- Critique of the Framework Proposal

The Framework Proposal states:

11 U.S.C. § 524(c) should be amended to provide that a reaffirmation agreement is permitted, with court approval, only if the amount of the debt that the debtor seeks to reaffirm does not exceed the allowed secured claim, the lien is not avoidable under the provisions of title 11, no attorney fees, costs, or expenses have been added to the principal amount of the debt to be reaffirmed, the motion for approval of the agreement is accompanied by underlying contractual documents and all related security agreements, mortgages, or liens, together with evidence of their perfection, the debtor has provided all information requested in the required form motion for approval of the agreement, and the agreement conforms with all other requirements of subsection (c).

The Bankruptcy Code currently provides for the voluntary reaffirmation of secured and unsecured debt. (2616) A reaffirmation agreement is a voluntary contractual obligation under which a debtor agrees to repay all or a portion of a debt to a particular creditor which would otherwise be discharged in bankruptcy. The Bankruptcy Code provides significant safeguards for debtors and outlines in detail the procedures that must be followed in order to create an enforceable reaffirmation agreement. The opponents of reaffirmation agreements argue that these agreements seriously undermine two of the basic policies inherent in consumer bankruptcy--a debtor's fresh start and the equal treatment of creditors. We believe that reaffirmation agreements are helpful in ensuring the successful rehabilitation of debtors(2617) and in reducing the costs of credit to the millions of hard-working individuals who do not seek bankruptcy relief. In other words, reaffirmation agreements are not only debtor friendly, they are consumer friendly.

The evidence presented to the Commission clearly establishes that the identified problems surrounding reaffirmation agreements(2618) are, in large part, the result of the failure of debtors' lawyers,(2619) creditors,(2620) and the courts(2621) to comply with Section 524(c)-(d) and Section 524(a)(2) of the Bankruptcy Code. These identified problems, while they detract from the integrity of the bankruptcy system, are not ones that call for changes in the law of reaffirmation. Thus, we recommend no substantive changes in the law, but emphasize the need for all parties involved in the bankruptcy process to comply with the present statutory Framework for reaffirmation agreements.

We do, however, recommend several minor procedural changes. We recommend that all reaffirmation agreements be approved by the Court following a hearing. The evidence at the hearing must establish that the agreement is voluntary, does not impose an undue hardship upon the debtor, and is in the debtor's best financial interest. (2622) We further recommend that all reaffirmation agreements, when submitted to a court for approval, must be accompanied by an affidavit from the attorney whose signature appears on the petition (unless an order authorizing withdrawal and/or substitution has been approved by the Court) that the agreement is voluntary, does not impose undue hardship upon the debtor, and is in the best financial interest of the debtor. We contemplate that the attorney's affidavit alone will not be sufficient to support entry of an order approving the reaffirmation agreement. Additional evidence will be needed.

Debtors' attorneys and the courts should take the responsibility to uphold the integrity of the system and refuse to recommend and/or approve reaffirmation agreements which place debtors in serious financial jeopardy. (2623) However, research on this subject does not demonstrate a problem of this kind is of great magnitude. (2624) In fact, nearly all of the reaffirmation abuse identified by the Commission could easily be remedied by a more serious and reflective investigation into the economics of the reaffirmation process by the two parties to whom Congress has already given this responsibility -- debtors' attorneys and courts. To advocate the modification of the reaffirmation process because individuals are failing to take responsibility for their actions is ludicrous. It should be noted that the researchers who studied reaffirmations and noted the problems did not believe that abolishing reaffirmations was an appropriate response, as they do serve useful purposes for debtors as well as for creditors. (2625) It is not the current law which is at fault; it is the inability or unwillingness of the courts and/or the debtors' attorneys to do their jobs and enforce it. (2626)

The Commission was also well informed of the activities of certain creditors who sought reaffirmation agreements in direct contravention of the statutory procedures. Such actions are to be condemned, but once again, do not call for wholesale change in the present system. The specific problem should be forcefully addressed under the current law, as has been done in the case of Sears, Roebuck & Co. (2627) What is needed is enforcement of current law -- not more legislation.

We would be remiss in our report if we did not call to Congress' attention the fact that the Framework's proposal to limit reaffirmation agreements to the value of the secured claim enforces no policy other than one of paternalism toward debtors. First, the reaffirmation proposal is contrary to the Framework's avowal that it maintains the present balance between creditors and debtors. Under the Commission's proposal, secured creditors will be unable to enter into agreements with debtors for the repayment of the undersecured portions of their claims, while unsecured creditors will be prohibited from entering into reaffirmation agreements. The resulting financial loss to the credit industry will be significant, while no other change suggested by the Commission balances the equation on their behalf.

Second, Congress and the courts have generally recognized that reaffirmation agreements are a two-way street. (2628) The debtor gets some benefit from the reaffirmation -- either the possibility of keeping collateral otherwise subject to a security interest or continued borrowing privileges under a particular credit arrangement. (2629) And the creditor gets the benefit of participating in the determination of its repayment terms. The Framework's reading of legislative history revealing wariness of reaffirmation agreements is correct, as far as it goes,(2630) but Congress has given no indication of retreating from its position favoring all reaffirmation agreements.

Third, again contrary to the express goal of the Framework, limiting the amount payable on secured reaffirmation agreements will cause debtors to prefer Chapter 7 rather than 13. Under present law, a Chapter 7 debtor who does not intend to surrender property subject to a security interest has two methods by which to retain possession of the collateral--reaffirming the debt with the creditor, or redeeming the property by payment of the allowed secured claim. Redemption must be for a lump sum cash payment; installment redemption over the objection of the creditor is presently prohibited under section 722. (2631) Currently, the reaffirmation agreement may include both secured and unsecured components of the debt. If a debtor does not desire to reaffirm the entire amount of the undersecured debt, he must file a Chapter 13 bankruptcy, which enables him to strip the lien. Chapter 13, however, also requires the debtor to commit payments of disposable income to the unsecured creditors. (2632)

Under the Framework proposal, in either Chapter 7 (with a reaffirmation) or Chapter 13, the maximum amount the debtor will be required to pay on the secured debt is the stripped-down value of the collateral. In this scenario, there is no reason for a debtor to choose Chapter 13 and agree to make payments to the unsecured creditors. The Framework proposal gives him the benefit of a stripped-down lien, thus arbitrarily disadvantaging the secured creditor while conferring no corresponding benefit on unsecured creditors.

Fourth, as the Framework reaffirmation proposal introduces more complexity for less financial return, it may substantially discourage creditors from agreeing to reaffirmations on secured debts. In their place, however, creditors will have incentive to create a market for redemption-repurchase financing, in order to circumvent the controls in the Code on the terms of reaffirmations. Courts do not oversee redemptions at all. If secured creditors will not agree to reaffirm because they lose too much of their claim, while debtors have need to keep collateral, then they will all seek alternative sources of funding. Creditors would probably be willing to provide this financing, at "market" terms (i.e., high-interest terms), so that they can get full, immediate payment on their claims. Such a result would hardly protect debtors from financially overburdening themselves post-petition.

Finally, it should be noted that the Framework's proposal strikes at the very heart of individuals' freedom to contract. The present Code provides sufficient safeguards to prevent overreaching and unfair advantage when debtors' attorneys and the courts enforce the existing law. Drastic changes to remedy a problem which is already treated under present law are not justified. As indicated by testimony and documents received by the Commission, such changes will adversely affect the ability of debtors to rehabilitate financially.

1.3.3    Elimination of the "Ride-Through" of Secured Debt

Debtors should not be permitted to "ride-through" secured claims in bankruptcy and retain collateral via a de facto non-recourse loan so long as contract payments on the debt are made. Debtors must make a § 521 election to redeem, reaffirm, or surrender each asset subject to a security interest.

The Bankruptcy Code currently provides that the debtor must file a statement, with respect to secured debts, of the debtor's intention to redeem collateral for a secured debt, reaffirm a debt, or surrender collateral. (2633) Debtors are to perform their stated intentions with respect to the collateral within 45 days after filing the statement of intention. (2634) Currently, these three choices are the only ones recognized in the Bankruptcy Code.

Some Circuit Courts of Appeals, however, have discerned that the debtor has a fourth option, when the debtor has a debt on which he was not in default when he filed his bankruptcy petition. (2635) In these circuits, the debtor may retain collateral without reaffirming the debt or redeeming the collateral. This split should be resolved by amending § 521 so that keeping collateral without redeeming or reaffirming is prohibited.

The bankruptcy laws are intended to provide a debtor a "fresh start" by allowing a debtor to discharge all dischargeable debts while retaining assets that are exempt. (2636) Allowing a debtor to retain property without reaffirming or redeeming gives the debtor a "head start" instead of a "fresh start." When the debtor rides his secured debt through the bankruptcy, he effectively converts a secured obligation from a recourse debt to a nonrecourse one. The result is an involuntary modification (from the creditor's view) of the original contract, after which the debtor has little incentive to protect the collateral. (2637)

Allowing the debtor to retain the collateral absent reaffirmation or redemption limits the remedies available to the creditor in the event of the debtor's default after discharge. Because the secured creditor may not enforce the debt against the debtor personally when the secured debt is permitted to "ride through," the creditor's only remedy in the event of default is to repossess or foreclose upon the collateral as quickly as possible after default. A superficial analysis might suggest that a debtor benefits from the non-recourse status of a "ride-through" of the secured debt. However, the benefit comes at the expense of certainty that the creditor will not allow a discharged debtor to cure a default, but will instead immediately foreclose his lien since that is his only remaining right. Creditors will have an incentive to declare a default on any pretense, however minor,(2638) in order to protect their interests.

1.3.4    Purchase Money Security Interests in Household Goods of "Nominal" Value -- Critique of the Framework Proposal

The Framework Proposal states:

Section 522(f) should provide that a creditor claiming a purchase money security interest in exempt property held for personal or household use of the debtor or a dependent of a debtor in household furnishings, wearing apparel, appliances, books, animals, crops, musical instruments, jewelry, implements, professional books, tools of the trade or professionally prescribed health aids for the debtor or a member of the debtors' household must petition the bankruptcy court for continued recognition of the security interest. The court shall hold a hearing to value each item covered by the creditor's petition. If the value of the item is less than $500, the petition shall not be granted; if the loan value is $500 or greater, the security interest would be recognized and treated as a secured loan in Chapter 7 or Chapter 13.

This proposal of the Framework drastically changes the present balance between creditors and debtors in the bankruptcy system with both procedural and substantive changes in the law. One can only assume that the increasing costs to creditors of participating in the bankruptcy process, combined with increasing losses from writing off debtors' accounts, will lead to incrementally higher interest rates for all borrowers in the larger credit marketplace.

The suggested provision shifts the burden to prove claims. A claim filed under section 501 is "deemed allowed, unless a party in interest, . . . objects". (2639) The proposal would automatically convert what would otherwise be a secured claim (assuming a secured proof of claim was filed) to an unsecured claim, unless the creditor, in addition to filing a proof of claim, affirmatively acted to confirm the perfected security interest. No justification has been advanced for this procedural change.

The legislative history of § 522(f)(2640) clearly establishes that Congress was seeking to remedy the problem of creditors taking blanket non-purchase money security interests in all of a debtor's possessions as leverage to extract repayment on a debt. Congress did not state that purchase money liens had only hostage value. Interestingly enough, the proposal fails to note that in Chapter 13, the debtor already has the right to strip down purchase money liens. (2641) This proposal changes the law to permit a Chapter 7 debtor to gain some of the benefits of Chapter 13. Will this encourage more Chapter 7s? As in the case of the false claims proposal, this § 522(f) proposal is not aimed at any real problem. No public outcry has sought this reform, nor does any testimony justify it. It is merely one of the proponents' perceived evils in the states' general commercial law which needs to be remedied as part of their social-engineering agenda.

Article 9 of the Uniform Commercial Code provides for automatic perfection of purchase money security interests in consumer goods. However, in order for there to be perfection, there must first be a valid security interest. The Framework alludes to the "questionable validity" of purchase money security interests in many retail charge card agreements and acknowledges that most creditors realize their liens are not enforceable. So, is this a real problem, or is this like other proposals of the Framework -- part of an agenda to create a federal commercial law? The validity of such a lien is properly a question of state law. (2642) Once state law determination has been made, the next step should be to determine whether any overriding bankruptcy policy justifies not applying the state's law. Both Congress and an earlier Commission found none; no overwhelming evidence supports such a change. The Framework has been driven by its social-engineering agenda;(2643) given the lack of substantial evidence, reference is made instead to individual anecdotes to show a larger problem. However, the logical conclusion is that the individual anecdotes are just that -- isolated events not reflecting a pattern.

The Framework's argument in support of the change is spurious. The authors assert that the loss of or damage to personal property subject to these security interests could cause denial of discharge of the debt. The case law is clear, however, that unless a creditor can prove not only that the debtor knew of the security agreement (according to the proposal, this is rare), but also that the debtor knew that a transfer of the property was wrongful, the debt should be dischargeable. (2644)

This provision of the Framework is unnecessary. This problem has not been established or studied by the Commission. A competent debtor's attorney will not have any problem avoiding a purported lien on the debtor's pantyhose; nor, for that matter, will a creditor's attorney have any difficulty in recognizing the unenforceability of the lien. The problem is already addressed by the present law; no reform is needed.

1.3.5    Characterization of Rent-to-Own Agreements -- Critique of Framework Proposal

The Framework provides:

Consumer rent-to-own transactions should be characterized in bankruptcy as installment sales contracts.

The issue here is simple -- is a rent-to-own ("RTO") contract a "true lease" or is it a credit sale with a retained security interest under the Uniform Commercial Code? Senate Bill 540, in 1994, proposed to treat RTO contracts as credit sales rather than leases for purposes of Chapters 7 and 13. Congress rejected that proposal. Furthermore, as of 1994, 39 states have statutes which explicitly identify RTO contracts as true leases. (2645) The RTO business is a robust $2.8 billion industry with some 8,000 stores operating in the United States. (2646) Changes in the law that would affect such a significant economic segment should not be made lightly, particularly in the face of the above-referenced efforts of many state legislatures to direct their laws to the opposite result. Finally, under the federal Truth in Lending Act, a regulation has been promulgated which excludes rent-to-own contracts from the definition of credit sales. (2647) As one observer has pointed out,

[R]echaracteriz[ing] rent-to-own transactions as installment sales is misguided. It conflicts with well-settled federal law under the Truth in Lending Act. It flies in the face of special rent-to-own legislation enacted during the last 13 years in 45 states. It raises a serious issue of federalism in bankruptcy policy as expressed in prior United States Supreme Court decisions. It undercuts consumer choice in the marketplace and is certain to increase costs to consumers. (2648)

Ordinarily, the existence, nature and extent of a security interest in property is governed by state law. (2649) The Code does not define the term "lease." The legislative history of the Code indicates that whether a lease is a security interest under the Code is to depend on its treatment under applicable state law. Thus, a determination of whether a RTO contract is a lease or a security agreement is properly a matter of state law and outside the scope of bankruptcy law. (2650)

By converting RTO contracts from leases to credit sales, debtors (at least in 39 states) reap a windfall in Chapter 13. If the RTO contract is a lease, a debtor may only retain possession of the leased goods by assuming the lease under 11 U.S.C. § 365(b). Such assumption requires the debtor to pay the total of the lease payments without modification. If the contract is treated as creating a secured interest, however, the debtor may modify the contract's terms by stripping the lien down to the amount of the secured claim and treating the stripped portion as an unsecured debt -- which normally means less than full payment on the unsecured portion under a plan.

This part of the Framework has no place in Bankruptcy reform. It reflects the proponents' dissatisfaction with the legitimate variances caused by state laws in our dual-sovereignty republic. The proponents are attempting to use the bankruptcy reform process as a method of creating a federal commercial code to replace state commercial law. This is but another example of an issue treated in the Framework in the absence of any working group discussion or evidence presented at any of the hearings. It is another attempt to impose the proponents' social agenda upon the Code -- "these poor unsophisticated consumers need help."(2651) Finally, it should be noted that this proposal, like many proposals contained in the Framework, may be thought by its proponents to be debtor-friendly, but it is not consumer-friendly. Low-income consumers will suffer when the availability of RTO items tightens up because the costs of doing business as a secured lender exceed those of lessors.

1.4.1    - 1.4.6    Exceptions to Discharge -- No Comment

1.4.7    - 1.4.8    Objections to Discharge -- No Comment

1.5A   Repayment Plans in Chapter 13

Chapter 13 should be strengthened as follows:

  • payments under a Chapter 13 plan should be made simultaneously to secured and unsecured creditors for the life of the plan, as provided in the Framework;

  • specific approval of 5-year plans should be codified. See § 1325(d);

  • Chapter 13 plans should be reviewed annually and payments modified if a debtor's income goes up or down.

Chapter 13 plans embody in theory a debtor's honest attempt to repay some portion of his obligations based on his "disposable income."(2652) Unfortunately, the success rate of Chapter 13 plans is low: nationally, approximately two-thirds of the debtors do not complete their plans. (2653) These proposed statutory carrots and sticks should be added to facilitate payments and discourage voluntary cessation of payments. Many courts with higher Chapter 13 plan success rates already routinely confirm five-year plans. That practice, often a convenience to debtors, should be codified though not required. Providing that payments will be made simultaneously on secured and unsecured debt encourages the debtor to complete the plan to obtain the desired debt relief. (2654)

Some observers fear that Chapter 13 plans take too long to complete,(2655) and that plan confirmation is a speculative process, because most debtors cannot predict with accuracy their future earnings. A better system would allow repayment plans to be completed based on actual income, rather than the speculative projections made in the plan proposal and confirmation process. One suggested solution is an annual review of plans based on debtors' tax returns. Section 521 would be amended to require that Chapter 13 debtors making payments under a confirmed plan must provide copies of all tax returns they file to their trustee. If a debtor's reported income significantly changes, the trustee or any party in interest could move for the plan to be modified. Notice and opportunity for hearing would be required for any such modification. Debtors' attorneys would be entitled to additional compensation for their representation of debtors at modification hearings.

1.5.1    Home Mortgage Debt

Section 1322(b)(2) should be clarified to state that no lien for a debt secured principally by a debtor's homestead can be stripped down.

We take no position on this Framework's proposal to strip home mortgage liens that had greater than 100% loan-to-value ratio when taken.

Courts have split on whether the Chapter 13 protection from lien-stripping granted to home mortgage lenders in § 1322(b)(2) applies if the loan collateral includes any interests besides the real property mortgage. (2656) Some of these decisions have undercut Congress's intent to insulate home mortgage lending from the vicissitudes of bankruptcy. (2657) Congress itself has consistently rejected previous attempts to permit stripping of liens. (2658) A minor change to § 1322(b)(2) will eliminate the uncertainty and protect home mortgage lending whenever the homestead lien is the principal collateral for the debt. (2659)

1.5.2    Other Secured Debt

a. Valuation of Retained Collateral.

We recommend adoption of a simple standard for valuing collateral and, consequently, lien interests, under § 506(a): the replacement value standard described in Rash,(2660) on personal property, and tax-assessed value for real property.

Valuation of collateral in bankruptcy has not been debated by this Commission at all, a fact which may account for the shifting positions on the subject proposed in the Framework and by these dissenting recommendations.

The May version of the Framework recommended the midpoint between wholesale and retail values for personal property, and it eliminated any reference to real property valuation. The Framework also looked to the impending Rash decision for guidance. When Rash adopted a "replacement value" standard, however -- not to the Commission staff's liking -- the staff generated a new proposal advocating wholesale value for personal property and a reduced-fair market value standard for real property. This standard was adopted by a five-four mail-in ballot vote. We have never discussed the ramifications of this standard in open session.

Valuation is the "third rail" of bankruptcy practice. Section 506(a), which the Supreme Court interpreted in Rash, cuts across every chapter of the Code, applies to every type of property imaginable and has enormous macro-economic consequences for lenders and strategic consequences for all parties in bankruptcy. A good argument can be made that the 1978 Code, in addressing the complexity of valuation, deliberately left the statutory language fuzzy in order to preserve judges' flexibility to determine valuation in different circumstances. But the pervasiveness of the issue cries out for legal uniformity in like cases, in part to reduce the transactional costs of litigation, and the Supreme Court as well as this Commission have recognized the need for valuation rules. (2661)

Unfortunately, the Commission's process has not given us the time to study valuation properly or reach an informed judgment on it. The Framework position on valuation has vacillated; the dissenters' position has wavered;(2662) we should confess that we had neither the time nor the opportunity to explore this subject. The Framework proposal is thoroughly staff-generated and staff-justified, and nearly all of it was composed after the vote was taken.

In lieu of recommending a new set of valuation standards, we advocate adopting the Rash "replacement value" standard for personal property and the tax-assessed value for real estate. These standards are wholly justifiable for several reasons.

First, Rash fairly interpreted the Bankruptcy Code's language as recognizing two ways that a debtor deals with property: he uses it or disposes of it. 11 U.S.C. § 506(a). Rash held that if the debtor continues to use property subject to a security interest, the property has become subject to a forced loan by the creditor under terms set by bankruptcy law. The debtor "uses" this property so he does not have to go into the market for its replacement. Thus, "replacement value" becomes the touchstone for the amount of the creditor's forced loan. This is a fair measure of the creditor's opportunity cost in lending on equivalent collateral.

Second, the replacement value standard is not as difficult a concept as some commentators have suggested. (2663) The Court listed in footnote 6 of Rash some factors that may be properly deductible from retail value when a replacement value standard is calculated. They may or may not reduce replacement value to a proxy for wholesale value, as Judge Easterbrook has implied;(2664) in fact, it seems equally likely that replacement value will often be nearly the same as retail value for goods of like condition. Rash held that "whether replacement value is the equivalent of retail value, wholesale values or some other value will depend on the type of debtor and the nature of the property." 117 S. Ct. at 1887, n.6. Caselaw will in short order coalesce around replacement value measures that are not as widely different as the pre-Rash cacophony of standards.

Third, replacement value more fairly corresponds with the creditors' and debtor's rights outside bankruptcy than does wholesale value. Valuing collateral strictly at wholesale provides a benefit to unsecured creditors and the debtor, in that the secured claim is set at its smallest reasonable value. (2665) When this valuation occurs in the context of confirmation of a plan, the collateral is valued to calculate the secured claim and determine what amount of the debtor's finite available resources, whether Chapter 13 disposable income or Chapter 11 business revenues, will be distributed to pay secured claims and how much will remain to be prorated into the unsecured creditors' dividend. However, the benefit is achieved entirely at the expense of the secured creditor, whose bargain was, in the beginning, to be paid retail price for the collateral, over time and with interest; repossessing the collateral was a second-best alternative to the terms of the original bargain. With this bankruptcy valuation rule, the secured creditor has been put in the position where the baseline value of his claim is determined without any reference at all to his original bargain, but rather is determined entirely based on the less-desired contingency. In contrast, unsecured claims are at least valued (even if not necessarily paid) according to their contract terms, without reference to any comparable "second-best" value.

Fourth, as previously noted, this Commission has not engaged in a dialogue on valuation, as did the Supreme Court before it issued Rash. There is no reason to suppose that the last-minute decision of five members of this Commission is better than that of the nearly-unanimous Supreme Court.

The tax-assessed value of real property makes sense for two reasons. First, reference to this value should completely eliminate litigation and the high costs of litigating and bargaining over real property value in a vast number of bankruptcy cases. Second, as better technology has been applied by most taxing authorities both to estimate and update property assessments, the value generated will be realistic and objective.

In contrast, the Framework's proposal on real estate valuation recommends fair market value less hypothetical costs of sale. Although intellectually defensible, the fair market value standard invites litigation, especially when compared to the tax-assessed value. This fair market value proposal was never discussed in the Commission at all. It was not in the June version of the Framework. If it is a good idea, it is one that the Commission adopted utterly without forethought. What is more troubling in light of the Framework's recommendation to permit lien-stripping on certain types of junior home mortgages is that this value standard may impinge upon that recommendation, making it easier to strip such liens. The Framework does not comment on such an unfortunate possibility.

b. Interest Rate.

The non-default contract rate of interest should be applied in cramdown cases.

The choice of non-default contract interest rate is based on two premises. First, debtors should be bound to their original credit bargains to the extent possible even in bankruptcy cases. Second, the non-default rate represents a fair proxy for general market rates of interest applicable to the type of collateral the debtor wishes to retain. (2666)

The Framework's proposal appears to advocate a bright-line interest rate at six-month Treasury bill rates plus 3%. We should all be able to borrow at this rate! This proposal was never discussed or voted on by the Commission. It also conflicts outright with the Framework's earlier recognition that, in valuing property at wholesale value for cramdown purposes, the interest rate should allow the creditor to adjust for the risk of its forced loan. True to its usual approach, the Framework denies the creditor either a higher valuation or a reasonable interest rate.

1.5.5    Consequences of Non-completion in Chapter 13

The consequences for not completing a Chapter 13 plan should be amended as follows:

  • a default should be defined in Chapter 13 to include a debtor's missing two consecutive payments and failure to catch up within 15 days of the due date for the second payment;

  • if a debtor defaults on a Chapter 13 plan by missing payments or otherwise, and if the case is converted to Chapter 7 for this or any other reason, the debtor shall forfeit the unique benefits of Chapter 13. All liens which had been stripped will be reinstated to their prebankruptcy contract terms, all ability to cure will be lost, and any tax restructuring will be withdrawn.

The dismissal provisions in § 1307(c) should be amended to include, as a cause for conversion or dismissal, default on the Chapter 13 plan. Default would be defined as missing more than two plan payments. Section 1307 should be further amended so that conversion of a Chapter 13 case to a case under another Chapter cannot be abused to impair a creditor's rights. For example, under the current system, debtors can begin a Chapter 13 plan, pay off secured creditors through a crammed-down plan according to the value of a stripped-down lien, and thereby convert all secured debt into non-recourse obligations. Then the debtors can convert to Chapter 7. Upon conversion, all debt is discharged, including unsecured debt that should have been paid under the plan but was not. Unsecured creditors who might have expected to receive a dividend under the plan receive nothing, and secured creditors have received less than full payment on their claims because of cramdown. The following amendment to § 1307 would prevent such manipulation of the system:

(g) Upon conversion of a case under Chapter 13 to one under another Chapter, creditors shall be restored to the same position they occupied immediately prior to the Chapter 13 filing. Payments made during the pendency of the dismissed or converted Chapter 13 case shall be applied to the debtor's obligations.

Consequences of Repayment Under Chapter 13 Plans

1.5.7   Superdischarge. -- No Comment.

1.5.8   Credit Reporting Of Plan Completion and Debtor Education Program.

Debtors who complete voluntary debtor education programs should have that fact noted on their credit reports. Debtors who complete Chapter 13 repayment plans should have their bankruptcy filings reported differently from those who do not. The Commission recommends that the Fair Credit Reporting Act be amended accordingly.

One of the ironies of the current bankruptcy system is that debtors who try to repay their debts in Chapter 13 may appear to have worse credit histories than those who quickly discharge debts in Chapter 7. (2667) Few credit reporters identify debtors who tried to repay or those who, in fact, completed substantial repayments. Debtors who choose Chapter 13 repayment plans should have their bankruptcy filings reported differently from those who do not. (2668) Moreover, differential reporting would give debtors an additional incentive to undertake repayment in Chapter 13. (2669)

The Consumer Bankruptcy Reform Forum of the American Bankruptcy Institute unanimously endorsed this recommended change in credit reporting, as did the National Association of Consumer Bankruptcy Attorneys. (2670) These groups felt strongly that more information in the credit system would help debtors re-establish their credit following a bankruptcy and help creditors make better underwriting decisions.

1.5.9    Credit Rehabilitation Programs.

Credit rehabilitation by means of incentive loan programs to debtors who have successfully completed a Chapter 13 plan should be encouraged.

Both the fact that the debtor completed a repayment plan and that the debtor attended a debtor education program would be useful information for creditors in making subsequent credit decisions. The debtor should be considered more credit-worthy if he has completed these steps, and he should receive commensurate treatment, both in availability and in cost of credit, for having worked to repay his past creditors and having learned financial and credit management skills through education.

1.5B   Restriction on Successive Attempts to Obtain Bankruptcy Relief

We recommend two alternatives to the problem of abusive refiling: (1) adopt a simple rule to prevent repetitive filings by amending § 109 of the Bankruptcy Code to prohibit, except in extraordinary cases, the availability of any relief for individuals under Title 11 for six years after either the dismissal or discharge in any previous case; or (2) eliminate the possibility of an "automatic" stay for those who refile within 180 days or who are spouses, co-owners or co-lessees of a person who filed in the previous 180 days.

The purpose of our proposal, which is the same as that contained in a prior version of the Framework, is two-fold. First, it is aimed directly at the increasing number of abusive repetitive filings by individuals who seek to hinder and delay creditors from either collecting debts or regaining possession of collateral. One of the purposes of bankruptcy relief is to relieve the honest debtor of oppressive indebtedness and permit him a fresh start. Serial filings can be an abuse of the provisions and the spirit of bankruptcy relief. (2671) Second, this recommendation is designed to impose financial responsibility and integrity upon individuals. Bankruptcy relief is a serious undertaking which needs to be fully appreciated by those who seek its protection. We believe that by making it clear that a potential debtor has only one chance every six years to enjoy the extraordinary protection of discharge from debt, bankruptcy relief will become what it should be--the last resort, not the easy resort. This recommendation will also stop many of the impulse filers who file to obtain some advantage and then either dismiss or convert their cases. As clearly indicated by the rising number of repeat filers, bankruptcy relief is becoming merely another form of financial planning for some and a tool to defeat creditors' collection efforts for others. The profound moral implications and the serious financial ramifications of bankruptcy filings have too long been forgotten and were apparently lost during the Commission's rush to "finish its work." The Framework's proposal to remedy this problem by tinkering with the availability of the automatic stay is clearly inadequate. (2672)

The flat six year prohibition would be subject to a good-faith administrative exception in those cases where a debtor could show cause for the need to refile and to seek relief inside the six-year bar. This exception should be available in only rare cases. For example, the exception would cover the situation of a bankruptcy case dismissed because of administrative error when the debtor did not receive a discharge or a filing of which the debtor had no knowledge or understanding. To the extent that repeat filings now arise from debtors' inability to make their Chapter 13 plan payments, we contemplate that debtors will need either to modify Chapter 13 plans to make them livable, or else convert to Chapter 7 and receive that discharge, instead of dismissing and refiling afresh for Chapter 13 relief. (2673)

While some may call this "bar" draconian,(2674) we believe that bankruptcy does have implications beyond the debtors and creditors involved in the cases. The Commission has repeatedly heard testimony concerning the economic impact upon non-debtors of the increasing number of filings. The bankruptcy process needs to be not only debtor-favoring, but also consumer-favoring in the larger sense. Too many hard-working individuals are paying more for credit as a direct result of the easy choice many take to file for bankruptcy relief. The Commission owed a responsibility not only to those directly affected by adjustment of the process by which such relief is obtained, but also to those who are indirectly affected. The Commission failed to take into consideration the non-debtor and to make suggestions for change to improve the common good of the entire community. We believe that this absolute bar to refiling is the proper step to take for the common good of all.

Finally, asserting that a limit on serial filings is "draconian" is contrary to the history of American bankruptcy law. The legislative history of the 1978 Act also stated that "use of the bankruptcy law should be a last resort."(2675) Congress criticized the inadequate supervision of wage-earner plans which "made them a way of life for certain debtors" by means of plan extensions, new cases, and newly incurred debts. (2676) Congress intended to discourage repetitive filings twenty years ago; it is high time to effectuate that goal.

Although some creditors are using current law to curb refiling problems, often through motions to dismiss Chapter 7 cases for cause under § 707(a) or, in Chapter 13 cases, under § 1307(c), these efforts are of limited success at best. Such efforts take time and cause additional expense to a creditor who is likely to suffer a loss or has already suffered a loss on account of the particular debtor whose case he seeks to dismiss. Creditors have no incentive to "throw good money after bad." Trustees have no incentive to seek dismissal of cases upon which they depend for their livelihood. And courts simply do not have the resources presently to root out these abuses. Therefore, Congress should act to remove the unlimited ability of debtors to file cases and, perhaps, modify the incentive that motivates these sorts of filings in the first place -- the automatic stay.

A more limited approach to refiling than a six-year bar would solve this direct problem and render the stay non-automatic to serial cases where filed by a debtor within 180 days of each other. Such a debtor would have to go to bankruptcy court and persuade the judge to issue a second or successive stay. This alternative proposal, which contains three parts, would also limit "team-tag" filings by spouses and members of a household. This proposal would be structured as follows:

1. Augment Remedy Under Section 109(g).

A. Section 109(g) now provides that a debtor is not eligible to refile for 180 days after: (a) the debtor's case is dismissed for willful failure to obey an order of the court; or (b) the debtor voluntarily dismisses after a relief from stay motion is filed.

B. Under Section 109(g), if a new petition is filed within 180 days, the new case is subject to dismissal, but dismissal is not automatic or immediate, and the new case still creates a new automatic stay.

C. The effectiveness of Section 109(g) would be enhanced by providing that a refiling prohibited by § 109(g) does not create an automatic stay. The debtor could apply for a stay on notice and a hearing.

2. Automatic Limitations on Effect of Frequent Filing.

Where a debtor files a case that is dismissed or in which relief from stay is granted, and within 180 days after the earlier of the dismissal or relief from stay debtor files a second case that is dismissed or in which relief from stay is granted, and within 180 days after the earlier of the dismissal or relief from stay in the second case debtor files a third case, no automatic stay is created upon the filing of the third case, but debtor can apply for a stay on notice and a hearing.

3. Relief from Stay with Prejudice.

A. When a debtor files a case that is dismissed or in which relief from stay is granted, and within 180 days of the earlier of the dismissal or relief from stay, the debtor, debtor's spouse, or a co-owner or co-lessee of debtor files a new case for an improper purpose, the court may grant relief from stay with prejudice in the second case.

B. If the court grants relief from stay with prejudice, in any new case filed by debtor (or, where the order so provides, the debtor's spouse, a co-owner, or a co-lessee) within 180 days after entry of that order, the automatic stay in the new case shall not apply to the action permitted under the order granting relief from stay with prejudice. (2677) The debtor may apply for a stay on notice and a hearing.

C. The court may enter an order granting relief from stay with prejudice only upon an express finding that the second case was filed for an improper purpose. Such an order may not be entered merely on basis of a stipulation of the parties or on the basis of the debtor's failure to contest a request for such relief. (2678)

In stark contrast to our bright-line proposals, the Framework permits two repeat filings and does not squarely prohibit successive filings. It recommends that the filing of a petition by an individual does not operate as a stay if the individual has filed two or more petitions for relief under Title 11 within six years of filing the instant petition for relief and if the individual has been a debtor in a bankruptcy case within 180 days prior to the instant petition for relief. The Framework says that on a third filing, the court may impose a stay for cause shown, subject to such conditions and modifications as the court may impose.

This proposal, quite simply, does not achieve its intended result of curtailing abusive repetitive filings. (2679) It is far too narrow to be effective with respect to a great many abusive refilers, and it may be easily circumvented by careful planning. The "three strikes" approach might bar an additional petition only when the second case was still open within 180 days of the debtor's third filing. On the 181st day, the third filing is permissible. The evidence shows that multiple filings are particularly problematic for mortgage creditors (although certainly all creditors are affected). This proposal actually institutionalizes a debtor's "right" to forestall foreclosure at least twice by carefully-timed filings and justifies the use of bankruptcy for manipulation rather than debt relief. An additional weakness of this provision is its philosophical acceptance of debtors who "live" in bankruptcy. This is not a provision whose drafters believe bankruptcy to be an extraordinary remedy, but it is instead a tool to be used routinely and infinitely, so long as the uses are at least six months apart. Nor will the Framework proposal have any impact upon abusive "Chapter 20" filings.

As to in rem orders, the Framework recommends that section 362 should be amended to provide that the filing of a petition by an individual does not operate as a stay with respect to property of the estate transferred by an individual who was a debtor under Title 11 within 180 days of the filing of the petition, unless the court grants a stay with respect to such property after notice and a hearing on request of the debtor.

Likewise, the limited applicability of the in rem orders portion of the Framework's proposal renders it somewhat ineffective to deal with the problem it addresses, and it would be completely unhelpful to landlords dealing with eviction problems. That is why we propose our own recommendations to deal with these particular problems, infra Parts 1.5.6    ("In Rem Orders") and Part 1.5D ("Residential Leases")

1.5.6    In Rem Orders

Bankruptcy courts should be empowered to issue in rem orders barring the application of a future automatic stay to identified property for a period of up to six years.

In rem orders should be an appropriate and available remedy for a creditor that could show the debtor had transferred property or fractional shares of property or that a present co-owner of the property filed a separate, additional bankruptcy petition to avoid creditor foreclosure or eviction. (2680) Some courts already issue such orders, with instructions that they be recorded as equitable servitudes running with the land. (2681) A subsequent owner of the property who also files for bankruptcy (or the same owner in a subsequent filing) could petition the bankruptcy court to have the servitude set aside, allowing for the imposition of the stay to protect the property. The court would have discretion to grant such a petitioning debtor stay relief so that innocent parties who were not a part of a scheme to wrongfully hinder foreclosure or eviction can be protected. Of course, even in the absence of a scheme, the equities of a particular case may still favor permitting a creditor to foreclose.

This proposal(2682) should be effective against the typical participants in this type of abuse -- existing co-owners of property, often spouses , who subsequently or repetitively file bankruptcy petitions. (2683) It may be helpful also to amend the rules to require that all known existing co-ownership interests in any property listed as property of the estate must be disclosed in the schedules; creditors seeking initial relief from the automatic stay would be permitted to notice both the debtor and these co-owners concerning the hearing of the lift-stay motion, if feasible. Notification of co-owners might reduce the incentive for subsequent filings -- as well as making them more risky, in that they would more clearly be fraudulent, abusive filings made in bad faith.

1.5C   Affidavit Practice.

Relief from the automatic stay should be available to secured creditors upon a sworn motion supported by appropriate affidavits without the necessity of preliminary and final hearings when no one contests the creditor's right to foreclose.

The automatic stay is the most important relief granted to consumer debtors under the Bankruptcy Code. The stay shelters debtors from creditors' collection efforts while they resolve their financial affairs in Chapter 7 or in Chapter 13. Stay relief is currently granted to debtors immediately upon the filing of the case through the earliest of the time of closing of the case, of dismissal of the case, or of the grant or denial of discharge. (2684) The stay may, however, be lifted with respect to a particular creditor, on motion of a party in interest, and after notice and a hearing, for cause. (2685) Such cause may consist of the lack of adequate protection of the creditor's interests or a showing that the debtor does not have equity in the property, and the property is not necessary to an effective reorganization. (2686)

Unnecessary cost and systemic inefficiency justify reform of the procedure for lifting the stay when such creditor relief is uncontested. (2687) Corporate creditors (most are corporations) must currently be represented by counsel, at ever-increasing cost. (2688) Currently, a motion for relief from stay is required in all cases, even when debtors agree voluntarily to surrender collateral. (2689) Finally, preliminary and final hearings in these uncontested proceedings inefficiently diverts court resources from real disputes.

Section 362 should be amended to provide a more efficient summary procedure for the resolution of motions for relief from stay. Summary relief from stay should be granted on sworn motion, without the necessity of a hearing, if the motion establishes the statutory basis for such relief(2690) and the debtor receives adequate notice in order to enable him to contest the motion. Once fifteen days have passed, the requested relief should be granted if no response or opposition to the motion has been filed. The debtor's notice should have been sufficient to allow him to respond. No reason justifies requiring a creditor to prove a second time in court, and to pay attorneys to do, what is already established presumptively by its proof of claim -- that is, the validity and extent of its security interest. In all but a few cases, which can easily be resolved as contested matters heard by court, the proposed affidavit procedure should be fair to all parties.

This recommendation adopts the current local practice of some bankruptcy judges, in which motions for relief from the stay which contain negative notice language are filed together with affidavits and forms of default order lifting the stay. In one such district, default orders are entered, without hearing, if debtors fail to respond or request a hearing within fifteen days after the date of filing of the motion. (2691)

To accomplish this reform, we recommend that Congress amend section 362 by inserting the following new subsection (e) and renumbering the following subsections:

(e)(1) A party seeking relief from the stay under subsection (d) of this section may, at any time after the filing of the petition, file a sworn motion for relief from stay setting forth all the facts necessary for such relief. Such a motion shall be accompanied by notice of the right of any adverse party to file a response and request a hearing under subsection (f) of this section, and to file opposing affidavits.

(2) The motion for summary determination shall be served forthwith on the debtor and any potentially adverse party. Any party opposing the lifting of stay must file affidavits in opposition to the motion and request a hearing, if a hearing is desired, prior to the expiration of 15 days after the date of filing of the motion for summary determination.

(3) On the 16th day after the filing of the motion for summary determination, the court shall enter an order granting summary relief from the stay if no adequate opposition has been filed.

1.5D   Eliminate Residential Leases from Section 362

The automatic stay provided in § 362 of the Bankruptcy Code should be modified so that the stay does not apply to bar a lessor of residential realty from evicting a tenant/debtor and retaking possession of the realty, when the lease or rental agreement under which the tenant/debtor took possession has terminated, whether by its own terms or because of judicial eviction processes.

The Commission has heard powerful testimony and received over three hundred letters, including, at last count, seven from members of Congress,(2692) concerning persistent, systematic abuse of the automatic stay by residential tenants who have successfully forestalled eviction for months by filing a bankruptcy petition. Typically, once in bankruptcy, the tenants refuse to pay rent and cost the landlords hundreds of dollars in lost rents and legal fees to pursue bankruptcy remedies. This tactic is particularly egregious when one considers that under many states' laws,(2693) the tenant/debtor whose lease has expired or who has been evicted retains no property interest in the tenancy or residential realty that could ever have become property of the estate. If the tenancy is not property of the estate, then it is not shielded by the automatic stay.

The problem of tenant bankruptcy abuse has raged in the Central District of California (which furnished statistics to the Commission), but it is by no means confined there. (2694) Landlords and members of the National Multihousing Council flooded the Commission with letters from all over the country relating their personal experiences and unjustifiable financial losses. (2695) Many of these letters were written by individual landlords of patently modest means who can ill afford to lose months of rent and hire an attorney to evict a tenant. (2696)

It is no defense of this abuse to contend that bankruptcy law is needed to "protect" the tenant/debtors. (2697) State law eviction procedures are fair, sophisticated and fully protective of tenant rights. (2698)

Therefore, § 362(b) should be amended to make clear that the automatic stay does not bar eviction of a residential tenant whose lease or rental agreement has expired or of one who has been or is being evicted for cause by his landlord. In the alternative, Congress may wish to consider amending § 362(a)(3) to make clear that a residential tenancy that has expired or been terminated prior to the filing of the bankruptcy petition does not become property of the estate, such that acts to obtain possession of the rented or lease residential realty are not barred by the stay.

III.   General Critique of the Framework

Metaphorically, consumer bankruptcy legislation can be viewed as a "field of dreams." Since enactment of the Bankruptcy Code in 1978, over ten million debtors have sought relief under its provisions. (2699) Hundreds of millions of dollars in debts have been discharged. There appears to be no foreseeable reduction in the numbers lining up for a chance to "play" for the "home team." The "visiting team" -- the creditors -- also play on the same field. Debtors view winning in terms of discharge from debt obligations; creditors, however, view winning in terms of the number of dollars they collect through this federally operated debt collection system. Neither "team" is concerned about the effects of the game upon the hundreds of millions of Americans who play a different game with different rules in which debts are repaid without the intervention of the ever-burgeoning federal bureaucracy necessary to support the bankruptcy system. These other Americans view the bankruptcy game with a jaundiced eye, and feel that the rules need to be changed. While much of this perception is the result of high-profile players, who are not abusing the rules, as well as the staggering increase in the number of overall players in recent years, the general consensus in America today is that something needs to be done.

Congress heard the outcries of the general population and has started the ball rolling toward change. The need for improvement and updating of consumer bankruptcy legislation was the stated objective for the congressional creation of the Bankruptcy Review Commission. (2700) During the signing ceremony of the Bankruptcy Reform Act of 1994,(2701) President Clinton cited its creation of the Bankruptcy Review Commission as the new law's most significant measure. (2702) The President stressed the need for the Commission to review and suggest changes in some of the serious policy issues raised in the Bankruptcy Code. The National Bankruptcy Review Commission(2703) has been conducting extensive hearings in an attempt to accomplish its statutory mandate to provide Congress with suggestions for improving and updating the Bankruptcy Code. (2704) In the area of consumer bankruptcy, five members of the Commission support the controversial portions of a Framework they propose as the model for consumer bankruptcy reform. While suggesting some noncontroversial modifications, the Framework marks a drastic change in the direction of consumer bankruptcy. Initially, the Commission identified two significant problems to be remedied: the lack of uniformity(2705) in the treatment of similar cases across the country because different courts interpret and apply the existing consumer bankruptcy provisions differently,(2706) and the documented examples of abuse by both creditors and debtors(2707) under the present statutory Framework. The Commission also was well aware that part of its charge required addressing the need to address how to reduce the number of consumer bankruptcy filings.

Although the Commission correctly identified many of the problems, the solutions advocated by a slim majority will only exacerbate them. Furthermore, contrary to Congress's intent, the Framework dramatically expands the ability to debtors to discharge debt, changing the balance in the present system between debtors and creditors to be more debtor-favoring.

This surprising result of the Commission's work was as unnecessary as it was self-inflicted. The Framework was developed and presented to the Commission as a package, although constructed of disparate elements, and the Commissioners were required to vote on a take-it-or-leave-it basis. The process was unfair and led to a skewed result. A better and fairer approach would have been to list all the elements important in consumer bankruptcy and engage in debate over the alternatives for each element. As it is, no meaningful point-by-point debate ever took place; the clock ran out on the Commission just when the issues had been defined. No compromises were possible or even attempted. The Framework thus embodies a radically different philosophical view of bankruptcy law than the recommendations of the four-member dissenting group.

For both public policy and practical reasons the most significant parts of the Framework are flawed and should be rejected. The proponents of the Framework are disgruntled with what they see as defects in the laws of certain states. Therefore, the Framework seeks to create a federal law of commercial transactions in an attempt to evade the effect of the Butner(2708) decision. Seen in its best light, the Framework reflects the well-intentioned aspirations of individuals who live in ivy-covered towers who have no real day-to-day experience with the law they are seeking to reform. The sum of their knowledge of consumer bankruptcy is the incomplete raw data from selected judicial districts from which they draw "undisputable" conclusions and make recommendations, and the culled and selected portions of the Commission's hearings and materials forwarded to the Commission which reflect and support their preconceived ideas of problems and need for reform.

One basic defect in the Framework is philosophical. The Framework is based upon two major assumptions: first, that debtors are financially disadvantaged through no fault of their own; and second, that debtors are inadequately represented in the bankruptcy process. From these two assumptions come the Framework's inevitable conclusion: that as a matter of social justice, it is necessary to level the playing field by insuring that debtors are treated better under the reformed Code than they were before. As a result, much of the Framework can be characterized as social engineering designed to redistribute wealth, rather than bankruptcy reform. Redistributionism characterizes all of the Framework's most far-reaching proposals: the limit of reaffirmation agreements; the voiding of security interests in household goods; recharacterizing rent-to-own contracts as security devices in order to limit their enforceability; generously increasing exemptions. (2709)

The tragedy of the Commission's review process has been that the largest affected group has been left out: the legions of hard-working individuals who live within their means and pay their bills. They have been entirely unrepresented. As a consequence, the Framework implicitly assumes that its proposed changes will have no broader effects. We disagree. Many of the proposed changes will adversely affect this group through increased prices for goods, added borrowing costs, and reduced credit availability.

The Framework studiously ignores the external economic consequences of bankruptcy filings, portraying bankruptcy instead as a self-contained system, an analgesic for whatever ails debtors. But the impact upon the general economy and non-bankrupt citizens cannot be denied. If the Framework does nothing to stem the flood of increasing bankruptcy petitions during prosperous times, then a cataclysm of filings, whose damage we cannot foresee, will ensue with the next recession. (2710) Further, the debtor-friendly remedies in the Framework are not consumer-friendly. To take one example, the Framework's recommendation to void liens on household goods with a "value" less than $500 per items markedly increases the risk for sellers of those goods. Sellers can only avoid losses from such prophylactic provisions by (a) increasing costs and interest rates to all customers and (b) limiting or denying credit to more marginal customers. A two-tier credit system will take over, widening the gap between "haves" and "have-nots" and unfairly penalizing lower-income people who handle credit responsibly.

Finally, it is no answer to deflect criticisms of the Framework with the old saw that "everyone is unhappy, therefore it must be fair." The disadvantages crafted in the Framework for debtors lie in the remote possibility of a random audit of their petitions, exposure to mild minimum template payments in Chapter 13, and a three-strikes condition on refiling for bankruptcy relief. Offsetting these occasional disadvantages are more generous exemptions and debtor-protection measures.

Creditors' unhappiness stems, however, from Framework proposals that will pervasively affect general lending practices and the cost of credit to all consumers, while doing little to encourage repayment of debt. We will all pay the price of a Framework which is designed to aid debtors and penalize creditors. Unfortunately, lower-income citizens who struggle to and do pay their bills responsibly will be the foremost victims of the Framework.



2588  Commissioners John A. Gose and Jeffery J. Hartley concur with many of the substantive proposals in this dissent; however, they have written a separate concurrence. Return to text

2589  Because decisions on these issues were being made at the last minute, and/or because we are not fully agreed, no comments are included on these Recommendations. Judge Jones dissents separately on several of these provisions. Return to text

2590  Associates Commercial Corp. v. Rash (In re Rash), 117 S. Ct. 1879 (1997). Return to text

2591  Diligent trustees try to gather this information now. See letter of James H. Cosset, Bankruptcy Trustee, to National Bankruptcy Review Commission Consumer Working Group, May 9, 1997. Return to text

2592  See, e.g., Testimony of William Whitford, Jan. 23, 1997, at page 86, line 4 through page 87, line 1:

JUDGE JONES: Those schedules are filed under penalty of perjury. Doesn't that mean anything?

MR. WHITFORD: I'm sure it means something, yes.

JUDGE GINSBERG: The schedules are the great American novel . . . . They run exactly backwards . . . . Instead of going through the expenses and seeing what's available and then choosing relief based on that, they set the bottom line as to what choice they want to make, and then have the schedules add up to within a dollar or two of that amount. It's done all the time. The data is useless. Return to text

2593  18 U.S.C. § 152(4). Return to text

2594  Official Form 10. Return to text

2595  18 U.S.C. § 152(3). Return to text

2596  For example, the only case in the annotations to 18 U.S.C.A. § 152 which explicitly deals with a creditor's false proof of claim is Levinson v. United States, 263 F. 257 (3d Cir. 1920), in which it was held that the fact a creditor acted on the advice of his attorney in presenting the proof of claim was not a defense when the creditor did not fully disclose all material facts to his attorney. In contrast, at least 50 cases in notes 101-130 and 181-190 to § 152 concern various false statements or oaths by debtors. Return to text

2597  See General Critique of the Framework, infra Part III. Return to text

2598  11 U.S.C. § 1302(b)(1). Return to text

2599  Federal Rule of the Bankruptcy Procedure 3007. Return to text

2600  See 11 U.S.C. § 704(5). Return to text

2601  Paraphrasing the Framework, as no final version of its language was available when this was written. Return to text

2602  F.R.B.P. 9011 reads:

Every petition, pleading, motion and other paper . . . except a list, schedule, or statement, or amendments thereto, shall be signed . . . . The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney's or party's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact . . . and that it is not interposed for any improper purpose, such as to harass, or to cause unnecessary delay, or needless increase in the cost of litigation . . . .(emphasis added).

As it has been proposed to be amended, see Communication from the Chief Justice, the Supreme Court of the United States, dated April 15, 1997, the Rule would retain the exception from certification for lists, schedules, statements, and their amendments. Return to text

2603  See supra note 11 and accompanying text. Under the currently proposed amendments, the rule would still not clearly apply to these papers. The amendments leave unsolved this particular problem. The revised Rule will also conform to Fed. R. Civ. P. 11, by allowing a party threatened with sanctions to "withdraw or correct" [amend] the challenged pleading voluntarily. The policy that supports voluntary amendments in ordinary federal court litigation does not apply in bankruptcy, where numerous parties may be involved for relatively small claims, and deadlines for action spawn gamesmanship. The onus must be placed squarely on the debtor and his counsel to file truthful, complete documents. Return to text

2604  Letter of John Dolan-Heitlinger, CEO of Keys Federal Credit Union, dated May 6, 1996. Return to text

2605  Susan Jensen-Conklin, "Nondischargeable Debts in Chapter 13: 'Fresh Start' or 'Haven for Criminals'?," BANKRUPTCY DEVELOPMENTS JOURNAL, Nov. 1990; David J. Cook, "Road Map Through Fraud: Stops, Back Roads, Turnouts & Detours," COMMERCIAL LAW BULLETIN, Nov./Dec. 1995. Return to text

2606  Federal Rules of Bankruptcy Procedure 4003, 4007. Return to text

2607  National Bankruptcy Review Commission: Meeting (May 16, 1996)(testimony of Henry Hildebrand). Return to text

2608  National Bankruptcy Review Commission: Meeting (May 16, 1996)(testimony of William Whitford, Jerry Hermesch, Henry Hildebrand, and Richardo Kilpatrick); National Bankruptcy Review Commission: Public Meeting (April 19, 1996)(testimony of Prof. Jeffrey Morris). But see letter of Mallory B. Duncan, Vice President and General Counsel, National Retail Federation, dated June 16, 1997. Duncan argues that the opportunity to earn higher attorney fees in Chapter 13 cases was a positive incentive encouraging 50% more Chapter 13 filings in Atlanta. Return to text

2609  National Bankruptcy Review Commission: Meeting (February 21, 1997)(testimony of Gary Klein). Return to text

2610  See Order #72, In re Davila, Case #94-44142-H5-7, in which a sanction was imposed on attorney Frank Mann. This attorney has now also been disciplined by the State Bar of Texas. Return to text

2611  National Bankruptcy Review Commission: Meeting (May 14, 1997)(testimony of Tim Kline). Return to text

2612  11 U.S.C. §§ 329-331. Return to text

2613  See supra note 19 and accompanying text. Return to text

2614  Letter from Fran Allegra, Deputy Associate Attorney General, United States Department of Justice, to Chairman Williamson, attacking analysis from Jonathan Gruber, Deputy Assistant Secretary (Economic Policy), United States Treasury Department, dated June 18, 1997. Return to text

2615  Alan N. Resnick, Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy, 31 Rutgers L. Rev. 615, 621 (1978). Return to text

2616  11 U.S.C. § 524(c)-(d). Return to text

2617  See, e.g., Thomas C. Leduc, Michigan Credit Union League, Letter to the Consumer Working Group of the National Bankruptcy Review Commission, May 12, 1997 (noting that reaffirmation agreements are mutually beneficial for both the debtor and creditor). Mr. Leduc also stressed the importance of reaffirmations for the continued vitality of credit unions. Return to text

2618  See Elizabeth Warren and Melissa Jacoby, Memorandum to Consumer Working Group, January 14, 1997 (identifying the settling of questionable nondischargeability actions by execution of reaffirmation agreements and the use of "rogue" reaffirmation agreements which were never approved by courts). Return to text

2619  National Association of Consumer Bankruptcy Attorneys, Proposals for Improving the Consumer Provisions of the Bankruptcy Code, May 14, 1997. The largest association of debtors' attorneys acknowledged to the Commission that most reaffirmation agreements were the result of underrepresented debtors. The association fails to acknowledge the reason for this underrepresentation -- the attorney who was paid to represent the debtor in the proceedings fails to continue the representation after the § 341 meeting. Return to text

2620  See, e.g., In re Latanowich, 207 B.R. 326 (Bkrtcy. D. Mass. 1997)(outlining the conduct of Sears, Roebuck & Co. in failing to get court approval for "reaffirmation agreements" and attempting to enforce these void agreements). Return to text

2621  The Honorable John C. Akard, United States Bankruptcy Judge, Northern District of Texas, Letter to Elizabeth Warren, February 19, 1997 (stating that he will tell a debtor that he can reaffirm a debt if he wants to, even though it does not look like a good deal to him as judge). Return to text

2622  In re Avis, 3 B.R. 205 (Bkrtcy. S.D. Ohio 1980)(giving a historical survey of congressional approval of reaffirmation agreements and concluding that the best interest phrase used in § 524(c) was intended to mean only financial and economic best interest). Return to text

2623  Studies presented to the Commission by researchers at Creighton University and by the Credit Research Center at Purdue University showed that, in a few isolated federal judicial districts, reaffirmed debt constituted a substantial portion of debtors' post-discharge income. These sketchy statistical reports are an insufficient basis for the broad generalizations concerning reaffirmations contained in the Commission's report. In addition, the authors of the Creighton study have reported errors in their preliminary analysis. Memorandum of Marianne Culhane and Michaela White to Melissa Jacoby, June 18, 1997. Return to text

2624  Reaffirmations of secured debt in an amount exceeding the value of collateral constitute perhaps 10% of all filed agreements. Marianne Culhane and Michaela White, letter to Commission, June 11, 1997. Moreover, the researchers did not measure or indicate whether any of these 10% included any additional, new line of credit that might account for the difference. Return to text

2625  Id. Return to text

2626  The case law does establish that some courts take their jobs seriously. see, e.g., In re Latanowich, 207 B.R. 326 (Bkrtcy. D. Mass. 1997) (noting that Bankruptcy Court has power to impose remedial sanctions including compensatory and punitive damages to ensure compliance with the discharge injunction); In re Izzo, 197 B.R. 11 (Bkrtcy. D. R.I. 1996)(striking affidavit of attorney when it was clear that debtor could not make payments required under reaffirmation agreement); In re Hovestadt, 193 B.R. 382, 385-86 (Bkrtcy. D. Mass. 1996)(striking affidavit of attorney when Schedules I and J indicated that a debtor's expenses exceeded the debtor's income). Return to text

2627  United States Bankruptcy Judge Carol J. Kenner conducted an investigation that uncovered that Sears had over a ten year period, systematically pressured hundreds of thousands of bankrupt customers to reaffirm debts without receiving the required bankruptcy court approval. See In re Latanowich, 207 B.R. at 338 ("The court has issued an order to show cause why compensatory and punitive damages should not enter in each of the 2,733 other cases in which Sears has admitted that it obtained a reaffirmation from the debtor that it failed to file.") The nationwide settlement will cost Sears nearly $300 million. Bruce Mohl, "Sears to Pay State, Residents $10.82 Million," Boston Globe, September 4, 1997. Return to text

2628  National Consumer Bankruptcy Coalition, "What's Wrong with the Commission's Consumer Bankruptcy Proposal," July 18, 1997 (noting that in many instances, a continued line of credit which results from the reaffirmation is critical for a fresh start). Return to text

2629  Statement of American Financial Services Association, January 22, 1997. See also National Bankruptcy Coalition, Memorandum, April 16, 1997. Return to text

2630  The original House Bills disallowed reaffirmation altogether (H.R. 31 and H.R. 32, 95th Cong. 1st Sess. (1977)); however, the bill which finally passed in the House contained provisions for limited reaffirmation. H.R. 8200, 95th Cong., 1st Sess. (1977). Senate amendments to that bill resulted in the final compromise which became the Bankruptcy Code of 1978. Reaffirmation of both secured and unsecured debt has been the law since that time. 11 U.S.C. § 524(c), as amended. Return to text

2631  See, e.g., In re Bell, 700 F.2d 1053 (6th Cir. 1983). Return to text

2632  In fact, Professor William Whitford asserts that reaffirmation of secured and undersecured debt under present law is a good idea. He argues that full reaffirmation is a better deal for a debtor than filing a Chapter 13, in which other creditors get a "free ride" because of a debtor's desire to keep a particular item of collateral. Professor William Whitford, letter to Elizabeth Warren, March 15, 1997. It might be contended that because of the ready availability of reaffirmation agreements under current law, the filing of Chapter 7 is more attractive to many debtors than Chapter 13. Following this logic, it might be asserted that the incentives created by the Framework's limitation on reaffirmations are no different from those in present law. Such a facile analysis would be wrong. First, unlike present law, the Framework says it intends to encourage Chapter 13 filings, but this proposal conflicts with the Framework's intention. Second, to the extent present law on reaffirmations encourages Chapter 7 filings, this may indicate the need for other or stricter incentives for Chapter 13 plans. Return to text

2633  11 U.S.C. § 521(2)(A). Reaffirmation is a voluntary agreement between a creditor and the debtor concerning a debt for which the debtor's personal liability would otherwise be discharged. 11 U.S.C. § 524(c). The creditor may then enforce the agreement as a post-petition obligation not affected by the debtor's discharge. Redemption, 11 U.S.C. § 722, allows a Chapter 7 debtor to redeem personal property from a lien securing a dischargeable consumer debt by paying the secured lender the lesser of the fair market value of its collateral or the amount of the claim on the date the petition is filed. Surrender permits a debtor to choose to give the collateral to the lienholder in satisfaction of the debt. Return to text

2634  11 U.S.C. § 521(2)(B). Return to text

2635  Cases holding that debtors may not retain the collateral without redeeming or reaffirming are In re Johnson, 89 F.3d 249 (5th Cir. 1996); Taylor v. AGE Credit Union (In re Taylor), 3 F.3d 1412 (11th Cir. 1993); In re Edwards, 901 F.2d 1383 (7th Cir. 1990). Cases holding that debtors may retain the collateral are Home Owners Funding Corp. of America v. Belanger (In re Belanger), 962 F.2d 345 (4th Cir. 1992); Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989). Return to text

2636  See 11 U.S.C. §§ 727, 522. Return to text

2637  Nicholas A. Penfield, "Letter to the National Bankruptcy Review Commission" (May 14, 1997), at 2-3. Return to text

2638  For example, not just nonpayment, but also failure to insure the collateral and failure to perform maintenance and upkeep on the collateral are typical events of default. Return to text

2639  11 U.S.C. § 502; see also Fed. R. Bankr. P. 3001(f). Return to text

2640  H.R. Rep. No. 595, 95th Cong., 2d Sess. at 126-27 (1977), reprinted in 1978 U.S.C.C.A.N. at 6087-88; Report of Commission of the Bankruptcy Laws of the United States, H.R.Doc. No. 137, 93rd Cong., 1st Sess. pt. I at 169 (1973). Return to text

2641  11 U.S.C. § 1325(a)(5)(B)(ii). Return to text

2642  Butner v. United States, 440 U.S. 48 (1979). Return to text

2643  See General Critique of the Framework, infra Part III. Return to text

2644  11 U.S.C. § 523(a)(6) covers willful and malicious conversion of collateral; see also In re Posta, 866 F.2d 364 (10th Cir. 1989). Return to text

2645  See Cooper, IDENTIFYING A TRUE LEASE UNDER U.C.C. SECTION 1-201137 (J. Wong, ed. 1995); see also In re Connelly, 168 B.R26452645. 714 (Bkrtcy. W.D. Wash.)(holding that state statute's characterization of RTO as lease is determinative for bankruptcy purposes). Return to text

2646  WALL STREET JOURNAL, June 4, 1994, at A5. Return to text

2647  12 C.F.R. § 226.2(a)(16). Return to text

2648  Attorney Barkley Clark, undated memorandum to National Bankruptcy Review Commission: "A Brief Critique of the Commission's Proposal to Recharacterize Rent-to-Own Transactions." Return to text

2649  Butner v. United States, 440 U.S. 48, 99 (1979). Return to text

2650  See, e.g., In re Powers, 983 F.2d 88 (7th Cir. 1993). Return to text

2651  See General Critique of the Framework, infra Part III. Return to text

2652  11 U.S.C. §§ 1306(a)(2), 1325(b)(1)(B). Return to text

2653  Michael Bork & Susan D. Tuck, Administrative Office of the United States Courts, BANKRUPTCY STATISTICAL TRENDS, CHAPTER 13 DISPOSITIONS (WORKING PAPER 2), at 2. "Discharges comprised 36% of all cases terminated." According to the same source, 63% were concluded by either dismissal (49%) or conversion to Chapter 7 and termination as such a case (14%). Return to text

2654  In a slightly different context, U.S. Bankruptcy Judge Arthur J. Spector, in a letter to the Commission dated March 14, 1997 (supra n. 8), had this comment: "[I]t seems that creditors holding dischargeable unsecured claims could be cheated out of dividends which they otherwise would be entitled to in Chapter 7 if the debtor defaults and the case is closed . . . ." This comment illustrates the harm to unsecured creditors of leaving payment of their claims to the end of a Chapter 13 plan, particularly when one considers, again, the present high rate of plan failure. See Bork & Tuck, supra note 58. Return to text

2655  But consider this comment: "In 1978 when the Code was adopted, most car loans were for three years and most families had only one vehicle. Consequently debtors could pay off their one vehicle and make a reasonable distribution to unsecured creditors in three years. With the advent of much longer car notes and multiple car families, it is often difficult to make any significant distribution to unsecured creditors in a three year plan." U.S. Bankruptcy Judge John C. Akard, Letter to members of the Consumer Working Group of the National Bankruptcy Review Commission, March 26, 1997. Return to text

2656  See, e.g., Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond), 27 F.3d 52 (3d Cir. 1994) (distinguishing Nobelman v. American Savings Bank, 508 U.S. 324, 332 (1993)). One lender's representative states that types of collateral which render inapplicable § 1322(b) include mineral rights, rents, escrow balances, etc. Janet S. Roe, G.E. Capital Mortgage Services, letter to National Bankruptcy Review Commission, November 12, 1996. Return to text

2657  "[S]ection 1322(b)(2) exist[s] because of the national policy in favor of home ownership . . . . The elimination of [the intended] protections for some home mortgages will force lenders to underwrite and price these loans as unsecured loans, making them more expensive to some borrowers and unobtainable to others." William J. Perlstein, Esq., letter to National Bankruptcy Review Commission, June 4, 1997. Ms. Roe, see supra note 64, concurs: "'[B]ankruptcy severity' has an ultimate effect on the price of mortgage loans. . . . On the other hand, changes in the bankruptcy system that decrease bankruptcy severity will ultimately favorably impact the cost of home mortgages and will benefit those bill-paying consumers who are seeking financing for new homes." Id. Return to text

2658  See Sen. Bill 1985. Return to text

2659  Mr. Perlstein suggested examples of what collateral would be affected by this proposal, so that their inclusion as collateral would not subject the lien to stripping: "fixtures, escrow accounts and other related collateral that are customarily part of a home mortgage transaction. . . . [this promotes] uniformity because of the [current] need to determine whether a particular item of collateral is part of the real estate under the law of a particular state." Perlstein, letter to National Bankruptcy Review Commission, supra note 65. Return to text

2660  Associates Commercial Corp. v. Rash (In re Rash), 117 S. Ct. 1879 (1997). Return to text

2661  See In re Hoskins, 102 F.3d 311 (7th Cir. 1996). Return to text

2662  A previous version of this dissent recommended the midpoint between wholesale and retail valuation for personal property. Return to text

2663  See Jon Yard Aranson, Bankruptcy, NATIONAL LAW JOURNAL, July 14, 1997. But see Mark J. Lieberman, Supreme Court Hands Down Major Decision on Valuation of Secured Claims, COMMERCIAL LAW BULLETIN, July/Aug. 1997, at 22-31. Return to text

2664  Honorable Frank H. Easterbrook, "Bankruptcy Reform," Luncheon Address to the Commission's Chicago Regional Hearing, at 4 (July 17, 1997). Return to text

2665  The Framework describes wholesale value as a "midpoint" value for the collateral. This is a novel way to describe wholesale. The Framework cites only academic articles; no caselaw has employed a below-wholesale standard. Return to text

2666  See General Motors Acceptance Corp. v. Jones, 999 F.2d 63 (3d Cir. 1993). Return to text

2667  "I have heard from auto dealers and lenders that it is better to file Chapter 7 if a debtor needs to get a loan on a car in the next several years, and I so advise my clients. This is a very significant incentive to avoid Chapter 13 for those debtors who need transportation...and who doesn't need a car in order to work?" David C. Andersen, Attorney at Law, Letter to National Bankruptcy Review Commission, June 29, 1997. Return to text

2668  Henry E. Hildebrand, a Chapter 13 trustee in Nashville, Tennessee, commented that in his district, about 46% of Chapter 13 plans paid 100% to creditors. By way of explanation of the reasons why creditors tend to receive more from Chapter 13 debtors in Tennessee compared to other parts of the country, Mr. Hildebrand explained that "[m]any of the trustees, certainly in the Southeast, have tried to get together with the credit bureaus to expand the record to show what dividend was paid in Chapter 13. And while we've succeeded in Tennessee, the Fair Credit Reporting Act doesn't require that. . . . [I]t would help." "American Bankruptcy Institute Roundtable--Consumer Bankruptcy Issues Facing the Commission," ABI Journal, July/August 1996, at 33-34. Return to text

2669  A number of attorneys have noted:

FAVORABLE TREATMENT ON CREDIT REPORTING IS THE MOST IMPORTANT OF ALL SUGGESTIONS TO ENCOURAGE CHAPTER 13 OVER CHAPTER 7. As an attorney who meets with approximately 1,500 potential clients per year, I know that the major reason people pick a payment plan over straight bankruptcy is the hope that it will look more favorable on their credit.

Andersen, Letter to National Bankruptcy Review Commission, supra note 12.

[Improved chapter 13 credit reporting] would also be a great incentive for debtors to propose a plan . . . and would motivate them to stay in the plan in the later years when a lot of people either decide to convert to a chapter 7 once the secured debts are paid or when they find they are struggling in the middle part of the plan. I truly believe that this would motivate debtors to both file and complete chapter 13 plans and, again, it would also ensure that more money is paid to the unsecured creditors.

Ronald C. Sykstus, Attorney at Law, Letter to National Bankruptcy Review Commission, June 24, 1997. Return to text

2670  Norma Hammes, President, National Association of Consumer Bankruptcy Attorneys, Letter to Chairman Williamson of the National Bankruptcy Review Commission, February 12, 1997. Return to text

2671  Under the present statutory Framework, the Supreme Court has ruled that Congress has not categorically foreclosed all serial filing. Johnson v. Home State Bank, 111 S. Ct. 2150, 2156 (1991). The objective of this change is to categorically deny a debtor the ability to avail himself of multiple bankruptcy proceedings. Return to text

2672  See, e.g., National Consumer Bankruptcy Coalition, "What's Wrong with the Commission's Consumer Bankruptcy Proposal," July 18, 1997 (asserting that the absolute refiling bar ought to be ten years). Return to text

2673  Jill Sturdivant, Assistant General Counsel for Bank of America noted that this original proposal would resolve a vast majority of abusive filings. Letter to Richardo Kilpatrick from Jill Sturdivant, May 28, 1997. See also Memorandum of the National Bankruptcy Coalition, April 16, 1997 (also endorsing that proposal). Return to text

2674  Letter from Professor William C. Whitford to Elizabeth Warren, March 15, 1997 (noting that some restrictions on refiling are desirable but this proposal was drastic). Return to text

2675  3 Lawrence P. King, COLLIER ON BANKRUPTCY, App. Pt. 4-1209 (1997). Return to text

2676  Id., at App. Pt. 4-1208. Return to text

2677  Where the movant sought to have the order bind parties other than the debtor in the second case, the motion would have to be served on the second debtor's spouse, or the co-owner or co-lessee. Return to text

2678  The express finding is required to prevent creditors from routinely inserting "with prejudice" provisions in all stipulations and motions. the court would be able to grant relief with prejudice through stipulation or after debtor's default, but only after making an independent determination that a factual basis for such relief exists. It would be like taking a guilty plea. Return to text

2679  For example, the Framework proposal would not have alleviated the problems reported by Herbert Piller, President of Merit Industries, in his letter to Commission Chairman Brady Williamson, July 30, 1997:

We have had 6 homes that we sold to people only to first have the husband go bankrupt on a Chapter 13 with their plan due in 3-4 months. Then the wife goes bankrupt taking another 3-4 months to work out a plan. After 6-8 months go by they WITHDRAW their bankruptcy filings and start again. Another 6-8 months go by and then finally they do the same tactic again.

The judge says, "his hands are tied because they can do this under the current laws." [And under the Framework proposal, as well].

In the meantime, I've had zero money coming in for 12-15 months for several homes--is this fair? Is this what bankruptcy laws are for? Return to text

2680  For examples of the sorts of fraud perpetrated by such filings, see the "Materials on the Issue of Refiling in Consumer Bankruptcy" presented by U.S. Bankruptcy Judge Geraldine Mund on April 17, 1997, as well as her Letter to Melissa Jacoby and the National Bankruptcy Review Commission dated June 23, 1997. See also the Letter to the National Bankruptcy Review Commission of Michael S. Polk, dated April 15, 1997, in which he writes,

[L]ender losses attributable to these abuses is extreme. . . . A bar on repetitive filings is helpful; however, the ability and authority of the Bankruptcy Court to issue some form of "prospective" or "in rem" relief order against future debtors, upon a finding of abuse, is necessarily appropriate. Many Judges do not believe they have such authority without specific statutory foundation. Return to text

2681  See, e.g., In re Snow, 201 B.R. 968 (Bkrtcy. C.D. Cal. 1996). Return to text

2682  It should be noted that this proposal is in addition to, and does not duplicate or render unnecessary, the other proposals to limit repetitive filings. These different methods of correcting this problem attack different methods of abuse of the system. As one bankruptcy judge noted, "I also support the restriction on serial filing (although I recognize that in some jurisdictions, some form of in rem power will still be necessary.)" U.S. Bankruptcy Judge Arthur J. Spector, letter to National Bankruptcy Review Commission, March 14, 1997. Return to text

2683  "Mortgage servicers routinely see debtors and their spouses filing separate and successive petitions to increase the time that they can live in their home without making payments." Janet S. Roe, letter to National Bankruptcy Review Commission, November 12, 1996, at 4. See also, e.g., In re Lester, Case #96-47131-H4-13 (Bkrtcy. S.D. Tex. 1997), Report and Recommendation of Contempt to the District Court. Return to text

2684  11 U.S.C. § 362(c) Return to text

2685  11. U.S.C. § 362(d). Return to text

2686  Id. Return to text

2687  As one judge noted, "I do not believe the aggregate costs of unnecessary motion practice is trivial." Ronald Barliant, United States Bankruptcy Judge, Memorandum to the Honorable Robert E. Ginsberg, Vice Chair of the National Bankruptcy Review Commission, June 4, 1997. Return to text

2688  Gerard A. Nieters, Memorandum, March 30, 1997, at 1-4. One bank, in Maine, reported it had spent over $100,000 on attorneys' fees in 1996 for such motions alone. Nicholas Penfield, Peoples Heritage Bank, letter to National Bankruptcy Review Commission, May 14, 1997. See also In re K.M.A., Inc., 652 F.2d 398 (5th Cir. 1981). Return to text

2689  Judge Ronald Barliant, memorandum to the Honorable Robert E. Ginsberg, supra note 93 at 2-3; Nicholas A. Penfield, Letter to the National Bankruptcy Review Commission, May 14, 1997, at 1-2. Return to text

2690  11 U.S.C. § 362(d). Return to text

2691  Judge John C. Akard, letter to the National Bankruptcy Review Commission, May 12, 1997, at 8; Judge Robert W. Alberts, letter to the Commission, May 7, 1997 (recommending maximum 14-day duration of stay in Chapter 7 cases to facilitate uncontested repossessions); Judge Barliant, memorandum to the Honorable Robert E. Ginsberg, supra note 93. Return to text

2692  These seven are, in chronological order, the Hon. Nick Lampson, U.S. House of Representatives (Tex.-9th Dist.), March 18, 1997; the Hon. Sue Myrick, U.S. House of Representatives (N.C.-9th Dist.), April 24, 1997; the Hon. Sam Brownback, U.S. Senate (Kan.), April 25, 1997 and April 30, 1997; the Hon. Carol Moseley-Braun, U.S. Senate (Ill.), June 13, 1997; the Hon. Ernest F. Hollings, U.S. Senate (S.C.), June 19, 1997; the Hon. Matthew G. Martinez, U.S. House of Representatives (Cal.-31st Dist.), June 19, 1997; and the Hon. Paul Sarbanes, U.S. Senate (Md.), July 8, 1997. Return to text

2693  For example, Bankruptcy Judge Vincent P. Zurzolo so concluded, with respect to California law, in the case In re Smith, 105 B.R. 50, 53-54 (Bkrtcy. C.D. Cal. 1989). Return to text

2694  One Florida property management company, for example, wrote, "What we have begun to witness, however, is an increasing number of residents faced with eviction who are filing for bankruptcy with the sole purpose of delaying the eviction." Ms. LuAnne Acton, Area Property Manager for Jackson Management Group, letter to National Bankruptcy Review Commission, June 4, 1997. Return to text

2695  One landlord wrote of a particularly large loss:

A skilled group of tenants, who knew more about tenancy rights and laws than most lawyers, managed to stay in my rental home for six months rent free, while causing more than $20,000 in damages . . . . The health department had sited [sic] them. It took four hearings, none of which did the tenants attend, before I could gain possession again. After the $40,000 in damage, legal fees, and lost rent, the marshall finally evicted them . . . . If these people had stolen $40,000 they would be in jail.

Ms. Patty Boge, letter to National Bankruptcy Review Commission, February 2, 1997. As another landlord, Mr. Wynn Sandberg, summed it up, "The automatic stay only delays things longer [than the 45-90 days already spent in the eviction process] and adds more expense to an already expensive process for the property owner. There are many small operators who cannot afford any additional delay." Letter to National Bankruptcy Review Commission, June 8, 1997. The Commission has received other letters relating similar anecdotes from landlords in California, Louisiana, Virginia, Florida, Tennessee, Arizona, Pennsylvania, Colorado, New Jersey, Texas, North Carolina, and Alabama. Landlords from virtually every state have written to the Commission urging reform, even when they have not personally been affected by this type of abuse. Return to text

2696  One landlord, Ms. D. Kay Harrison, wrote the following: "Our net income [from a 12-plex apartment building] for 1994 was $1,535. For 1995 it was [a net loss of] $2,306." Letter to National Bankruptcy Review Commission, January 27, 1997. Return to text

2697  This is particularly true when one considers the larger economic impact of higher rents upon non-debtor tenants. As pointed out by one landlord, "This adds unnecessary costs to the ownership of rental property which, in fact, must be added to the rental rates which means that someone else is bearing the cost." Mr. Marvin G. Dole, letter to National Bankruptcy Review Commission, June 11, 1997. Return to text

2698  "We have researched this issue and have not found any state eviction statute that allows non-judicial evictions. Moreover, as you know, one of the primary justifications for [this] proposal is that a tenant in a state court eviction proceeding is provided extensive due process rights through that proceeding." Clarine Nardi Riddle, letter to National Bankruptcy Review Commission, July 7, 1997. Return to text

2699  Under present bankruptcy legislation, the consumer debtor has the option of protecting his human capital and surrendering his nonexempt assets (Chapter 7, 11 U.S.C. §§ 701, et seq. (1996)), or surrendering a portion of his future earnings while maintaining all of his assets (Chapter 13, 11 U.S.C. § 1301, et seq. (1996)), in return for a discharge of many of his existing debts. 11 U.S.C. §§ 523(a), 1328 (1996). An individual debtor not engaged in business may also file for relief under Chapter 11 (11 U.S.C. § 1101, et seq. (1996)), as the Code contains no "ongoing" business requirement. See Toibb v. Radloff, 111 S. Ct. 2197 (1991). Return to text

2700  See H.R. REP 103-835, at 59 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3368. The Commission was charged with reviewing, improving, and updating the Code. Id. at 3368. This all inclusive Act of 1994 made the most significant and substantial changes in the Code itself since in enactment. Id. at 3340. Return to text

2701  Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (1994). See, e.g., Gregg, Checklist for the Commission, 14 AM. BANKR. INST. J. 35 (1995). Return to text

2702  Statement by President William J. Clinton upon signing H.R. 5116, reprinted in 1994 U.S.C.C.A.N. at 3372-2. Return to text

2703  Title VI of the Bankruptcy Reform Act of 1994 establishes the Commission, outlines its duties, provides a method for the selection of its members, and addressed various fiscal matters related to the Commission. Bankruptcy Reform Act of 1994 at §§ 601-610, 108 Stat. at 4147-4150. Return to text

2704  The House Report accompanying the legislation noted only:

[T]he Commission should be aware that Congress is generally satisfied with the basic Framework established in the current Bankruptcy Code. Therefore, the work of the Commission should be based upon reviewing, improving, and updating the Code in ways which do not disturb the fundamental tenets and balance of current law.

H.R. REP. 103-835, at 59 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3368. An earlier Senate Report relating to S. 1985 (which also contemplated the creation of a review commission in almost identical language to that which was contained in the bill signed by the President) also compared the new commission's work to the earlier Burdick Commission. S. REP. 102-279, at 85. The Senate Report noted that unlike the Burdick Commission this commission was not "designed or empowered to rewrite the entire Bankruptcy Code," but that it was to study the functions and balances of the present Code and provide Congress with recommendations to address areas where the Code might be "improved and modernized." Id. at 85-86.

Under its charter, the Commission is to deliver to Congress on October 20, 1997, its report which represents its conclusions and recommendations for legislation. Bankruptcy Reform Act of 1994, 108 Stat. at 4149. Return to text

2705  This lack of uniformity leads to serious concerns about the ability of the present system to satisfy and fulfil basic notions of justice. If individual creditors or debtors who are substantial similar are treated differently dependent solely upon the court in which they find themselves located, the system is seriously flawed. The Commission is clearly aware of the unfairness and the lack of cost effectiveness that this lack of uniformity breeds. However, despite the acknowledgment of the lack of similar treatment for equals by all participants in the system, no one has raised the issue which is the subject of this article -- the need for a coherent philosophy of consumer bankruptcy.

This admitted lack of uniformity is ironic in the face of the fact that the lack of uniformity of practice and procedure was the primary reason given to abandon the Act and push for new Legislation which subsequently became the Code. See REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 137, 93rd Cong., 1st Sess., pt. 1, at 4 (1973) (hereinafter referred to as REPORT OF THE COMMISSION). Return to text

2706  In large part this lack of uniformity is seen as a direct result of the wide latitude of discretion which the various judges feel that they are allowed to exercise. Whether the judges see this as the residuary of the equitable nature of bankruptcy proceedings, or their use of equitable powers to interpret the Code, or otherwise is unascertainable. This disparate treatment (from state to state, district to district, city to city, and judge to judge) leads to a lack of uniformity and predictability that similar cases will be treated alike. This leads to serious concerns as to the intrinsic justice of the consumer bankruptcy process. The lack of uniformity also raises concerns concerning the cost effectiveness of the process from both the creditor and debtors perspective.

Examples of a lack of uniformity abound especially in Chapter 13 cases. Bankruptcy judges across the country implement the provision of Chapter 13 in a widely divergent manner. First, there is no agreement on the minimum level of payments necessary for the implementation of a Chapter 13 plan; some courts approve only 100% plans, while others routinely approve plans that result in little, if any, percentage payments to the unsecured creators. Compare In re Fields, 190 B.R. 16 (Bank. D. N.H. 1995)(court can approve a zero distribution plan to unsecured creditors); In re Anderson, 173 B.R. 226 (Bankr. D. Colo. 1993)(there is no minimum payment requirement for unsecured debt in Chapter 13); In re Tobiason, 185 B.R. 59 (Bankr. D. Neb. 1995)(except in cases of assault or attempted murder court should not find bad faith based on size of payments to unsecured debts) with In re Carver, 110 B.R. 305 (Bankr. S.D. Ohio, 1990)(a plan does not satisfy the good faith requirement if there are only small percentage payments to creditors whose claims would be nondischargeable in 7). Furthermore, the length of the plans vary from judge to judge, often unrelated to the percentage of payout. Compare In re Smith, 130 B.R. 102 (Bankr. D. Utah, 1991)(length of plan is a relevant consideration in determining whether plan is confirmed in good faith) with In re Tobiason, 185 B.R. 59 (Bankr. D. Neb. 1995)(plan which proposes to pay less than 100% satisfies good faith even though length of plan less than 36 months). Finally, there is no uniformity in valuation determinations involving lien stripping. Compare In re Murray, 194 B.R. 651 (Bankr. D. Ariz. 1996)(vehicle should be valued at wholesale value) with In re Mitchell, 191 B.R. 957 (Bankr. M.D. Ga. 1995)(vehicle to be valued at average between wholesale and retail values). The court in In re Valenti, 105 F.3d 55 (2d Cir. 1997), noted the three categories of cases making valuation determinations: (1) those applying the collateral's wholesale value, (2) those applying the retail value, and (3) those using some amount in between wholesale and retail value. In this case the court held that a bankruptcy court must consider the purpose of the valuation and the proposed disposition and use of the collateral when valuing a creditor's allowed secured claim, for the purposes of a Chapter 13 plan's confirmation. In the Fifth Circuit, the starting point for valuation of collateral which the debt proposes to retain and use as part of its Chapter 13 plan is what the creditor would obtain if it repossessed and sold the collateral pursuant to the security agreement. Matter of Rash, 90 F.2d 1036 (5th Cir. 1996), rev'd sub nom. Associates Commercial Credit Corp. v. Rash, 117 S. Ct. 1879 (1997).

Chapter 7 is also not immune from a lack of uniformity. A review of various judicial opinions concerning the application of the substantial abuse dismissal power, 11 U.S.C. § 707(b), leads to no general principles. Although the credit industry in 1974 had hoped that Congress would pass legislation which would have required a debtor to file Chapter 13 if he had sufficient income projected to fund a plan, Congress rejected this proposal. Instead, Congress enacted 707(b) which permits a court to dismiss a Chapter 7 petitioner upon a finding of substantial abuse. In spite of Congressional rejection of the "income test", several courts have adopted such a test. See, e.g., In re Harris, 960 F.2d 74, 77 (8th Cir.)(rejecting an inquiry of "egregious behavior" on the part of the debtor as a necessary condition for dismissal under 707(b)); In re Kelly, 841 F.2d 908, 914-15 (9th Cir. 1988)(noting a finding that a debtor can fund a Chapter 13 plan, alone will justify granting a motion to dismiss under section 707(b)). Other courts have taken a more equitable approach and investigated the "totality of circumstances," not just the ability to fund a Chapter 13 plan. See, e.g., In re Green, 934 F.2d 568, 572 (4th Cir. 1991). The equitable approach is arguably more consistent with the language of the statute. 11 U.S.C. § 707(b) ("There shall be a presumption in favor of granting the relief required by the debtor."). Another clear area of lack of uniformity concerns the issue of whether a debtor who is current on his payments under the terms of a note and security agreement must either reaffirm, redeem, or return the property under Section 521(2)(A) of the Code. Compare In re Belanger, 962 F.2d 345 (4th Cir. 1992)(allowing retention without reaffirmation); Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir.)(allowing retention without reaffirmation) with In re Johnson, 89 F.3d 249 (5th Cir. 1996) (finding that debtor cannot retain property without redeeming or reaffirming); In re Taylor, 3 F.3d 1512 (11th Cir. 1993); In re Edwards, 901 F.2d 1383 (7th Cir. 1990)(holding that 1984 amendments to the Code do not support notion that debtor can retain property without reaffirming debt). Return to text

2707  The Commission has been told of debtors who file repeatedly to avoid either foreclosure by mortgagees or eviction by landlords. The Commission has been told that there is little accuracy of the debtors' schedules. On the other hand, the Commission has been told of creditors who threaten frivolous dischargeability adversaries in order to extract ill-advised reaffirmation agreements. More recently, the disclosure by Sears concerning the taking of reaffirmation agreements without court approval has raised eyebrows.

"[M]ost debtors are processed like cattle by trustees. Most of them never see a judge. The gravity of the bankruptcy process is thereby diminished." Frank M. Hensley, letter to Elizabeth Warren, July 28, 1997. There is a distressing lack of accountability throughout the bankruptcy system. One attorney wrote, "The great majority of 341 meetings [creditor meetings per § 341 of the Code] are hollow rituals in which the trustee asks a routine series of questions duplicating the sworn schedules, and there is no other appearance of any substance." Kenneth J. Doran, letter to National Bankruptcy Review Commission, July 26, 1996. The Commission heard extensive testimony at its May 16, 1996 meeting in San Antonio, Texas, that § 341 meetings are typically only five or ten minutes long, because as many as 50 of them may be scheduled to take place within a single hour; that creditors are often not permitted to participate meaningfully either because of time constraints or because they do not have an attorney representative present to speak for them; that false information on debtors' bankruptcy documents is common and is routinely permitted to be corrected by amendment without any consequences, or, when consequences are threatened (such as non-dischargeability of a particular debt or a total bar to the debtor's discharge), the debtor then converts his case to one under Chapter 13 where such actions cannot be pursued; that debtors frequently fail to appear for such meetings or examinations conducted pursuant to Fed. R. Bankr. P. 2004; and that no participants in the system have adequate resources or incentives to actively combat fraudulent activity. See testimony of Lenore Baughman, senior staff attorney for Chrysler Financial Corp.; Richard E. Flint, professor, St. Mary's University School of Law; Jerry Hermesch, Vice President, Citibank; Henry Hildebrand, Chapter 13 Trustee; Jean Ryan, attorney; Henry Sommer, attorney; and Stanley Spence, Vice President and associate general counsel, Pentagon Federal Credit Union, at the afternoon session of the May 16, 1996 meeting for full text of their comments on the system's integrity. Return to text

2708  Butner v. United States, 440 U.S. 48 (1979). Return to text

2709  Each of these proposals is more specifically discussed supra. Return to text

2710  It is already estimated that the bankruptcy system will discharge $40 billion in debt this year, imposing costs of about $400 per household nationwide. cite. Return to text

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