LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 17, 1999, Wednesday

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3068 words

HEADLINE: TESTIMONY March 17, 1999 RANDALL J. NEWSOME PRESIDENT NATIONAL CONFERENCE OF BANKRUPTCY JUDGES HOUSE JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW BANKRUPTCY REVISION

BODY:
Statement of Randall J. Newsome United States Bankruptcy Judge Northern District of California President National Conference of Bankruptcy Judges Before the House Judiciary Subcommittee on Commercial and Administrative Law March 17, 1999 Mr. Chairman and distinguished members of this Subcommittee, I am honored to testify once again regarding the important subject of bankruptcy reform. By way of background, I have been a bankruptcy judge in the Northern District of California sitting in Oakland since May of 1988. From October, 1982 until May, 1988 I was a bankruptcy judge in the Southern District of Ohio sitting in Cincinnati. I became president of the National Conference of Bankruptcy Judges in October of 1998. Unless otherwise noted herein, I am speaking on behalf of the NCBJ and all 319 of its members. Ever since its formation in 1926, the National Conference of Bankruptcy Judges has sought to be an independent, neutral source of information regarding the administration and substance of the bankruptcy laws in this country. We do not presume to tell Congress what is sound or unsound policy, or to make value judgments about proposed legislation. Rather, we endeavor to analyze legislative proposals and offer information regarding their probable effects and impact upon the bankruptcy courts and bankruptcy administration generally. As I stated in my testimony before this Subcommittee almost exactly one year ago, everyone involved in bankruptcy reform has been hampered by the lack of reliable information about bankruptcy debtors and their families. The empirical void is far from being filled, but some progress has been made in developing a portrait of the typical consumer debtor. I made a small contribution to this cause by putting together a survey of 100 chapter 7 cases in Oakland. That survey was appended to my testimony before you last year. In November of 1998 I asked all of my colleagues to conduct exactly the same survey on 100 randomly-selected chapter 7 cases closed within the last year in their districts. The response to my request was most gratifying. By January of this year I had received 65 surveys from 46 different judicial districts in 3 3 different states. Although most of the surveys are of 100 cases, they range in size from 20 cases to 400. The resulting database consists of some 42 categories of information in approximately 5235 chapter 7 cases. We view this data as being in the public domain, and will provide a copy of it to anyone who seeks it. Professor Gary Neustadter of the Santa Clara University School of Law graciously agreed to undertake the task of reviewing and analyzing this information. Given the sheer volume of data, time has not permitted him to compile results for every category of information. But the numbers he has been able to glean from the data (attached as Exhibit 1) in the short time available warrant caution in engrafting the means test in H.R. 833 upon the bankruptcy system. (Exhibit available on hard copy only). Based upon his review of the 3151 cases filed and closed in 1998, Professor Neustadter found that the median gross annual income for those cases was $21,540, over $15,000 lower than the median income for all U.S. households as of 1997. 1 Approximately 15% of the families in the 3151 cases had gross annual income equal to or greater than the national median income for families of the same size. This number is significant in the context of H.R. 833's means test. Under that test, the panel trustee may file a motion to convert or dismiss a case if the debtor can pay 25% or $5000 in a chapter 13 plan over 5 years, but the trustee must file a motion only if the debtor's income exceeds certain national median income levels. See Section 102(b)(2). 1 U.S. Census Bureau, "Money Income in the United States: 1997", P60-200 p. vi (September, 1998). Notwithstanding a prosperous economy, the Census Bureau reports that the median income for all households in 1997 ($37,005) was almost identical to the median income for all households in 1989 ($37,303). Id. By contrast, the level of revolving consumer credit in the United States more than doubled between January, 1986 and December, 1991, and doubled again between January, 1992 and August, 1998. Federal Reserve Statistical Release G. 19 at www.bog.frb.fed.us/release/G19/hist. Given these numbers, it is not surprising that the number of nonbusiness bankruptcy filings has doubled since 1990. See Non-Business Bankruptcy Filings by Chapter 1990-1998 (3rd Quarter) <http://www. abiworld.org/stats/1990nonbuschapter.html. Furthermore, creditors may file motions under this section only as to those who are over the national median household income levels. Thus, the 15% number defines the universe of potential cases which will draw heightened scrutiny by the trustee and creditors, and possibly result in a mandatory motion for presumed abuse. In raw numbers, that means that the bankruptcy courts potentially could be embroiled in disputes over the means test in at least 150,000 cases based on 1998 filings (i.e., 15% times approximately 1,000,000 chapter 7 consumer filings). But according to Professors Marianne B. Culhane and Michaela M. White in "Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors," (to be published in the next edition of the American Bankruptcy Institute Law Review), only about 3.6% of all chapter 7 cases would actually be subject to conversion to chapter 13 or dismissal under a means test very similar to that of H.R. 833. To summarize, the means test and other provisions of H.R. 833 would require 85% of chapter 7 filers to complete and file an additional 7 or more sets of forms and documents beyond what they are required to file now, 2 even though they probably would not be subject to a motion to convert or dismiss under section 707(b). Another 15% might be subject to a mandatory section 707(b) motion, but ultimately such motions would be granted in only 3.6% of all the chapter 7 cases filed. Thus, the means test in H.R. 833 will substantially increase the expense and red tape of filing a bankruptcy for the overwhelming majority who deserve relief, but will net only a tiny number of abusers, There may be some justification for imposing this bureaucratic and financial burden on some chapter 7 debtors, but is there much to be gained by so burdening those who have filed because of crushing medical debts, or those who are struggling as single parents, or those who are disabled or retired? As Exhibit 2 3 illustrates, a significant number of the over 5000 chapter 7 debtors surveyed fall into each of these categories. The number of debtors with over $1000 in medical debt is especially striking, particularly in rural areas. (Exhibit is available on hard copy only). 2 Section 603 of H.R. 833 requires that the following documents be filed: 1. certificate of notice under 342(b); 2. copies of federal tax returns and all attachments for the preceding 3 3 years-, 3. copies of all pay stubs for the previous 60 days; 4. statement of projected monthly income, itemized to show how calculated; 5. statement disclosing any reasonably anticipated increase in income or expenditures over the next 12 months; 6. federal tax returns and any amended returns filed after the case is commenced and before it's closed. With the exception of number 6, failure to file the above within 45 days results in automatic dismissal under section 604. In addition, section 302(a) requires the debtor to file a certificate of credit counseling and a debt repayment plan, and section 102 requires that a statement of current monthly income and calculations under the means test be included in the schedule of current income and expenditures. 3 The data in Exhibit 2 was extracted from the case surveys by my law clerk and judicial extern. (Exhibit is available on hard copy only). One of the stated goals of H.R. 833 and other recent bankruptcy reform proposals is to stem the tide of increased bankruptcy filings. A review of our data casts doubt on whether H.R. 833 will have this effect. The surveys indicate that the level of unsecured indebtedness is so great in most cases that most debtors have no other realistic option but to seek bankruptcy relief. As Exhibit 1 indicates, the median amount of unsecured nonpriority debt for the surveys' 3151 chapter 7 cases filed in 1998 is a staggering $23,411. With an overall median income of only $21,540, it is apparent that most of these debtors are hopelessly insolvent. Although some instruction in financial management might have helped some of these people avoid their financial plight, it seems doubtful that credit counseling on the eve of bankruptcy would have done anyone much good given these debtors' income and debt levels. Because the means test in H.R. 833 allows debtors to deduct "all amounts scheduled as contractually due to secured creditors," some have predicted that debtors will engage in prebankruptcy planning by purchasing a car to raise their secured debt payments, thus avoiding chapter 13. Given the age of the automobiles these 65 surveys, these predictions appear to be well-founded. The average model year of the cars and pick-up trucks listed in all chapter 7 cases was about 1989. See Exhibit 2. 4 Most of the cases surveyed were filed in 1998, and almost all of the cases were filed in 1996 or thereafter. Thus, many of these people own cars that are more than 7 years old and are ready or overdue for replacement. Given the age of their cars, as well as the absence of any specific car replacement allowance in the IRS standards, debtors would have every incentive to purchase a new car before filing their bankruptcy petitions. That incentive is heightened for the substantial number of debtors who own no car at all. (Exhibit is available on hard copy only). H.R. 833's means test also risks overwhelming the bankruptcy courts with disputes over its particulars. As attached Exhibit 3 indicates, I have identified 16 areas of potential litigation in section 102 of the bill alone. Many of the issues raised are factually intensive, and will recur in the thousands of potential motions that might be filed pursuant to the means-testing provisions. (Exhibit is available on hard copy only). In addition to the 16 litigation points embedded in section 102, Exhibit 3 lists another 42 issues that potentially may require bankruptcy court intervention for their resolution. Again, many of these issues will come before the court repeatedly. For example, section 119 of H.R. 833 limits the automatic stay to 30 days for some repeat filers and eliminates it altogether for others. Bankruptcy judges will be required to set a new calender (probably every week) for motions to extend the stay or to impose a stay under this section. Section 129, which gives creditors the right to challenge the dischargeability of certain debts in chapter 13 cases, almost certainly would increase the number of dischargeability lawsuits significantly. These types of lawsuits already make up a large percentage of our adversary proceeding calenders. (Exhibit is available on hard copy only). 4 The median model year of all cars was only slightly higher in most of the surveys. Exhibit 3 identifies only 58 new litigation points in H.R. 833. I'm sure I have overlooked many others. Some of these issues may arise infrequently; some of them undoubtedly will arise almost every day; some may be resolved without the need for a hearing; others will require a fullblown trial. Taken together, however, I have no doubt that the increased litigation arising from H.R. 833 will strain the resources of our bankruptcy courts, many of which are already struggling to keep up with the workload. The Congressional Budget Office's estimate of 15 to 30 additional judgeships 5 being required under one of H.R. 833's predecessors may need to be revised upward. (Exhibit is available on hard copy only). The misgivings I've expressed about the effects of H.R. 833 should not be interpreted as a wholesale rejection of the need for bankruptcy reform. As I emphasized in my remarks to you last year, if there's one thing every bankruptcy judge would agree upon, it is that there are abuses occurring in the bankruptcy system. Although abuse is not nearly as pervasive as some have suggested, bankruptcy judges witness it all too frequently. We are frustrated not by the absence of laws to address abuses, but by the lack of enforcement of those laws, particularly the bankruptcy criminal statutes (18 U.S.C. Sec. 151 et seq.) and Title 18 of the United States Code generally. Real reform of the bankruptcy system will only arrive when those who make statements under oath in their bankruptcy filings are held to account for them. That accountability simply doesn't exist at present, and no amount of additional paperwork will foster it. 5 Congressional Budget Office, "Cost Estimate: H.R. 3150 -- Bankruptcy Reform Act of 1998" (June 5, 1998). Speaking solely on my own behalf, and not on behalf of the NCBJ, I believe there is a simpler, more effective, less costly way to achieve reform that would require relatively little change in the law. Instead of subjecting everyone to the means-testing gauntlet, the process could be greatly simplified by requiring the United States trustee to review every consumer chapter 7 case, and requiring the United States trustee to file a motion under section 707(b) if the debtor could pay more than 25% of his unsecured nonpriority debts or if the chapter 7 case was filed in bad faith. The United States trustee's inquiry would be guided not by rigid and unrealistic IRS standards, but rather by common sense and perhaps some flexible guidelines. Having reviewed fifteen of these case surveys myself, I can assure you that the few potential abusers in each survey are not that difficult to identify. Creditors and other parties in interest would be given the opportunity to file a section 707(b) motion if the debtor made significantly more than the national median income. This is precisely the sort of task envisioned for the United States trustees when the program was created in 1978. 6 Unfortunately, the program has never been adequately funded to perform all of the duties assigned to it. Although the United States trustees do review chapter 7 cases and file motions under the present version of section 707(b), it is only one of their discretionary duties, not a mandatory one. 7 6 H.R. 833 presently vests in the chapter 7 panel trustees the mandatory duty of reviewing all chapter 7 cases and bringing motions under section 707(b). The chapter 7 trustees are certainly capable of performing this task, but have little incentive to do so, since their prime function is to recover assets in chapter 7 cases, not move people into chapter 13 or out of the system altogether. More importantly, while there may be a way to compensate them for their efforts in converting or dismissing the 3.6% of the debtors who are abusing the system, how do we compensate them for the time they will have to spend on the other 96.4% of the cases where there is no abuse? No simple solution to this problem comes to mind. 7 See 28 U.S.C. Sec. 586(a)(5). The United States trustee program has also suffered from not having the cabinet-level leadership promised in 1978. As a part of the Bankruptcy Reform Act of 1978, Congress authorized an Assistant Attorney General position in the Department of Justice to head up the United States trustee program. That position was never used as originally intended. At present, the program is headed by a Director of the Executive Office of the United States Trustee, a position which the statute only references in passing. 8 Although the present Director. Mr. Joseph Patchen, has performed admirably, the position lacks the authority to prescribe and enforce uniform policies nationwide where needed. Authorization for an Assistant Attorney General to provide that authority and leadership would constitute a major step towards realizing the full potential of the United States trustee program -- and a major step towards real bankruptcy reform. To complement the United States trustees' mandatory responsibility for policing the system, the newly-created Assistant Attorney General should also be given primary responsibility for the prosecution of federal crimes arising in or related to bankruptcy cases. That authority could be folded into the operations of the local United States Attorneys by providing that Special Assistant United States Attorneys be assigned to work in each regional United States trustee office. National strike forces could also be established if needed to pursue particular kinds of bankruptcy crimes. 8 See 28 U.S.C. Sec. 586(a)(3)(A)(1). 28 C.F.R. Sec. 0.37 provides for the appointment of the Director. 28 C.F.R. Sec. 0.38 states that the Director shall assist the Attorney General and Deputy Attorney General "in supervising and providing general coordination and assistance to the United States Trustees", and perform other duties assigned to her. Obviously, the Assistant Attorney General for Bankruptcy Administration and the United States trustees will require additional funding for personnel and other resources to properly carry out their mandatory section 707(b) duties and prosecutorial functions. All of the money needed to fund these new operations is already available in the bankruptcy system. In order to fund their operations, the chapter 13 trustees are authorized to collect up to 10% in commissions from all the funds they distribute to creditors. At present. the average chapter 13 trustee is charging approximately 5.6% 9 . In all likelihood, only an additional 1% to 2% in chapter 13 trustee commissions would be necessary to fund the entire bankruptcy reform package. Bankruptcy reform need not be as complicated or as costly as that proposed in H.R. 833. The provisions suggested above, along with modest changes to address problems such as abusive repeat filers, would provide all of the reform the system requires. Thank you again for giving me this second opportunity to appear and be heard before this Subcommittee. 9 See M.B. Culhane & M.M. White, "Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors," p.33 (March 8, 1999).

LOAD-DATE: March 19, 1999