LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 17, 1999, Wednesday

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 9633 words

HEADLINE: TESTIMONY March 17, 1999 P. WAYNE SIGMON HOUSE JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW BANKRUPTCY REVISION

BODY:
STATEMENT OF P. WAYNE SIGMON March 17, 1999 The writer is an attorney who has practiced bankruptcy law almost exclusively for the past twenty years in Gastonia, North Carolina. He represents between five and six hundred Chapter 7 and Chapter 13 debtors per year and he serves as a court appointed panel trustee in approximately 350 consumer Chapter 7 cases per year. Gaston County, North Carolina contains approximately 200,000 residents, and is located approximately twenty miles west of Charlotte. The majority of its residents are blue collar workers in households whose income would fall below the National Median. Gastonia, North Carolina is a part of the Western District of North Carolina. The Western District of North Carolina averages approximately 7,000 case filings per year. Curiously though North Carolina does not have a wage garnishment law, the great majority of consumer debtors who file in the United States Bankruptcy Court for the Western District of North Carolina file Chapter 13 cases. This is true because the court and bar have developed an efficient and effective Chapter 13 system that helps the consumer debtors save their homes, cars and personal property while paying what they can to their unsecured creditors. A very important feature of the Chapter 13 program in North Carolina, and elsewhere, is the cooperation of the courts and consumer debtors' attorneys in allowing for the payment of all, or at least a substantial portion, of Chapter 13 debtors attorney's fee by deferred payments by the trustee. Most prospective Chapter 13 debtors could not afford to pay the entire attorney's fee in advance of the filing of their case, but are able to do so when the fee is included as a claim in their Chapter 13 plan, and paid over time along with the claims of their other creditors. To be sure, the deferral of the payment of the fee in this manner does increase the chance that the Chapter 13 attorney will not be fully compensated for his or her services. However, the willingness of the attorney to share the risk of the ultimate success of the repayment plan has resulted in making Chapter 13 an affordable option for many more residents of our State and Nation. Over the past twenty years the nature of the people I work with has not changed. The great majority were, and still are, honest, hard-working people who for whatever reason, have encountered financial problems. What has changed, especially in the last ten years, is the nature of consumer lending. With deregulation of interest rates and increased competition, it would have been logical to assume that consumers loan interest rates would have dropped. But, that has not happened. Rather, the consumer credit industry has drastically lowered its standards and made credit available to almost anyone regardless of credit history and without any meaningful credit check. Also, the consumer credit industry now regularly extends loans "secured" by real and personal property in amounts which greatly exceed the value of the collateral. The requirement of a "down payment" has, in many cases, disappeared from consumer credit transactions. It is against this background that I will attempt to analyze H.R. 833. The purpose of this paper is to analyze the practical effects of H.R. 833 on consumer debtors in the Western District of North Carolina with emphasis on the effects on Chapter 13. Also, where applicable, the practical effects on creditors and Chapter 7 trustees will be noted. Contrary to national popular belief, the bankruptcy system as it is operating at least in the Western District of North Carolina is efficient, balanced and is not being abused to any significant extent. As a Chapter 7 panel trustee, I can unequivocally say that I have seen very few cases of abuse in the bankruptcy system in my twenty years of experience. In the few cases where there was abuse, I was able as trustee to thwart the debtor's efforts through alternative actions such as objections to discharge. Therefore, my experiences do not indicate that drastic changes to the Bankruptcy Code are warranted. H.R. 833 contains a number of provisions which are positive refinements and should be enacted. They include: 1. Section 123 which would provide for the secured creditor's retention of its lien on property of the debtor until the payment of its claim in full, or the entry of the order discharging the debtor, 2. Section 116 which would require a creditor to properly credit to its account any payments that it receives under a bankruptcy plan of reorganization, 3. Section 601 which would allow creditors, at their election, to appear and participate in meetings of creditors without being required to be represented by legal counsel. 4. Section 107 which requires a clear and concise written fee agreement. However, H.R. 833 would drastically and fundamentally change the landscape overnight for consumer Chapter 7 and Chapter 13 debtors and for the attorneys who represent them in Bankruptcy Court. H.R. 833 purports to limit the availability of Chapter 7 relief to a large number of consumer debtors and this goal will clearly be accomplished by the legislation. However, the legislation will also "shut down" the current Chapter 13 bankruptcy system. Various provisions to be discussed, such as the anti-claim bifurcation rules, the 5 year contract valuation rules, the direct cash payments to secured creditors at the contract rate rules, the delayed confirmation process, and the numerous exceptions to the automatic stay simply create a new Chapter 13 that will not work in the real world. 5. Section 102. Dismissal. This is the "means test." Though it is certainly a central part of the legislation which has been extensively debated, its practical effects on Chapter 13 cases are no more extensive than many of the less debated provisions discussed below. Legislative Changes Section 102 of FIR 833 amends 11 U.S.C. Sec. 707 to provide for the dismissal or conversion of a Chapter 7 case upon a finding of abuse. The "substantial abuse" provision has been removed from this section by H.R. 833. Abuse is presumed to exist if the debtor's current monthly income (as defined by amended Sec. 101 (10A)) less expenses (as defined in amended Sec. 707) and multiplied by 60 months is not less that 25 percent of the debtors nonpriority unsecured debt in the case or $5,000, whichever amount is less. Current monthly income is defined in section 102 of H.R. 833 (new Sec. 101 (10 A)) as the average monthly income from all sources whatsoever, without regard to whether it is taxable, which is received within 180 days of the petition date. Section 102 of H.R. 833 then provides that for purposes of dismissal based on abuse, you must deduct the following from current monthly income: the IRS monthly expenses "for the area in which the debtor resides" as of the filing date; the average monthly payments on account of secured debts (calculated as all contractually due amounts in each month of the 60 months following the filing of the petition divided by 60); and, the debtor's expenses for all priority claims including priority child support and alimony (calculated as the total amount of debts entitled to priority and divided by 60). Section 102 of H.R. 833 amends Sec. 707(B) to provide that the presumption of abuse may be rebutted only for extraordinary circumstances with respect to additional expenses or current monthly income. Both the debtor and the attorney for the debtor must attest under oath as to the accuracy of any information provided for in this petition. In addition, extraordinary income and expense information must result in a net disposable income, when multiplied by 60, that is less than 25 percent of the debtor's nonpriority unsecured claims or $5,000, whichever amount is less. Code section 707(C)(3) (as amended by H.R. 833) provides that if the presumption of abuse does not apply or has been rebuffed in a contested case then the court shall still consider whether the debtor filed the petition in bad faith or if the totality of the circumstances of the debtors financial situation demonstrates abuse. Code section 704(10) provides that 10 days prior to the 341 meeting the Panel Trustee or the Bankruptcy Administrator shall file a statement with the court as to any finding of presumed abuse under 707(b) and the court shall serve such finding on all creditors within 5 days of receipt. Upon a finding of such abuse, and if the debtor's current monthly income when multiplied by 12 is not less than the highest national median income applicable, the Panel Trustee or the Bankruptcy Administrator shall within 30 days file a motion to dismiss or convert or a statement setting forth the reasons they believe such a motion would not be appropriate. If such a motion is filed and granted and if the court finds that the action of the attorney for the debtor was not substantially justified, then the court shall order the attorney to reimburse the Trustee for all reasonable costs in prosecuting the motion, including reasonable attorneys' fees. If the court also finds that the attorney violated Rule 9011, then at a minimum the court shall order the assessment of an appropriate civil penalty against the attorney and the payment of the penalty to the Trustee. If the motion to dismiss for abuse is filed by a party other than the Panel Trustee, the United States Trustee, the Bankruptcy Administrator, or a party with an aggregate claim of less than $1,000, and is not granted, then the court may award the debtor all reasonable costs in contesting the motion, including a reasonable aftorneys' fees, if the court finds the position of the party that brought the motion was not substantially justified or the party brought the motion solely for the purpose of coercing the debtor into waiving a right guaranteed to the debtor under Title 11. Practical Analysis of Provisions One example of an item the formula does not take into account is payroll deductions for loans for qualified retirement plans. Under H.R. 833, these loans may not be modified under Chapter 13 and the creditor does not violate the stay by the continuation of the wage deduction. Another examples arises out of the Religious Liberty and Charitable Donation Protection Act of 1998. This act amended Code sections 548, 707(b) and 1325(b)(2)(A) of the Code. Generally speaking, the debtor may commit up to 15% of his annual gross income for a qualified charitable contribution. Such a contribution may not be considered for purposes of Chapter 7 abuse or Chapter 13 confirmation. However, this type of expense is not covered by the new income and expense rules. Another omitted expense relates to the costs of supporting a disabled or dependent mother or father or grandparent. While the new income rules require the monthly Social Security or disability income check to be included in the income computations, the expense rules fail to automatically include any funds for the necessary upkeep and support for this type of dependent. Finally, the failure of the IRS expense rules to deal with such things as day care expenses demonstrate the general problems created by this approach. The income formula is troublesome because it fails to take into account the problems of a debtor who has suffered a recent and dramatic loss of income due to unemployment, health, or other similar circumstances. It is well established that many debtors are finally forced into bankruptcy due to these and similar factors. Also, many widows and widowers are forced into bankruptcy shortly after the death of a spouse and the resultant loss of income. Yet, this budget approach strictly defines income as all income received from any and all sources within 180 days before filing and hence would preclude persons suffering from a drastic loss of income from filing. The new sanction rules for abusive Chapter 7 filings and for abusive motions to dismiss or convert are simply not equivalent. The rules impose a substantially higher standard on the debtor and his attorney. To require the attorney to attest under oath to the accuracy of the information provided by his client creates an impossible situation that will cause significant problems, especially for the most honest, diligent and ethical attorneys- those whose efforts currently keep abusive practices by debtors to a minimum. 6. Section 124. Restraining Abusive Purchases on Secured Credit. Legislative Changes Contrary to the title, this provision is best described as the "anti-claim bifurcation rule." It amends Sec. 506 of the current Bankruptcy Code by adding Sec. 506(e) which in Sec. 506(e)(1) provides that in a Chapter 7, 11, 12 or 13 case the normal Sec. 506(a) valuation rules do not apply to any claim, in whole or in part, if it arose out of the purchase of personal property within 5 years of the filing date. Code section 506(e)(2) provides that if the 5 year purchase is secured only by the personal property so acquired, the amount of the allowed secured claim shall be the "sum of the unpaid principal balance of the purchase price and accrued and unpaid interest and charges at the contract rate. Code section 506(e)(3) provides that if the 5 year purchase is secured by the personal property so acquired and other property, then the Sec. 506(a) valuation rule applies but the amount of the secured claim shall not be less than the unpaid principal balance owed on the 5 year property plus unpaid interest and charges at the contract rate. Code section 506(e)(4) provides that if a second case is filed by or against the debtor within 2 years of the filing date of the first case then the secured value of all personal property shall not be less than the amounts provided in subsections (2) and (3) above. Practical Analysis of Provisions By enacting a flat prohibition against the bifurcation of purchase money claims 5 years old or less, section 124 will remove a major incentive for debtors to choose Chapter 13 over Chapter 7. The new rules in effect create two classes of secured personal property debt: 5 year purchase money secured debt and any other secured debt. With respect to any security agreement related only to personal property acquired within 5 years of the petition date, the value must the "sum of the unpaid principal balance" plus all "accrued and unpaid interest and charges at the contract rate." If the security agreement includes purchase money 5 year property and other property (i.e., a refinance), then the valuation of all of the property may not be less than the unpaid principal balanced on the 5 year property "plus unpaid interest and charges at the contract rate." This new claim bifurcation rule will severely limit the value of Chapter 13 for any consumer who has purchased any new property within 18 to 24 months of the filing date. Since high-end consumer finance agreements range from 60 to 72 months, the benefits of a 60 month Chapter 13 plan that requires payment of the full debt (plus all later charges) are not substantial. And, for the low-income consumer who may be paying a contract interest rate of 20 percent to 40 percent the benefits of a Chapter 13 plan are further reduced if not eliminated. The anti-claim bifurcation rule raises serious problems with respect to personal property that may be defective, damaged, or otherwise not in prime condition. The rule includes no provision for any reduction in value for these matters. This may leave many consumers with no option but to abandon such property as a part of their Chapter 13 plan. The 5 year anti-claim bifurcation rule will also cause many debtors with income below the National Median level to choose Chapter 7 over Chapter 13 because this section takes away their ability to keep personal property with monthly payments they can afford. The enactment of the new rules against claim bifurcation will work to the disadvantage of many creditors in Chapter 13, as well. A prohibition against the bifurcation of accounts representing older credit purchases will result in the creation of some secured claims the amount of which will likely substantially exceed the fair market replacement value of their collateral. As a result, the Section will discriminate against other secured creditors by reducing the pro-rata portion of the Chapter 13 plan payment that will be available for the payment of their claims, thus extending the time period necessary to pay the value of their properly-valued secured claims. In addition, unsecured creditors will see their percentage dividend reduced by the pro-rata portion of the plan payments that must be applied toward payment of the artificially high portion of the secured claim. I suggest replacing section 124 of H.R. 833 with a provision that prohibits bifurcation of any secured claim to the extent that the claim represents a purchase money credit transaction incurred within 180 days of the bankruptcy filing date. This would represent a reasonable time period to protect secured creditors against abusive credit purchases in contemplation of bankruptcy. By case law in the Western District of North Carolina, the bankruptcy court has created its own anti-claim bifurcation in Chapter 13 cases for personal property purchased within 180 days of bankruptcy filing. This case law has worked well to prevent "abusive" filings involving recent purchases. 7. Section 137. Adequate Protection of Lessors and Purchase Money Secured Creditors. Legislative Changes Section 137 amends 1307 of the Code to add Sec. 1307A(a)(1)(A) which provides that adequate protection for Chapter 13 purposes means that on or before the end of 30 days from the filing date the debtor shall make direct cash payments to any lessor or personal property and any purchase money claim secured by personal property at the contract amount. Code section 1307A(a)(1)(B) provides that the debtor or the plan shall continue making the adequate protection contract cash payments until the creditor begins receiving actual payments under the plan or the debtor relinquishes possession of the property to the creditor. Code section 1307A(b)(1) provides that subject to the limitations in (b)(2), the court may, after notice and hearing, change the amount or timing of the dates of adequate protection cash payment or payments to these creditors. However, 1307A(b)(2)(A) provides that the adequate protection cash payments shall be payable not less frequently than monthly and that the court may not limit this time period. Absent the filing of a motion to change the timing of these payments, 1307A(b)(2)(B) provides that the adequate protection cash payments shall not be less than the amount of any weekly, biweekly, monthly, or other periodic payment as determined and scheduled under the contract between the debtor and creditor. Code section 1307A(c) provides that the adequate protection cash payments shall be continued in addition to plan payments under a confirmed plan until actual payments to the secured creditors begin under the plan if the plan provides for payments to these creditors and for the deferral of payments to such creditors or lessors under the plan pending the payment of any amounts as described in section 1326(b). Code section 1326(b) provides that before or at the time of each payment to creditors under the plan there shall be paid all unpaid administrative claims (legal fees under 507) and the percentage fixed for the Chapter 13 trustee. Code section 1307A(d) provides that a lessor or purchase money secured creditor may retain possession of property obtained under state law before the filing date until the first adequate protection cash payment is actually received. Such action does not violate Code sections 362, 542 or 543 of the code. Practical Analysis of Provisions The intent of this section is to correct that problem whereby secured creditors or lessors in some parts of the country do not receive periodic cash payments from the debtor or the Chapter 13 trustee to offset the continuing depreciation in the value of their collateral for a substantial period of time after the case filing date. While the concern is valid, the solution proposed in this section would not be financially possible for most Chapter 13 debtors. As proposed, this section would in effect require the debtor to make double payments on secured claims and leases pending plan confirmation and the commencement of trustee distribution sot creditors. That is, the debtor would have to make the direct adequate protection payments to secured creditors and lessors, as required by this section, and begin to make proposed plan payments to the trustee as required by the Bankruptcy Code at the same time. For individuals who are already in financial distress, this will simply be impossible. And with the related provisions in H.R. 833 that will act to lengthen the time between case filing and plan confirmation, a bad situation will become worse. It is important to note that the bankruptcy court and the Chapter 13 trustee, acting pursuant to the Code-and not the debtors- control the timing of plan confirmation and the commencement of plan distributions to creditors. I believe that an equally effective and substantially less financially burdensome solution to the concern of secured creditors and lessors would be to require the Chapter 13 debtor to begin escrowing plan payments with the trustee as of the case filing date. The trustee would then be authorized, pursuant to the statute, to begin making monthly adequate protection payments to creditors within thirty days of the case filing date. This would ensure a prompt commencement of adequate protection payments to creditors and eliminate the "double payment" problem faced by Chapter 13 debtors. The amount of the payments should be at least the amount of the monthly depreciation of the personal property. In fact, the trustee can calculate the amount of the plan payment based upon the plan as proposed and the first payment at filing, so that the amount of payment to be received by the creditor under the plan can be the amount that is initially paid, and is the amount that continues throughout the life of the plan. This suggested solution would also be responsive to the problem of prebankruptcy filing repossessions of secured or leased property. By requiring the escrow of the first plan payment by the debtor with the trustee on the case filing date, and confirmation of receipt to all affected parties, the creditor can safely return possession of the repossessed property with assurance of the prompt commencement of adequate protection payments by the trustee. 8. Section 117. Automatic Stay. Legislative Changes This provision amends 362(h) to eliminate possible recovery of punitive damages for any willful violation of the automatic stay and to preclude bringing an action for a stay violation as a class action. Under H.R. 833 individuals injured by willful violations of the stay are entitled to recover only actual damages and costs, including attorney's fees. Also, section 117 of H.R. 833 adds Sec. 362(i)(2) which provides that if a creditor took action in a good faith belief that the stay did not apply, the recovery is limited to actual damages. Practical Analysis of Provisions This change will not be a strong enough deterrent to willful violations of the stay by creditors. Without the threat of possible punitive damages or possible class action lawsuits, many creditors may make an economic decision that it is cheaper to risk that its employee may violate the stay than it is to maintain the safeguards necessary to prevent the stay violation. This is a very ill-advised provision. 9. Section 116. Effect of Discharge. Legislative Changes The addition by section 116 of H.R. 833 of subsection (i) to Sec. 524 is a positive change. But, section 116 also adds subsection (j) to Sec. 524 which allows only the greater of actual damages or $1,000 plus costs and attorneys fees for any willful violation of the discharge injunction and also class actions for discharge injunction violations are precluded. Practical Analysis of Provisions As with the automatic stay provisions discussed above, this provision would not act as a sufficient deterrent to willful violations of the discharge injunction by creditors. As recent headlines have confirmed, the risk of violation of the discharge injunction by corporate commercial interests is very real. The elimination of punitive damage and class action remedy options would only serve to encourage such violation in the future. 10. Section 129. Discharge under Chapter 13. Legislative Changes This provision expands the exceptions for the Chapter 13 discharge and amends Sec. 1328(a) by adding matters currently excepted from Chapter 7 discharge under Sec. 523(a)(2), (3)(B), and (4). Practical Analysis of Provision This provision also reduces the incentives for a debtor to choose Chapter 13 over Chapter 7 with the addition of subsection (a)(2) exception to a Chapter 13 discharge there will probably be a significant increase in litigation in Chapter 13 cases. As illustrated by the In re Stahl case, a copy of which is attached here to, notwithstanding the provisions of Sec. 523(d) which subjects creditors to possible sanctions for prosecuting challenges to dischargeability which are not substantially justified. As the Stahl case shows, these creditors "play the odds" that the debtor's attorney will not fight back and thus use the discharge complaint as a way to force a reaffirmation of the debt. If section 129 of H.R. 833 is enacted, fact situations like that stated in In re Stahl will be commonplace and litigation in Chapter 13 cases will increase significantly. Opening the door in Chapter 13 cases only encourages this behavior on the part of some unscrupulous creditors. 11. Section 603. Fair Notice in Chapter 7 and Chapter 13 Legislative Changes Section 603 of H.R. 833 expands Sec. 342 by adding Sec. 342(c) which provides that the debtor shall include the account number and any designated address for any creditor on any notice required by the Code. Code section 342(d) provides that at any time after commencement of the case a creditor may serve on the debtor a notice of address to be used for the creditor and 5 days after receipt such address must be used on all future notices. The rule further provides if the debtor lists a governmental until he shall identify the department, agency or instrumentality thorough which the debtor is indebted and identify the basis for the claim with all appropriate account or identification numbers. Code section 342(e) provides that any creditor may file an address notice with the court for all Chapter 7 and Chapter 13 cases and 30 days after such filing all such notices given by the court (and perhaps by the debtor) must be to that address. This rule also provides that any governmental unit may file a "safe harbor" mailing address for service of notices in cases pending in the district and the Clerk shall make this list available to all debtors. Section 603 of H.R. 833 also added Sec. 342(f) which provides that notice given to a creditor other than provided in this section shall not be effective notice until it has been brought to the attention of the creditor. Furthermore, if a creditor has designated a person or a department to be responsible for receiving notices concerning bankruptcy cases and has established reasonable procedures so that bankruptcy notices received by the creditor will be delivered to such department or person, notice will not be brought to the attention of the creditor until received by such person or department. No sanction under Code section 362(h) of this title or any other sanction which a court may impose on account of violations of the stay under Sec. 362(a) of this title or failure to comply with Sec. 542 or Sec. 543 of this title may be imposed on any action of the creditor unless the action takes place after the creditor has received notice of the commencement of the case effective under this section. As to a governmental unit, a notice that fails to comply with these rules shall not be effective unless the debtor demonstrates, by clear and convincing evidence, that timely notice was given in a manner reasonably calculated to satisfy the requirements of this section and that either the notice was timely sent to the safe harbor address or no safe harbor address was provided and that an officer of the governmental unit who is responsible for the matter or claim had actual knowledge of the case in sufficient time to act. Practical Analysis of Provisions The new notice and automatic stay violations rule appear to create a new defense so long as the creditor does not provide the debtor with any "bankruptcy notice" address on its bills and statements and does not file a master address with the clerk. This is the case because if a debtor cannot give a creditor notice at such an address then in order to successfully prosecute a stay or discharge violation the debtor must prove that the offensive action was taken after the bankruptcy department of the creditor actually received the bankruptcy notice. On the other hand, this same section gives every creditor a new defense to this type of motion: We have established a bankruptcy unit and have established reasonable internal procedures for processing bankruptcy notices. If a governmental unit fails to give a "safe harbor" address to the clerk, then in order to prove a stay or discharge violation the debtor must establish by "clear and convincing evidence" that timely notice was given and that the responsible governmental unit had actual knowledge of the bankruptcy case. Here again, the new rule creates good reasons for not filing "safe harbor" addresses. The combination of damage limitations, notice requirements, defenses, and sanctions will certainly "chill" the rights of many debtors who seek to enforce bankruptcy stays and discharge injunctions. It is also clear that absent a "safe" "safe harbor" address any debtor's attorney must make a "good faith" effort to confirm actual notice and knowledge of the case before pursuing any bankruptcy violations. 12. Section 603(b). Debtor Duties. Legislative Changes Section 603(b) of H.R. 833 amends Sec. 521 requiring debtors to file additional documents including: 1. Copies of any Federal tax returns for 3 years prior to filing (including schedules, etc); 2. Copies of all payments from any employer received in the 60 days before the filing; 3. A statement of the amount of projected monthly net income, itemized to show how calculated; and 4. A statement disclosing any reasonably anticipated increases in income or expenditures for 12 months post filing. Section 603 of H.R. 833 adds to 11 U.S.C. Sec.521, subsection (f) which provides that a debtor in a Chapter 7 or 13 case shall file with the court any tax returns that become due until the case is closed, any returns not filed at the petition date for up to 3 years prior to filing date (as they are filed with the taxing authority), and any amendments to any filed tax returns, whether or not related to pre or post petition returns. In the case of a Chapter 13 debtor, an annual statement of income and expenses must also be filed for the preceding tax year. The statement must clearly show how the amounts were calculated. Section 603 of H.R. 833 adds subsection (b) to 11 U.S.C. Sec. 521. Code section 521 (b)(1) provides that in a Chapter 7 or 13 case the failure of the debtor to file all of the (a)(1) documents within 45 days after the petition shall result in the automatic dismissal of the case on the 46th day after filing. Code section 521 (b)(2) provides that any party in interest may request the court to dismiss a Chapter 7 or 13 case under Sec. 521 (b)(1) and the court must, if so requested, enter an order of dismissal not later than 5 days after such a request. Code section 521 (b)(3) provides that upon request of the debtor and for good cause made within the first 45 days from the filing date the court may allow the debtor an additional period not to exceed 45 days to file the (a)(1) documentation. Practical Analysis of Provision The income tax requirement raises troublesome issues about privacy rights and the disclosure of confidential information related to every Chapter 7 and 13 debtor. Although the statute authorizes a "study" to review how to safeguard the information in these returns, the filing requirement is not delayed pending the study. Moreover, 11 U.S.C. Sec. 521(g)(1), which is added by section 603 of H.R. 833, does not require any safeguards as to the filing of tax returns until 30 days after cases are filed in which returns are due under this Act. The tax filing rule also creates a problem for many low-income debtors who simply do not keep any records of their prior returns. The penalty for non-filing is very harsh-automatic dismissal on the 46th day with no extension except for good cause. And, the extension is somewhat illusory. Debtors who do not maintain copies of their tax returns will be required to request copies from the Internal Revenue Service. Receipt of such returns from the Internal Revenue Service within 45 days of the request is unheard of. Within 90 days is unlikely. Additionally, delaying the first meeting of creditors in a Chapter 13 case will be burdensome if not impossible for Chapter 13 debtors who are required to continue making contract payments on most secured debts pending "distribution of payments under the plan." Finally, this requirement creates a problem for any debtor filing between January 1st and April 15th of any calendar year. Under the rules, this debtor must file his current tax return before the first meeting of creditors. And, if such a return has not been filed then the first meeting is continued until the return April 15 or any automatic extension date. The problem with this rule relates to the adequate protection cash payments to secured creditors that the Chapter 13 debtor must make pending plan distributions to these creditors. For these debtors, a 4 to 6 month delay in the first meeting is simply not feasible. As a Chapter 7 panel trustee, in the vast majority of cases it is not necessary to review a debtor's tax returns. In cases where it is necessary, the trustee or other party in interest need only request them pursuant to Federal Rule of Bankruptcy Procedure 2004. Moreover, debtors are required pursuant to Sec. 521(3) and Sec. 521(4), and may have their discharge denied for failure to meet these duties. The current provisions are sufficient to enable trustees, United States trustees, bankruptcy administrators and other parties in interest to protect their interests and the integrity of the bankruptcy system. 13. Section 302. Miscellaneous Improvements. Legislative Changes Section 302 of H.R. 833 adds Sec. 109(h)(1) which provides that notwithstanding any other provision of the Code an individual may not be a debtor under Title 11 unless during the 90 day period before the date of filing the individual has received credit counseling, including, at a minimum, participation in an individual or group briefing that outlined the opportunities for available credit counseling and assisted that individual in performing an initial budget analysis. Code section 109(h)(2)(A) provides that (h)(1) does not apply if the United States Trustee or Bankruptcy Administrator for the district determines that the credit counseling services in that district are not reasonably able to provide adequate services. Code section 109(h)(2)(B) provides that these certification decisions shall be reviewed on an annual basis. In other words, the application of the rule to any district must be determined and re-determined on an annual basis. Code section 109(h)(3)(A) provides that the 90 day debt counseling rule shall not apply to a debtor who submits to the court a certification that: 1. describes exigent circumstances that merit the waiver; 2. states that the debtor requested credit counseling services from an approved counseling service, but was unable to obtain the services during the 5 day period beginning on the date on which the debtor made the request; and 3. is satisfactory to the court. Code section 109(h)(3)(B) provides that the exemption from debt counseling upon a showing of exigent circumstances "shall cease to apply to that debtor on the date on which the debtor meets the requirements of paragraph (1), but in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition." Practical Analysis of Provisions The irony of the "credit counseling" rule is that it probably will not apply at all in many rural districts. It is not clear, however, if the "finding of inadequate services" by the Trustee or the Bankruptcy Administrator is limited to the entire "judicial district" or to "divisions" within the district. For example, the Western District of North Carolina is divided into the Charlotte, Statesville, Shelby, Asheville and Bryson City divisions. It is certainly likely that an "inadequate services" finding would apply to the Shelby Division but not to the Charlotte division. The same argument could be made for individuals residing in rural counties within each judicial division. The standard of not "reasonably able to provide adequate services to individuals" is very vague and subject to many different interpretations. The Act also seems to require any debtor who files under "exigent circumstances" in an approved district or division to secure "credit counseling" within 30 days of the petition date. If such counseling was not secured, then it appears that the case would be subject to a motion to dismiss on the grounds that the individual was no longer "a debtor" under Code section 109. What the debtor must do in this situation, what the debtor must file with the court in the form of a certification, or who may move to dismiss is not covered by this amendment. It is also not clear how these post-filing credit services would benefit an individual who was already a debtor under Chapter 13. Perhaps the only possible benefit would be the additional leverage the Chapter 13 filing might bring on unsecured creditors to accept a voluntary repayment plan. For example, Code section 502 has been amended to allow a debtor to file a motion to reduce an unsecured consumer claim by not more than 20% if the debtor can prove by "clear and convincing" evidence that the claim was filed by a creditor who unreasonably refused to negotiate a alternative repayment schedule approved by an approved credit counseling agency. However, this same section provides that the repayment schedule must have been offered "at least 60 days before the filing of the petition", had to offer to repay at least 60 percent of the loan during the original loan term, and provided that no part of the debt to be repaid would be non- dischargeable in a bankruptcy case. The Chapter 13 discharge rules, supra, have been amended to provide that a debtor is not entitled to the discharge unless the debtor has completed an instructional course concerning personal financial management (assuming such a course has been approved in the district). 14. Section 126. Exemptions. Legislative Changes Section 126 of H.R.833 amends Sec. 522(b)(2)(A) to provide that a debtor may claim State or local exemptions on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 730 days (2 years) immediately preceding the date of the filing of the petition. The old 180 rule is therefore deleted as is the provision that would allow a debtor to claim exemptions where the debtor had been domiciled for a greater part of the old 180 day period. Code section 522(n) provides that the amount of value a debtor may exempt in real or personal property that the debtor or a dependent of the debtor uses as a residence, a cooperative or a burial plot shall be reduced to the extent the value is attributable to any property the debtor disposed of within the 730 day period with the intent to hinder, delay or defraud a creditor which the debtor could not have exempted on the filing date. Code section 522(f)(1)(B)(ii) provides that household goods shall mean clothing; furniture; appliances; one radio; one television; one VCR; linens; china; crockery; kitchenware; education materials and educational equipment primarily for the use of minor dependent children of the debtor, but only one personal computer and only if used primarily for the education or entertainment of such minor children; medical equipment and supplies; furniture exclusively for the use of minor children, elderly or other dependents of the debtor; and personal effects (including wedding rings and the toys and hobby equipment of minor dependent children) of the debtor and his or her dependents: Provided, That the following are not included within the scope of the term "household goods": (aa) works of art (unless by or of the debtor or his or her dependents); (bb) electronic entertainment equipment (except one television, one radio, and one VCR); (cc) items acquired as antiques; (dd) jewelry (except wedding rings); (ee) a computer (except as otherwise provided in this section), motor vehicle (including a tractor or lawn tractor), boat, or a motorized recreational device, conveyance, vehicle, watercraft, or aircraft. Code section 522(b) also provides that any funds placed in an Educational IRA account at least 365 days before filing and which has not been pledged or promised to any person in connection with credit is exempt. However, this same section then provides that such accounts shall not be exempt: 1. Unless the debtor has one or more dependent children less than 22 years of age; 2. If the amounts in the IRA are not less than $50,000.00 per each dependent and not more than $100,000.00 for all such dependents; 3. To the extent the contributions to the fund exceed the sum of $500.00 per year per child; and 4. To the extent any person has any ownership rights or control of the fund other than the dependent child or children of the debtor to whom such account is attributable. Practical Analysis of Provisions The new exemption rules appear to create what may be called a "debtor without a state" or a debtor"without any exemptions." The problem is created by the requirement that the debtor may only claim exemptions on the filing date "at the place in which the debtors domicile has been located for the 730 days immediately preceding the date of the filing of the petition." The statute does not say for the "greater part of the last 730 days" but for the last 730 days. This leaves in doubt what happens to the debtor who just moved to a State 18 months before the filing date. This debtor would not be able to claim the exemptions in his new state or in his old state. Would this debtor then be limited to the federal exemptions? Would the debtor have no exemptions? The rule is simply not clear on these issues. The new exemption rules also impose a highly restrictive definition on household goods. Generally speaking, works of art, electronic equipment (other than 1 t.v., 1 vcr, and 1 radio), items purchased as antiques, jewelry (other than wedding rings), a computer, motor vehicle, riding lawn mower, motorcycle, boat, camper, and aircrafts are excluded from the definition. The definition is therefore limited to such things as clothing, furniture, appliances, 1 radio, I television, 1 VCR, linens, china, crockery, kitchenware, and furniture and educational materials for dependents. The definition of household goods would clearly pre-empt state exemptions statues as to the type of goods but the valuation issues would still be subject to state limitations. This would only serve to give leverage to the sub- prime, non-possessory, non-purchase money lenders in household goods who use the household goods merely as a threat. The Education IRA account may only come into play for a Chapter 7 or 13 case filed after the year 2020. Simply stated, it would take that long for any debtor to build up a fund of not less than $50,000.00 nor more than $100,000.00 with contributions of not more than $500.00 per year per child. Furthermore, the application of the annual contribution is unclear since it fails to account into account any appreciation in the account or to what extent the exemption may still apply if the annual contributions exceeded $500.00 per child. And, if the value of the account was $49,999.99 on the date of the filing then none of the IRA would be exempt regardless of the number of dependent children. Likewise, if the account was $100,000.99 on the date of filing then no part of the IRA would be exempt. 15. Section 605. Adequate Time to Prepare for Hearing on Confirmation of the Plan. Legislative Changes Section 605 of H. R. 833 amends Sec. 1321 to provide that the debtor shall file a plan not later than 90 days after the filing of the petition. The court may extend such period if it is the result of circumstances to which debtor should not justly be held accountable. Code section 1322(d) provides that if the total income for the filing unit is not less than the highest national median family income reported for a family unit of the same size, the plan may not provide for payments over a period that is longer than 5 years. If the total income for the filing unit is less than this amount, the plan may not provide for payments over a period that is longer than 3 years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than 5 years. Code section 1329(c) then provides that the duration of a plan shall be for a period of at least 5 years if the current total monthly income for the filing unit is not less than highest national median family income for the same size family unit, as of the date of modification and shall be at least 3 years if the said income is less than the national median. Code section 1325(a)(8) provides that in order to confirm the plan the debtor must have filed all Federal, State and local tax returns as required by Sec. 1308. Code section 1308(a) provides that at least one day before the 341 meeting the debtor shall have filed all tax returns for periods ending 3 years before the date of the filing. Code section 1308(b) provides that if such returns have not been filed at least one day before the 341 meeting, the trustee may continue the meeting for a reasonable time but in no event for more than 120 days for past due returns and for returns not past due the meeting may be continued until the later of 120 days from such date or the due date for such returns under the last automatic extension of time for filing and for which such a request has been timely made by the debtor. Code section 1307(e) provides that upon failure of the debtor to file such tax returns and on request of a party in interest the court shall dismiss a case or convert the case to Chapter 7, whichever is in the best interest of creditors. Practical Analysis of Provisions All plans must be for at least 5 years in duration if the current total monthly income for the filing unit is not less than the highest national median income for the same size family unit. Otherwise, the plan may not exceed 3 years unless the court allows a longer period. The same 5 year rule applies to any Chapter 13 plan modification. The 5 year rule is somewhat illusory since the anti-claim bifurcation and valuation rules will require almost all plans to run for 60 months just from a feasibility point of view. The debtor must also prove that all pre and post filing tax returns have been filed as a condition of confirmation. Such returns must also have been filed before the first meeting. As a result, the confirmation provision on taxes will have little or no relevance in almost every Chapter 13 case. The real problem with tax returns relates to the prior year returns that become due for all cases filed between 01 January and 15 April of any calendar year. In order to avoid the direct adequate protection cash payments and a mandatory delay of the first meeting, all debtor may be required to file such returns with their petition. This could create yet another roadblock to filings under exigent circumstances and cause many attorneys to decline representation in any such cases. 16. Section 302. Miscellaneous Improvements. Legislative Changes The definition of a residence is expanded to include a mobile home or a modular home or any similar structure. Practical Analysis of Provisions As a result, the debts secured by first mortgage liens on this type of property will not be subject to modification under Chapter 13. This property will be treated just like residential real estate under 1322(b)(2). 17. Sections 103, 105, 106, 107 and 108. Debtor Protections. Legislative Changes Code section 342(b) provides that prior to the commencement of a consumer bankruptcy case the debtor must be provided with an approved written notice of Chapters 7, 11, 12 and 13 and the general purpose, benefits, and costs of proceeding under each of those chapters. The section then goes on to provide that this notice must also include a brief description of services that my be available to the debtor from a "credit counseling service that is approved by the United States trustee for that district." Code section 101 is amended to create the following new terms: an assisted person, bankruptcy assistance, and a debt relief agency. An assisted person is any person whose debts consist primarily of consumer debts and whose non-exempt assets are less than $150,000.00. Bankruptcy assistance means doing anything for any type of fee to provide an assisted person with bankruptcy advise or help including the providing of legal representation under Title 11. A debt relief agency is any person who provides any bankruptcy assistance to any assisted person in return for the payment of money or other valuable consideration or a bankruptcy petition preparer. Non-profit organizations, creditors, or any FDIC bank or any affiliate or subsidiary of such a bank are specifically excluded from this definition. The rule then creates three separate disclosures that must be given by any debt relief agency. These disclosures are in addition to the 342(b) disclosure. The new disclosures are provided for by Rules 526(a), 526(b) and 526(c). The 526(a) disclosure must be given within 3 business days after the first date of any bankruptcy assistance. The rule basically includes all information that the assisted person must provide in connection with the bankruptcy filing and warns these parties of the new audit procedures. The notice specifically provides that "failure to provide such information may result in dismissal of the proceeding under this title or other sanction including, in some instances, criminal sanctions." The 526(b) disclosure informs the assisted person that he may represent himself in a bankruptcy case or hire an attorney or a bankruptcy petition preparer. The notice also includes information about the requirement of a written contract specifying what the attorney or petition preparer will do for the debtor and how much it will cost. The form includes many statements about bankruptcy relief including the following: "Although bankruptcy can be complex, many cases are routine." Code section 526(c) provides that a debt relief agency shall provide the assisted person at the time of the initial (a) and (b) notices "reasonably sufficient information" either orally or in clear and conspicuous writing on how to provide all of the information required to commence a bankruptcy case including: 1. How to value assets at replacement value, determine current monthly income, projected monthly income and, in a Chapter 13 case, net month income, and related calculations; 2. How to complete the list of creditors, including how to determine what amount is owed and what address for the creditor should be shown; and 3. How to determine what property is exempt and how to value exempt property at replacement value as defined under Code section 506 of this title. A debt relief agency must retain signed copies of these notices for two years after the later of the date on which the notice is given the assisted person. Code section 527(a)(1) provides that within 5 business days after a debt relief agency provides any bankruptcy services to an assisted person that parties must execute a written contract. The contract must specify "clearly and conspicuously" the services to be provided and the basis on which fees or charges will be made and the terms of payment. Any contract that fails to fully comply with these rules is "void" and may "not be enforced by an Federal or State court or any other person" under Code section 528(a). In addition, 528(b) provides for serious sanctions for failure to comply with the rules, the contract, or for any negligence or intentional disregard of any of the bankruptcy rules. The remedies include liability for all fees and charges to the assisted person, actual damages to the assisted person, injunctive relief, and other civil penalties. Code section 527(a)(2) provides that a debt relief agency shall disclose the following on any advertisement related to bankruptcy: WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY PETITIONS TO OBTAIN RELIEF UNDER THE BANKRUPTCY CODE. Practical Analysis of Provisions The practical effect of these new notice rules will be to discourage debtors from using attorneys to represent them in bankruptcy cases. Encouraging pro se filings by debtors will increase the administrative costs of operating the bankruptcy system and will prejudice the substantive rights of all parties. The requirement to "fully and completely" explain the "ins and outs" of how to file a consumer bankruptcy case are extremely burdensome. Due to the complexity of the legislation, it is simply too risky to rely on a written document for this information and certainly much too dangerous to rely on what at best would be an inconsistent oral presentation. CLOSING COMMENTS The credit industry cites the large number of consumer bankruptcy filings and the perceived abuse in a large number of Chapter 7 cases as a reason for "bankruptcy reform.' The anomaly the current political discourse is that all of the debate has been focused on the stated purpose of reforming or denying Chapter 7 relief to the majority of debtors and forcing these same debtors into Chapter 13 repayment plans. It is hard to argue against the proposition that everyone should pay their debts to the extent they have the ability to do so. The problem with H.R. 833 is that it creates financial, procedural and jurisdictional barriers to Chapter 13 relief for the majority of debtors who really need relief. The objective evidence does not support any factual finding of present or a pending bankruptcy crisis or of the need for massive consumer bankruptcy reform. For example, Daniel Mica, President of the Credit Union National Association, said at a meeting in September of 1997 that "when it comes to blame, there's enough to go around, both consumers and financial institutions." Mr. Mica's common-sense observations have been documented by several studies including one by the Hon. Joe Lee, a distinguished bankruptcy judge in Lexington, Kentucky. Using Federal Reserve data, Judge Lee found a direct and irrefutable relationship between the number of consumer bankruptcy filings since 1977 and the amount of outstanding consumer credit. Specifically, in 1977 there were .74 consumer bankruptcy filings for every million dollars in consumer credit; and, in 1997 there were .73 consumer bankruptcy filings for every million dollars of consumer credit. Judge Lee's detailed, learned and highly documented observations are supported by more complex studies. After a comprehensive analysis, the Congressional Budget Office told Congress in April of 1997 that "nonbusiness bankruptcy filings move with measures of household indebtedness." In another detailed statistical study, economists Jagdeep Bhandari and Lawrence Weiss reached a similar conclusion. Specifically, they stated to the National Conference of Bankruptcy Judges that "our evidence indicates that the increase in the number of bankruptcy filings is primarily due to the increased level of debt as a percentage of income." Finally, economist Lawrence Ausubel, focusing particularly on credit card debt, noted that the rate of consumer bankruptcy filings is "astonishingly highly correlated with the rise in credit card defaults." No one would argue that some level of reform would be helpful and that some abusive practices should be eliminated. However, before we throw out the baby with the bath water everyone needs to take a deep breath and a long second look at what we are about to do. The reason that our bankruptcy system has always worked so well is that it is balanced. Before we un-level the playing field we need to thoroughly examine the full impact of the proposed changes-not just on the credit industry, but on the ability of families to provide for their children, on whether entrepreneurial endeavors are discouraged and the health of the entire consumer-oriented economy. Indeed, these proposed changes may have far-reaching effects on our economy which could prove disastrous, even to the credit industry. P. Wayne Sigmon, Esq. Gray, Layton, Kersh, Solomon, Sigmon, Furr & Smith, P.A. P.O. Box 2636 Gastonia, NC 28053-2636 (704) 865-4400

LOAD-DATE: March 19, 1999