LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 17, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 3709 words

HEADLINE: PREPARED TESTIMONY OF
HENRY E. HILDEBRAND, III
CHAIRMAN, LEGISLATIVE AFFAIRS COMMITTEE
THE NATIONAL ASSOCIATION OF CHAPTER 13 TRUSTEES
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW O

BODY:

My name is Henry E. Hildebrand, III and I currently serve as a standing trustee for Chapter 12 and Chapter 13 cases filed in the Middle District of Tennessee. I have also served as a Chapter 11 trustee. I currently serve on the Board of Directors of the National Association of Chapter 13 Trustees and the Trustee's Education Network. I currently administer nearly 14,000 active Chapter 13 cases and I disburse approximately $80 million per year to creditors.
On behalf of the hundreds of members of the National Association of Chapter 13 Trustees, I want to thank you for the opportunity to appear before this Subcommittee to comment on consumer bankruptcy reform and to assist you in your focus on examining the impact H.R. 833 would have upon the consumer bankruptcy system.
The National Association of Chapter 13 Trustees is a non-profit organization devoted to providing education and information related to the consumer bankruptcy process focusing particularly on Chapter 13 bankruptcy. Our members include trustees; attorneys who represent debtors, creditors and debt collection managers; academics; and other persons interested in the consumer bankruptcy system. Our membership is diverse geographically, politically, and economically and the individual interests of our members relating to bankruptcy reform cover a wide spectrum. The Chapter 13 trustees who are members of the NACTT do not represent interests that could be called "pro-debtor" or "pro-creditor." The trustees generally have no economic interest in whether there are more or less bankruptcy petitions filed. This being said, there is one unifying theme voiced by all of the trustee members of the NACTT: whatever results from the overhaul of the consumer bankruptcy system undertaken by Congress, the law must be functional, must be capableof easy application, and must actually accomplish the stated goals of Congress. The Chapter 13 Trustees are deeply concerned over the impact of H.R. 833, not so much for its underlying policies, but the startling realization that the language currently before the House will not accomplish the goals of the drafters.
I wish to make this point extremely clear. In its current form, H.R. 833 will discourage the Chapter 13 option for debtors seeking bankruptcy relief, will impose significant hardships and costs on debtors and creditors who are involved in the bankruptcy process, will impose significant unfunded costs on the system, and will result in the inequitable and reduced distribution of any dividend to creditors.
The NACTT has undertaken an analysis of the various consumer related provisions of H.R. 833 and we attach our comments to these sections as Appendix A to this testimony.
For purposes of this testimony today, however, we would like to sound the clarion bell of warning that the current draft of the bill will decimate many Chapter 13 programs across the country. The tragic thing about this fact is that the policies sought to be addressed by Congress can be achieved without such a destructive impact. Many Chapter 13 trustees are strongly supportive of many of these policies.
The NACTT encourages this Committee to restore the protections and benefits of Chapter 13 in H.R. 833. We believe, at a minimum, the following changes must be made to preserve a viable Chapter 13 option:
I Prohibition upon Valuations in Chapter 13 Plans
Current Law: Under existing law, a claim is a secured claim only to the extent of the value of the collateral. This is a recognition that the secured creditor has an interest in theproperly that secures the loan and a claim against the debtor to the same manner as a general unsecured lender. If the collateral is insufficient to satisfy the creditor's debt, the creditor can pursue the debtor for the deficiency. In Chapter 13 a debtor proposing to retain property that is subject to a lien must either surrender the property (which would give the creditor the collateral and an unsecured claim for any deficiency), or pay to the creditor the replacement value of the collateral with interest sufficient to provide the creditor the present value of the property. There is an exception to such treatment for debts secured only by a debtor's principal residence.
H.R. 833: Sealion 123 of the bill would require that to confirm a Chapter 13 plan (also applicable to a Chapter 12 farmer's case and a Chapter 11 individual's case) a claim that is secured by a purchase money security interest in the debtor's property must be treated as if the property had a value equal to the debt, if the property were purchased within 5 years of the filing.
Apparent Justification for the Provision: Debtors should not be permitted to purchase items on credit, effectively planning a bankruptcy to the detriment of well intended creditors. Debtors who incur a debt on the eve of filing do so seeking to retain properly purchased by such credit while limiting their personal exposure on the debt. The provision could prevent "eve of bankruptcy" buying sprees.
Anticipated Effect of the Provision: The bill would force reorganization plans to divert significant portions of a debtor's available income, now generally available for unsecured creditors of all types, to fund the under-secured claims of PMSI creditors. Since a debtor in Chapter 13 must dedicate all disposable income to fund a plan, the only possible outcomeis to divert funds from one type of unsecured creditor (medical bills, credit cards) to another (PMSI deficiencies). Many debtors who would not be compelled to file Chapter 13 under any sort of means testing in an effort to reduce (not eliminate) their debt load currently elect Chapter 13 If enacted this provision would provide such "voluntary" debtors a much better result in a Chapter 7 (by reaffirming on the debt agreeing to pay it in full). The result would be a significant decrease in voluntary Chapter 13 plans which under current law pay a substantial portion of debts back.
Alternative: Since very few debtors have the ability or the foresight to plan a bankruptcy, the effort to divert funds from unsecured creditors to secured creditors to compensate for this abuse is misdireded. The Bankruptcy Code now uses the period of 90 days as a presumption of preference (Section 547), and a presumption of a buying spree on a credit card (Section 523(a)(2)(C)), it would seem to be consistent to limit such diversion to properly that is acquired within the three months prior to filing.
II Adequate Protection Payments in Chapter 13 Cases
Current Law: There is no specific provision for preconfirmation distribution of funds to creditors in Chapter 13 cases. Courts in some districts do provide for such preconfirmation payments. The Code requires debtors to dedicate all of their disposable income to fund a Chapter 13 plan. Such payments must commence within 30 days of the filing of the Chapter 13 plan. !f a secured creditor is harmed as a result of the delay, the creditor may request the court impose an obligation on the trustee of providing preconfirmation payments to the creditor as a form of adequate protection.
Because some courts refuse to confirm a Chapter 13 plan (even if the plan is uncontested) for a significantperiod of time, often waiting until after the bar date for filing claims (which can be 180 days after the filing of the petition), and because there is no provision for an under-secured creditor to accrue interest on the obligation until the plan is confirmed, creditors are now injured economically by the very fact of filing.
H.R. 833: The bill would compel the court to hold early confirmation hearings (Section 605 of the bill) (This same provision (Section 605(b)) permits a debtor to delay the filing of a Chapter 13 plan for a period of 90 days from existing 15 days). The bill would also compel a debtor to maintain contract payments to purchase money secured creditors in addition to their payment of all disposable income to a Chapter 13 trustee. (It is very confusing to determine the source of such payments since all disposable income is defined as all income not necessary to support a debtor or a debtor's dependents. Such adequate protection payments must be paid from the funds needed to support the debtor and the debtor's family.) The court might be able to modify these payments upon the request of a party in interest (although such is not clear) and the payments from the debtor would continue until the debtor either relinquished the properly of the creditor began to actually receive payments under the plan.
Justification for the Provisions: The principal complaint of secured creditors is delay in Chapter 13. The inherent delay in the commencement of a Chapter 13 repayment plan, conducting of a meeting of creditors, consideration and modification of the plan by parties in interest and consideration of confirmation of the plan all take time. During this period the under-secured creditor's interest is losing value. While a creditor could seek adequate protection, given the size of the claims involved, the costs of such action seem to outweighthe benefits on a case by case basis. System wide, however, such delay is substantial.
Effect of the Provision: The difficulty in dealing with a requirement that Chapter 13 debtors pay to a trustee all of their disposable income ( all income not reasonably necessary to maintain or support a debtor or a dependant of a debtor) and at the same time pay additional funds to creditors is apparent. In most courts, trustees are the disbursing agents as to all claims (other than ongoing mortgage payments and child support). The provision appears to require a debtor to pay twice - once to the trustee under a proposed plan and once to the purchase money secured creditor under this provision.
The provision precludes a trustee from accurately making disbursements on a secured claim after confirmation of a plan since the debtor should have made some payments on a claim as to which there will be no accounting. Trustees will be forced to compel creditors holding such claims to make accountings prior to disbursements under a plan.
The provision is somewhat confusing in that it states that the court can modify the amount and timing of such "adequate protection" payments (in which case it is reasonable to expect a substantial amount of "first day" orders as in Chapter 11 cases) but then it states that the modification cannot alter the contract frequency of payments and cannot alter the contract amounts of such payments. It is not at all clear what modifications could be permitted.
Clearly, the provision will result in diminished distributions in Chapter 13 plans to other secured creditors, resulting in delays in curing mortgage defaults (plans would need to be crafted to reduce payments on mortgages and nonpurchase money secured creditors in order to provide the debtor with sufficient funds to make the direct "adequate protection"payments) and reduced distributions to unsecured creditors.
Since trustees may only assess fees upon funds that the trustees actually distribute (see 28 U.S.C. Section 586(e)), the provision will preclude the collection of fees necessary to administer Chapter 13 cases. The most significant costs incurred by a trustee occur in setting up and shepherding a case to the confirmation hearing. To the extent the provision will diminish trustee distributions, the provisions seriously undercuts the ability of trustees to have resources to administer the cases entrusted to them.
Suggested Alternatives: To more effectively accomplish the goals of the provision without impairing the ability of trustees to administer cases, the following changes are suggested:
1. Modify Section 1325(a)(5)(B) by adding a new subsection (iii) which provides that if a plan proposes to satisfy an allowed secured claim (other than a claim secured only by real property) in installment payments, the payments should be equal monthly payments sufficient to provide adequate protection of the secured creditors' interest.
2. Amend Section 1321 to require the debtor to file a plan within 15 days unless the court, for cause, extends such time.
3. Require prompt confirmation hearings as contemplated in Section 605 of the bill but permit earlier confirmation than 20 days if there is no objection to confirmation raised at or prior to the meeting of creditors.
4. Amend Section 1326 to require the trustee to make preconfirmation distributions to purchase money secured creditors holding allowed secured claims in an amount equal to proposed plan distributions. Because plans would be filed quickly, trustees could make distributions quickly. A creditor could still seek a greater distribution than proposed by filing a request with the court, but since the plan must provide adequate protection (see #1 above) a purchase money creditor need do nothing to receive adequate protection.
5. Amend 28 U.S.C. Section 586(e) to permit the trustees to recover the percentage fees from funds received for disbursements, whether such disbursements are prior to or after confirmation.
6. Amend Section 1 326(b)(1 ) to preclude confirmation of a plan which proposes to make administrative payments in a manner which impairs or delays a secured creditor from actually receiving the adequate protection payments provided in section 1325(a)(5)(B)(iii) (see #1 above). This will preclude the frontloading of administrative costs in a plan which has caused delays to a creditor's distributions.
7. Amend 1326(a)(1 ) to require debtors to commence payments to a trustee no later than 30 days after filing of the case - not 30 days after filing of the plan.
III Destruction of the Superdischarge
Current Law: A Chapter 7 discharge will notdischarge all debts. There is excepted from discharge 18 different types of debts in 523 (several exceptions to discharge exist in other parts of the United States Code). Section 1328(a) does not exclude nearly so many debts from discharge in a Chapter 13 case, excepting long term debts treated under 1322(b)(5) such as mortgages, support obligations, student loans, DUI personal injury obligations, and criminal restitutions or fines. The reason for this as articulated by the drafters of the 1978 Code, is that in exchange for a debtor voluntarily committing all disposable income to fund a plan for a period of three to five years, such a debtor should be able to obtain a true fresh start.
H.R. 833: The bill would except from discharge in a Chapter 13 plan any debt of a kind listed in 523(a)Cl),(2),(4) and (6)(to the extend of personal injury or wrongful death) (See Sections 129 and 807 of the Bill).
Justification for the provisions: It seems unfair to permit debtors to escape from their obligations to pay debts that public policy holds should not be discharged in a Chapter 7. Some debtors may be filing for Chapter 13 relief only to avoid debts that are incurredthrough fraud, embezzlement or willful injury to others. Chapter 13 has been used by a few debtors to discharge tax obligations that would not be discharged in a Chapter 7 because the debtor did not file a tax return or the return that was filed was a fraudulent return.
Effect of the Provisions: While it is true that some debtors seek to avoid the dischargeability litigation that results in some Chapter 7 cases by filing under Chapter 13, it should not be assumed that such debtors have debts that would be excepted from discharge after a trial. Many such debtors file under Chapter 13 to avoid the cost and difficulty of litigation. Section 129 of the bill will require litigation in all cases which might involve nondischargeable debts and such actions must be commenced within 60 days of the meeting of creditors. This would be required even where a creditor is willing to accept a Chapter 13 plan as proposed.

If a debtor is to face litigation in both a Chapter 13 case and a Chapter 7 case, it only makes sense for that debtor to elect a Chapter 7 case which would be quicker and would result in the discharge of claims that would receive some distribution in a Chapter 13. This would clearly result in fewer voluntary Chapter 13 cases being filed and an increase in Chapter 7 cases.
The provision would also make taxes nondischargeable in a Chapter 13 case. While current law prohibits confirmation of a Chapter 13 case which does not propose to pay priority taxes in full, the provision would also make nondischargeable the interest that accrues on taxes post petition. Because post petition interest is not a "claim", it could not be paid in a Chapter 13 plan. Thus a debtor would emerge from Chapter 13 still owing the post petition interest on taxes that accrued during the plan.Alternatives: If courts were compelled to consider the dischargeability of debts in their consideration of confirmation of a Chapter 13 plan, the use of Chapter 13 to avoid paying debts would be limited. Section 1325(a)(3) should be amended so as to require a finding of a lack of good faith if the Chapter 13 plan does not propose to make a meaningful distribution to creditors who hold claims of a kind described in 523(a)(2), (4) and (6). Further, 1322(b)(1 ) should be amended to permit a Chapter 13 plan to pay those debts that are nondischargeable under Chapter 7 differently than other unsecured creditors. This would permit debtors to craft Chapter 13 plans that could make meaningful distributions to potentially nondischargeable debts.
Section 1322(a)(2) should be amended to require a Chapter 13 plan to pay in full any tax obligation with respect to a return, if required, was not filed, or with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax. Such would accomplish the goal of closing the loophole that permits fraudulent or undisclosed taxes from being discharged, but would not force debtors to face the Hobson's choice of trying to repay taxes but emerging from bankruptcy still owing the interest that had accrued.
IV Prefiling Consumer Credit Counseling
Current Law: Nothing now requires a debtor to seek to work on a voluntary basis with their creditors prior to the filing of a bankruptcy. Some, but not many, debtors' counsel seek to work out debts with creditors prior to filing a petition.
H.R. 833: Section 302 would make it a condition to filing a bankruptcy that the debtor have received credit counseling within 90 days which counseling would include an individualor group "briefing" that outlined opportunities for additional counseling and an "initial budget analysis". The bill has an exception to this requirement only if there is a geographic barrier to obtaining such counseling or the counseling service could not be obtained within 5 days.
Justification for the provisions: There is insufficient effort by debtors to seek nonbankruptcy workouts prior to filing of a petition. If there were more attempts to work out voluntary debt repayments, fewer Chapter 7 bankruptcies would be filed. The use of counseling could result in helping debtors live on budgets and work out voluntary repayment plans.
Effect of Provisions: Without question debtors should attempt to work out debt repayment plans outside of bankruptcy. Unfortunately, by the time most debtors come to grips with their financial problems, it is too late to seek counseling. By preventing a debtor from initiating a bankruptcy case, the provision would result in many families being unable to stop foreclosures and repossessions, even though they may have the capacity to repay such debts. Since foreclosing creditors are confronted with substantial losses in a foreclosure, such a result is counterproductive to the goal of assisting in repayment of debts.
Credit counseling should give debtors an opportunity to create a meaningful and realistic budget, obtain assistance and education in personal financial management, and put together a repayment plan that gives some return to creditors. Unfortunately a voluntary restructuring of debt requires the unanimous consent of all creditors and the refusal of one creditor to such a plan dooms the entire process. There are several major creditors that are unable or unwilling to participate in such a voluntary program.Alternative: There should be created a means where the court can "hold up" a Chapter 7 bankruptcy and refer a filed case to consumer credit counseling, similar to a pretrial diversion program. Section 707 could be amended to provide that upon the request of any party in interest in a Chapter 7 case, or the court acting upon its own could suspend all time periods and deadlines in the case and refer the debtors to participate in a counseling program. If the counselor certifies that the program would be unsuccessful, the Chapter 7 could proceed. If the counselor does not so certify or if the debtors fail to participate in such a program, the case would be dismissed.
Since Chapter 13 debtors are participating in a voluntary repayment program under the supervision of the court and a trustee that requires the creation of a meaningful budget followed by counseling and educational programs during the pendency of the case, to require pre and post petition counseling seems to be duplicative. Since the goal of the provision of the bill is to encourage the creation of a budget that permits debtors to repay debts and such is accomplished in a Chapter 13 case, the requirement of consumer credit counseling seems most appropriate in a Chapter 7 case alone.
The NACTT believes that the provisions of the bill noted above have the most serious impact on the viability of a strong Chapter 13 program. We can provide language to effect the alternatives proposed.
Our membership is ready to assist this Committee and its staff in finding alternative ways to achieve the goals of encouraging debtors to repay their debts to the best of their ability and to obtain a fresh start after making a meaningful repayment. Our members havebeen encouraging debt repayment and assisting families to repay their debts for many years. We can provide to you statutory language that will accomplish the goals of repayment and presentation of a system that works.
END

LOAD-DATE: March 18, 1999