LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 18, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 2798 words

HEADLINE: PREPARED TESTIMONY BY
JOSEPH A. PEIFFER
BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - H.R. 833 BANKRUPTCY REFORM ACT OF 1999

BODY:

Summary of
* Chapter 12 needs to be made permanent to provide stability for family farmers and their creditors to negotiate and adjust their debts fairly.
* Chapter 12 eligibility should be expanded by increasing the debt limit to $3,000,000 from the current limit of $1,500,000.
* Chapter 12 should be improved to deal with the severe capital gain tax problems experienced by many family farmers. S. 260 addresses these problems and should be passed.
* Section 330(a) should be amended to direct bankruptcy judges to consider board certification when reviewing professional compensation applications. * Retirement Savings Plans should be made exempt from the claims of creditors both in and out of bankruptcy to provide equal protection for all Americans.
* The provisions of H.R. 833 which essentially require a "permission slip" from a credit counseling service as a prerequisite to filing a bankruptcy should be eliminated.
* Provisions to require consumer education classes in elementary and secondary schools should be enacted and funded.
* Section 506(a) of the bankruptcy code should not be amended to protect creditors that make loans with little or no down payment.
* Section 149 of H.R. 833 wisely eliminates the incentive to obtain a loan to pay off a non-dischargeable debts. *******************
Testimony
If enacted, H.R. 833 will have dramatic and far reaching effects upon the bankruptcy system of the United States. It will have a significant impact upon farmers that can avail themselves of Chapter 12 but it does not go far enough to provide the protection needed for farmers. First, I will outline the case for making Chapter 12 permanent. Second, I will suggest a significant change improvement to H.R. 833 to address the capital gains tax problem that family farmers face as they struggle to survive. Third, I will suggest changes to Section 330 of the Bankruptcy Code to increase the efficiency of the bankruptcy system. Finally, I will comment on some other aspects of H.R. 833.
I. Making Chapter 12 Permanent
Section 201 Reenactment of Chapter 12 is vitally necessary to provide farmers and their creditors with predictability of the reorganizational options available within bankruptcy. The current "off again, on again" approach to Chapter 12 is not beneficial to either lenders or farmers. On September 30, 1998, I filed a large Chapter 12 because it was the last day it was available. It would have been better for the farmer and its creditors not to have begun the Chapter 12 then as negotiations were slowly progressing with the affected creditors. However, when faced with the prospect that Chapter 12 might not be available again the bankruptcy was filed to allow the farmer to utilize Chapter 12. Chapter 12 has proven its worth in the agricultural sector since it was enacted in November of 1986. In Dr. Neil E. Harl's study, The Experience of Chapter 12 Bankruptcy Filers in Iowa, Dr. Harl(3) concluded that Chapter 12 assisted many filers in continuing to farm, or at least maintain ownership of farm land. Dr. Harl observed that fifty-two percent of the Chapter 12 filers believed that Chapter 12 had been very helpful to them in maintaining their farming operations.
Chapter 12 bankruptcy should be made a permanent part of the Bankruptcy Code. Without making Chapter 12 permanent farm borrowers will remain at a competitive disadvantage in negotiating equitable treatment from the lenders. In addition, if Chapter 12 is not made permanent, the cyclical nature of agriculture will result in an agricultural depression in the future which will be much deeper and longer than necessary if the playing field is not maintained on a nearly level basis. If Chapter 12 is allowed to expire it will take an extreme financial crisis, much like the farm crisis of the 1980's to arouse the consciousness of America to address the crisis and reenact Chapter 12. Family farmers should not be thrown to the wolves only to await another depression in the agricultural economy to get the national spotlight so that Chapter 12 can be reenacted.
II. Improvement to Chapter 12 -- Addressing the Capital Gains Tax Problems
While Chapter 12 should be made permanent, it will be of more vitality in assisting farmers to restructure their indebtedness if Congress passes S260. The practical impact of passing S260 is to expand the eligibility for participation in Chapter 12 and it will allow many family farmers to sell their under-productive business assets, pay their secured debt, pay the capital gains taxes which they can pay through the plan and have a truly fresh start unfettered by non- dischargeable capital gains taxes.
Thousands of family farmers fail each year. In many instances the family farmer has over encumbered assets with little, if any, adjusted tax basis. Upon sale, either through foreclosure or other forced liquidation, the sale proceeds are paid to secured creditors while the farmer is left with few, if any, funds to pay the capital gains income taxes. If the business owner has elected to file a Chapter 7 bankruptcy prior to forced sale the trustee will abandon the over encumbered assets and the taxable event (the forced sale) will occur after the debtor receives his discharge. The capital gains tax resulting from the forced sale will remain as it was not discharged by the Chapter 7 bankruptcy. Thus, the taxpayer will face the prospect of dealing with the Internal Revenue Service to pay this tax. The debtor will be unable to file a Chapter 7 bankruptcy to obtain a discharge of this tax for at least six years after filing his initial Chapter 7 petition.(4) This is not a fresh start.
If the individual taxpayer sells the over encumbered assets prior to filing a Chapter 7 bankruptcy and recognizes the capital gains income on a tax return, the tax assessed is not dischargeable until at least three years after the last date the tax return could have been timely filed.(5) Until this time the taxpayer must face the collection activities of the Internal Revenue Service and, presumably, his other creditors before getting the fresh start envisioned by Congress when the bankruptcy code was enacted. If the taxpayer elects to file a Chapter 13 bankruptcy after the sale the tax can be paid through the Plan without interest or penalty assuming the Plan is otherwise feasible.(6) The maximum time for payments under a Chapter 13 plan is five years.(7) If a Chapter 11 is elected by the taxpayer, the maximum time for repayment of the tax can be extended is six years after the date of assessment.(8) The Chapter 12 debtor that sells the over encumbered assets prior to filing a bankruptcy petition must pay the capital gains taxes over a maximum of five years.

(9) In addition, the Chapter 12 debtor is not given the option of paying the tax incurred in the year of filing the petition over the life of the Plan, an option given the Chapter 13 debtor.(10)
Capital Gains Tax Solution
S. 260 provides a logical solution faced by thousands of American family farmers. It expands the definition of family farmer by expanding the debt limits and expanding the years in which the family farmer is required to earn greater than 50% of its gross income from farming activities. S. 260 allows a family farmer to liquidate its under producing assets, repay its secured creditors and save its farm operation. If saving the farming operation is not feasible S. 260 allows the family farmer to liquidate its farming operation and pay the amount of capital gains taxes the family farmer can pay. Since the priority taxes are treated as a pre-petition unsecured claim in S. 260, the honest Chapter 12 family farmer will be able to emerge from Chapter 12 unfettered by the non-dischargeable capital gains taxes and become a regular taxpayer. By passage of S. 260, Congress can insure that only the honest family farmer obtains this favorable tax treatment as only family farmers that receive a discharge will have their capital gains taxes discharged. If the family farmer does not obtain a discharge the capital gains taxes will remain and the IRS and other taxing bodies will seek to collect the tax debt.
S. 260 should be passed to deal with the capital gains tax problems experienced by family farmers as they down size operations. Passage of S. 260 would encourage family farmers to make financially sound decisions regarding liquidation rather than continue to operate inefficiently out of fear of the capital gains taxes which liquidation would create. Making Chapter 12 permanent and passing S. 260 would greatly enhance the orderly liquidation of inefficient farms as well as facilitate the preservation of farms that are economically viable.
III. Professional Compensation
The administration of justice in bankruptcy courts could be enhanced by the following amendment to 11 U.S.C.Section 330. Section 330(a)(3) should be amended to read as follows:
(3)((A))* In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services,
taking into account all relevant factors, including--
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial
at the time at which the service was rendered toward the completion of, a case
under this title;
(D) whether the services were performed within a reasonable amount of time
commensurate with the complexity, importance, and nature of the problem, issue,
or task addressed; (and)
(E) whether the professional is board certified or otherwise has demonstrated
skill and experience in the bankruptcy field; and
(F) (E) whether the compensation is reasonable based on the customary
compensation charged by comparably skilled practitioners in cases other than
cases under this title.
(Additions in italics, deletions in brackets.)
Rationale
Although section 330(a)(3) lists several factors that should be considered in setting reasonable compensation of professional persons, the list fails to include a factor relating to the professional's training and experience in the bankruptcy field. The efficient and economical operation of the bankruptcy system depends upon the active participation of professionals with
special expertise in the bankruptcy field. A professional's lack of sufficient bankruptcy experience not only interferes with the reorganization or liquidation effort, but it also increases the cost of the bankruptcy proceeding both to the estate and to the other parties in interest. The creation of independent certification boards in the bankruptcy specialty make it possible to easily identify those professionals who have the special skills and experience necessary to handle bankruptcy cases in the most efficient manner. Several states, like North Carolina, Texas and Tennessee have state-run board certification programs for bankruptcy attorneys. In addition, the American Bar Association and several states have accredited the national attorney board certification programs in consumer bankruptcy law and business bankruptcy law that are offered by the non-profit American Board of Certification. Each of those programs require proof of substantial experience in the bankruptcy field and knowledge of bankruptcy law. Similar national board certification programs are offered by the Association of Insolvency Accountants for insolvency accountants and by the Turnaround Management Association for turnaround management consultants.
The proposed amendment to section 330 authorizes the courts to consider the important factors of skill and experience in determining reasonable compensation for bankruptcy professionals. Although board certification provides a simple and objective measure of competency in the bankruptcy field, the proposed amendment also authorizes the courts to consider other evidence of skill or expertise in the bankruptcy field.
*Section 224 of the Bankruptcy Reform Act of 1994, Pub. L. No. 103- 394, rewrote Section 330(a) and added two subparagraphs 330(a)(3)(A). It appears that the first reference to paragraph 330(a)(3)(A) is extraneous and should be deleted.
IV. Review of Selected Provisions of H.R. 833
A. Sections of H.R. 833 to Retain
Section 203 Retirement Plan Exemptions This reform is long overdo, however, Section 203 does not appear to apply in some opt out states that do not provide for the exemption of pension plans. Section 203 should be changed to protect retirement savings both in and out of bankruptcy. This would provide fairness to all Americans, those with ERISA qualified plans and non-ERISA qualified retirement savings.
Section 1101 Eliminates the Family Farmer from the Effects of the Single-Asset Provisions of the code is warranted. This is valuable as many farmers only have one basic asset their land. The single asset legislative reforms were enacted by Congress to prevent abuse in the residential and commercial real estate cases.
Section 149 Makes debts incurred to pay non-dischargeable debts non- dischargeable is a reasonable provision to prevent this abuse.
Section 109 Educational Programs for Elementary and Secondary Schools is essential to prevent Americans from continuing to over spend and to assist them in resisting the advertisements of creditors that would encourage overspending and imprudent borrowing. Section 115 Protection of Post Secondary Education Funds is Overdue.
Section 816 Requiring Debtors to File All Tax Returns to Confirm a Chapter 13 is realistic. It should be extended to all chapters of reorganizational bankruptcies.

B. These Sections that Should be Eliminated from H.R. 833
Section 102 Dismissal or Conversion goes too far when requiring the attorney's signature on the petition a representation punishable under Rule 9011. What is reasonable inquiry? Does the attorney need to go to the debtor's house to view the assets? Does the attorney need to have an appraisal conducted? Will this increase the costs of bankruptcies?
Section 124 Which seeks to restrain abusive purchases on secured credit by amending Section 506 is really a bail out of creditors that made imprudent loans in the first place. If there is blame for any losses suffered by secured creditors it should be borne by the credit underwriting departments not the debtor. The secured creditors can easily protect themselves by requiring a reasonable down payment when the loan is made.
Section 125 Valuation of Assets in Chapter 7 and Chapter 13 is unfair as it establishes an unrealistic value for the assets. The retail price typically includes some warranty. Section 125 does not make any allowance for the lack of a warranty. In addition, Section 125 also protects the creditor that elects to provide 100% financing for goods with little, if any, analysis by the creditor of the debtor's ability to repay the loan.
Section 126 Exemption Qualification changes of the length of time that a debtor must live in a state to claim exemptions from the greater part of the last 180 days to 730 days (2 years). This appears to leave some people forced to move to follow a job without exemptions. Or, potentially with more meager exemptions than they could utilize if they had not been forced to move. This is simply unfair.
Section 302 Misc. Improvements -- Who May Be a Debtor requires in essence a "permission slip" to allow a debtor to utilize the bankruptcy courts. Many times debtors do not appear in my office until the foreclosure on their house has been completed and the foreclosure sale is imminent. In addition, I have needed to file many cases for debtors that are facing an IRS levy. To require the "permission slip" in order to utilize the bankruptcy courts cannot be what our founding fathers envisioned when they authorized the establishment of bankruptcy courts in Article One of the Constitution. Conclusion
Representatives, I thank you for giving a small firm Iowa farmer's lawyer the opportunity to address you. I urge you to make Chapter 12 permanent and to enact the changes to Chapter 12 suggested by Senator Grassley in S.260 to eliminate the severe capital gain tax problems experienced by many struggling family farmers. I also urge a change in Section 330 to make certification of professional one of the factors which a bankruptcy judge should consider in fixing compensation for professionals. I believe that Congress should carefully consider the motivations of the credit industry is suggesting many of the changes to the code. Congress should not change the bankruptcy code merely to make collection by creditors that make improvident loans easier. Any changes should be balanced. Much of H.R. 833 does not appear balanced.
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LOAD-DATE: March 23, 1999