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PrintHouse Passes Its Version of Bankruptcy Reform Act of 1999
By Stephen Cooper, CCH Washington Staff Writer
For the second time in as many years, the House has passed legislation to reform the nation's bankruptcy system, but the promise of a White House veto threatens to derail lawmakers' efforts to rein in the growing number of Chapter 7 filers. By a wide margin of 313-108, House lawmakers passed H.R. 833, the Bankruptcy Reform Act of 1999, on May 5, 1999. The measure now goes to the Senate for its consideration.
Nearly a dozen amendments were offered on the House floor, including a more conservative Democratic alternative bill by Rep. Jerrold Nadler (D-N.Y.) and a compromise effort by House Judiciary Committee Chairman Henry J. Hyde (R-Ill.), geared to make bankruptcy reform more debtor-friendly. Both of these amendments failed to win passage.
House Judiciary Commercial and Administrative Law Subcommittee Chairman George Gekas (R-Pa.) said the approved measure is designed to stem the tide of bankruptcy filings, which reached roughly 1.4 million cases last year. The bill would establish an income-based means test that uses Internal Revenue Service living expense standards to determine which of the various types of bankruptcy the debtor is eligible for. If a debtor fails to meet the income threshold, only then can the debtor file Chapter 7 bankruptcy and erase almost all of unsecured debt after a liquidation of assets.
"Bankruptcy was never meant to be used as a financial planning tool, but it is increasingly becoming a first stop rather than a last resort," said Rep. Rick Boucher (D-Va.). "Many filers, who could repay a substantial part of what they owe, elect to use the complete liquidation provisions of Chapter 7 of the bankruptcy law, wipe out all of their debt, even that portion they could repay, and seek an entire fresh start."
Under the means test, if a debtor is expected to have at least $6,000 over five years available (after deducting allowable expenses) to pay nonpriority unsecured claims, then the debtor would be presumed ineligible for Chapter 7 relief. The Congressional Budget Office said it expects increased litigation as the courts and debtors debate what are allowable expenses under the new law's standards. The agency estimated that implementing H.R. 833 would cost $333 million over the 2000-2004 period.
Veto Threat
The Clinton administration recommended a presidential veto of H.R. 833, maintaining that it "fails the test of balance between creditors and debtors." In a written statement of administration policy on May 5, the bankruptcy bill was criticized for containing provisions that are viewed as unfair to middle- and low-income debtors.
The administration cited, in particular, what it considers an "excessively rigid . . . and arbitrary means test" for debtors to gain access to a Chapter 7 bankruptcy filing. "The administration agrees that debtors who can repay a portion of their debt should not have access to Chapter 7 . . . however, H.R. 833 simply takes IRS expense standards, which were not developed for bankruptcy purposes, and applies them rigidly to determine ability to repay in bankruptcy," according to the policy statement.
The administration also raised concern over provisions that could jeopardize the repayment of priority debts, such as child support, alimony payments, educational loans and taxes.
Small Business Provisions
The bankruptcy bill defines a small business debtor as an entity that has aggregate noncontingent, liquidated secured and unsecured debts of $4 million or less. The bill provides flexible rules for disclosure statements to allow small business debtors to avoid spending unnecessary money and time to prepare and disclose a statement for creditors. The Advisory Committee on Bankruptcy Rules of the Judicial Conference of U.S. Courts would create standardized disclosure statements and reorganization plans for small business debtors.
The bill would require small business debtors to file on a monthly basis financial reports containing information about profitability, projected cash receipts, disbursements and other financial information. Small business debtors would also be required to file a reorganization plan and seek confirmation for the debtor's plan in 90 and 150 days, respectively.
Trustees would also be required to conduct initial debtor interviews to investigate the debtor's financial viability and business plans. The trustee would also be authorized to inspect a debtor's premises, review books and records, and verify that a tax return has been filed. The trustee could also apply to dismiss a case or convert it to a different chapter if material grounds to do so are discovered.
The measure would limit the application of the automatic stay provisions for small businesses that are debtors in other cases pending at the time of the filing of the second bankruptcy case. The bill would also expand the grounds for which a Chapter 11 case may be converted to a Chapter 7 case or dismissed altogether. The bill directs the Small Business Administration to study the internal and external factors that cause small businesses to seek bankruptcy relief as well as factors that cause small businesses to successfully complete their Chapter 11 cases.
The House approved an amendment by Rep. Nydia Velazquez (D-N.Y.) that expands the credit committee membership under Chapter 11 bankruptcy to include a small business when it is determined that the small business' claims are disproportionally large to its gross revenues.
Other Amendments Accepted
During the daylong debate on May 5, House lawmakers accepted several amendments designed to improve the bill and make it more acceptable to the Clinton administration. The House supported a manager's amendment offered by Rep. Gekas that allows states to opt out of the bill's $250,000 cap on homestead claims before the president signs the measure.
Lawmakers accepted an amendment offered by Rep. Jim Moran (D-Va.) that modifies the Truth in Lending Act to require credit card issuers to make disclosures regarding interest rates, monthly payments information and late fees. It also subjects Internet credit card solicitations to the same disclosure requirements.
The House also approved another of Rep. Moran's amendments that would require debt relief agencies to make certain disclosures to debtors. The amendment also included a debtor's bill of rights. Lawmakers approved an amendment by Rep. Lindsey Graham (R-S.C.) that extends the bankruptcy code's prohibition against discharging federal education loans to include all qualified education loans.
The House also accepted an amendment by Rep. Calvin Dooley (D-Calif.) that would require the Federal Trade Commission to set standards for the United States Trustees in approving credit counseling agencies, counselors, and related programs and courses of instruction.
House lawmakers also accepted an amendment by Rep. Ed Whitfield (R-Ky.) to provide that judges determine the level of compensation for bankruptcy trustees when they transfer cases from Chapter 7 to Chapter 11.
The Bill's Main Provisions
The bill would require the U.S. Trustees Office to establish a test program to educate debtors on financial management; authorize 18 new temporary judgeships and extend five others; permit courts to waive Chapter 7 filing fees to debtors who can't pay them in installments; and require audits of one out of every 250 Chapter 7 and Chapter 13 cases.
The measure would also exempt Chapter 11 debtors from having to pay certain fees in connection with their bankruptcy cases; require the Administrative Office of the U.S. Courts to receive and maintain tax returns for all Chapter 7 and Chapter 13 debtors; and require the administrative office and the U.S. Trustees to collect and publish certain statistics on bankruptcy cases.
The bill would also make permanent Chapter 12 bankruptcy relief available to family farmers, which is currently authorized through October 1, 1999.
Tax Provisions
The bankruptcy bill would make changes to tax payment plans, time limits on tax collections, taxes and administrative expenses, tax return filing and government notification, and priority of payments. Under the bill, payment plans for tax liabilities would be limited to six years and payment amounts would have to be regular and proportionate to payments for other obligations. The legislation would also establish interest rates to be applied to outstanding tax liabilities.
Under current law, if a local or state tax is assessed within a specific period of time from the date of bankruptcy filing, then the tax claim can be granted priority status. The bill would allow these claims to retain their priority status, even in the event that a filing is subsequently dismissed and a new filing is made.
Several provisions in the bill would require debtors to have filed tax returns and, in some cases, be current in their tax payments before a bankruptcy case may continue. Debtors would also be required to provide notice to state authorities in a specific manner when they pursue bankruptcy relief.
The bill would also restrict the use of funds for administrative expenses to a limited number of circumstances, thereby making it more likely that funds would remain available to cover tax obligations. The bill also requires Chapter 11 debtors to disclose the potential material consequences of bankruptcy with regard to their state, federal and local taxes.
Under the bill, single-asset real estate cases could be handled under an expedited bankruptcy proceeding, thereby allowing state and local government to return the property to the tax rolls as early as possible. The bill would also provide greater protection for ad valorem tax liens on real or personal property of a debtor's estate.
H.R. 833 makes the types of claims that may be discharged under Chapter 7 the same as under Chapter 13 cases. The bill also prevents tax or customs duty claims from being discharged if they result from a corporate Chapter 11 debtor's fraudulent tax returns or willful evasion of tax laws. Obligations based on income tax returns prepared by taxing authorities would be nondischargeable under the bill.
Under the bill, creditors with priority tax claims can file either before the trustee begins distributing proceeds from a debtor's estate or 10 days after the trustee mails the final report to the creditors' of the estate, whichever is earlier.
The bill would also allow governmental units to withhold an income tax refund related to a pre-petition tax period if the debtor owes income taxes during that period.
