To amend title 11 of the United States Code, and for other purposes. Conference Report on H.R. 3150—Major Consumer Provisions

Prepared for: the American Bankruptcy Institute Web posted and Copyright © October 9, 1998 American Bankruptcy Institute.

Prepared by: Hon. Eugene R. Wedoff United States Bankruptcy Court Northern District of Illinois Chicago, Illinois

See Issue 4: Additional Content and Commentary have been inserted.

H.R. 3150 was passed by the House of Representatives on June 10, 1998; S. 1301 was passed by the Senate (as an amendment to H.R. 3150) on September 23, 1998. Both bills provided for extensive—but conflicting—changes in consumer bankruptcy law. ABI has published several analyses of the consumer provisions of these bills, at various stages of their consideration. The most recent analysis of the House bill can be found at http://www.abiworld.org/legis/bills/98julhr3150.html. The most recent analysis of the Senate bill is at http://www.abiworld.org/legis/bills/98julnew1301a.html.

On October 7, a conference report on H.R. 3150 was released, modifying many of the provisions of the two bills. To help assess the potential impact of these changes on consumer bankruptcy law, the following chart lists several major issues covered by the legislation as passed by the House and Senate, and discusses the treatment of these issues by the Conference Report.

Issue	Senate bill	House bill
1. Means testing	§§101-102 A Chapter 7 case would be subject to dismissal or conversion to Chapter 13 (on the debtor's request) if the debtor could pay 20% of general unsecured claims through a Chapter 13 plan. Any party in interest would be allowed to move for such dismissal or conversion, unless the debtor's income was below a specified level. Where the debtor's household was four or less, the threshold would be the national median for a household of the same size. Where the debtor's household was larger than four, the threshold would be the national median for a household of four, increased by $583 for each member of the debtor's household beyond four.	§101 A debtor would be ineligible for Chapter 7 relief where (1) the debtor's household income is above a national median for same size household, and (2) the income—after deduction of (a) expenses allowed according to IRS collection standards, (b) extraordinary expenses shown by the debtor, and (c) amounts necessary to pay secured and priority debts—is both greater than $50 per month and sufficient to pay 20% of general unsecured claims over a five-year period. Trustees would be required to report on ability to repay in all Chapter 7 cases. §103 Any party in interest would be allowed to challenge any debtor's eligibility based on ability to repay. §105 Debtors ineligible for Chapter 7 relief under the means-testing of §101 of the bill would be allowed to file under Chapter 11.

Conference Report—§§101-102.

Content: The mechanism for means-testing would be that of the Senate bill—motions under §707(b) would be changed to allow dismissal or conversion (at the debtor's option) in cases of simple abuse (instead of "substantial" abuse) of Chapter 7—rather than the eligibility requirement of the House bill. However, the motions would be required to be filed in many cases, and judicial discretion to deny the motions would be strictly limited.

• Reflecting the House formula, abuse under §707(b) would be presumed if, during a 5-year period, the debtor would have sufficient income to pay at least $5000 ($83.33 per month) toward general unsecured claims or to repay at least 25% of those claims. The debtor's ability to pay general unsecured claims would be calculated by deducting three categories of expenses from the debtor's current monthly income—defined on the basis of the debtor's average monthly income for 180 days prior to filing—(1) expenses allowed under IRS collection standards; (2) payments on secured claims that would become due during the 5-year period, divided by 60; and (3) all of the debtor's priority debt, again divided by 60.

• The only way for a debtor to rebut the presumption of abuse would be to show "extraordinary circumstances that require additional expenses or adjustment of current monthly total income." Such a showing, in turn, would require detailed itemizations and explanations sworn to by both the debtor and the debtor's attorney. The extraordinary circumstances—together with the standard three deductions—would have to reduce the debtor's current monthly income to a level that would not allow payment of the minimum amounts of general unsecured claims (at least $5000 over 5 years, amounting to at least 25% of general unsecured claims).

• As under the House bill, any panel trustee would be required to analyze each case to determine whether the debtor's schedules reflected the presumptive ability to repay debt. If this analysis reflected grounds for a §707(b) presumption, the trustee would be required to file the motion, unless the debtor's family income was less than a specified minimum (based on average household incomes).

• Parties in interest would be allowed to bring §707(b) motions, but only in those circumstances where a panel trustee would be required to bring such motions. In cases where the debtor's income was below the specified minimum, only the judge, United States Trustee, bankruptcy administrator or panel trustee could bring the motion.

Commentary: The impact of the Conference Report is largely to adopt the means-testing mechanism proposed by the House bill, which relies principally on IRS collection standards to assess reasonable expense levels for debtors, and calculates repayment ability over a 5-year period. However, the Conference Report introduces a feature substantially different from the earlier test—rather than limiting Chapter 7 relief to debtors who have an inability to repay a certain amount of their debt, the Conference Report would deny Chapter 7 relief to any debtor with $83.33 in disposable income per month, regardless of the amount of outstanding debt. For example, a debtor with medical bills totalling $200,000, and disposable income (under the formula) of $90 per month, would be found to have made an abusive Chapter 7 filing, even though less than 3% of the unsecured debt could be paid in a 5-year Chapter 13 plan. Conversely, debtors with very small amounts of disposable income could be denied Chapter 7 relief if their debts were also small. For example, a debtor with disposable income of only $20 per month could be denied Chapter 7 relief unless the unsecured debts scheduled exceeded $7200.

Several problems with the use of the IRS standards are pointed out in the analysis of the House bill cited above: for example, the IRS standards themselves include a category ("other necessary expenses") covering the sort of individualized expenses that also be seen as arising from "extraordinary circumstances." The standards do not specify any particular allowance for such expenses, and thus trustees would have to assess reasonableness on a case by case basis. If an expense arose from "extraordinary circumstances," detailed scheduling (under oath from the debtor and the debtor's attorney) would be required. Trustees would therefore have to determine how any given expense (such as for medical care) not covered by the other IRS categories should be categorized.

Secured debt presents another serious problem under the formula adopted by the Conference Report. The House bill provided that payments of secured debt should be excluded from the IRS allowances. This provision had a sensible basis—the IRS expense allowances are intended to cover all housing and transportation expenses, including the cost of acquiring a dwelling or automobile. Therefore, if a debtor was given a separate expense allowance for repaying a mortgage or car loan, there would be double counting of the expense. However, it is not possible to deduct mortgage or car payments from the IRS allowances, because IRS standards establish single allowances for all of the expenses connected with housing (such as insurance, maintenance, and real estate taxes) and all of the expenses connected with transportation (such as parking and fuel). The Conference Report accordingly allows separate deductions of the IRS allowance and of secured debt payments, but this creates the problem of double expense allowances in all situations of secured debt. The Conference Report formula therefore discriminates substantially against those who rent either their housing or their automobiles. Such renters will receive only the expense allowance provided by the IRS standards (supplemented by any showing of extraordinary circumstances). Owners of cars or houses, in contrast, would receive not only the IRS allowance, but the full amount of their mortgage and auto loan payments as well, unlimited in amount.

The fact that allowed expenses can be increased by incurring secured debt provides a ready means of avoiding the proposed means test. A debtor who would otherwise have disposable income of as much as $400 per month could trade in an old car for a new one, and the resulting increase in secured indebtedness could easily reduce the disposable income to a number that would not result in dismissal of the Chapter 7 case. An even easier method of avoiding the test would be for a debtor to declare an intent to make charitable contributions. Section 4 of the Religious Liberty and Charitable Donation Protection Act of 1998, enacted earlier this year, allows debtors to contribute up to 15% of their gross income to charity without those contributions being considered in making a determination under §707(b). Thus, a debtor with an income of $60,000 could remove $500 per month in disposable income by declaring an intent to make the maximum charitable contributions.

Issue	Senate bill	House bill
2. Abusive Chapter 7 petitions and §707(b) motions	§102 Debtor's attorneys would be required to reimburse panel trustees for all costs of prosecuting a successful motion to dismiss or convert under §707(b) of the Code, wherever the court found the filing of the case "not substantially justified." If the court found a violation of Rule 9011, it would be required to impose a civil penalty against the debtor's attorney in favor of the United States trustee or the case trustee. Costs could be imposed against the proponent of a §707(b) motion only if (1) the motion was not substantially justified; or (2) the motion was brought "solely for the purpose of coercing the debtor into waiving a right guaranteed . . . under the Bankruptcy Code;" and (3) the moving party was not a panel trustee, the United States trustee, or a party in interest with an aggregate claim against the estate of less than $1000.	§103 The debtor would be required to pay the fees and costs of the United States trustee or Chapter 7 trustee who prevailed in a motion to dismiss or convert under § 707(b), unless the award of such costs would be an unreasonable hardship on the debtor. If the court found a violation of Rule 9011, it would be required to impose a civil penalty against the debtor's attorney in favor of the United States trustee or the case trustee. A creditor who brought an unsuccessful motion under §707(b) would be required to pay the debtor's fees and costs if the court found that the motion was not substantially justified, absent special circumstances making such an award unjust.

Conference Report—§101.

Content: The provisions of the Senate bill were adopted.

Commentary: The potential for an award of sanctions against debtors' counsel may have a chilling effect on representation of debtors. Creditors with claims of less than $1000 may bring entirely groundless §707(b) motions without being liable to pay the costs of the debtor in responding. This immunization would allow major creditors to file §707(b) motions, without potential liability, in any case where their claims were small.

Issue	Senate bill	House bill
3. Chapter 13 plan length	No change is made in current law, which set out a minimum plan term of three years.	§§102, 409 Where the debtor's household income is above the national median for the same size household, the minimum plan term would be five years.

Conference Report—§606.

Content: For debtors whose income equals or exceeds a specified amount, generally based on national median household income: (a) five years is the maximum term of the plan, (b) a plan cannot be amended to provide for payments extended beyond "the applicable commitment period under section 1325(b)(1)(B)(ii)," and (c) the "duration period" would be five years. For debtors whose income is below the specified amount, three years would be the maximum plan term unless the court found cause to extend the term to no more than five years (the current law as to all Chapter 13 debtors), and the "duration period" would be three years.

Commentary: The provisions of the Conference Report are confused. There is no §1325(b)(1)(B)(ii) under current law, and the Conference Report does not appear to add such a section. There is also no provision of the Conference Report defining "duration period" or specifying its relevance. The provision regarding "duration period" is placed at the end of §1329 of the Code, which deals with plans modified after confirmation, and so would not appear to require a minimum five-year plan for any debtor. If the Conference Report did require minimum five-year plans for certain, it would make the completion of Chapter 13 plans more difficult for these debtors, increasing incidents of default, and giving the debtors an incentive to choose Chapter 7 over Chapter 13.

Issue	Senate bill	House bill
4. Limitation of the Chapter 13 discharge	§314 Debts covered by §523(a)(6) would be nondischargeable in Chapter 13 only if they involved injuries resulting in personal injury or death. Debts under §523(a)(2) and (4) would be nondischargeable in Chapter 13 as well as Chapter 7. §327 The limitations on the nondischargeability of property settlements under §523(a)(15) would be removed, but the nondischargeability would continue to apply only in Chapter 7. No change is made to current §523(a)(1), which applies only in Chapter 7.	§143 All debts covered by §523(a)(6) (willful and malicious injury)—as well as §523(a)(2) and (4)— would be nondischargeable in Chapter 13 as well as in Chapter 7. §146 Property settlements in divorce and separation cases (now covered by § 523(a)(15) and nondischargeable only in Chapter 7) would be made part of §523(a)(5), and so would be nondischargeable in Chapter 13 as well as Chapter 7. §508 All debts covered by §523(a)(1) (certain tax obligations) would be nondischargeable in Chapter 13 as well as in Chapter 7.

Conference Report—§§129, 807, 1113.

Content: All debts covered by §523(a)(1) (certain tax obligations), (a)(2) (fraud), (a)(3)(B) (unlisted debts requiring dischargeability determinations in bankruptcy court), and (a)(4) (breach of fiduciary duty) would be nondischargeable in Chapter 13 as well as in Chapter 7. All debts covered by §523(a)(15) would remain the same, but the provision would be clarified to apply only to claims of a spouse, former spouse or child of the debtor.)

Commentary: The "superdischarge" of Chapter 13 has the effect of encouraging debtors with debts that might be nondischargeable in Chapter 7 to choose Chapter 13 as a means of discharging those debts and obtaining a fresh start. This has the corollary result of reducing litigation over dischargeability. The Conference Report preserves more of the superdischarge that either the House or Senate bill, and thus retains more of the positive effects of that discharge. However, the Conference Report would exclude from the Chapter 13 discharge debts arising from fraud—the most common ground for claims of nondischargeability, and the one involved in most claims of credit card nondischargeability. Under this change in the law, debtors subject to nondischargeability claims under §523(a)(2) would be encouraged to file Chapter 7 rather than Chapter 13, and litigation over dischargeability in Chapter 13 would increase substantially.

Issue	Senate bill	House bill
5. Presumption of fraud	§316 Fraud would be presumed under §523(a)(2) as to all debts incurred within 90 days of the order for relief that are (1) in an aggregate amount of more than $400 to a single creditor, and (2) for goods and services not reasonably necessary for the support of the debtor or a dependent child of the debtor.	§142 Fraud would be presumed for all debts incurred within 90 days of an order for relief, except for purchases of "necessaries" that do not exceed an aggregate of $250 to a single creditor.

Conference Report—§135.

Content: All credit card debt aggregating more than $250 in cash advances or $250 in "luxury goods or services" during the 90 days preceding a voluntary bankruptcy filing would be presumed nondischargeable under §523(a)(2). "Luxury goods or services" is not defined, but the section specifies that the phrase "does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor."

Commentary: The presumption of fraud in the Conference Report is potentially much broader than the presumption in either of the passed bills, since it aggregates all purchases and all cash advances. Thus, under either of the bills, a single, small "luxury" purchase from an individual creditor (for example, the purchase of flowers for the debtor's spouse) would never be presumed fraudulent. But if several of such small purchases were made from different creditors over a 90-day period, the Conference Report would result in a presumption of fraud. However, this is only a potential result, due to the ambiguity in the description of "luxury goods or services." Although the Conference Report clearly excludes "necessities" from the scope of "luxury goods," it leaves open the possibility that some purchases (like flowers for a spouse), although not "necessary" for support, would still be common enough, and inexpensive enough, not to be considered "luxuries." The absence of a definition here could lead to substantial litigation.

Issue	Senate bill	House bill
6. Valuation of secured claims	§302 Secured claims incurred within 90 days of bankruptcy would not be bifurcated. No bifurcation of secured claims would take place in Chapter 13. In situations where claims were still bifurcated, no change would be made in the valuation of secured claims.	§128 Secured claims incurred within 180 days of bankruptcy would not be bifurcated No change would be made in current law respecting bifurcation of claims in Chapter 13 §129 All secured claims would be valued on the basis of the debtor's cost of replacement, without deduction for costs of sale. For household and personal goods, this would be retail price.

Conference Report—§§124-125.

Content: Secured claims for the purchase of personal property acquired by an individual debtor within 5 years of the bankruptcy filing would not be bifurcated in any chapter of the Code. Where bifurcation did occur in Chapter 7 and 13 cases, the secured claim would be valued on basis of the debtor's cost of replacement, without deduction for costs of sale. For household and personal goods, this would be retail price.

Commentary: The overall impact of the Conference Report is (1) to encourage debtors to surrender collateral in both Chapter 7 and 13, and (2) to allow secured creditors to obtain artificially high payments in Chapter 13, at the expense of unsecured creditors.

Surrender of collateral would be encouraged, because, unless the debtor purchased the collateral more than five years prior to the bankruptcy, the debtor would have to pay the full amount outstanding on the purchase in order to retain the collateral, even if the collateral was worth much less that the outstanding balance. For example, the debtor may have purchased a used car, or a new refrigerator, on credit, with a high rate of interest. If the debtor missed several payments before filing the bankruptcy case, the amount owed on the car or refrigerator could greatly exceed its actual value. Nevertheless, in order to redeem the property in Chapter 7 or to retain it in Chapter 13, §124 of the Conference Report would require the debtor to pay the full outstanding balance. In such circumstances, it would often be in the debtor's best interest to return the collateral, and attempt to purchase a replacement.

Where the debtor chose to retain the property in Chapter 13, unsecured creditors would be disadvantaged in any case that did not have a 100% payout. This is because, in such a case, the payments made by the debtor in excess of the collateral value would otherwise have gone to the unsecured creditors. Valuing collateral at its retail price involves payment to secured creditors of more than they could obtain upon surrender or repossession of the collateral (since selling the property at retail would ordinarily involve substantial costs of sale). This provision, then, would also have the effect of diverting funds from unsecured to secured creditors in many Chapter 13 cases.

Issue	Senate bill	House bill
7. Adequate protection of secured claims pending Chapter 13 plan confirmation	§319 Payments of adequate protection would be required, pending confirmation of a Chapter 13 plan, at times and in amounts determined by the court.	§162 Payments of adequate protection would be required, pending confirmation of a Chapter 13 plan, at times and in amounts specified by the applicable contract, but the debtor would be allowed to seek a court order reducing the amounts and frequency.

Conference Report—§137.

Content: The provisions of the House bill were adopted.

Commentary: By requiring adequate protection payments to be made in addition to preconfirmation plan payments, this provision would make Chapter 13 very difficult for many debtors. Plan payments are often intended to deal with secured claims, and are often required to exhaust the debtor's disposable income (pursuant to §1325(b) of the Code). Thus, pending confirmation it would often be impossible for debtors to make both plan payments (as required by §1326 of the Code) and adequate protection payments. Furthermore, contract payments are often in an amount greater than the depreciation of collateral withheld by the debtor, and so a presumption that adequate protection should be paid in the contract amount may be unreasonable. Requiring the debtor to seek a lower payment would increase the debtor's costs of proceeding in Chapter 13.

Issue	Senate bill	House bill
8. Timing of events in Chapter 13 cases	§304(a) Debtors would be required to file a plan within 90 days of the case filing. No change is made to the current law (Fed.R.Bankr.P. 2003(a)) which requires that the meeting of creditors take place between 20 and 50 days after case filing. §304(b) Confirmation hearings for Chapter 13 plans would be held no later than 45 days after case filing unless the court ordered otherwise. §313 If a creditor objects to confirmation, the confirmation hearing may be held no earlier than 20 days after the meeting of creditors.	No change is made to the current law (Fed.R.Bankr.P. 3015) which requires the debtor to file a Chapter 13 plan within 15 days of the case filing. §401 Meetings of creditors pursuant to §341 of the Bankruptcy Code would be required to take place in Chapter 13 cases between 60 and 90 days after case filing. §408 Confirmation hearings for Chapter 13 plans would be held between 20 and 45 days after the meeting of creditors. Current law does not treat this issue.

Conference Report—§605.

Content: Debtors would be given 90 days after case filing to file a Chapter 13 plan; no change is made in the time for meetings of creditors; confirmation hearings would be held between 20 and 45 days after the meeting of creditors.

Commentary: The timing specified by the Conference Report would cause substantial difficulty. By delaying plan filing for up to 90 days after case filing, the Report would allow plans to be filed after the usual time limit for the meeting of creditors under §341, which would then have to be continued. The notice of the meeting of creditors would often be unable to set out a summary of the plan, which would not have been filed. If the meeting of creditors is continued, a question will arise about whether the confirmation hearing must be held within 45 days of the first date set for the meeting, or whether that time limit should run from the continued date. Any delay in confirmation, which would be often necessitated by the proposed procedure, would result in a delay in payment to unsecured creditors, and a greater need for litigation regarding adequate protection payments to secured creditors pending plan confirmation.

Issue	Senate bill	House bill
9. Special treatment for support obligations	§323 "Domestic support obligations"— entitled to a variety of protections— would include obligations arising both before and after the filing of the bankruptcy case, whether owed to a spouse, former spouse, child, or guardian of the child of the debtor, or to any governmental entity, as long as the obligation both was in the nature of support and arose from a specified agreement, decree, or process. The special treatments would include the following: §324 A first priority of distribution would be accorded to "domestic support obligations." §325 "Domestic support obligations" would be required to be current as a condition for confirmation of any plan under Chapter 11 or 13. §§326-27 The exceptions from the automatic stay set forth at §362(b)(2) and the exception from discharge set out in §523(a)(5) would apply to actions in connection with "domestic support obligations." §328 Exempted property would continue to be liable for domestic support obligations, under §522(c)(1), even if state law provided to the contrary. §329 Payment of domestic support obligations would be excepted from preference recoveries, pursuant to §547(c)(7). No change would be made in the scope of §523(a)(18), in its applicability, or its enforceability against exempt property. No certification of completed support payments would be required as a prerequisite for a standard Chapter 13 discharge.	§§ 145(d), 151 The support obligations entitled to first priority of distribution would be limited to "claims" (prepetition obligations), owed to a spouse, former spouse, or child of the debtor, and would not include assigned debts and debts to governmental entities. Support obligations owing to governmental entities (nondischargeable under §523(a)(18)) would be given an eighth level priority. §145 Support obligations would have to be paid as a prerequisite to confirmation in Chapter 12 cases, as well as Chapter 11 and 13 cases. §523(a)(18) would be broadened by making interest on the covered debts nondischargeable and by allowing the states or municipalities to collect support obligations that are not governed by federal law. The broadened nondischargeability would apply in Chapter 13 as well as in Chapter 7. Exempt property of the debtor would continue to be liable for debts to state and local municipalities for support obligations that are nondischargeable under §523(a)(18). A standard (nonhardship) discharge in Chapters 12 and 13 would only be granted to a debtor obligated to make support payments if, at the time the debtor was otherwise entitled to a discharge, the debtor certified that all support obligations that became due after the bankruptcy filing had been paid. No change would be made in the definition of support obligations excepted from the automatic stay in §362(b)(2) or from discharge under §523(a)(5). No change would be made in the treatment of exempt property under §522(c) or in the exception from preference recovery in §547(c)(7).

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Conference Report—§141-144, 146-147.

Content: The provisions of the Senate bill were adopted.

Commentary: The provision according support obligations priority over administrative expenses would make it difficult for a trustee to administer any case in which there may be support obligations, since any professional retained by the trustee would be at risk of nonpayment, even though some funds are available to the estate.

Issue	Senate bill	House bill
10. Nondischarge- ability of property divisions	§327 Debts arising from property divisions in divorce or separation proceedings would be nondischargeable only in Chapter 7 cases, pursuant to §523(a)(15), as under current law, but the property division debt would be nondischargeable regardless of the debtor's ability to pay or the nondebtor's need for the payment. Also, the dischargeability of debts under § 523(a)(15) would no longer require bankruptcy court determination.	§§146, 147 Debts arising from property divisions in divorce or separation proceedings would be included in §523(a)(5), and §523(a)(15) would be eliminated. This would have the effect of making all property division debts completely nondischargeable in both Chapter 7 and Chapter 13, regardless of the debtor's ability to pay or the nondebtor's need for the debt to be paid.

Conference Report—§145, 1113.

Content: The Conference Report contains conflicting provisions on this topic. Section 145 sets out the provision of the Senate Bill, making all property settlements in family cases nondischargeable regardless of ability and need, and removing exclusive bankruptcy jurisdiction. Section 1113 generally reaffirms the current language of §523(a)(15), and implicitly continues exclusive bankruptcy jurisdiction over §523(a)(15) by providing that, if a creditor does not receive notice of the bankruptcy in time to file a timely claim under §523(a)(15), the claim would be nondischargeable under §523(a)(3).

Commentary: It would be difficult to determine which of the conflicting provisions should be enforced. There is no apparent reason why property settlements not needed for support should be made nondischargeable.

Issue	Senate bill	House bill
11. Disclosure of tax return information	§301 Several items—including copies of any federal tax returns, with schedules and attachments, filed by the debtor during three years prior to the bankruptcy case— would be added to the information that individual Chapter 7 and 13 debtors are required to provide, unless otherwise ordered by the court. These documents would be available for inspection and copying by any party in interest, but the Director of the Administrative Office of the United States Courts would be required to "establish procedures for safeguarding the confidentiality of any tax information." §312 If this information was not filed within 45 days of case commencement, the case would automatically be dismissed. However, the court could authorize an extension of the period for filing for up to 50 additional days.	§406 The same additional items would have to be filed by the debtor, but the filed documents would be available for inspection and copying by any party in interest, with no provision for procedures to safeguard confidentiality of tax information. §407 Automatic dismissal for failure to file the required documents is also provided for, but the period of potential extension is limited to 15 days.

Conference Report—§603-604.

Content: The provisions of the Senate bill were adopted, except that the maximum extension would be 45 days rather than 50.

Commentary: The Senate bill makes it less likely that a case would be automatically dismissed simply because the debtor did not maintain copies of tax returns and the IRS was unable to furnish copies within 45 days of the case filing. However, several problems with the provision remain: (1) the requirement to furnish tax returns (and the other required information) will impose an additional cost on debtors who do not have tax return copies and financial records available; (2) the requirement to file tax returns will impose an additional burden on the clerks of the bankruptcy courts; (3) automatic dismissal would take place even in cases where the trustee finds assets to administer, such as preferences and fraudulent conveyances, that creditors might have difficulty pursuing outside of bankruptcy; (4) it would be difficult for regulations to safeguard the confidentiality of tax returns in a manner consistent with the general requirement that they be made available to any party in interest for inspection and copying.

Issue	Senate bill	House bill
12. Audits	§307 At least 0.2% of individual Chapter 7 and 13 cases—and schedules reflecting "greater than average variances from the statistical norm of the district in which the schedules were filed"—would be required to be audited by "qualified persons" according to procedures established by the Attorney General. No provision is made for payments of the expenses of the audits.	§404 At least 1% of all individual Chapter 7 and 13 cases—and schedules reflecting "greater than average variances from the statistical norm of the district in which the schedules were filed"— would be required to be audited "in accordance with generally accepted auditing standards . . . by independent certified public accountants or independent licensed public accountants." The proposal requires the Attorney General to establish procedures for fully funding the audits, but does not specify a source of funding.

Conference Report—§602.

Content: Audits would be required in at least 0.4% of individual Chapter 7 and 13 cases, as well as schedules reflecting "greater than average variances from the statistical norm of the district in which the schedules were filed." The audits would be required to be performed "in accordance with generally accepted auditing standards [GAAS] . . . by independent certified public accountants or independent licensed public accountants." The U.S. trustee for each district would be authorized to contract for the auditing services, but no funds are provided for this purpose.

Commentary: Audits by licensed professionals according to GAAS are likely to be extraordinarily expensive. Such formal audits are likely unnecessary to determine significant misstatements in debtors' petitions and schedules. The Senate formula would have been substantially less costly. The proposal is ambiguous in requiring audits of all schedules with "greater than average variances from the statistical norm of the district in which the schedules were filed." If "statistical norm" means the median, and the average variation is half the range from the high and low points to the median, then the proposal could require audits of half of all filed schedules: the lowest 25% and the highest 25%.

Issue	Senate bill	House bill
13. Credit counseling	§321(a) Debtors would generally be ineligible for bankruptcy relief until they had first attempted to negotiate a voluntary repayment plan through a consumer credit counseling service approved by the United States trustee, with no limitations as to the type of counseling service that could be approved. Exceptions would be made for situations (1) in which the U.S. trustee or bankruptcy administrator found that credit counseling services were unavailable and (2) in which the debtor was unable to obtain credit counseling services within five days of making a request from an approved counselor. There would be no limitation on standing to bring a motion to dismiss based on the debtor's ineligibility under this section.	§104 Debtors would generally be ineligible for bankruptcy relief until they had first attempted to negotiate a voluntary repayment plan through a consumer credit counseling service approved by the United States trustee, with approval withheld from any service that did not offer its program either without charge or at reduced charges in situations of hardship. Exception would be made (1) if the United States trustee found that there was no suitable credit counseling service available in the debtor's geographical area, or (2) if the debtor was made subject to a debt collection proceeding, involving a potential loss of property, "before the debtor could complete" the good-faith attempt. Only the United States trustee would be allowed to bring a motion for dismissal of the bankruptcy case on the ground that the debtor failed to meet these new eligibility and filing requirements.

Conference Report—§302.

Content: The provisions of the Senate bill were adopted, with provision for group briefings by the creditor counseling service, but requiring an initial budget analysis by the counseling service.

Commentary: The requirements would add to the cost of bankruptcy relief, and the cost of existing credit counseling services. New credit counseling services can be expected to be formed, associated with debtor attorneys. Regulating and approving credit counselors would impose a substantial burden on the U.S. trustees.

Issue	Senate bill	House bill
14. Debtor education	§321 A new exception to discharge would be applicable in Chapter 7 cases, for situations in which the debtor failed to complete a course in personal financial management administered or approved by the U.S. trustee. The court would be directed not to grant a Chapter 13 discharge to any debtor who failed to complete such a course. An exception would be made for districts in which the U.S. trustee or bankruptcy administrator found that suitable courses were unavailable.	§112 The Executive Office of the U.S. Trustee would be required (1) to develop a program to educate debtors on the management of their finances, (2) to test the program for one year in three judicial districts, (3) to evaluate the effectiveness of the program during that period, and (4) to submit a report of the evaluation to Congress within three months of the conclusion of the evaluation. The test program would be made available, on request, to both Chapter 7 and 13 debtors, and, in the test districts, bankruptcy courts could require financial management training as a condition to discharge.

Conference Report—§104, 302.

Content: The provisions of both bill were adopted.

Commentary: Requiring completion of an approved course of instruction in personal financial management as a condition for discharge would present several problems: (1) it would apply to individuals who could not benefit from such a course, such as financial professionals who had encountered financial problems (such as medical expenses) unconnected to failures in personal budgeting or the mentally impaired; (2) there is no provision for payment for the courses, and Chapter 13 debtors would ordinarily lack disposable income to pay for them; (3) substantial resources would have to be expended by the U.S. trustee in order to administer a program for approving and regulating educational facilities; (4) it is difficult to see why a complete educational program would be put into effect before the results of the pilot program are reported.

Issue	Senate bill	House bill
15. Homestead exemptions	§§212, 320. A $100,000 cap would be placed on homestead exemptions and a finding made that such a cap is necessary for meaningful bankruptcy reform. No change would be made in the availability of state exemptions after a debtor's change of domicile.	No cap would be placed on homestead exemptions. §181 Debtors who changed their state of domicile within one year of bankruptcy would apparently be required to employ federal exemptions, rather than the exemptions of either state of domicile.

Conference Report—§126.

Content: The provisions of the House bill were adopted, amended to require that a debtor reside in a state for 730 days before being allowed to claim the exemption law of that state.

Commentary: The proposal does nothing to address abuse of the bankruptcy system by existing residents of states with unlimited homestead exemptions. Such individuals may amass substantial estates in homestead property, and obtain a bankruptcy discharge without having to surrender any of that property. The proposal would discourage some debtors from changing their state of domicile for the purpose of obtaining higher exemptions. However, it would encourage many others to make such moves. Since no state's exemption law would apply until a debtor had resided in the state for two years, the applicable exemption law would be the federal exemptions. These exemptions are more generous than the laws of many states, and debtors from states with exemptions lower than the federal exemptions would be encouraged to move to any new state prior to filing bankruptcy.

Issue	Senate bill	House bill
16. Bankruptcy appeals	§602 Appeals of bankruptcy court decisions could be taken to the Circuit Courts of Appeals if the district court did not file a decision within 30 days of the filing of the appeal.	§411 Bankruptcy court decisions would be directly appealable to the Circuit Courts of Appeals.

Conference Report—no provision regarding bankruptcy appeals is included in the report.

Commentary: Although both bills contained provisions for expedited appeals from bankruptcy courts to the courts of appeals, the Conference Report fails to address the issue. Direct appeal would have the benefit of reducing the cost of obtaining binding precedent in bankruptcy cases.

Issue	Senate bill	House bill
17. Effective date	§408 The amendments contained in Title IV of the bill ("Financial instruments") would apply to cases commenced "or appointments made" after the date of enactment. §734 The amendments contained in Title VII of the bill ("Technical corrections") would (1) "take effect on the date of enactment of this Act," but (2) "apply only with respect to cases commenced. . . on or after the date of enactment of this Act."	No effective date is specified

Conference Report—§1201.

Content: Unless otherwise specifically provided, the amendments would become effective 180 days after enactment, and would not apply to cases pending on that date.

Commentary: Because of the many changes in the law, the delay in the effective date would be critical to allow for study and preparation of forms and procedures necessary to comply with the new provisions.

Wednesday, June 10, 1998