H.R. 833 The Bankruptcy Reform Act of 1999
S. 625 SENATE DEBATE ON CLOTURE
Web posted
September 22, 1999, American Bankruptcy Institute.
U.S. Senate Roll Call Vote
Motion to Invoke Cloture on S.625
[Page: S11088] GPO's PDF
The PRESIDING OFFICER. The time between now and 5:30 is equally divided between the Senator from Utah and the Senator from New Jersey.
Mr. HATCH. Mr. President, this bill is a bipartisan bill, drafted jointly by Senators Grassley and Torricelli. This legislation has been developed in a fair and inclusive manner.
The reforms proposed in this bill have been carefully studied and have been deliberated upon at length. Indeed, Congress has been engaged in the consideration of this issue now for several years. The National Bankruptcy Review Commission spent two years comprehensively examining the bankruptcy system. The findings and opinions of the Commission, which were reported to Congress, have proved helpful in identifying the problems in the bankruptcy system and in finding appropriate solutions.
Furthermore, the Subcommittee on Administrative Oversight and the Courts, which is chaired by Senator Grassley, has held numerous hearings on the issue of bankruptcy reform. The subcommittee heard extensive testimony on the subject from dozens of witnesses. Again, I would like to thank Senators Grassley and Torricelli for their leadership in this important consumer bankruptcy reform, and also last session's ranking member of the Administrative Oversight and the Courts Subcommittee, Senator Durbin, along with other members of the Senate, for their hard work on this issue.
Throughout the process of consideration of this bill, at both the subcommittee and full committee level, changes suggested by the minority were included in the bill. During this entire process, I have expressed my willingness to work to address any remaining concerns the minority has about the bill. It is apparent, however, that efforts are underway to defeat this important legislation by attaching irrelevant, extraneous 'political agenda' items to it, such as minimum wage, guns, abortion and tobacco, to name a few.
I am open to full debate on relevant issues. Nevertheless, some of my friends on the other side of the aisle continue to tie up consideration of this bill for what appears to be political points.
Despite the efforts of those in opposition, I remain hopeful and optimistic that we will be able to pass legislation this year that provides meaningful and much-needed reform to the bankruptcy system.
The House of Representatives passed a much more stringent bankruptcy reform bill by an overwhelming bipartisan majority earlier this spring. The time has come for us to rise above politics and to do what is right for the American people. It is time for meaningful and fair bankruptcy reform.
I urge my colleagues to vote for cloture so we may consider the substance of this important legislation and make our bankruptcy system better for all Americans.
The Bankruptcy Reform Act of 1999 closes many of the loopholes in our bankruptcy system that allow unscrupulous individuals to use bankruptcy as a financial planning tool rather than as a last resort.
Despite the White House's statement of opposition to the House's bankruptcy reform bill, H.R. 833, the House of Representatives realized that the time has come to restore personal responsibility to our nation's bankruptcy system. House Democrats and Republicans alike recognized that if we do not take the opportunity to reform our broken system, every family in my own State of Utah and throughout the country, many of whom struggle to make ends meet, will continue to bear the financial burden of those who take advantage of the system. As a result, the House bill passed by an overwhelming margin of 313 to 108. Half of the House Democratic Caucus joined with every House Republican to support the bill. And notably, the House bankruptcy reform bill is more stringent in its reforms than the Senate bill before us today.
More than three decades ago, the late Albert Gore, Sr., then a Senator, commented on the moral consequences of a lax bankruptcy system. He said:
I realize that we cannot legislate morals, but we, as responsible legislators, must bear the responsibility of writing laws which discourage immorality and encourage morality; which encourage honesty and discourage deadbeating; which make the path of the social malingerer and shirker sufficiently unpleasant to persuade him at least to investigate the way of the honest man. (Cong. Rec. 905, January 19, 1965.)
I too believe that the complete forgiveness of debt should be reserved for those who truly cannot repay their debts. S. 625 provides us with the opportunity to prevent people who can repay their debts from 'gaming the system' by using loopholes that are presently in place.
Mr. President, S. 625 provides a needs-based means test approach to bankruptcy, under which debtors who can repay some of their debts are required to do so. It contains new measures to protect against fraud in bankruptcy, such as a requirement that debtors supply income tax returns and pay stubs, audits of bankruptcy cases, and limits on repeat bankruptcy filings. It eliminates a number of loopholes, such as the one that allows debtors to transfer their interest in real property to others who then file for bankruptcy relief and invoke the automatic stay. And, the bill puts some controls on the ability of debtors to get large cash advances on their credit cards and to buy luxury goods on the eve of filing for bankruptcy.
At the same time, the Senate bill provides many unprecedented new consumer protections. It imposes penalties upon creditors who refuse to negotiate in good faith with debtors prior to declaring bankruptcy. Also, it imposes penalties on creditors who willfully fail to properly credit payments made by the debtor in a chapter 13 plan, and for creditors who threaten to file motions in order to coerce a reaffirmation without justification. Moreover, the bill imposes new measures to discourage abusive reaffirmation practices.
Mr. President, S. 625 addresses the problem of bankruptcy mills, firms that aggressively promote bankruptcy as a financial planning tool, and often end up hurting unwitting debtors by putting them in bankruptcy when it may not be in their best interest. The bill also imposes penalties on bankruptcy petition preparers who mislead debtors.
Importantly, the bill makes major strides in trying to break the cycle of indebtedness. It educates debtors with regard to the alternatives available to them, sets up a financial management education pilot program for debtors, and requires credit counseling for debtors. I must commend Senator Sessions for his leadership on these important credit counseling provisions.
I am proud that the bill also makes extensive reform to the bankruptcy laws in order to protect our children. I have authored provisions of the bill to ensure that bankruptcy cannot be used by deadbeat dads to avoid paying child support and alimony obligation. Under my provisions, the obligation to pay child support and alimony is moved to a first priority status, as opposed to its current place at seventh in line, behind attorneys fees and other special interests. My measures also ensure the collection of child support and alimony payments by, among other things, exempting state child support collection authorities from the 'automatic stay' that otherwise prevents collection of debts after a debtor files for bankruptcy, and by exempting from discharge virtually all obligations one ex-spouse owes another. A new amendment will make changes to a number of provisions in the bill to clarify that the provisions are not intended, directly or indirectly, to undermine the collection of child-support or alimony payments.
The bill includes a provision that I offered, which was accepted in the Judiciary Committee, which creates new legal protections for a large class of retirement savings in bankruptcy, a measure which is supported by groups ranging from the AARP, to the Small Business Council of America and the National Council on Teacher Retirement.
Rampant bankruptcy filings are a big problem. In 1998, 1.4 million Americans filed for bankruptcy. That was more Americans than graduated from college, were on active military duty, or worked in the post office. Indeed, more people filed for bankruptcy in 1998 than lived in the states of Alaska, Delaware, Hawaii, Idaho, Maine, Montana, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont, or Wyoming.
Last year, about $45 billion in consumer debt was erased in personal bankruptcies. Let me give this number some context. Forty-five billion dollars is enough to fund the entire U.S. Department of Transportation for a year. Losses of this magnitude are passed on the American families at an estimated cost--if we use low estimates--of $400 to every household in America every year. That $400 could buy every American family of four: five weeks worth of groceries, 20 tanks of unleaded gasoline, 10 pairs of shoes for the average grade-school child, or more than a year's supply of disposable diapers.
Under current law, families who do not file for bankruptcy are unfairly having to subsidize those who do. Currently, our bankruptcy system is devoid of personal responsibility and is spiraling out of control. This is our opportunity to do something about it.
As noted scholars Todd Zewicky of George Mason Law School and James White of the University of Michigan Law School recently wrote:
[Page: S11089] GPO's PDF
Current law requires a case-by-case investigation that turns on little more than the personal predilections of the judge. This chaotic system mocks the rule of law, and has resulted in unfairness and inequality for debtors and creditors alike. The arbitrary nature of the process has also undermined public confidence in the fairness and efficiency of the consumer bankruptcy system.
I am proud to be proposing several enhancements to the bill that primarily are designed to protect consumers and further provide incentives for consumers to take personal responsibility in dealing with debt management.
In the area of domestic support, as I indicated earlier, Senator Torricelli and I intend to build upon the new legal protections we created, as part of the underlying bill, for ex-spouses and children who are owed child support and alimony payments. The changes will further strengthen the ability of ex-spouses and children to collect the payments they are owed, and will make changes to a number of existing provisions in the bill to clarify that they will not directly or indirectly undermine the collection of child support or alimony payments.
In the area of education, Senator Dodd and I, along with Senator Gregg, have developed an amendment that will protect from creditors contributions made for education expenses to education IRAs and qualified state tuition savings programs. This is a significant protection for those who honestly put money away for the benefit of their children and grandchildren's educational expenses. The potential that education savings accounts will be abused in bankruptcy is addressed by the amendment's requirement that only contributions made more than a year prior to bankruptcy are protected. I believe that protecting educational savings accounts is particularly important because college savings accounts encourage families to save for college, thereby increasing access to higher education. Nationwide, there are more than a million educational savings accounts, meaning there are more than a million children who would benefit from this amendment. As much as I believe that the bankruptcy laws need to be reformed to prevent abuse and to ensure debtors take personal responsibility, the ability to use dedicated funds to pay the educational costs of children should not be jeopardized by the bankruptcy of their parents or grandparents.
I have also developed a debt counseling incentive provision, which builds on the credit counseling provisions currently in S. 625. It removes any disincentive for debtors to use credit counseling services by prohibiting credit counseling services from reporting to credit reporting agencies that an individual has received debt management or credit counseling, and establishes a penalty for credit counseling services that do. Debt management education is vital to reducing the number of Americans who, because of poor financial planning skills, are forced to declare bankruptcy. Providing crediting counseling--instruction regarding personal financial management--to current and potential filers will help curb bankruptcy filing.
In addition, I intend to offer an amendment that is designed to curb fraud in filing. This amendment puts in place new procedures and provides new resources to enhance enforcement of bankruptcy fraud laws. It will require No. 1 that bankruptcy courts develop procedures for referring suspected fraud to the FBI and the U.S. attorney's office for investigation and prosecution and No. 2 that the Attorney General designate one assistant U.S. attorney and one FBI agent in each judicial district as having primary responsibility for investigating and prosecuting fraud in bankruptcy.
I also plan to offer an amendment that will allow a victim of a crime of violence or drug trafficking offense or another party in interest to petition the bankruptcy court to dismiss a petition voluntarily filed by a debtor who was convicted of the crime of violence or drug trafficking offense. In order to protect women and children who may be owed payments by such a debtor, however, the amendment would still allow the bankruptcy petition to continue if the debtor can show that the filing of the petition is necessary to ensure his ability to meet domestic support obligations. Bankruptcy is not an entitlement--it is a process by which certain qualifying individuals with substantial debts may cancel their debts and obtain a 'fresh start.' Under this amendment, violent criminals and drug traffickers--individuals who have chosen to engage in serious, criminal conduct--would be precluded from availing themselves of the benefits of bankruptcy protection.
Again, I thank Senator Grassley, the distinguished chairman of the Judiciary Committee's Subcommittee on Administrative Oversight and the Courts, for his leadership and dedication to this effort, and look forward to working with him and the subcommittee's ranking member, Senator Torricelli, in passing this legislation.
Let's look at a couple of other charts. This one is done by Penn, Schoen and Bergland Associates, Inc.: 83 percent of the American people favor an income test in bankruptcy reform. Only 10 percent oppose it and 7 percent don't know. So we should have an income test in bankruptcy reform.
Americans agree that bankruptcy should be based on need. Ten percent believe an individual who files for bankruptcy should be able to wipe out all their debt regardless of their ability to repay that debt. Only 10 percent of our society believe that, and I am surprised that many people believe that. If somebody has the ability to pay a debt, why should they stiff other people with their debts and why shouldn't they have to live up to paying off their debts?
Four percent refused to answer this. But 87 percent believe an individual who files for bankruptcy --all of this yellow--should be required to repay as much of their debt as they are able and then be allowed to wipe out the rest.
That makes sense. Otherwise, we have people who are using the bankruptcy laws as an estate planning device. We have people who every 5 years file for bankruptcy after running up all kinds of bills and enjoying the life of Riley during those intervening years. What we want to do is have people realize there are some disincentives for doing that and that they have to pay some of these bills themselves.
These particular charts show that the American people have their heads screwed on right, except for about 10 percent of them. If an individual has the ability to repay some of the debt, they ought to be able to and they ought to want to, they ought to do what is right, and 87 percent of the American people believe that is the case. Only 10 percent believe they should be able to wipe out any debts at any time by going into bankruptcy.
I hope we can get people to vote for cloture on this matter so we can proceed and so we will not have any further delay in passing what really will be one of the most important bills in this particular session of Congress.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
[Page: S11090] GPO's PDF
Mr. HATCH. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. HATCH. Mr. President, I suggest the absence of a quorum and ask that the time be divided equally.
The PRESIDING OFFICER. Time will be charged to both sides. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. WELLSTONE. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER (Mr. Crapo). Without objection, it is so ordered.
Mr. WELLSTONE. I thank the Chair.
Mr. President, I will speak briefly in opposition to cutting off debate on S. 625, the Bankruptcy Reform Act of 1999. I say to my colleagues, the entire concept of the bill is wrong. It addresses a 'crisis' that appears to be self-correcting. It rewards the predatory and reckless lending by banks and credit card companies which fed the crisis in the first place, and it does nothing to actually prevent bankruptcy by promoting economic security for working families.
To support, if you will, my case on the floor, I will talk about a couple of amendments I intended to offer to this bill which I think will make a huge difference. Let me give a couple of examples.
One amendment will prevent claims in bankruptcy on high-cost credit transactions in which the annual interest rate exceeds 100 percent, such as pay-day loans and car title pawns. Pay-day loans are intended to extend small amounts of credit, typically $100 to $500, for an extremely short period of time, usually 1 week or 2 weeks.
These loans are marketed as giving the borrower a little extra until pay day, hence the term 'pay-day' loan. The loans work like this:
The borrower writes a check for the loan amount plus a fee. The lender agrees to hold the check until an agreed-upon date and gives the borrower the cash. On the due date, the lender either cashes the check or allows the borrower to extend the loan by writing a new check for the loan. In any case, the annual interest rate can get as high as 391 percent.
We ought to do something about that, Mr. President. I have an amendment that will make a difference. I believe I would win if I offered this amendment to address this problem.
Another amendment I want to offer is about making sure banks offer low-cost banking services to their customers. For about 12 million Americans, having a checking account is a simple convenience which they cannot afford. Why? Because quite often there is a large minimum or you have fees that are really too high, and therefore people cannot even have these accounts. I want to make sure these banks are responsive to low-income citizens as well.
Mr. President, I was on the floor last week for several hours talking about the crisis in agriculture. I said that those of us from the farm States want an opportunity to pass legislation that would change the course of policy and prevent our family farmers from being driven off the land and prevent, really, what is right now the devastation of our rural communities.
The minority leader, Senator Daschle, has an amendment to get the loan rate up, to get prices up, which I support. I have an amendment--and Senator Dorgan will join me--which basically says we are going to--for 18 months, until we pass some antitrust action--put a moratorium on a lot of these mergers and acquisitions. We want to have some competition in the food industry.
I think I can get a lot of support from Republicans as well as Democrats. I think there will be a lot of support on the floor of the Senate for these amendments that try to do something about changing farm policy so our producers--whether they be in Minnesota, whether they be in Idaho, whether they be in the Midwest, or whether they be in the South--are able to make a living and support their families.
In all due respect--I hate to say this--bankruptcy is all too relevant to what these family farmers are going through. I have an amendment that says we ought to do some policy evaluation if we are going to be talking about bankruptcy and we are not going to do a darn thing to deal with the predatory policies of these credit companies, that we are not going to do a darn thing about the ways in which they hook people in who have precious little consumer protection, that if we are going to talk about low-income citizens, I would like to see some policy evaluation.
I would like to see us have some understanding about what is going on in welfare. Where are these mothers and children who are no longer on the rolls? What are their wage levels? Is there affordable child care? Do these families have health care coverage or do they not have health care coverage?
It is also the case that my colleague who sits right next to me, Senator Kennedy, has an amendment he wants to offer to raise the minimum wage. I find it interesting that what we have here is a piece of legislation that does nothing by way of providing consumer protection, does nothing by way of challenging these credit card companies, and does absolutely nothing to prevent the bankruptcy in the first place.
We have the evidence that shows that very few people--maybe 3 percent--have abused the law. And because of that, we are passing a draconian, harsh piece of legislation which imposes enormous difficulties on the poorest families, on working-income families. Yet when some of us say we want to bring some amendments to the floor that deal with exorbitant interest rates, to make sure that low-income people have access to banking services, and to make sure we do something about the economic security for working families--and I include family farmers who are going bankrupt--we are told by the majority leader we are going to be shut out from being able to offer amendments, and therefore the majority leader files cloture.
We will have a cloture vote. I am going to vote against cloture; I am sure many of my colleagues are going to vote against cloture, and then I am sure the majority leader is going to pull the bill. If he pulls the bill, that will be actually a plus for Americans. This is a deeply flawed piece of legislation--great for the credit companies, terrible for consumers.
But if he pulls the bill, also that is basically a message to those of us who for weeks now have been saying we want to come to the floor with substantive amendments, to fight for the people we represent, to do something about making sure they have a decent chance--and I am talking in particular about family farmers. Basically what I am hearing from the majority leader is: Anytime you say you are going to come to the floor with these amendments, I am going to pull the legislation. I am not going to give you a vehicle. We are not going to have an up-or-down vote on minimum wage.
Apparently, a lot of my colleagues on the other side do not want to be on record; we are not going to have an up-or-down vote on getting farm prices up; we are not going to have an up-or-down vote on a moratorium dealing with these mergers and acquisitions; We are not going to have an up-or-down vote on amendments that really do deal with these payday loans, with these exorbitant interest rates, making sure again that low-income people have access to banking services.
I think there will not be enough votes for cloture. I do not think there should be enough votes for cloture. I want to say today on the floor of the Senate, especially to the majority leader--not so much to my colleague from Utah--if each and every time, as a Senator from an agricultural State, I am going to be shut out from having any vehicles whereby I can bring some amendments to the floor to change farm policy so these producers do not go under in my State, then I am going to have to look for whatever leverage I have as a Senator to force some cooperation on the other side so we can have a genuine, substantive debate
about a lot of issues that are important to people's lives.
Let's talk about raising the minimum wage. Let's talk about what is happening to family farmers. Let's talk about health care policy. Let's talk about consumer protection.
This effort on the part of the majority leader--and I guess, therefore, the majority party--to shut us out from introducing substantive legislation that would make all the difference in the world to the people we represent is just simply unacceptable. I do not think this is any way for us to operate as a Senate. I urge my colleagues to vote against cloture.
I yield the floor.
[Page: S11091] GPO's PDF
Mr. GRASSLEY addressed the Chair.
The PRESIDING OFFICER. The Senator from Iowa.
Mr. GRASSLEY. I yield 7 minutes to the Senator from Alabama.
The PRESIDING OFFICER. The Senator from Alabama is recognized for 7 minutes.
Mr. SESSIONS. I thank the Senator from Iowa and appreciate his steadfast leadership on this issue. I also thank the distinguished chairman of the Judiciary Committee, Senator Hatch, for his leadership.
We have worked over the past several years to produce a much needed piece of legislation, a reform of Federal bankruptcy law. Bankruptcy is provided for in the U.S. Constitution, and we have seen some remarkable changes in the last few years that demand that we reform the system.
Last year there were over 1.4 million bankruptcies filed in America. That comes out to almost 4,000 filings every day of the year. Since 1990, personal bankruptcies are up 94.7 percent. This dramatic increase in personal bankruptcies occurred in spite of the fact that over that same period business bankruptcies fell 31 percent and the country enjoyed a healthy and expanding economy. These statistics demonstrate there is need for reform immediately.
Bankruptcy exists to provide relief as a last resort for the most debt-ridden individuals. It is not a financial planning device. This bill was needed last year, but it did not pass due to the same kinds of partisanship and political tactics we have seen here today.
This year, I think Congress will pass this bill. I hope we will proceed to it today for a final vote. The majority leader of the Senate and the Members of this Senate have a lot of work to do this year. We have quite a number of critical appropriations bills, including the Defense appropriations that may come up later tonight. We have to consider those bills.
We cannot have a bankruptcy bill like the one that passed this Senate last year with 97 votes--a very similar bankruptcy bill which almost every single Senator voted for. That bill turned into a Christmas tree of amendments on every kind of unrelated issue that any Senator wanted to bring up, and I am afraid that the same thing might happen today.
Why is this happening? I will tell you why. Some Senators do not want this bill to pass, but they are afraid to vote against it straight up, and so they offer amendment after amendment, and they tell the majority leader: We won't have any limit. We want to offer as many amendments as we can on a number of unrelated subjects--international affairs, economics, whatever they want to bring. This means we could be here for weeks on a bill that has been debated for the last 2 years with great intensity. The Senate does not need that. The majority leader cannot allow that to happen. We will have to not proceed with it, I assume, if we cannot get cloture today.
A bankruptcy bill similar to this passed the House earlier this year 313-108. Senator Grassley's bill came out of the Judiciary Committee 14-4. So I am proud to be a key sponsor of this. I think it makes the kind of changes we need without changing the fundamental principles that if a person is over their head in debt, helplessly unable to pay their debts, they ought to be able to wipe out those debts and start over. We have no dispute with that principle. That is a fundamental, historic principle.
I know it makes a lot of people mad to think that somebody does not have to pay their debts, that they can just go to court and wipe out their duly signed contract. But this country has always adhered to the view that if your debts reach a certain level and you cannot pay them, you can start
H.R. 1282 Individual Bankruptcy Abuse Reform Act of 1999
H.R. 833 COMPLETE ANALYSIS
Web posted and Copyright © November 1, 1999, American Bankruptcy Institute.
An Updated Analysis of the Consumer Bankruptcy Provisions
of H.R. 833
Bankruptcy Reform Act of 1999,
As passed by the House of Representatives
of H.R. 833 Bankruptcy Reform Act of 1999,
As passed by the House of Representatives
Written by:
Hon. Eugene R. Wedoff
United States Bankruptcy Court
Northern District of Illinois
Chicago, Illinois
H.R. 833, passed by the House of Representatives on May 5, 1999, proposes major changes in the Bankruptcy Code (Title 11, U.S.C.). A parallel bill, S. 625, is pending in the Senate. H.R. 833 and S. 625 build on two bills—H.R. 3150 and S. 1301—that were passed by the separate houses of the 105th Congress last year, but which were not enacted into law. The American Bankruptcy Institute published analyses of the consumer provisions of each of the prior bills, see http://www.abiworld.org/legis/bills/98julhr3150.html and http://www.abiworld.org/legis/bills/98julnew1301a.html.
This analysis of H.R. 833 follows the format of the prior analyses: first, by identifying each of the changes that the bill would make in the current consumer law; second, by assessing the impact that these changes would have on the operation of the law; and third, by suggesting alternative approaches, where appropriate, to achieving the goals of the legislation. Several of the suggested alternatives reflect work done by the Consumer Bankruptcy Legislative Group—a group of individuals assembled to represent diverse interests affected by consumer bankruptcy law. The complete recommendations of the group have also been published by ABI: http://www.abiworld.org/legis/reform/rec4000.html.
Introduction to current consumer bankruptcy law.(1)
An Introduction to Proposed Bankruptcy Reform http://www.abiworld.org/legis/bills/s1301intro.html provides a description of the operation of current consumer bankruptcy law, which may be helpful in understanding the changes proposed in H.R. 833.
Summary: major effects of the consumer bankruptcy provisions of H.R. 833.
The major effects that H.R. 833 would have on consumer bankruptcy law include the following (with reference made to the relevant section(s) of the bill):
Chapter 7
1. Means testing. §102. Section 707(b) of the Bankruptcy Code would be amended to
provide for dismissal of Chapter 7 cases or (with the debtor's consent) conversion to Chapter 13,
upon a finding of abuse. Abuse would be presumed if the debtor had more than $100 in monthly
income available to pay general unsecured debt, based on a formula incorporating collection
standards of the Internal Revenue Service. The case trustee would be required to file a statement
as to the calculation under the formula in each case, which the court would be required to serve on
creditors, and, if the presumption applied, the trustee would be required to file either a motion
under §707(b) or a statement explaining why the motion was not being filed. There are conflicting
provisions regarding standing to bring §707(b) motions, but such standing would be extended to
all parties in interest in cases where the debtor's income is above a defined median.
2. Compensation of trustees for means testing. §§102, 607, 614. No additional
compensation would be provided to trustees for work involving means testing that does not
involve conversion or dismissal of the case. Section 707(b) would be amended both to require the
court to award damages if it finds that a Chapter 7 filing violates Fed.R.Bankr.P. 9011, and to
specify that these damages may include an award of fees and costs from debtor's counsel to the
trustee or a civil penalty payable to the trustee. Moreover, §§101 and 607 of H.R. 833 are
intended to extend Rule 9011 to the debtor's lists and schedules. In the event that the actions of
the trustee result in conversion or dismissal of a Chapter 7 case, the trustee would be allowed an
administrative claim for compensation and expense reimbursement for these actions. This claims
would not be subject to the fee cap of §326 and would be payable if the case converted to Chapter
13 case or in any subsequently filed Chapter 13 case.
3. Support priority. §139. Family support obligations of the debtor would have the first priority in distribution, ahead of the costs of administering the estate.
4. Nonsubordination of property tax liens to family support claims. §801. Section 724(b) of the Bankruptcy Code currently allows a Chapter 7 trustee to pay family support obligations from funds that would otherwise be used to satisfy a property tax lien, with the tax lien being subordinated to other liens on the affected property. This type of subordination would be eliminated, so that if the debtor owed both property taxes (secured by a lien on the debtor's property) and support obligations, the proceeds of any sale of the property would be used to pay the taxes before the support obligations.
Chapter 13
1. Stripdown of secured claims. §§122, 123. Claims secured by purchase money security
interests arising within five years of the bankruptcy filing would not be subject to stripdown under
§506(a). Where stripdown remained applicable, collateral would be valued at its retail price.
2. Preconfirmation adequate protection. §135. Prior to distributions to creditors under a confirmed Chapter 13 plan, debtors would be required both to make proposed plan payments and adequate protection payments to lessors of personal property and holders of secured claims. The adequate protection payments would have to be made at least monthly and in at least the contract amounts.
3. Delay in confirmation. §605. Even in the absence of objections to confirmation, the confirmation hearing could not take place until at least 20 days after the §341 meeting of creditors.
4. Plan length. §606. Debtors whose income is above a defined median would be required to pay their creditors either in full or through a plan with a length of five years.
5. Exceptions to discharge. §§127, 807. In addition to those debts excepted from a Chapter 13 discharge under current law, there would also be exceptions to discharge for debts defined by § 523(a)(1), (2), (3)(b), (4), and—insofar as personal injury or wrongful death is concerned—(6).
General
1. Tax returns. §§603(b), 604. Individual debtors would generally be required to file with the court copies of their tax returns for the three year period preceding the bankruptcy as well as all returns filed with taxing authorities while the bankruptcy case is pending. The returns could be inspected by any party in interest, subject to regulations designed to prevent use other than in the bankruptcy case. Failure to file the prebankruptcy returns within 45 days of the bankruptcy filing (or within one extension for a maximum of 45 days) would result in automatic dismissal of any voluntary filing.
2. Audits. §602. Audits, conducted by certified or licensed public accounts in accordance with generally accepted auditing standards, would be required (1) of all information provided by the debtors in at least 0.4% of consumer cases, randomly selected, and (2) of any schedules of income and expenses that "reflect greater than average variances from the statistical norm."
3. Credit counseling. §302(a). Individuals would be ineligible for relief under any
chapter of the Code unless they had, within 90 days of their bankruptcy filing, received credit
counseling—through a service approved by the United States trustee or bankruptcy administrator
—that included, at least, a briefing on the opportunities for credit counseling and assistance in
performing an initial budget analysis. Exceptions would be made (1) for districts in which
adequate services were unavailable and (2) for debtors with exigent circumstances requiring filing
before the counseling could be obtained (in which case the debtor would be required to complete
the counseling within 30 days after the bankruptcy filing).
4. Debtor education. §§104, 302(b)-(c). Pilot educational programs for debtor financial
management would be tested in six judicial districts over an 18 month period, and thereafter
evaluated for effectiveness and cost. At the same time, all Chapter 7 debtors would be subject to
denial of discharge under §727, and Chapter 13 debtors would not be granted a discharge, if they
failed to complete an instructional course concerning personal management, unless the United
States trustee or bankruptcy administrator determined that approved courses were inadequate.
5. Successive discharges. § 137. Debtors would be denied discharge in any Chapter 13
case filed within five years of the order of relief in any other bankruptcy case in which the debtor
received a discharge. A Chapter 7 case would be subject to denial of discharge under §727 if the
debtor received a Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the
pending case.
6. Notice to creditors. §603(a). Notice to a creditor would not be effective unless served at the address filed by the creditor with the court or at the address stated on the last communication from the creditor to the debtor.
7. Exemptions. §§ 124, 147. There would be a 730-day residency requirement before a debtor could claim state exemptions. A $250,000 cap would be placed on homestead exemptions, but would be able to be waived by express state legislation.
8. Reaffirmations. §108. Reaffirmations of unsecured debt would require a court hearing unless the debtor was represented by counsel and waived the hearing requirement.
9. Appeals. §612. Final decisions of bankruptcy judges would be appealable directly to the circuit courts of appeal unless the circuit had established bankruptcy appellate panels (BAPs). Where BAPs were established, the appeal would be presented to the BAP unless a party to the appeal elected to have the court of appeals hear the case.
The consumer bankruptcy provisions of H.R. 833: specific proposals.
H.R. 833 is divided into 12 titles, seven of which contain provisions that affect consumer bankruptcy. Most of the relevant provisions are included in Title I, "Consumer Bankruptcy Provisions." However, provisions affecting consumer bankruptcy are also included in Title II, "Discouraging Bankruptcy Abuse"; Title III, "General Business Bankruptcy Provisions"; Title VI, "Streamlining the Bankruptcy System"; Title VII, "Bankruptcy Data"; Title VIII, "Bankruptcy Tax Provisions"; and Title XI, "Technical Corrections." This analysis discusses only those sections of these titles that would have a significant effect on consumer bankruptcy. Finally, there is a discussion of the single section of Title XII, "General Effective Date; Application of Amendments." For each section discussed, a reference is made to any section of S. 625 dealing with the same subject.
Title I ("Consumer Bankruptcy Provisions")
Subtitle A—"Needs based bankruptcy"
§101 ("Conversion") (See S. 625, §101)
Changes. Section 706(c) of the Bankruptcy Code currently provides that the court may not convert a Chapter 7 case to a case under Chapter 12 or 13 unless the debtor requests such a conversion. As amended, Section 101 provides that conversion could also be ordered when the debtor consents to it.
Impact. This section would operate primarily in connection with motions to dismiss Chapter 7 cases brought against a debtor under §707(b) of the Code. Under current law, there may be a question of whether, instead of ordering dismissal in connection with such a motion, the court, with the debtor's consent, could order conversion of the case to Chapter 13. Section 101 would clarify that the option of conversion is available to the debtor in such situations. Because H.R. 833 expands the circumstances under which Chapter 7 cases are subject to dismissal under §707(b)—see the discussion of §102, below—this clarification may be helpful.
§102 ("Dismissal or conversion") (See S. 625, §102)
This provision is the subject of Recommendations 1 and 2 of the Consumer Bankruptcy Legislative Group.
Changes. Section 102, the central provision for the "needs-based" bankruptcy approach of H.R. 833, operates by broadening §707(b) of the Bankruptcy Code. Section 707(b) currently provides for dismissal of Chapter 7 cases if granting relief under Chapter 7 would be a "substantial abuse" of the provisions of Chapter 7. "Substantial abuse" is not defined, and standing to bring a motion for dismissal under §707(b) is limited—it may be brought only by the United States trustee or by the court, and "not at the request or suggestion of any party in interest." Section 102 would change §707(b) in the following respects:
(1) The proposal would change the ground for relief from "substantial abuse" to simple "abuse" of the provisions of Chapter 7, and would remove the current presumption in favor of the form of bankruptcy relief chosen by the debtor.
(2) If abuse is found, the proposal would allow, with the debtor's consent, conversion to Chapter 13 (but not Chapter 11) as an alternative to dismissal.
(3) Although "abuse" would continue to be undefined, two sets of considerations would
apply in a court's determination of §707(b) motions: (a) a presumption of abuse would arise in
defined circumstances, and (b) general factors would be applicable where the presumption did not
arise.
(4) The presumption of abuse would arise under an amended §707(b)(2) where the
debtor's "current monthly income"—after specified deductions—was at least $100 ($6,000 over
60 months). "Current monthly income" would be defined as the monthly income received by the
debtor (and the debtor's spouse in a joint case), averaged over the 180 days "preceding the date of
determination," together with amounts regularly contributed by others to the debtor's household
expenses, but not including war crime reparations or Social Security benefits. Five deductions
would be made from this amount:
- (a) "Estimated administrative expenses and attorneys' fees." This deduction would
be defined as "10 percent of projected payments under a chapter 13 plan."
- (b) Monthly living expenses as prescribed under standards issued by the Internal
Revenue Service for collection of unpaid taxes, with modifications. The expense
allowances under the IRS collection standards fall into three categories: National
Standards, covering food, housekeeping supplies, clothing, services, personal care
products, and miscellaneous expenses; Local Standards, covering housing and
transportation; and Other Necessary Expenses, covering taxes, health care, court
ordered payments, involuntary wage deductions, accounting and legal fees, and
other expenses necessary to produce the debtor's income.(2)
Debtors would be
limited to deducting the amounts set out in the national IRS standards—except that
the IRS allowances for food and clothing could be increased by up to 5% "if it is
demonstrated that it is reasonable and necessary." Debtors would also be limited to
deductions for housing and transportation set out in the IRS local standards,
without including payment of debt (such as home mortgages and auto loans).
Finally, for items in the IRS's "other necessary expenses" category, debtors would
be allowed to deduct their actual expenses, including "the continuation of actual
expenses of a dependent child under the age of 18 for tuition, books, and required
fees at a private elementary or secondary school, not exceeding $10,000 per year."
- (c) Monthly secured debt payments, defined as all secured debt payments
contractually due in the 60 months following the filing of the bankruptcy petition,
divided by 60.
- (d) Monthly priority debt payments, defined as the total amount of priority debt
divided by 60.
- (e) Monthly charitable contributions. Section 707(b),as amended by H.R. 833, would continue to provide that in determining whether to dismiss a case under §707, the court may not "take into consideration whether a debtor has made, or continues to make, charitable contributions." "Charitable contributions" are defined to allow up to 15% of a debtor's gross income to be paid to any tax-qualified charitable organization.
(5) Where the presumption arose—that is, where the debtor's "current monthly income," less the five categories of deductions, was at least $100—the debtor would be able to prevail against a §707(b) motion only "by demonstrating extraordinary circumstances that require additional expenses or adjustment of current monthly income" and showing that these extraordinary circumstances were sufficient to reduce the debtor's income after allowable expenses to less than $100 monthly. In order to make such a demonstration, the debtor would have to "itemize each additional expense or adjustment of income and provide documentation for such expenses or adjustment of income and a detailed explanation of the extraordinary circumstances which make such expenses or adjustment of income necessary and reasonable," and the accuracy of all such itemized information would have to be attested to, under oath, by the debtor and the debtor's attorney.
(6) Where the presumption did not arise—that is, where the debtor's "current monthly income," less the five categories of deductions, was less than $100—or where the presumption was rebutted, a court ruling on a §707(b) motion would be required to consider (a) whether the debtor filed the petition in bad faith, and (b) whether the "totality of the circumstances . . . demonstrates abuse."
(7) The debtor's schedules of current income and expenses (currently set out on Schedules I and J) would be required to include a statement of "current monthly income," together with calculations showing whether there would be a presumption of abuse under §707(b). The Federal Rules of Bankruptcy Procedure would be required to be amended so as to prescribe a form for these schedules. The trustee would be required to review the materials submitted by the debtor, and, within 10 days after the §341 meeting of creditors, file a statement with the court as to whether the debtor's schedules would give rise to a presumption of abuse. The court would be required to provide a copy of the statement regarding the presumption to all creditors within five days of its filing.
(8) If the presumption applied, and if the debtor's income was at least equal to a defined national median, then the trustee would have the obligation to file either a motion under §707(b) or a statement as to why such a motion was not being filed.(3)
(9) The current limitation on standing to bring a motion under §707(b) would be reversed, with amended §707(b)(1) affirmatively providing that the motion could be made by "the trustee or any party in interest." However, there would be different and inconsistent limitations on standing to bring a motion under §707(b), depending on whether the presumption was involved. In order for the presumption to be invoked by any party, the debtor's income would have to be above a defined regional median.(4) But for a creditor to bring any motion under §707(b)—even a motion that did not involve the presumption—the debtor's income would have to at least equal to the national median applicable to the trustee's mandatory filing.(5)
(10) If a panel trustee brought a successful motion under §707(b), and if the debtor's attorney violated Fed.R.Bankr.P. 9011 by filing the case under Chapter 7, the court would be required to award damages against the debtor's attorney, which could include both reimbursement of the trustee's expenses and an award of a civil penalty to the trustee. The signature of the debtor's attorney on a bankruptcy petition would be declared to constitute a certificate that the debtor's "petition, lists, schedules, and documents" are "well grounded in fact."
(11) If a party other than a trustee or United States trustee brought an unsuccessful motion under §707(b), and if the court found that the motion was not substantially justified or that the party brought the motion solely to coerce the debtor into waiving a right under the Bankruptcy Code, the court would be authorized to award the debtor all reasonable costs in contesting the motion, including attorneys' fees.
(12) Within three years of the enactment of the amendments, the Director of the Executive Office for the United States Trustees (EOUST) would be required to submit a report to Congress on the utility of the IRS collection standards in measuring abuse under §707(b).
Impact. The purpose of means-testing is to deal with debtors who have the ability to make substantial payments, from current income, to their general unsecured creditors. Under means-testing, these debtors would be denied the right to obtain an immediate discharge of their indebtedness in Chapter 7, under which (depending on the applicable exemption law) they may make little or no payments to general unsecured creditors. The means-testing procedures of H.R. 833, as passed, address several of the problems of earlier proposals, but still present significant difficulties in accomplishing the goal of means-testing:
(1) The presumption of abuse would frequently be difficult to apply or arbitrary. At each step in its application, there are problems with H.R. 833's formula for determining whether a debtor has at least $100 per month available to pay general unsecured debt, and hence should be presumed to be abusing Chapter 7.
- Determining the total income available to the debtor. In applying the presumption
formula, the first step is to determine the debtor's current gross monthly income. There are
several problems in this step.
- First, there is no apparent justification for excluding Social Security benefits from
income—the source of funds received by a debtor in no way affects the debtor's ability to
pay debts. Thus, for example, there would seem to be no reason why a debtor who
chooses early retirement and lives on a combination of investment earnings and social
security benefits should be treated as having less income than an individual who obtains the
same amount of money through continued employment.
- Second, the bill directs that income be averaged over the 180 days preceding the
"date of determination." It is unclear whether this date would be the date of the preparation
of the debtor's schedules (which could be substantially before filing the bankruptcy case),
the date of filing (which could require last-minute changes in the debtor's schedules), or
some later date, such as the date of a hearing in which the application of the presumption is
being determined (in which case, the schedules would often be unable to reflect the
appropriate income figure).
- Third, a 180-day period would often produce anomalous results. Because 180
days is always less than six months, debtors who are paid monthly will often have only
five paydays during the 180-day period preceding their bankruptcy filing, artificially
reducing current monthly income.
- Fourth, and similarly, the 180-day average will produce anomalous results for
seasonal workers; for example, debtors who earn most of their income during the summer
would show an artificially high total income if the 180-day period ended in the middle of
fall, and an artificially low income if the period ended in mid-spring.
- Fifth, and most significantly, the total income determined by a 180-day average will
simply be inaccurate whenever the debtor's income has permanently changed during the
180-day period. For example, a debtor may file a bankruptcy case after a prolonged period
of unemployment, but shortly after getting a new permanent job, in which case the salary
of the new job would be artificially reduced by the lower income during the period of
unemployment. Conversely, a debtor who files a Chapter 7 case shortly after obtaining a
new permanent job with substantially reduced income, would have the presumption
calculated based on an artificially high income. H.R. 833 provides for a debtor to show
extraordinary circumstances justifying a reduction from the 180-day average, but there is
no provision for disclosure of factors indicating that a debtor's actual income is higher than
the average.
- First, there is no apparent justification for excluding Social Security benefits from
income—the source of funds received by a debtor in no way affects the debtor's ability to
pay debts. Thus, for example, there would seem to be no reason why a debtor who
chooses early retirement and lives on a combination of investment earnings and social
security benefits should be treated as having less income than an individual who obtains the
same amount of money through continued employment.
- Deduction of administrative expenses and attorneys' fees. Once a debtor's current
monthly income is determined, the formula for the presumption requires that several
expense items be deducted. The first of these is administrative expenses and attorneys'
fees, defined as "10 percent of projected payments under a chapter 13 plan." This
definition is ambiguous. It could mean (a) all payments that a debtor would make under
the plan, including direct payments to creditors like mortgagees, (b) only the payments that
the debtor would make to the Chapter 13 trustee, or (c) the payments that the Chapter 13
trustee would make to creditors. Of these possibilities, the second is perhaps the most
likely, since this would approximate the actual administrative expenses that would be
incurred by a trustee in disbursing funds to creditors under a Chapter 13 plan, pursuant to
28 U.S.C. §586(e)(1)(B). However, even with this understanding, there would still be
substantial questions about how much would be paid by the debtor to the trustee in a
Chapter 13 case. Most significantly, this sum would vary greatly depending on whether
the debtor would have current mortgage payments made by the Chapter 13 trustee or paid
directly. For example, if the debtor had a monthly mortgage payment of $2000, the
administrative expense deduction would be $200 greater if it assumed that the mortgage
would be paid by the trustee in a Chapter 13 plan.
- Deduction under IRS "National Standards." The first of the monthly living expenses to
be deducted under the means-test formula are the "National Standards" that allowed by the
Internal Revenue Service. These standards set out specific allowances— regardless of the
debtors' actual expenditures—for items such as food, clothing, and household supplies, on
a nationwide basis. Because the standard is nationwide, it would discriminate against
debtors in areas with a higher-than-average cost of living. Moreover, because the statute
would allow an increase of up to 5% for food and clothing allowances "if it is
demonstrated that it is reasonable and necessary," a discretionary determination of
reasonableness will be required whenever a debtor claims the increase.
- Deduction under IRS "Local Standards." The IRS "Local Standards" include deductions
from income for housing and transportation costs, set out on a regional basis. In contrast
to the national standards, the IRS Manual states that the local standards are maximum
allowances—if the debtor's actual housing or transportation costs are less, then the actual
costs are to be applied. Thus, in order to apply the local standards, the debtor's actual
housing and transportation costs must be determined in every case. Another set of
problems would arise from the bill's requirement that "the debtor's monthly expenses shall
not include any payments for debts." The IRS's local standards include payments for debt.
The local standards for transportation include an "ownership" component to cover monthly
loan or lease payments and the housing standards are intended to cover the cost of
obtaining housing, including rent or mortgage payments. Thus, in order to apply the local
standards under the bill, the auto loan and home mortgage payments must be deleted from
the amounts allowed by the standards. For the transportation standards, this can be done,
because the standards separate ownership costs from operating costs. A debtor who
owned an automobile would therefore be allowed only actual operating costs, up to the
maximum specified by the standards. However, it is not possible to similarly apply the
local standards for housing to debtors who pay home mortgages, since the IRS provides a
single allowance to cover the cost both of acquiring and maintaining housing. For
example, the housing allowance for a family of four in Cuyahoga County, Ohio is $1069
monthly. There is no way to know what part of this allowance should be deducted in order
to account for a mortgage payment. If the debtor's mortgage payment is $500 per month,
it is not clear that $569 should be allowed as a maximum cost for items such as insurance,
utilities and repairs. On the other hand, if the debtor's mortgage is $1100, it can hardly be
that the debtor should receive no monthly allowance for maintaining the home. For debtors
with mortgages, the IRS local standard simply cannot be meaningfully applied in the
manner directed by H.R. 833.
- Deduction for "Other Necessary Expenses." The IRS collection standards recognize that
there are a number of expenses that debtors may have, that (1) are either necessary to
provide for the health and welfare of the debtor and the debtor's family or necessary for the
production of income, but (2) are not covered by the national and local standards. The IRS
allows for such expenses in the amounts established as necessary by the taxpayer. The
IRS Manual (at §5323.434) sets out two different lists of categories into which these "other
necessary expenses" may fall, but the Manual also states: "The expenses listed . . . do not
exhaust the category of necessary expenses. Other expenses may be considered if they
meet the necessary expense test: health and welfare and /or production of income." The
incorporation of the IRS's "Other Necessary Expenses" into H.R. 833's presumption
formula raises several questions. The bill specifies that the debtor should be allowed
"actual monthly expenses for the categories specified as Other Necessary Expenses." This
appears to imply if the debtor's expenses fit within categories specified in the Manual as
Other Necessary Expenses, then they should be allowed in the amounts actually expended
by the debtor, even if these amounts are not shown to be necessary. For example, one
category specified in the Manual in the "Other Necessary Expenses" category is child care.
Exhibit 5300-46 of the IRS Manual states: "Care should be taken to ensure that only a
reasonable amount is allowed. Costs of child care can vary greatly. We should not allow
expensive child care if more reasonable alternatives are available." The bill would appear to
contradict this provision of the Manual, requiring a deduction for purposes of the
presumption formula for whatever child care expenses are actually incurred by the debtor.
On the other hand, a debtor may have an expense necessary for the welfare of the family
but not specifically identified in the IRS Manual. For example, the debtor may own a
rental unit, and incur costs of maintaining that unit in order to obtain rental income. The
costs of maintaining a rental unit are not specifically listed in the IRS Manual as a category
of necessary expenses, but would plainly be included under the "production of income"
test set out in the Manual. The bill could be interpreted to disallow such expenses in
applying the presumption formula. In any event, it can be anticipated that debtors will
assert as "other necessary expenses" many items that might be questioned, such as life
insurance premiums, special diets for health reasons, and contributions for the care of
elderly relatives. For all such questionable claims, a determination will have to be made
before the presumption formula can be applied. The bill does specify, contrary to the IRS
Manual, that the expenses of private primary and secondary education should be deducted,
up to $10,000 annually for each dependent child under 18 years of age.
- Deduction for secured debt. The bill provides a deduction for secured debt, calculated as
1/60th of all the secured debt that will be "contractually due" in the 60 months following
the date of the petition. It is unclear whether this would include payments that are in
default at the time of the petition. However, unless such defaulted amounts are deducted,
the presumption formula would not give an accurate picture of the debtor's ability to make
payments in a Chapter 13 plan. In any event, the deduction discriminates against those
who do not have secured debt. For example, a debtor who drives an old car, with no
outstanding loan, will receive no allowance for ownership costs under the IRS local
standards; a debtor who leases a car will have ownership costs capped by the local
standards; but a debtor who buys a new car on credit will have the entire cost of the loan,
in an unlimited amount, deducted from income. Similarly, a debtor would not be allowed a
special deduction for monthly cable television fees, but would be allowed to deduct the cost
of a satellite dish purchased on credit.
- Deduction for priority debt. The deduction for priority debt is defined as "the total
amount of unsecured debts entitled to priority" divided by 60. In order for this deduction
to apply meaningfully, it would have to include not only the priority debt outstanding at the
time of the bankruptcy filing, but also any interest that would accrue on the debt during the
period after the bankruptcy filing.
- Deduction for charitable contributions. Charitable contributions of up to 15% of the debtor's gross income are deducted only if it can be found that the debtor "continues to make the contributions." This may lead to questions about whether charitable contributions proposed by the debtor are a "continuation" of a prior practice.
In summary, the presumption formula is problematic in that (1) calculation of current monthly income has no fixed period for determination, and would often produce a figure different from the debtor's actual monthly income; (2) the deductions for food, clothing, and other necessary expenses would require discretionary determinations; (3) the IRS local standard for housing cannot be applied to debtors with home mortgages; (4) debtors without secured indebtedness would be substantially disadvantaged; and (5) debtors would be encouraged to increase secured indebtedness, charitable donations, and expenditures on discretionary "other necessary expenses" in order to avoid the presumption of abuse.
(2) The presumption of abuse is subject to manipulation. Due to some of the features of the means-testing formula outlined above, debtors would be able to avoid an otherwise applicable presumption of abuse by prebankruptcy planning. For example, a debtor might, at the time of consulting a bankruptcy attorney, have gross monthly income of $10,000 and "current monthly income" after the allowed deductions, of $1,500. The debtor could remove this remaining income by commencing a program of charitable contributions or by incurring additional secured debt (for example, by trading in a used car for a new one, purchased on credit). Current estimates indicate that the means-testing of H.R. 833 would result in no more than 10% of currently filed Chapter 7 cases being subject to a presumption of abuse.(6) However, these estimates are based on filing made under current law, which presents little incentive to increase charitable contributions and secured indebtedness prior to filing under Chapter 7. Under the means test of H.R. 833, it can be expected (1) that the percentage of affected cases would be lower than anticipated because of the ability of debtors to work around the means-testing formula, and (2) that courts will be required to make substantial numbers of discretionary determinations as to whether prebankruptcy actions of the debtor were undertaken in good faith.
(3) The proposal requires significant additional work by trustees and the court, with no provision for additional funding. As noted in the previous paragraph, the means-testing provisions of H.R. 833 are likely to result in only a small percentage of Chapter 7 cases being converted to Chapter 13. The vast majority of Chapter 7 cases are "no-asset" cases, in which no funds are available for paying administrative expenses. Nevertheless, the bill would mandate that Chapter 7 trustees file with the court in every case a report as to application of the presumption. This would add to the cost of the trustee's processing of routine no-asset cases, with no provision for additional compensation. Moreover, in each case, the bill would require the court to serve creditors with a copy of the report. Assuming 15 to 25 creditors in each of 1.4 million cases, this requirement would burden the clerk's office and the postal service with the handling of 20 to 37 million additional pieces of mail annually. This additional activity, in the great majority of cases, will merely inform creditors that the presumption is inapplicable.
(4) The complex standing limitations would be difficult to apply and arbitrary. H.R. 833 would apply two different definitions of median income to issues of standing to bring motions under §707(b). If a debtor's current monthly income is less than a defined national median, standing to bring any motion under §707(b) would be limited to the court, the United States trustee and the case trustee. But if the debtor's income is not greater than a defined regional income, no party (including the court and trustees) would be able to invoke the exemption. This system of dual standing limitations will require calculation and maintenance of multiple lists of median income, with resulting uncertainty in application. Moreover, where the national and regional medians differ, there will be standing limitations with no apparent basis in policy: (a) for debtors whose income is at least equal to the national median but is not greater than the regional median, any party could bring a §707(b) motion, but the motion could not assert the presumption of abuse; (b) for debtors whose income is greater than the regional median but less than the national, only the court and trustees could bring a §707(b) motion, but they would be allowed to assert the presumption.
(5) The relationship between the proposed statutory language and Fed.R.Bankr.P. 9011 is confused. Fed.R.Bankr.P. 9011 is the bankruptcy equivalent of Rule 11 of the Federal Rules of Civil Procedure. It requires, among other things, that an attorney representing a debtor sign every petition filed under the Bankruptcy Code, and it provides that this signature constitutes a certificate, among other things, "that the attorney . . . has read the document [and] that to the best of the attorney's . . . knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law." The rule requires sanctions for its violation that may, but need not, include a civil penalty. The rule does not apply to lists, schedules, and statements. The proposed change to §707(b) contains language that (1) requires a civil penalty if the court finds a violation of Rule 9011 in connection with a §707(b) motion filed by a panel trustee or bankruptcy administrator, and (2) states that the signature of an attorney in connection with a Chapter 7 petition constitutes a certification of the kind specified in Rule 9011, applicable to lists, schedules and statements. Under these provisions, where a Rule 9011 motion is brought in connection with a Chapter 7 petition, it would be unclear whether: (1) the terms of the rule or the terms of the proposed statute would apply; (2) whether the civil penalty required by the statute applies only to violations of the terms of Rule 9011, or whether it applies to violations of the signature requirement set out in the proposed statutory language; and (3) whether, if Rule 9011 were amended in the future, the mandatory civil penalty imposed by the statute would apply to the amended language of the rule.
Alternatives.
1. Method for determining income available for payment of general unsecured debt.
Scheduling of monthly income. The debtor's schedules should list "current monthly income," as defined in H.R. 833, except that the "180-day" average should be the average income during the six calendar months preceding the date of filing. If current monthly income does not reflect the income that will actually be available to the debtor at the time of the bankruptcy filing, the debtor should be required to state the amount of income that will actually be available, and the reasons why current monthly income does not reflect the actually available monthly income.(7)
Scheduling of expenses. Deductions from income should be scheduled for (1) secured debt payments, including arrearages, (2) priority debt payments, and (3) charitable contributions, again, as each of these categories is defined in the bill. Finally, the other living expenses of the debtor should be measured against average expenditure levels, based on data compiled by the Bureau of Labor Statistics (BLS).(8) Specifically, (1) Federal Rules of Bankruptcy Procedure and Official Forms should be adopted to require the scheduling of expenses in categories corresponding to those in which consumer expenditure data is collected by BLS;(9) (2) the United States trustees and bankruptcy administrators should be required to designate and publish, on an annual basis, tables of average expenditure levels, applicable within their districts, for the categories specified in the rules and forms, based on BLS data; (3) a reasonable allowance should be designated by law for discretionary expenditures;(10) and (4) debtors should be required to schedule their living expenses within the specified categories, compare their expenditures to the designated level in each category, and provide a specific explanation for any expenditure that is greater than the designated level. Debtors should also be required to enumerate and explain any necessary expenses for which average expenditure data cannot be designated, such as costs of child care, future support payments, and the expenses of operating a business owned by the debtor.(11)
2. Procedure for dismissal or conversion.
Filing obligations. There should be no additional filing obligations imposed on case trustees, United States trustees, or bankruptcy administrators. Rather, case trustees should be given an incentive to pursue meritorious motions under §707(b) (as proposed in Point 3, below).
Standing and time for filing. Standing to bring §707(b) motions should be as provided in the H.R. 833, but a single, national median income test should apply: case trustees (not limited to panel trustees) as well as judges, bankruptcy administrators, and United States trustees should be allowed to bring §707(b) motions in any Chapter 7 case. Other parties in interest, in all Chapter 7 cases, should be allowed to suggest specific grounds for the filing of a §707(b) motion to the judge, bankruptcy administrator, United States trustee or case trustee, but they should be allowed to bring such motions themselves only in cases where the debtor's current monthly income exceeds the national median income, adjusted for inflation. A deadline for filing §707(b) motions should be fixed at 10 days after the conclusion of the meeting of creditors, subject to extension of time for cause.
Burden of proof. On a motion brought under §707(b), the court would be required to convert or dismiss the Chapter 7 case if the debtor's schedules themselves reflected income available to pay general unsecured claims in excess of the defined level, unless the debtor established that reductions in current income or increases in appropriate expenses, resulting from events subsequent to the filing of the schedules, reduced available income below the defined level. Where the debtor's schedules reflected less than the defined amount of income available to pay general unsecured debts, but where the debtor's current monthly income exceeded the applicable median, the debtor, in responding to a §707 motion, would bear the burden of establishing (1) the income actually available to the debtor, (2) the appropriateness of any expenditures in excess of the designated amounts, and (3) the appropriateness of any expenditures in categories for which there is no designated amount. Where the debtor's schedules reflected less than the defined amount of income to pay general unsecured debt and the debtor's current monthly income was below the applicable median, the moving party would bear the burden of establishing that the debtor's actually available income and appropriate expenses result in available income to pay general unsecured claims in excess of the defined amount.
3. Compensation for successful motions under §707(b).
There should be no special provisions for awards of costs and fees against debtors' counsel. Rather, trustees and bankruptcy administrators who bring any successful §707(b) motion should be awarded an administrative claim against the debtor that is not subject to discharge in the pending case or in any subsequently filed case. There should be no special provisions for application of Fed.R.Bankr.P. 9011.
§103 ("Notice of alternatives") (See S. 625, §103)
Changes. Section 342(b) of the Bankruptcy Code currently requires that the clerk of court provide each consumer debtor with a notice indicating the chapters of the Code under which the debtor may proceed. This subsection would be changed to require further information in the notice—(1) the "purpose, benefits, and costs" of each chapter, (2) "the types of services available from credit counseling agencies," and (3) warnings, regarding both the penalties for false statements in connection with bankruptcy cases and the fact that information supplied by debtors is subject to examination by the Attorney General.
Impact. This change has the potential for providing useful information at little additional cost to the bankruptcy system.
§104 ("Debtor financial management training test program") (See S. 625, §104)
Changes. The Executive Office of the United States Trustee would be required (1) to develop a program to educate debtors on the management of their finances, (2) to test the program for 18 months in six judicial districts, (3) to evaluate the effectiveness of the program during that period,(12) and (4) to submit a report of the evaluation to Congress within three months of the conclusion of the evaluation. There is no authorization given to bankruptcy courts to require debtors to participate in financial management training.
Impact. A test program of the kind outlined in H.R. 833 could be very helpful in determining what types of debtor education would be effective. The only apparent problem with the proposal is that 18 months may not be a long enough time to assess the effectiveness of an educational program. Success in financial management would be indicated by such factors as completion of a Chapter 13 plan, ability to reestablish high quality credit, and (most importantly) avoidance of further financial overspending. These factors are unlikely to be measurable after one year.
Alternatives. The legislation might better provide for an interim report within 3 months of the completion of the test program, with a follow-up reports at intervals of two and four years thereafter.
Subtitle B—"Consumer bankruptcy protections"
§105 ("Definitions") (See S. 625, §221)
§106 ("Enforcement") (See S. 625, §§222-24)
Changes. These two sections of H.R. 833 set up a new system for regulating the providers of consumer bankruptcy services. Section 105 defines the term "debt relief agency" to include both lawyers and non-lawyer providers of consumer bankruptcy goods or services (excluding tax-exempt nonprofit organizations, creditors, and depository institutions and credit unions). Section 106 would establish, in a new § 526 of the Bankruptcy Code, a set of regulations bearing on "debt relief agencies" and a mechanism for enforcing the regulations.
The regulations would prohibit "debt relief agencies" from (1) failing to perform promised services, (2) negligently making or counseling to be made any false statement in a bankruptcy filing, (3) misrepresenting the services to be provided, or the benefits or detriments of bankruptcy, and (4) advising the incurring of debt to pay for bankruptcy related services. Waivers of these prohibitions by debtors would be invalid.
There would be three distinct mechanisms for enforcing the prohibitions. First, a debtor would have a private cause of action against a "debt relief agency" (1) for intentional or negligent failure to comply with the prohibitions, (2) for dismissal or conversion of a bankruptcy case due to the agency's intentional or negligent failure to make required filings, and (3) for any intentional or negligent "disregard" of "the material requirements" of the Bankruptcy Code and Rules "applicable to such debt relief agency." In any such action, the debt relief agency would be liable for the fees and charges it received in connection with services rendered to the debtor, as well as actual damages and reasonable attorneys' fees and costs. Second, state governments would be authorized (through their chief law enforcement officers or designated agencies) to bring actions to enjoin violations of the new §526 or to pursue the private cause of action granted to debtors on their behalf (with an award of fees and costs awarded to the state in any successful action). Any district court in the state would be given "concurrent jurisdiction" over such actions by the state.(13) Third, the bankruptcy court, on its own motion or on motion of the United States trustee or the debtor, would be authorized to enjoin both intentional violations of the new §526 and any "clear and consistent pattern or practice" of violating the section. Civil penalties would also be authorized in connection with such motions.State consumer protection laws would be superseded only to the extent that they were inconsistent with the new federal debtor protections specified for the Bankruptcy Code.
Impact. The proposed prohibitions and enforcement mechanisms would strengthen the ability of the courts to deal with dishonest and incompetent providers of bankruptcy-related services. However, the prohibition against advising the incurring of debt to fund a bankruptcy filing is overbroad. While a debtor should never be counseled to borrow money fraudulently, with the intent of discharging the debt, it may be entirely appropriate to enter into a secured loan for the purposes of financing a bankruptcy filing, and a loan from a friend or relative (intended to be repaid despite the discharge) may also be proper. Moreover, the exclusion of nonprofit organizations may unnecessarily weaken the effectiveness of the proposal. Such organizations—which may be sponsored by debtors' attorneys as well as by creditor-funded organizations—also have the potential for engaging in dishonest or incompetent provision of services.
Alternatives. (1) The prohibition against counseling the incurring of debt to pay for a bankruptcy filing should be limited to fraudulent incurred debt. (2) The exclusion of nonprofit organizations should be removed.
§107 ("Sense of the Congress") (no parallel in S. 625)
Changes. None. The section simply expresses the sense of Congress that the states should develop courses in personal finance for grade school and high school. No action is required.
§108 ("Discouraging abusive reaffirmation practices") (See S. 625, §204)
This provision is the subject of Recommendation 7 of the Consumer Bankruptcy Legislative Group.
Changes. This section would impose special requirements for the reaffirmation of wholly unsecured debts. Unless such a debt was owed to a credit union (in which case the special provisions would not apply), the reaffirmation agreement could only go into effect after a court hearing, at which the debtor would be required to appear in person, and at which the court would determine whether the agreement (1) was an undue hardship, (2) was in the debtor's best interest, and (3) was a result of a threat by the creditor to take action that was either illegal or that the creditor did actually intend to take. The reaffirmation agreement for such debts would be required to contain a clear and conspicuous statement of the right of the debtor to such a hearing. A debtor represented by counsel would be able to waive the right to the hearing by signing a written statement of waiver, identifying the debtor's counsel.
Impact. This proposal is directed at the potential for creditor abuse in obtaining reaffirmations of unsecured debt. This focus is reasonable. Abuse of the reaffirmation process is much more likely to occur when the claim in question is not secured by collateral with substantial value, since there is often little need for debtors to reaffirm such debt. Nevertheless, the proposal is unlikely to have a major impact. Under current law (§524(c) and (d)), a court hearing on reaffirmations is already required for unrepresented debtors, so the requirement of a hearing for unsecured debt reaffirmations makes little difference for such debtors. Debtors represented by counsel may currently enter into binding reaffirmation agreements, under current law, if their attorneys execute a declaration stating, among other things, that the reaffirmation would not impose an undue hardship on the debtor. It can be anticipated that debtors whose counsel have executed such a declaration will almost always waive the "right" to a court hearing (and thus avoid the need to make an appearance at court). It is likely that hearings would only be held where conscientious debtors' counsel, rather than simply refusing to approve a reaffirmation agreement, execute the required declaration only if their clients agree not to waive hearing. This would have the effect of leaving to the court the question of whether the reaffirmation agreement is in the debtor's best interests.
The proposal would create uncertainty by failing to indicate how the required hearing would be initiated. Finally, the proposal excludes debts owing to credit unions, for no apparent reason, since reaffirmations of unsecured credit union debt may also be against a debtor's best interests.
Alternatives.
1. Unless a reaffirmation agreement involves a claim secured by a valid, perfected and enforceable purchase money security interest in property with an original selling price to the debtor (exclusive of costs of financing) of not less than $3,000, the agreement should be effective only (a) after a hearing, on motion by the creditor, attended by the debtor, and (b) upon findings by the court (1) that the agreement is in the best interest of the debtor and (2) that, in light of the income and expenses set forth on the debtor's schedules filed in the case, the debtor has the ability both to pay the reaffirmed debt and to provide support to all of the persons for whom he or she is responsible, including all court-ordered support payments.
2. For all reaffirmations as to which a court hearing is not conducted, the debtor's attorney's certificate should include a representation that the debtor has the ability to pay the reaffirmed debt as well as provide necessary support, including all court-ordered support payments, in light of the income and expenses set forth on the debtor's schedules filed in the case.
§109 ("Promotion of alternative dispute resolution") (See S. 625, §201)
Changes. Two distinct changes would be effected by this section of H.R. 833. First, an additional ground for partial disallowance of claims would be created. Claims based on wholly unsecured consumer debts could be reduced by up to 20 percent upon a showing by the debtor (by clear and convincing evidence) (1) that the debtor offered the creditor an alternative repayment schedule through an approved credit counseling agency within 60 days before filing bankruptcy, (2) that the offer provided for payment to the claimant of at least 60 percent of the amount of the debt over 'the repayment period of the loan, or a reasonable extension thereof," (3) that no part of the debt is nondischargeable, or entitled to priority, or "would be paid a greater percentage in a chapter 13 plan than offered by the debtor," and (4) that "the creditor unreasonably refused to consider the debtor's proposal."
The second change would prohibit trustees from using preference theory (under §547 of the Code) to recover any sums paid to creditors as part of a repayment plan created by an approved credit counseling agency.
Impact. The additional ground for partial disallowance is unlikely to have a substantial impact, for several reasons: (1) A debtor is only affected by the allowance of unsecured claims in situations where unsecured creditors are paid in full. Otherwise, any reduction in one creditor's claim merely results in other creditors receiving a higher dividend. (2) The maximum reduction is only 20% of the claim, unlikely to be a significant amount in most consumer cases. (3) A heavy burden of proof (clear and convincing evidence) is placed on the debtor, as to elements such as the reasonableness of the debtor's proposal and whether the creditor refused to "consider" the proposal. Such a burden is likely to be difficult to meet in most situations. (4) No provision is made for any award of a debtor's costs and fees in pursuing the claim reduction. A debtor following a bankruptcy filing is unlikely to have funds available to prosecute the objection.
A debtor who enters into a credit counseling plan may very well exclude certain creditors whom the debtor does not wish to have paid. Unless payments to other creditors can be recovered as preferences, the credit counseling plan will have the effect of ratifying the debtor's discrimination.
Alternatives. (1) The grounds for disallowance of claims under §502(b) could include failure of a creditor to negotiate in good faith when presented with a repayment plan proposed by the debtor in consultation with an approved credit counseling service. This ground for disallowance could be limited (as in the proposal) to general unsecured debt, and could provide for partial disallowance at a fixed rate of 50%. Any party in interest would have standing to assert the objection.
(2) Payments made under a repayment plan proposed through an approved credit counseling service should only be exempt from preference recovery if the plan was proposed by the debtor in good faith.
§110 ("Enhanced disclosure for credit extensions secured by a dwelling") (no parallel in S. 625)
Changes. None. The Federal Reserve Board would be directed to conduct a study and submit a report to Congress regarding the need for additional disclosures to consumers entering into home equity
H.R. 1588 Discrimination Judgment Protection Act of 1999
S. 751 Seniors Safety Act of 1999
S. 454 To Authorize the Appointment of Additional Bankruptcy Judges (Md.)
S 454 IS
February 24, 1999
Mr. SARBANES (for himself and Ms. MIKULSKI) introduced the following bill; which was read twice and referred to the Committee on the Judiciary
- Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. BANKRUPTCY JUDGESHIPS.
- In section 152(a)(2) of title 28, United States Code, in the
item relating to the judicial district of Maryland, strike `4' and
insert `8'.
S. 1217 Commerce Justice State Appropriations Bill
S. 2857 Privacy Policy Enforcement in Bankruptcy Act of 2000
H.R. 1276 Credit Card Consumer Protection Act of 1999
HR 1276 IH
March 24, 1999
Ms. ROYBAL-ALLARD (for herself, Mr. LUTHER, Mr. SHOWS, Mr. GREEN of Texas, Mr. PASTOR, Mr. BROWN of California, Ms. LEE, Mr. STARK, Mr. DAVIS of Illinois, Mr. FILNER, Mr. DIXON, Mr. OLVER, Mr. GEORGE MILLER of California, Mr. HINCHEY, and Ms. WOOLSEY) introduced the following bill; which was referred to the Committee on Banking and Financial Services
- Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
- This Act may be cited as the `Credit Card Consumer Protection
Act of 1999'.
SEC. 2. FEES FOR ON-TIME PAYMENTS PROHIBITED.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by adding at the end the following new subsection:
- `(h) FEES FOR ON-TIME PAYMENTS PROHIBITED-
- `(1) IN GENERAL- In the case of any credit card account
under an open-end consumer credit plan, no minimum finance charge for
any period (including any annual period), and no fee in lieu of a
minimum finance charge, may be imposed with regard to such account or
credit extended under such account solely on the basis that any credit
extended has been repaid in full before the end of any grace period
applicable with respect to the extension of credit.
- `(2) SCOPE OF APPLICATION- Paragraph (1) shall not be
construed as--
- `(A) prohibiting the imposition of any flat annual fee
which may be imposed on the consumer in advance of any annual period to
cover the cost of maintaining a credit card account during such annual
period without regard to whether any credit is actually extended under
such account during such period; or
- `(B) otherwise affecting the imposition of the actual
finance charge applicable with respect to any credit extended under such
account during such annual period at the annual percentage rate
disclosed to the consumer in accordance with this title for the period
of time any such credit is outstanding.'.
SEC. 3. FREEZE ON INTEREST RATE TERMS AND FEES ON CANCELED CARDS.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by inserting after subsection (h) (as added by section 2 of this
Act) the following new subsection:
- `(i) FREEZE ON INTEREST RATE TERMS AND FEES ON CANCELED
CARDS-
- `(1) ADVANCE NOTICE OF INCREASE IN INTEREST RATE REQUIRED-
In the case of any credit card account under an open-end consumer credit
plan, no increase in any annual percentage rate of interest (other than
an increase due solely to a change in another rate of interest to which
such rate is indexed) applicable to any outstanding balance of credit
under such plan may take effect before the beginning of the billing
cycle which begins not less than 15 days after the accountholder
receives notice of such increase.
- `(2) INCREASE NOT EFFECTIVE FOR CANCELED ACCOUNTS- If an
accountholder referred to in paragraph (1) cancels the credit card
account before the beginning of the billing cycle referred to in such
paragraph and surrenders all unexpired credit cards issued in connection
with such account--
- `(A) an annual percentage rate of interest applicable
after the cancellation with respect to the outstanding balance on such
account as of the date of cancellation may not exceed any annual
percentage rate of interest applicable with respect to such balance
under the terms and conditions in effect before the increase referred to
in paragraph (1); and
- `(B) the repayment of such outstanding balance after
the cancellation shall be subject to all other terms and conditions
applicable with respect to such account before the increase referred to
in such paragraph.
- `(3) NOTICE OF RIGHT TO CANCEL- The notice referred to in
paragraph (1) with respect to an increase in annual percentage rate of
interest shall
contain a brief description of the right of the consumer--
- `(A) to cancel the account before the effective date of
the increase; and
- `(B) after such cancellation, to pay any balance
outstanding on such account at the time of cancellation in accordance
with the terms and conditions in effect before the
cancellation.'.
SEC. 4. DISCLOSURE OF FEES AND INTEREST RATES ON CREDIT ADVANCES THROUGH THE USE OF 3d PARTY CHECKS.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by inserting after subsection (i) (as added by section 3 of this
Act) the following new subsection:
- `(j) FEES AND INTEREST RATES ON CREDIT ADVANCES THROUGH THE USE
OF 3d PARTY CHECKS-
- `(1) IN GENERAL- In the case of any credit card account
under an open-end consumer credit plan, a creditor may not provide the
accountholder with any negotiable or transferable instrument for use in
making an extension of credit to the accountholder for the purpose of
making a transfer to a 3d party, unless the creditor has fully satisfied
the notice requirements of paragraph (2) with respect to such
instrument.
- `(2) NOTICE REQUIREMENTS- A creditor meets the notice
requirements of this paragraph with respect to an instrument referred to
in paragraph (1) if the creditor provides, to an accountholder at the
same time any such instrument is provided, a notice which prominently
and specifically describes--
- `(A) the amount of any transaction fee which may be
imposed for making an extension of credit through the use of such
instrument, including the exact percentage rate to be used in
determining such amount if the amount of the transaction fee is
expressed as a percentage of the amount of the credit extended;
and
- `(B) any annual percentage rate of interest applicable
in determining the finance charge for any such extension of
credit.'.
SEC. 5. PROHIBITION ON OVER-THE-LIMIT FEES IN CREDITOR-APPROVED TRANSACTIONS.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by inserting after subsection (j) (as added by section 4 of this
Act) the following new subsection:
- `(k) LIMITATION ON IMPOSITION OF OVER-THE-LIMIT FEES- In the
case of any credit card account under an open-end consumer credit plan,
a creditor may not impose any fee on the accountholder for any extension
of credit in excess of the amount of credit authorized to be extended
with respect to such account if the extension of credit is made in
connection with a credit transaction which the creditor approves in
advance or at the time of the transaction.'.
SEC. 6. PROHIBITION ON 2-CYCLE BILLING.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by inserting after subsection (k) (as added by section 5 of this
Act) the following new subsection:
- `(l) PROHIBITION ON 2-CYCLE BILLING- In the case of any credit
card account under an open-end consumer credit plan, if the creditor
provides, with regard to any new extension of credit under such account,
a period during which such extension of credit may be repaid without
incurring a finance charge for such extension of credit, no finance
charge may subsequently be imposed for such period with regard to any
unpaid balance (as of the end of such period) of such extension of
credit.'.
SEC. 7. DISCLOSURES RELATED TO `TEASER RATES'.
- Section 127(c) of the Truth in Lending Act (15 U.S.C. 1637(c))
is amended--
- (1) by redesignating paragraph (5) as paragraph (6);
and
- (2) by inserting after paragraph (4) the following new
paragraph:
- `(5) ADDITIONAL NOTICE CONCERNING `TEASER RATES'-
- `(A) IN GENERAL- If any application or solicitation for
a credit card for which a disclosure is required under this subsection
offers, for an introductory period of less than 1 year, an annual
percentage rate of interest which--
- `(i) is less than the annual percentage rate of
interest which will apply after the end of such introductory period;
or
- `(ii) in the case of an annual percentage rate
which varies in accordance with an index, which is less than the current
annual percentage rate under the index which will apply after the end of
such period,
- the application or solicitation shall contain the
disclosure contained in subparagraph (B) or (C), as the case may
be.
- `(B) FIXED ANNUAL PERCENTAGE RATE- If the annual
percentage rate which will apply after the end of the introductory
period will be a fixed rate, the application or solicitation shall
include the following disclosure: `The annual percentage rate of
interest applicable during the introductory period is not the annual
percentage rate which will apply after the end of the introductory
period. The permanent annual percentage rate will apply after (insert
date) and will be (insert percentage rate).'.
- `(C) VARIABLE ANNUAL PERCENTAGE RATE- If the annual
percentage rate which will apply after the end of the introductory
period will vary in accordance with an index, the application or
solicitation shall include the following disclosure: `The annual
percentage rate of interest applicable during the introductory period is
not the annual percentage rate which will apply after the end of the
introductory period. The permanent annual percentage rate will be
determined by an index and will apply after (insert date). If the index
which will apply after such date were applied to your account today, the
annual percentage rate would be (insert percentage
rate).'.
- `(D) FORM OF DISCLOSURE- The disclosure required under
this paragraph shall be made in a clear and conspicuous manner in a form
at least as prominent as the disclosure of the annual percentage rate of
interest which will apply during the introductory
period.'.
SEC. 8. DISCLOSURES RELATING TO THE DATES PAYMENTS ARE DUE.
- Section 127(b)(9) of the Truth in Lending Act (15 U.S.C.
1637(b)(9)) is amended by striking `The date by which or the period (if
any) within which, payment must be made to avoid additional finance
charges,' and inserting `In a prominent place on the face of the
statement, the date of the last full business day on which payment may
be received before the imposition of late fees or additional finance
charges (without regard to whether payment may be received on a
subsequent nonbusiness day or during a portion of a subsequent business
day before any such fee or charge is imposed) and a conspicuous notice
that the failure to remit payment in sufficient time for the payment to
be processed by such date may result in substantial late fees or
additional finance charges,'.
SEC. 9. PROHIBITION ON MINIMUM PAYMENT AMOUNTS THAT RESULT IN NEGATIVE AMORTIZATION.
- Section 127 of the Truth in Lending Act (15 U.S.C. 1637) is
amended by inserting after subsection (l) (as added by section 6 of this
Act) the following new subsection:
- `(m) PROHIBITION ON MINIMUM PAYMENT AMOUNTS THAT RESULT IN
NEGATIVE AMORTIZATION-
- `(1) IN GENERAL- In the case of any credit card account
under an open-end consumer credit plan, the minimum amount of any
periodic payment required to be made on any outstanding balance may not
be less than the finance charge applicable with respect to such
outstanding balance for such period.
- `(2) DISCLOSURES REQUIRED IN CASE OF LOW AMORTIZATION RATE-
If, in the case of any credit card account under an open-end consumer
credit plan, the minimum amount of any periodic payment required to be
made on any outstanding balance reduces the outstanding balance by less
than 2 percent of such balance, after payment of any finance charge and
fees imposed for such period, the periodic statement required under
subsection (b) with respect to such account shall include a conspicuous
notice in a prominent place on the statement of--
- `(A) the fact that the outstanding balance will be
reduced by less than 2 percent if the consumer only pays the minimum
amount; and
- `(B) the period of time which would be required to pay
off the outstanding balance if the consumer paid only the minimum amount
of each periodic payment required until such balance is fully
repaid.
- `(3) EXCEPTION UNDER EXIGENT CIRCUMSTANCES- In addition to
any other authority of the Board under this title to prescribe
regulations, the Board may prescribe regulations which permit exceptions
to the application of paragraph (1) with respect to any consumer who
requests a creditor to agree to a payment deferral plan for a limited
period of time due to loss of employment, illness, or incapacity, or
such other exigent circumstances the Board may describe in such
regulations.'.
THIS SEARCH THIS DOCUMENT GO TO Next Hit Forward New Bills Search Prev Hit Back HomePage Hit List Best Sections Help Contents Display