Congress Continues to Address Bankruptcy Reforms
 
March 1, 1999
 

In 1998, the world watched as baseball’s Mark McGwire and Sammy Sosa succeeded in breaking the long-standing record for the most homeruns hit in a season. Although this was the most exciting record set in 1998, it was not the only one to be broken. According to the Administrative Office of the US Courts, a total of 1,442,549 bankruptcies were filed in 1998, an increase of 2.7% from 1997. Personal bankruptcies represented 96.9% of all filings in 1998 despite a booming economy.

Amid nationwide concern regarding the ease with which individuals can discharge their debts by filing for personal bankruptcy and regarding the costs absorbed by society as a result, Congress has been moving to crack down on personal bankruptcy filings. In 1998, in the House of Representatives, Rep. Gekas (R-Pa.) introduced the Bankruptcy Reform Act of 1998 (H.R. 3150). The main theme of this bill was to prevent debtors who could afford to repay at least some of their debts from shirking their responsibilities by filing for bankruptcy under Chapter 7. Instead, debtors would be forced to provide for at least partial repayment of outstanding obligations. Determining which bankruptcy chapter to file would be based on an objective "means test" outlined in the bill. The bill passed the House easily.

The Senate introduced and approved its own bankruptcy legislation, although the "means test" in the Senate Bill was not as harsh as the one contained in the House bill. A compromise version of the bankruptcy reform legislation was approved by a House/Senate conference committee and was passed by the House. However, the compromise bill never made it to the Senate and was not enacted.

As anticipated, both the House of Representatives and the Senate introduced their own versions of bankruptcy reform legislation early in the current 106^th Session of Congress. It is expected and inevitable that some version of the reform legislation will pass this year. While it is fairly certain that Congress will pass the legislation, it is not clear whether President Clinton will exercise his right to veto the bankruptcy reforms.

On February 24, 1999, Pennsylvania Representative George W. Gekas (R- Pa.) introduced the Bankruptcy Reform Act of 1999 (H.R. 833). The bill is virtually identical to the final version of the reform legislation that passed the House last year with 300 votes. Although the 1999 legislation was co-sponsored by a bipartisan group of six representatives, the Clinton Administration announced that it would veto the legislation because it is too harsh on debtors.

The new bill contains a revised "means test," whereby debtors who earn more than the national median income and could afford to repay either $5,000 or 25% of their debts over five years cannot seek relief under Chapter 7. The national median income for a family of four is $51,500.

In an attempt to help create more objective uniformity in determining the repayment capacity of debtors in Chapter 7, the use of IRS expense standards has been proposed. On April 20, 1999, the House Judiciary Committee Chair, Henry Hyde (R-Ill.) criticized the use of the IRS standards, which are often used with regard to delinquent tax cases, as being inappropriate for bankruptcy cases because debtors are not necessarily culpable parties. Hyde offered an amendment to do away with the IRS standards and apply new standards that were to be developed within one year from the enactment of the bankruptcy reform. The amendment passed by a 13-11 vote. However, only two days later, on April 22, 1999, after heated debate, the committee reversed course and passed an amendment that reinstated the use of the IRS standards.

In the event a debtor files for Chapter 7 and the debtor’s disposable income is not less than $6,000 over 60 months, the House bill would require the bankruptcy court to presume that abuse exists and may require the dismissal of the bankruptcy case.¹ A presumption of abuse can be rebutted only by a demonstration of extraordinary circumstances.² When the presumption of abuse is rebutted, the debtor would have to proceed under Chapter 13 or forego bankruptcy protections.

Another point of debate with regard to reform legislation has been the status of homestead exemptions. A House subcommittee approved an amendment that would impose a $250,000 cap on homestead exemptions. However, in states such as Florida where the homestead exemption is unlimited, the cap does not apply.

The House approved the sweeping bankruptcy reforms of H.R. 833 by a vote of 313-108 on May 5, 1999. The bipartisan vote is enough to override the threatened presidential veto.

On the other side of the hall, the Senate introduced its own version of reform legislation. Unlike the House Bill, the Senate Bill, the Consumer Bankruptcy Reform Act of 1999 (S. 945) is not identical to the 1998 bill. Once again, the primary difference between the Senate and House bills is the "means test." According to the Senate version, an individual presumed to have at least $15,000 in disposable income over a five-year period would be required to file Chapter 13 (the comparable five-year disposable income amount in the House Bill is $5,000). In addition, the Senate bill provides more flexibility with regard to the "means test," and the possibility of a finding of abuse when a debtor files Chapter 7. Instead of having to demonstrate "extraordinary circumstances" to rebut a presumption of abuse as required under the House bill, the Senate’s version only requires a showing of "special circumstances." The homestead exemption provisions in the Senate Bill are similar to those proposed in the House.

Notwithstanding initial expectations, it is now becoming less likely that the full Senate will consider its version of bankruptcy reform legislation before mid-June.

Additional issues being addressed in both the Senate and House bills include raising the priority of support obligations, restricting the scope of a Chapter 13 discharge, and imposing consumer credit counseling requirements to name a few. While the new legislation in both the Senate and the House are really overhauls of provisions related to consumer bankruptcies, there have been some suggested changes regarding Chapter 11 and other provisions in the current Bankruptcy Code.

For example, the Senate committee adopted an amendment to provide that the income earned by an individual Chapter 11 debtor be deemed "property of the estate" and be subject to administration for the benefit of creditors. Another recommended change would help ensure the payment of post-petition utility service claims when companies file Chapter 11.

The House adopted an amendment on April 20, 1999, extending the current 60-day time limit to assume or reject non-residential real property leases to 120 days. The debtor would then have the opportunity to extend the 120-day time limit for another 120 days with cause. No additional extensions would be granted without the landlord’s consent. On April 27, 1999, the maximum 240-day extension remained intact, although the House committee did agree to cap the priority for administrative expense claims under §503(b) in cases where a non-residential real property lease was assumed and later rejected. The cap would be one year following the later of the rejection date or the date of actual turnover of the premises, with any remaining claim to be treated as an unsecured claim under §502(b)(6).³

A significant amendment to the House Bill related to venue would limit the filing of corporate bankruptcy cases in Delaware. The venue amendment provides that the domicile and residence of a corporate debtor are conclusively presumed to be the district in which the debtor’s principal place of business is located.

On March 30, 1999, President Clinton signed into law a bill that extends the provisions of Chapter 12 until October 1, 1999. Chapter 12 of the Bankruptcy Code was originally enacted in 1986 as a temporary provision to protect family farmers by allowing them to reorganize their farms. The President urged lawmakers to make the provisions of Chapter 12 permanent.

During the debate on bankruptcy reform, there have been discussions regarding the regulation or restriction of credit card practices. In a separate bill, the House has introduced the "Consumer Credit Card Protection Amendments of 1999" (H.R. 900), which amends the Truth in Lending Act. This bill enhances the disclosure requirements on credit card issuers regarding minimum monthly payments, teaser and permanent interest rates, required payment dates and late fees. In addition, the bill bars the issuance of credit cards to individuals under the age of 21 and bans issuers from canceling an account or imposing new fees on card holders who routinely pay off monthly card bills in full. The bill allows consumers to cancel their card if the interest rate is raised, and allows consumers to pay off balances under terms in effect before the increase. The President has also introduced legislative proposals and executive orders intended to assist Americans "with both the tools and confidence" they will need to participate in "a thriving, but highly complex, 21^st Century economy."⁴ The "Financial Privacy and Consumer Protection Initiative" advocates greater disclosure by the consumer credit industry and addresses many of the same issues as the Consumer Credit Card Protection Amendments of 1999.

Although the proposed bankruptcy reform legislation in the Senate and House is controversial, some version is expected to pass this session. What is uncertain is whether President Clinton will exercise his veto power to assert the administration’s objections to the new restrictions that will be placed on debtors. In the event bankruptcy reform legislation is passed and signed into law, the new bankruptcy laws could be effective almost immediately. Perhaps bankruptcy and baseball will both be exciting in the fall.⁵

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¹See H.R. 833, §102. return to article

²Id. return to article

³See H.R. 833, §217. return to article

⁴President Clinton, Tuesday, May 4, 1999 press conference with the First Lady and Treasury Secretary Robert Rubin. return to article

⁵Information obtained from the American Bankruptcy Institute Network Update was used in the preparation of this article. return to article

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