[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]
IMPLEMENTATION OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER
PROTECTION ACT OF 2005
COMMERCIAL AND ADMINISTRATIVE LAW
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
JULY 26, 2005
Serial No. 109-55
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin JERROLD NADLER, New York
RANDY J. FORBES, Virginia DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
James Daley, Full Committee Counsel
Brenda Hankins, Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
JULY 26, 2005
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
Mr. Clifford J. White, III, Acting Director, Executive Office for
United States Trustees, Washington, D.C.
Oral Testimony................................................. 6
Prepared Statement............................................. 9
The Honorable A. Thomas Small, United States Bankruptcy Judge for
the Eastern District of North Carolina, on behalf of the
Judicial Conference of the United States, Washington, D.C.
Oral Testimony................................................. 19
Prepared Statement............................................. 20
Mr. Travis B. Plunkett, Legislative Director, Consumer Federation
Oral Testimony................................................. 24
Prepared Statement............................................. 27
George Wallace, Esq., Coalition for the Implementation of
Bankruptcy Reform, Washington, D.C.
Oral Testimony................................................. 38
Prepared Statement............................................. 41
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and
Chairman, Subcommittee on Commercial and Administrative Law.... 3
Material Submitted for the Hearing Record
Letter to the Honorable F. James Sensenbrenner, Jr., House
Judiciary Committee, from Bruce Leonard, Chair, and John A.
Barrett, Chair, Board of Governors, International Insolvency
Prepared Statement of the International Insolvency Institute..... 67
Prepared Statement of Samuel K. Crocker, on behalf of the
National Association of Bankruptcy Trustees, submitted by the
Honorable Mark Green, a Representative in Congress, from the
State of Utah.................................................. 84
IMPLEMENTATION OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER
PROTECTION ACT OF 2005
TUESDAY, JULY 26, 2005
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
The Subcommittee met, pursuant to notice, at 2:12 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Chairman of the Subcommittee) presiding.
Mr. Cannon. I think we'll go ahead and begin. Thank you all
for coming out. Quite a group. I'm a little surprised by the
attendance here today.
The Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 was signed into law by President George W. Bush on
April 20, 2005. The act represents one of the most
comprehensive overhauls of the Bankruptcy Code in more than 25
years, particularly with respect to its consumer bankruptcy
reforms. These consumer bankruptcy reforms include, for
example, the establishment of a means test mechanism to
determine a debtor's ability to repay debts and the requirement
that consumer debtors receive counseling prior to filing for
As we know, most of the act's provisions do not become
effective until approximately 3 months from now on October 17,
2005. As we also know, the act directs the Executive Office for
United States Trustees and the Judicial Conference to perform
various tasks to facilitate the act's implementation. These
responsibilities include the formulation and issuance of
various rules, forms, guidelines, and procedures.
The purpose of today's hearing is to provide an opportunity
for our Subcommittee to see how the Executive Office and the
Conference are progressing toward fulfilling these critical
responsibilities. For example, we are particularly interested
in hearing how the Executive Office will ensure that only
qualified credit counseling agencies and financial management
course providers are approved. Unfortunately, some players in
this industry have engaged in abusive practices and other
With respect to the act's means test reforms, which
establish an income/expense screening mechanism for the purpose
of determining a consumer debtor's ability to repay debts, the
act requires the Executive Office to proactively identify
abusive bankruptcy cases and to conduct random audits of cases,
as directed by the act. We would like to know how the United
States Trustee Program will implement these responsibilities.
With respect to small business debtors, the act requires
the United States trustee to conduct an initial debtor
interview before the creditors for the purpose of investigating
the debtor's viability and its business plan, among other
matters. In addition, the act authorizes the United States
trustee to inspect the debtor's business premises for the
purpose of reviewing the debtor's books and records and
verifying that the debtor has filed his tax returns. The
methods by which the initial debtor interviews and inspections
are of interest to us.
Like the Executive Office, the Judicial Conference is
tasked by the act to play a critical role in its
implementation. Much of the bankruptcy practice is guided by
official rules and forms that are prescribed by the United
States Supreme Court, subject to congressional disapproval or
The Supreme Court, in this endeavor, is largely guided by
the Judicial Conference, which typically engages in a very
prudential and public process from which draft rules and forms
are proposed and finalized. Specifically, with respect to the
development of bankruptcy rules and forms, the Conference
receives guidance from the Advisory Committee on Bankruptcy
An integral part of the act's means test provisions is the
requirement that a Chapter 7 debtor to file a statement setting
forth his or her current monthly income and the calculations
that determine whether a presumption of abuse based on the
debtor's ability to repay arises. To implement this
requirement, section 1232 of the act requires the Supreme Court
to prescribe an official form for the income/expense disclosure
statement and to promulgate general rules on the content of
such statement. These rules and forms must be finalized and
made available to the public by the act's effective date,
namely, October 17, 2005.
Accordingly, we're very interested to learn about the
process by which these rules and forms will be promulgated,
whether the process will be completed in time to meet this
deadline, and whether the public will have an opportunity to
participate in this process. In addition, we would like to know
the extent, if any, to which the court system will make the
Internal Revenue expense standards and Census Bureau income
statistics readily available to the public.
Another area of interest to us is the act's provision
authorizing a court to waive the Chapter 7 filing fee for an
individual and certain other fees under certain circumstances.
In light of the fact that $45 of the Chapter 7 trustee's fee is
paid out of this filing fee, we would like to know how
Conference will treat the payment of trustee compensation in
cases where the payment of the filing fee is waived.
Finally, the act requires certain personal information,
such as the names of a debtor's minor children, and tax returns
filed with the court to be safeguarded from public disclosure.
We would like to know how the court system will ensure that
this information does not fall into the wrong hands.
I now turn to my colleague Mr. Watt, who I suspect will
have a statement for the record. We may recognize him later,
when he arrives.
Without objection, any statement by him or other Members of
the Committee will be placed in the record. Hearing no
objection, so ordered.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Chairman, Subcommittee on
Commercial and Administrative Law
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
was signed into law by President George W. Bush on April 20, 2005. The
Act represents one of the most comprehensive overhauls of the
Bankruptcy Code in more than 25 years, particularly with respect to its
consumer bankruptcy reforms. These consumer bankruptcy reforms include,
for example, the establishment of a means test mechanism to determine a
debtor's ability to repay debts and the requirement that consumer
debtors receive credit counseling prior to filing for bankruptcy
As we know, most of the Act's provisions do not become effective
until approximately three months from now on October 17, 2005. As we
also know, the Act directs the Executive Office for United States
Trustees and the Judicial Conference to perform various tasks to
facilitate the Act's implementation. These responsibilities include the
formulation and issuance of various rules, forms, guidelines, and
The purpose of today's hearing is to provide an opportunity for our
Subcommittee to see how the Executive Office and the Conference are
progressing toward fulfilling these critical responsibilities. For
example, we are particularly interested in hearing how the Executive
Office will ensure that only qualified credit counseling agencies and
financial management course providers are approved. Unfortunately, some
players in this industry have engaged in abusive practices and other
With respect to the Act's means test reforms, which establish a
income/expense screening mechanism for the purpose of determining a
consumer debtor's ability to repay debts, the Act requires the
Executive Office to proactively identify abusive bankruptcy cases and
to conduct random audits of cases, as directed by the Act. We would
like to know how the United States Trustee Program will implemented
With respect to small business debtors, the Act requires the United
States Trustee to conduct an initial debtor interview before the
meeting of creditors for the purpose of investigating the debtor's
viability and its business plan, among other matters. In addition, the
Act authorizes the United States Trustee to inspect the debtor's
business premises for the purpose of reviewing the debtor's books and
records and verifying that the debtor has filed its tax returns. The
methods by which the initial debtor interviews and inspections are of
interest to us.
Like the Executive Office, the Judicial Conference is tasked by the
Act to play a critical role in its implementation. Much of bankruptcy
practice is guided by official rules and forms that are prescribed by
the United States Supreme Court, subject to Congressional disapproval
or amendment. The Supreme Court, in this endeavor, is largely guided by
the Judicial Conference which typically engages in a very prudential
and public process from which draft rules and forms are proposed and
finalized. Specifically, with respect to the development of bankruptcy
rules and forms, the Conference receives guidance from the Advisory
Committee on Bankruptcy Rules.
An integral part of the Act's means test provisions is the
requirement that a Chapter 7 debtor to file a statement setting forth
his or her current monthly income and the calculations that determine
whether a presumption of abuse based on the debtor's ability to repay
arises. To implement this requirement, section 1232 of the Act requires
the Supreme Court to prescribe an official form for the income/expense
disclosure statement and to promulgate general rules on the content of
such statement. These rules and forms must be finalized and made
available to the public by the Act's effective date, namely, October
17, 2005. Accordingly, we are very interested to learn about the
process by which these rules and forms will be promulgated, whether the
process will be completed in time to meet this deadline, and whether
the public will have an opportunity to participate in this process. In
addition, we would like to know the extent--if any--to which the court
system will make the Internal Revenue expense standards and Census
Bureau income statistics readily available to the public.
Another area of interest to us is the Act's provision authorizing a
court to waive the chapter 7 filing fee for an individual and certain
other fees, under certain circumstances. In light of the fact that $45
of the Chapter 7 trustee's fee is paid out of this filing fee, we would
like to know how Conference will treat the payment of trustee
compensation in cases where the payment of the filing fee is waived.
Finally, the Act requires certain personal information, such as the
names of a debtor's minor children, and tax returns filed with the
court to be safeguarded from public disclosure. We would like to know
how the court system will ensure that this information does not fall
into the wrong hands.
Mr. Cannon. Without objection, the Chair will be authorized
to declare recesses of the hearing at any point. Hearing none,
I ask unanimous consent that Members have 5 legislative
days to submit written statements for inclusion in today's
At this time, I would like to offer into the record, on
unanimous consent, a statement from the International
Insolvency Institute concerning the transitional insolvency
provisions to be codified in new Chapter 15 of the Bankruptcy
Code. I believe a copy of this statement is included in the
[The material referred to is located in the Appendix.]
Mr. Cannon. In addition, on behalf of my colleague, Mr.
Green, I would like to offer for submission into the record, a
statement on behalf of the National Association of Bankruptcy
As you all know, Mr. Green has been a staunch advocate for
the bankruptcy trustees over the years. Although he personally
wanted to be here to make this offer, his scheduling did not
permit him to attend this afternoon's hearing.
A copy of this statement was distributed earlier today. It
is also included in the Members' packets. Accordingly, I seek
on Mr. Green's behalf unanimous consent that the statement be
included in the record. Without objection, so ordered.
[The material referred to is located in the Appendix.]
Mr. Cannon. I am now pleased and honored to introduce the
witnesses for today's hearing. Our first witness is Clifford
White, who is the acting director of the Executive Office for
United States Trustees. Over the course of his 25 years of
public service in the Federal Government, Mr. White served as
an assistant United States trustee and a deputy assistant
attorney general within the Department of Justice. In addition,
he was an assistant general counsel at the U.S. Office of
Personnel Management. He is an honors graduate of George
Washington University and the George Washington University Law
Our next witness is Judge Thomas Small, who appears on
behalf of the Judicial Conference of the United States. Since
1982, Judge Small has served as a bankruptcy judge for the
Eastern District of North Carolina. He received his
undergraduate degree from Duke University and his law degree
from Wake Forest University School of Law.
From 2000 until last year, Judge Small chaired the Judicial
Conference's Advisory Committee on Bankruptcy Rules. He
currently serves as the bankruptcy judge representative to the
Conference. Judge Small was the president of the National
Conference of Bankruptcy Judges from 2000 to 2001.
Our third witness is Travis Plunkett, who is the
legislative director of the Consumer Federation of America. He
appears today on behalf of the Consumer Federation of America,
the National Consumer Law Center, and the U.S. Public Interest
The Consumer Federation is a nonprofit association of 300
organizations that promotes consumer interests through advocacy
and education. It has a defined membership of 50 million
Americans. The National Consumer Law Center, is a nonprofit
organization that specializes in consumer issues on behalf of
low-income people. The U.S. Public Interest Research Group
serves as a national lobbying office for State public interest
As the Federation's legislative director, Mr. Plunkett
focuses primarily on financial issues, including credit
reporting, bankruptcy, credit counseling, consumer privacy, and
insurance. Mr. Plunkett previously served as the New York State
legislative representative of the American Association of
Retired Persons and the association legislative director of the
New York Public Interest Research Group. He is a graduate of
the University of Denver and served in U.S. Army Intelligence
and Security Command.
Our final witness is George Wallace, who appears today on
behalf of the Coalition for the Implementation of Bankruptcy
Reform. Mr. Wallace has testified about the act's legislative
predecessors on several occasions.
Welcome back. We also understand that you interrupted your
vacation so that you could join us today, and we are most
appreciative of your efforts to accommodate us on your
Mr. Wallace began his career as a law professor, teaching
and writing about bankruptcy and consumer issues for 15 years
at Tulane, Iowa, Virginia, Stanford, and Rutgers Universities.
During this time, he started a legal aid clinic in Davenport,
Iowa; testified in favor of the FTC's credit practices rule;
was the principal draftsman of the Iowa consumer credit code;
and handled various bankruptcy matters.
In 1982, he entered the full-time practice of law, where he
represented lenders and debtors in commercial and consumer
bankruptcy cases. From 1997 onward, his practice included
representation of the Coalition for Consumer Bankruptcy Reform
and its successors during the development and legislative
refinement of the act. Currently, Mr. Wallace is the executive
director of the Center for Statistical Research in Alexandria,
Virginia. The center specializes in analyzing issues involving
consumer credit, housing, and wealth distribution.
Mr. Wallace received his law degree from the University of
Virginia Law School, where he was a member of the Order of the
Coif and the Law Review. He received his undergraduate degree
from Yale University, cum laude.
I extend each of you my warm regards and appreciation for
your willingness to participate in today's hearing. In light of
the fact that your written statements will be included in the
hearing record, I request that you limit your oral remarks to 5
minutes. So feel free to summarize them.
And I may tap a pencil or something inconspicuous because
we don't want you to just cut off, but to be aware of the time.
I think we'll have several Members of the Committee here today,
and they will all want the opportunity to ask questions. And
so, you'll have an opportunity to expand.
You have before you a lighting system that starts with a
green light. After 4 minutes, it turns to yellow and then turns
to red. And that will work for your 5 minutes as well as other
Members. I would be a little more strict with Members' timing
on their questions so that all Members will have an opportunity
to ask questions if they wish.
After you have presented your remarks, the Subcommittee
Members in the order they arrive will be permitted to ask
questions of the witnesses. And pursuant to the directive of
the Chairman of the Judiciary Committee, I ask the witnesses to
please stand and raise your right hand to take the oath.
Mr. Cannon. The record will reflect that all of the
witnesses answered in the affirmative. You may be seated.
And Mr. White, we'd be pleased if you would proceed with
TESTIMONY OF CLIFFORD J. WHITE, III, ACTING DIRECTOR, EXECUTIVE
OFFICE FOR UNITED STATES TRUSTEES, WASHINGTON, D.C.
Mr. White. Good afternoon, Mr. Chairman and Members of the
Subcommittee. I appreciate the opportunity to appear before you
to discuss the work of the U.S. Trustee Program, our plans for
implementing the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, and the fiscal year 2006 budget request
that will provide the necessary resources for us to accomplish
During the past year, the U.S. Trustee Program has made
substantial progress in achieving its mission to promote the
integrity and the efficiency of the bankruptcy system.
Beginning in April, our focus necessarily turned to
implementing the new bankruptcy reform statute. Most provisions
of the law become effective on October 17, and many of its key
features will be enforced by the U.S. Trustee Program. We are
currently engaged in a major effort to develop and to
communicate the necessary policies and systems to effectively
carry out our new duties.
Turning first to our major activities and achievements over
the past year, I can report that combating fraud and abuse in
the bankruptcy system has remained a key priority. The
cornerstone of this effort has been our National Civil
Enforcement Initiative, which addresses fraud and abuse and
enhances protections for consumer debtors.
Although the ultimate goal of enhancing the integrity of
the bankruptcy system does not lend itself easily to a
quantitative measure, some numbers do help describe the
magnitude of our success. In fiscal year 2004, the program took
more than 52,000 civil enforcement and other actions that
yielded more than $520 million in debts not discharged,
penalties, and other monetary remedies.
Criminal enforcement is another key component of our
strategy to combat fraud and abuse. Our 2-year-old Criminal
Enforcement Unit, which is largely staffed by veteran career
Federal prosecutors, has directly assisted United States
attorneys in numerous prosecutions. Importantly, the unit has
provided extensive training to program staff, private trustees,
and Federal law enforcement personnel.
In my written statement, I also describe many other major
activities of the program.
These efforts provide a helpful springboard as we launch
new initiatives to implement and enforce bankruptcy reform.
Currently, our foremost responsibility is to implement the new
statute. We've met with staff and trained staff at different
levels in the organization and can report a very high level
throughout the organization in energy, professionalism, and
commitment to getting the job done.
Let me briefly highlight just two major areas of interest.
First, in means testing. Congress prescribed new objective
criteria for determining an individual debtor's eligibility for
bankruptcy relief. The U.S. Trustee Program will be the primary
enforcer to help ensure that debtors seeking Chapter 7 relief
are not abusing the system.
It's critical that debtors file with the court new forms
containing the information necessary to evaluate their
eligibility. The U.S. Trustee Program is working closely with
the courts to develop data-enabled, ``smart'' forms, which may
be issued by the courts. Standardized, automated forms will
enhance accuracy, timeliness, and cost efficiency for the
benefit of debtors, creditors, the courts, and the U.S.
Second, I'd like to highlight credit counseling and debtor
education. The new law seeks to ensure that debtors are made
aware of their options prior to filing bankruptcy and are
equipped with more knowledge to avoid future financial
difficulties before they exit bankruptcy. Under the law, the
U.S. Trustee must approve eligible credit counseling agencies
and debtor education courses.
As recently reported by a congressional Committee and
elsewhere, some agencies within the credit counseling industry
have engaged in abusive practices. To the maximum extent
possible, we must screen out unscrupulous counselors without
erecting unnecessary barriers that would limit the number of
qualified providers who can assist debtors.
In June, we issued application forms for providers that we
believe strike the appropriate balance. We may modify
application requirements in the future as we learn from
The new law also imposes many other duties on the U.S.
Trustee Program. And, as the Chairman stated in his opening
remarks, we will be taking on new responsibilities in areas
such as small business Chapter 11 cases, debtor audits, and
conducting numerous studies. We're moving forward with alacrity
to carry out each of these mandates.
To continue our work and to implement bankruptcy reform in
fiscal year 2006, the President's amended budget contains a
request to fund the U.S. Trustee Program in the amount of
$222.6 million. This proposal includes an increase of $37.2
million to fund our new bankruptcy reform responsibilities. The
additional requested appropriations are within the revenue
amounts that were provided under the recently enacted
supplemental appropriations bill, which will add $241 million
to the U.S. Trustee System Fund over the next 5 years.
Again, I thank the Subcommittee for the opportunity to
testify. With adequate resources as contemplated by the new
bankruptcy reform statute, the program looks forward to
achieving its mission and successfully carrying out bankruptcy
reform. I would be pleased to answer any questions from the
[The prepared statement of Mr. White follows:]
Prepared Statement of Clifford J. White, III
Mr. Cannon. Thank you, Mr. White.
TESTIMONY OF THE HONORABLE A. THOMAS SMALL, UNITED STATES
BANKRUPTCY JUDGE FOR THE EASTERN DISTRICT OF NORTH CAROLINA, ON
BEHALF OF THE JUDICIAL CONFERENCE OF THE UNITED STATES,
Judge Small. Thank you, Mr. Chairman and Members of the
Subcommittee. I'm pleased to have this opportunity this
afternoon to advise you of the extraordinary efforts the
judiciary has made to implement the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005.
I'm happy to report that those efforts are on schedule, and
I anticipate that the bankruptcy system will be ready on
October 17, when the act's major provisions become effective.
As you know, the rule-making process under the Rules
Enabling Act is a deliberative one, with a long period provided
for public comment and public hearings. Bankruptcy rules must
be approved by the Advisory Committee on Bankruptcy Rules and
by the Standing Committee, then by the Judicial Conference of
the United States, and finally by the United States Supreme
Court. And after that, there is a 7-month review period by
Typically, the process takes at least 3 years, and if
everything goes according to plan, permanent rules and forms
needed to implement the reform legislation will be in place on
December 1, 2008. Until that date, interim rules and forms are
needed. The judiciary has utilized interim rules in similar
circumstances in the past, notably in connection with the
Bankruptcy Reform Act of 1978 that became effective on October
In mid August of '79, the Bankruptcy Rules Committee
proposed suggested interim rules to implement the 1978 act, and
they requested that those interim rules be adopted by each
court as local rules. A similar approach will be followed this
time with respect to the Reform Act of 2005. The only
difference being that, in addition to having the approval of
the Bankruptcy Rules Committee, the suggested interim rules and
forms will be approved by the Standing Committee and the
Judicial Conference as well.
On April 21, the day after President Bush signed the reform
act, the Chair and several members of the Bankruptcy Rules
Committee met in Washington to devise a plan for developing
interim rules and forms. Their goal was to have the interim
rules approved by the Bankruptcy Rules Committee at a special
meeting during the first week in August.
Herculean efforts toward that goal have made--were made by
the committee's chair, several subcommittees, the committee's
reporter, two consultants, the administrative office staff, the
Federal Judicial Center staff, and the Executive Office of the
United States Trustee. And as a result, drafts of 40 to 50
interim rules and forms are almost ready. And as soon as those
drafts are finalized, sometime this week, they will be
submitted to all Members of the Bankruptcy Rules Committee, and
they will also be posted on the Web site of the United States
The full Committee will vote on those interim rules at its
2-day public meeting next week in Washington on August 3 and 4.
When the suggested interim rules and forms have been approved
by the Bankruptcy Rules Committee, they will be sent first to
the Standing Committee and then to the Judicial Conference for
After the Judicial Conference approves the interim rules,
probably in mid August, each local court will be asked to adopt
them. The interim forms will be temporary forms, but pursuant
to Bankruptcy Rule 9009, they will be official forms required
for use by all courts until they are replaced by permanent
official forms, which will have been adopted after the
extensive public comment and public hearing process.
As I said before, the task force--the task before the
Bankruptcy Rules Committee over the past 100 days has been
formidable. And I can hardly overstate how much arduous work
the committee has devoted to developing proposed interim rules
and forms. But implementing the new law has involved much more
than just rules and forms. Countless working groups of judges,
clerks, deputy clerks, the staff of the administrative office,
and the Federal Judicial Center have diligently been preparing
for the coming changes on October 17.
Compliance with the new law requires extensive modification
of the court's operating procedures, also demands complete
reprogramming of the court's case management electronic case
filing system. A particular challenge has been devising a
reliable method for complying with the notice requirements of
new Bankruptcy Code Section 342. And another necessity, and
obviously a high priority, is the training of everyone involved
in carrying out the provisions of the new act, especially
judges, clerks, deputy clerks, case administrators.
Furthermore, bankruptcy administrators in the District of
Alabama and North Carolina are preparing to assume their new
responsibilities under the act, and the administrative office
is working hard to find the space and facilities for the new
and urgently needed bankruptcy judges. Getting ready hasn't
been easy, but with an impressive ongoing effort, the judiciary
will be ready on October 17, when the new law goes into effect.
[The prepared statement of Judge Small follows:]
Prepared Statement of Judge A. Thomas Small
Mr. Chairman and members of the subcommittee, I am A. Thomas Small,
judge of the United States Bankruptcy Court for the Eastern District of
North Carolina. I appear today on behalf of the Judicial Conference of
the United States, the policy-making arm of the federal courts, to
report on the actions taken by the federal judiciary to implement the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [the
``Act''], particularly the development of necessary new rules and
forms. I serve as the bankruptcy judge representative to the Judicial
Conference and am the immediate-past chair of the Advisory Committee on
Bankruptcy Rules, having served in that capacity from 2000 to 2004. The
present committee chair, Judge Thomas S. Zilly, is unable to attend
because of pressing court business.
I appreciate this opportunity to share with you details of the hard
work that the Judicial Conference and its committees have done so far
in reviewing, understanding, and implementing this massive and
complicated legislation within such a brief period of time. The Act
exceeds 500 pages in length and affects virtually every aspect of
bankruptcy cases. Among other things, it introduces the concept of a
means test as a requirement of eligibility for chapter 7 relief, adds
an entirely new chapter to the Code (chapter 15 governing cross border
insolvencies), and creates new categories of debtors and cases (small
business cases and health care businesses). The provisions of the Act
generally take effect on October 17, 2005. Implementing the legislation
on a timely basis presents a tremendous challenge for the judiciary.
I will address the actions taken by the Advisory Committee on
Bankruptcy Rules [the ``Advisory Committee'' or ``committee''] to
develop rules and forms implementing the Act, which I understand is one
of the subcommittee's principal concerns. Later, I will briefly discuss
the measures taken by other Judicial Conference committees and the
Administrative Office of the United States Courts to implement the Act
On April 21, 2005, (one day after the Act's enactment) the Advisory
Committee held an organizational meeting here in Washington to devise a
plan to carry out the Act's rules-related provisions. The Advisory
Committee represents a wide spectrum of views and consists of 16
members appointed by the Chief Justice, who are well experienced and
expert in bankruptcy law. The committee includes six article III
judges, four bankruptcy judges, three private-sector attorneys, two law
professors, and an official from the Department of Justice. In
addition, the Director of the Executive Office for the United States
Trustees and a bankruptcy clerk of court regularly attend and
participate in the committee's meetings. The committee has been working
closely and very productively with the Executive Office for the United
States Trustees to develop the means testing form, a primary component
of the Act. At the organizational meeting, the committee's chair tasked
three subcommittees to address the business, consumer, and forms issues
arising from the Act. Later, the chair tasked three additional
subcommittees to address the Act's provisions on cross-border
insolvencies, health care, and direct appeal provisions.
The Consumer Subcommittee met separately on May 6 and June 14; the
Business Subcommittee met on May 5 and June 13; and the Forms
Subcommittee met on May 6 and June 15. All the subcommittees have also
conducted lengthy conference calls, usually lasting more than three
hours. Their work product has been reviewed by a style subcommittee for
clarity and consistency. The full Advisory Committee is holding a
public meeting in Washington on August 3-4, 2005. At the meeting, the
committee will consider approximately forty new or amended rules and
changes to virtually all the Official Forms.
The groundwork for much of the Advisory Committee's work had been
prepared and considered by the committee at its meetings in 2001 and
2002, when earlier versions of the Act appeared to be nearing passage
in Congress. The committee worked on amendments to about thirty rules
and changes to about twenty forms. Many of these earlier proposals
remain largely unchanged or slightly refined and are part of the
package now under consideration. Along with the committee's more recent
consideration of the rules and forms, these records provide a rich
source of information for anyone interested in the development of the
rules and forms.
In accordance with established Judicial Conference procedures, all
rules-related records are available to the public on request.
Consistent with these procedures, the drafts of rules and forms
considered by the committee at its earlier meetings, as well as all
current draft rules and forms, have been and continue to be available
to the public on request. The public may obtain a copy of any draft
rule or form simply by contacting the Administrative Office. Likewise,
all meetings of the full Advisory Committee are open to the public.
Minutes of each meeting of the full Advisory Committee are posted on
the judiciary's internet web site.
At the Advisory Committee's April organizational meeting, it was
decided that a two-track process would be necessary to implement the
Act because its impending effective date did not provide sufficient
time to proceed under the regular rulemaking process, which ordinarily
takes three years. The first track was to: (1) identify which rules-
related provisions in the Act require an immediate response; and (2)
develop interim rules and forms addressing these time-sensitive
provisions well before the October 17 deadline so that the courts have
adequate time to implement them. The second track will be to monitor
the courts' experiences with the interim rules and forms,
simultaneously proceeding with the regular rulemaking process and
inviting public comment beginning in August 2006 on converting the
interim rules to permanent federal rules. At the same time, the
committee would also publish for comment additional proposed rule
amendments not included as part of the time-sensitive interim rules
Under the first track, interim rules will be circulated in mid-
August 2005 to the courts with a recommendation that they be adopted
without change as part of a standing or general order. The Advisory
Committee considered, but rejected, recommending model local rules
implementing the Act because many of the model local rules would
necessarily conflict with existing federal Bankruptcy Rules, which are
based on pre-Act law. Local rules cannot be inconsistent with the
federal rules. Any amendment of local rules will have to await
amendment of the federal rules through the regular rulemaking process,
which cannot be accomplished in time to meet the Act's effective date.
The committee concluded that the best vehicle to accomplish the Act's
objectives was to develop interim rules and urge the courts to adopt
them, while simultaneously monitoring the courts' experiences and
working on permanent changes to the federal rules. The same process was
followed on three separate occasions in the past when the Bankruptcy
Code was amended in 1978, 1986, and 1994, and interim rules
contemporaneous with the Act's effective date were issued. On each
occasion, the courts uniformly adopted the committee's interim rules
recommendations. I am confident that the courts will continue this
tradition and adopt the interim rules now under consideration.
As a practical matter, the courts' discretion in adopting the
amended and new rules is limited, because many of the Act's rules-
related provisions will be implemented by amended or new Official
Forms, which work in tandem with the interim rules and often are based
on them. Unlike the recommended interim rules, however, the Judicial
Conference itself authorizes the Official Forms, which courts must
``observe'' under Bankruptcy Rule 9009. Thus, courts will have a real
incentive to adopt the recommended interim rules in order to facilitate
compliance with the mandatory Official Forms.
Courts will require several weeks to train staff and make
appropriate arrangements to implement the interim rules and forms.
Major modifications must be made to the Case Management/Electronic Case
Filing software, which has now been deployed in virtually all the
bankruptcy courts. The judiciary must quickly accomplish many other
time-consuming and burdensome tasks, which I later describe, all of
which require significant lead time. In addition, legal publishing
firms require at least 60 days to make appropriate software changes and
arrangements to mass-produce amended or new Official Forms. To meet
these demands, the Advisory Committee has been working on an expedited
timetable that expects the interim rules and forms to be completed and
circulated to the courts by mid-August 2005. Achieving this ambitious
goal has imposed enormous burdens not only on the Advisory Committee,
but on the Committee on Rules of Practice and Procedure [the ``Standing
Committee''] and the Judicial Conference, all of which must review and
approve these actions. Then the ninety bankruptcy courts and their
administrative staff will have to adopt all the changes in their local
systems. Carrying out this legislation has severely strained the
judiciary, which is already under enormous pressure to cope with its
day-to-day responsibilities in the administration of justice.
Nevertheless, the judiciary is committed to fully and faithfully
execute the Act's provisions.
Recommending interim rules and authorizing Official Forms without
going through the regular Rules Enabling Act rulemaking process is an
unavoidable expedient compelled by the Act's fast-approaching effective
date. To meet the Act's deadline, the Advisory Committee has devoted
substantial time and effort in developing interim rules and forms that
faithfully implement the Act. It has worked closely with the Executive
Office for the United States Trustees. It has consulted with experts
who participated in the legislation, who at times disagreed among
themselves over the meaning of particular provisions in the Act, making
the committee's job all the more difficult. It has reached out to many
corners of the bar for assistance. It has relied on its members' varied
experiences, including members who represent creditors and others who
represent debtors in their private practice. All these efforts have
been undertaken in an open fashion to ensure that the process remains
transparent, a hallmark of the rulemaking process.
The Advisory Committee's work product is outstanding. But the
committee recognizes the inherent limitations of its abbreviated review
process. Any shortfalls in the committee's work will be identified and
corrected beginning in August 2006, when the interim rules and the
amended and new Official Forms will undergo the exacting scrutiny of
the regular rulemaking process. The Rules Enabling Act rulemaking
process is a painstaking and time-consuming process that ensures that
the best possible rules are promulgated. Permanent changes to the
Federal Rules of Bankruptcy Procedure and forms to implement the Act
will take place during the second track in accordance with the
rulemaking process as described below.
The Rules Enabling Act rulemaking process is set out in 28 U.S.C.
Sec. Sec. 2071-2077. In accordance with the regular process, the
Advisory Committee will review the experiences of the bench and bar
with the interim rules and forms with a view toward proposing permanent
amendments to the Federal Rules of Bankruptcy Procedure and
recommending any additional appropriate revisions to the Official
Forms. At its spring 2006 meeting, the committee is expected to approve
and transmit the interim rules as proposed amendments to the federal
rules, with or without appropriate revisions, to the Standing Committee
at its June 2006 meeting with a recommendation that it approve
publishing them for public comment. In addition, the committee will
request that the package include an opportunity for the public to
comment on the forms authorized in 2005. If approved, the interim rules
and forms will then be published in August 2006 for a six-month period.
Hearings will be scheduled at which the public can testify on timely
The Advisory Committee's reporter will summarize all comments and
statements submitted on the proposed rules and forms. The committee
will meet in spring 2007 and consider any changes to the proposed rules
and forms in light of the public comment. If approved, the committee
will transmit the proposed rules and forms to the Standing Committee in
June 2007 with a recommendation that they be approved and submitted to
the Judicial Conference at its September 2007 session. If approved by
the Standing Committee and the Conference, the proposed rules will then
be submitted to the Supreme Court for its consideration. Changes to the
Official Forms, however, do not have to be approved by the Court and
will take effect on a date designated by the Conference. The Court has
until May 1, 2008, to prescribe the rules and transmit them to
Congress. The rules then would take effect on December 1, 2008, unless
Congress acts otherwise.
At each stage of the rulemaking process, the proposed rule
amendments and forms will be subjected to exacting scrutiny.
Participation of the bench, bar, and public in the rules process
ensures that the procedural rules implementing the Act will be the best
that we can conceive. The rules committees have completed a remarkable
amount of first-rate work, yet much remains to be done. These
accomplishments are all the more impressive because they represent the
work of volunteers, many of whom incur substantial monetary sacrifices
in terms of lost income and all of whom sacrifice enormous amounts of
time for the public good.
I have alluded in earlier parts of my statement to many other
projects that the judiciary has undertaken to implement the Act. I now
turn to address some of these important matters.
Members of the judiciary, including members of several Judicial
Conference committees, judges, clerks, and staff at the Administrative
Office of United States Courts [the ``AO''] and the Federal Judicial
Center [the ``FJC''], have worked tirelessly to implement the Act by
its general effective date. This work involves a cross-section of
disciplines within the judiciary that require expertise in such areas
as rules and forms, clerk's office procedures, bankruptcy
administration, budget and accounting, information technology,
statistics, training, human resources, and judicial education.
Information on the Act was quickly transmitted to the courts and
clerks as soon as the law was enacted. Thereafter, judges, clerks, and
other members of the judiciary were kept informed of issues that arise
from the changes to the Bankruptcy Code, and given reports of progress
on the judiciary's implementation of the Act. In addition to memoranda
to the courts, the AO and the FJC have established web sites where
information and analyses of the Act are posted for review and study by
members of the judiciary. In order to implement the Act in an orderly,
methodical, and coordinated fashion, Director Mecham determined that
the AO's Office of Judges Programs would coordinate the multi-faceted
Implementing the new law has required substantial on-going
coordination with the Executive Office for the United States Trustees
and meetings or exchanges with other such agencies as the Internal
Revenue Service, the Department of Health and Human Services, and the
Census Bureau. Additionally, the AO has called upon many individuals
and groups for assistance, including members of the Judicial
Conference, article III and bankruptcy judges, clerks of court, and
deputy clerks. Ad hoc working groups were created, new Judicial
Conference subcommittees were formed, and a special advisory group of
judges and clerks was called upon to help develop new policies and
procedures for bankruptcy clerks' offices.
The implementation process is progressing according to projected
time tables. At this point, we expect to meet all deadlines, although
it will be a struggle to do so. It is not possible to provide a
detailed recitation of all of the work in progress in this short
testimony, but I can provide you an overview of some of the other major
initiatives beyond the rules process.
changes in operating procedures
Significant changes to the courts' operating procedures are
underway. First, careful analyses of the Act to determine all the
changes required in the courts' operating procedures were conducted.
Thereafter, revised practices and procedures were developed to meet the
requirements of the Act. Once a broad outline of the requirements and
revised procedures were in place, significant changes were initiated to
reprogram the judiciary's Case Management/Electronic Case Filing
system. Additionally, the judiciary is developing guidelines and
procedures to address various new procedures added by the Act, such as
allowing in forma pauperis chapter 7 filings, handling copies of
debtor-tax returns filed with the court, and instituting procedures for
nationwide noticing for creditors.
The FJC and the AO have planned and begun training for bankruptcy
judges, bankruptcy clerks and bankruptcy administrators, and court
staff, including case administrators in the clerks' offices who will
use the revised CM/ECF system. Training occurs nationally at
specifically designated seminars, at conferences, and via the ``FJTN,''
the FJC's closed-circuit television broadcast channel. Many other
groups have reached out to the AO for assistance or participation in
their training plans.
bankruptcy administrator program
The AO is working directly with the six bankruptcy administrator
offices in the states of Alabama and North Carolina to prepare them to
assume all the new duties and responsibilities required of them under
the Act. First, careful analysis of the Act was conducted to pinpoint
all the new duties, whether they are explicitly imposed on bankruptcy
administrators by the Act or are needed to maintain parallel treatment
with new duties imposed on United States trustees. The bankruptcy
administrator offices must be educated as to the changes in the law,
changes in the courts' operating procedures, and changes to the
bankruptcy administrators' own duties and responsibilities, such as
overseeing means testing and small business chapter 11 cases certifying
consumer credit counseling and financial management courses, and taking
on new audit and reporting responsibilities. The AO is in contact with
each bankruptcy administrator office, and an inclusive seminar is
planned for them well before the effective date of the Act. In
addition, current bankruptcy administrator procedures and manuals will
have to be revised substantially, and changes will have to be made to
their automated case management systems.
Major changes will be needed in the judiciary's statistical
systems, both to adjust to the many changes in the bankruptcy system
required in the Act generally and to comply with section 601 of the
Act, which requires the AO to gather information and produce a whole
new set of reports on consumer debtor cases. The AO has worked hand in
hand with the Executive Office for the United States Trustees and with
bankruptcy clerks to redesign the data input forms, reprogram the case
management systems, design extraction programs, and build a whole new
enterprise data system capable of receiving and processing the data.
Authorization of additional bankruptcy judgeships by the Act was
effective upon enactment. The Judicial Conference has notified all
affected circuits, including those that did not receive the bankruptcy
judgeships recommended by the Conference to Congress in early 2005.
Some circuits have begun the appointment process, advertising their new
vacancies and receiving applications for the positions. The AO is
working to identify adequate space and facilities for these new judges
and chambers staff.
We share a common interest in ensuring that the bankruptcy system
as a whole is prepared on October 17, 2005, when most of the provisions
of the Act are effective. The amount of work required of the judiciary
to implement the Act is immense and costly, especially considering the
short time frame available to accomplish the extensive revisions
required of the existing systems. The work to date has been impressive
and remarkable, and we are confident that the deadlines will be met.
Mr. Cannon. Thank you, Judge Small.
Mr. Plunkett, you are now recognized for 5 minutes.
TESTIMONY OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Good afternoon, Mr. Chairman, Ranking Member
Watt, and Members of the Committee.
I'm Travis Plunkett. I'm the legislative director of the
Consumer Federation of America, and I appreciate the
opportunity to offer our comments and those of the National
Consumer Law Center and the U.S. Public Interest Research Group
As you may know, our organizations opposed the Bankruptcy
Abuse Prevention and Consumer Protection Act because we viewed
it as an unbalanced law that erects dozens of new barriers that
will likely keep many Americans who need a fresh start in
bankruptcy from receiving it. However, since the law has yet to
take effect, I would like to focus my comments on two new
provisions in the law on which important implementation
decisions are being made as we speak.
One has already been talked about. It requires consumers to
receive credit counseling before filing for bankruptcy and then
again before being discharged. The second requires broad
disclosure of tax returns by debtors, which raises significant
First, on credit counseling. Our organizations support
credit counseling if it's properly administered, but this is a
very dangerous time to be requiring over a million new
consumers to see credit counselors. As you've heard, there have
been serious problems in the industry affecting a number of
agencies involving deceptive acts and practices, excessive
cost, and abuse by these agencies of their nonprofit status.
And a host of Federal and State agencies and regulators are
investigating this industry.
Unless the shady operators and substandard agencies in the
industry are completely shut out of offering credit counseling
under this law, Congress could be creating a situation in which
it has forced consumers into the hands of unscrupulous
agencies. So I would strongly urge this Subcommittee to
exercise vigorous oversight of the implementation of this
requirement in the next year.
I would say that the Executive Office of the U.S. Trustees
is working very hard, from what we could tell, to keep bad
agencies from being approved. But they've got a monumental task
before them. Let me point to four specific issues.
First, it's not at all clear that there is adequate
capacity of quality credit counseling to meet the requirements
of the law. So we're in a bind because, as you've heard, the
Executive Office of the U.S. Trustees is working hard to ensure
that there is adequate capacity.
We would hate to see a situation where, because of the
demands of the law, inferior or unscrupulous agencies are
approved. Conversely, we want to make sure, obviously, that
adequate capacity exists not just for in-person counseling,
which is allowed under the law; not just for telephone
counseling, which is allowed under the law; or Internet
counseling as well, but for all three throughout the country.
That is a difficult task.
So we urge this Committee and the Executive Office of the
U.S. Trustees to work hard to assure that, first, standards are
applied to ensure that no substandard agencies or agencies that
might cause harm are approved. And second, that adequate
capacity for all three delivery channels--consumers need a
choice here--is provided.
Second issue, affordability. Obviously, folks on the brink
of bankruptcy are not in good financial shape. We know from
much research that average incomes for Chapter 7 filers are in
the low 20's. For Chapter 13 filers, in the high 20's.
It would be a mistake to assume that the ability to pay
much, if anything, for credit counseling is significant here.
So it's going to be up to the Executive Office of the U.S.
Trustees to take affirmative steps to ensure that the law's
requirements that the fees be reasonable are met and that
appropriate fee waivers are provided for low-income consumers
so that they don't have to pay anything for this service.
The executive office has not done that yet, and it's
important that they lay out requirements for those fees, cap
them, and ensure that a sliding scale is available based on
ability to pay.
Third big issue, credit counselors and creditors need to do
more to ensure that credit counseling actually works, that it's
actually a viable alternative to bankruptcy. The key here is
that they need to provide a significant break for consumers who
enter credit counseling debt management plans on what they owe.
Right now, creditors don't provide a break at all in the
principal that is owed.
The law actually has a provision that we urge the Executive
Office of the U.S. Trustees to enforce that requires the
creditors offer--that provides an incentive, I should say, for
creditors to offer a real break on what is owed on principal.
And we urge the Executive Office of the U.S. Trustees to look
hard at that provision and to ensure that creditors and credit
counseling agencies are doing that.
Finally, let me say that privacy is going to be a major
issue regarding the new law's requirements that tax forms be
disclosed as part of the bankruptcy process by those filing.
This is a huge potential privacy issue. The law clearly vests
with the Administrative Office of the U.S. Courts the ability
to restrict access to creditors who are allowed access upon
And the important--the most important thing here is that
creditors should not be allowed carte blanche access for any
reason that they choose based on filing of one form with the
court to this tax information. They should be required by the
courts to show cause. Otherwise, we could have very significant
potential security breaches or the inappropriate uses of the
extremely sensitive information on these tax forms.
I have a lot of detail on the specific steps we urge the
Administrative Office to take to protect the privacy of tax
forms, especially regarding creditors in my testimony, and I'll
leave it at that.
[The prepared statement of Mr. Plunkett follows:]
Prepared Statement of Travis B. Plunkett
Mr. Cannon. Thank you, Mr. Plunkett.
TESTIMONY OF GEORGE WALLACE, ESQ., COALITION FOR THE
IMPLEMENTATION OF BANKRUPTCY REFORM, WASHINGTON, D.C.
Mr. Wallace. Good afternoon, Chairman Cannon, Ranking
Member Watt, and Members of the Subcommittee.
My name is George Wallace. It's my pleasure to appear
before you today to discuss the important topic of implementing
the Bankruptcy Abuse Prevention and Consumer Protection Act of
I am testifying on behalf of the Coalition for the
Implementation of Bankruptcy Reform, which is comprised of
major trade associations and companies that represent the full
range of consumer credit businesses interested in bankruptcy
The coalition is fully committed to working with all
interested parties to ensure that the act is implemented as
Congress intended. Our most important objective is to ensure
that an improved bankruptcy process enables consumers to fully
and efficiently obtain bankruptcy relief. At the same time,
this improved process should afford a meaningful opportunity
for consumers who can resolve their financial difficulties
through counseling or other means to do so.
My remarks today are focused upon implementation of the
consumer bankruptcy provisions of the act. Although the act
brings much needed fundamental change to this area, it must be
appropriately and efficiently implemented to fully accomplish
its goals. Let me now discuss some of the most significant
elements of the consumer bankruptcy implementation process. I
have approximately six points to make.
The act, with regard to credit counseling, which has been
discussed before, the act requires consumers to obtain credit
counseling, of course, before they file bankruptcy from a
nonprofit budget and credit counseling agency approved by the
United States trustee. This is one of the most important
consumer benefits included in the act. For this provision to be
effective, only counseling agencies of the highest quality can
be approved by the United States trustee.
In our view, the United States Trustee Program has taken
important steps to achieve this goal. We urge, however,
consideration of two modifications to its current draft
requirements. First, the proposed bonding requirements may be
given excessive--may be excessive, given the limited resources
of many of the nonprofit counseling agencies. One possible
solution would be to cap bonding requirements based on a
variety of factors, including the resources of the counselor
and other bonds and fidelity insurance it already has in
place--for example, under State law requirements. We under the
U.S. Trustee Program is already reviewing its requirements in
Second, counselors are appropriately required to properly
identify consumers when they seek counseling. But how is that
done when the counseling is conducted remotely, such as by
Internet or phone? One solution would be to require that when
the consumers seek counseling remotely, the consumers need to
be verified by comparing information the consumer provides to
information in a consumer report or similar document.
The second issues is needs-based bankruptcy. An essential
component of the reforms that are needs-based is the form
system. Congress designed the needs-based process so that it
could be implemented efficiently without imposing undue burdens
on those who administer the bankruptcy process. In order for
the clerks, United States trustees, and bankruptcy
administrators, the Chapter 7 trustees to perform their
required functions efficiently, the needs-based bankruptcy
forms must be properly crafted.
The forms should be simple and easy for consumers to
understand, court officials to use, and creditors to review,
and should provide a clear indication whether the presumption
of repayment capacity is triggered. Section 1232 of the act
requires no less. Development of this and other forms to
implement the act is delegated in the first instance of the
Judicial Conference. The first Advisory Committee on Bankruptcy
Rules meeting will be held August 3 of this year, and the steps
then proposed will permit us to evaluate how well this
important task is being performed.
In addition, whenever a trustee determines that the
presumption is triggered, a motion to dismiss the case should
be filed unless special circumstances required by the act are
clearly demonstrated. It is important to note that any
deviations from the means test enacted by Congress are
unnecessary because Congress already built into the needs-based
test sufficient flexibility in the repayment thresholds and
through the special circumstances provisions.
Thirdly, with regard to audits, the act requires the
attorney general and Judicial Conference to establish an audit
program to determine the accuracy, veracity, and completeness
of petitions, schedules, and other information that the debtor
required--is required to provide in individual bankruptcy
cases. These audit functions are an extremely important part of
the proper implementation of the act because the information
filed by individuals in a bankruptcy case is essential for the
proper working of the new bankruptcy process. Without
appropriate audits, the lack of reliability Congress found to
exist during the enactment process will continue unabated.
Fourthly, information filed with the bankruptcy case. As
part of the efforts to address the unreliability of information
filed in bankruptcy cases, the act requires that individual
debtors must file tax returns and pay stubs in Chapter 7 and
Chapter 13 cases. In order to ensure that congressional intent
is implemented, the trustees must make sure that procedures are
in place to ensure that creditors in the case are able to
access the tax return and other information efficiently.
Fifthly, reaffirmation agreements. The act includes new
provisions clearly defining and standardizing process for
reaffirming a debt. While the act sets out verbatim the
specific disclosures that must be made in connection with the
reaffirmation agreement, it would be very helpful in ensuring
uniform nationwide implementation if the Administrative Office
of the United States Courts, which now provides a nonmandatory
form for reaffirmations, would promptly revise and publish a
new form, faithfully following the new statutory requirements.
And last, improving bankruptcy statistics. Section 601 of
the act requires the clerk of the court to collect statistics
regarding debtors or individuals with consumer debts seeking
relief under Chapters 7, 11, and 13. In addition, the attorney
general must issue rules requiring uniform forms for final
reports by trustees in cases under Chapters 7, 12, and 13. And
then there is a provision for the collection of this
information and reporting it.
It is critical that these data collection tasks be fully
implemented. In future years, the resulting data will provide a
solid information basis on which to build constructive
Conclusion. I have highlighted some of the most important
implementation tasks, but I have hardly been exhaustive. The
act's reforms require cooperation by several separate
governmental and quasi-governmental agencies if the
legislation's goals are to be promptly realized.
The Bankruptcy Rules must be revised in several respects,
and since the formal process to do so takes some time, uniform
interim rules that can be adopted by each local bankruptcy
court should be proposed. Forms and procedures must be
developed. Issues, as they arise, must be resolved. Many
entities have important functions to perform, either in
cheerfully making the new system work or examining how well it
We appreciate the interest the Subcommittee has shown in
overseeing the process and encouraging the involved parties to
work together in good faith to implement the legislation. I
would like to thank the Subcommittee for the opportunity to
appear before you today to discuss this important topic. I
would be happy to answer any questions you may have.
[The prepared statement of Mr. Wallace follows:]
Prepared Statement of George Wallace
Mr. Cannon. Thank you, Mr. Wallace.
As Chair, let me suggest the following order for questions.
If someone has a commitment and would like to be recognized out
of this order, we'd appreciate hearing about it now. But first
of all, Mr. Gohmert, then Mr. Watt, then Mr. Franks, Mr.
Delahunt, Mr. Chabot, and then Mr. Nadler. And if there is
anything left to ask, I will follow up with questions.
Mr. Gohmert? You are recognized for 5 minutes.
Mr. Gohmert. Thank you, Mr. Chairman.
Mr. Plunkett, let me ask you a question. You had indicated
that we should be involved in significant oversight to help--
these weren't your words--but basically to keep the charlatans
out of the consumer counseling business. What amendments, if
any, do you think would help make that possible?
Mr. Plunkett. Well, at this point, it appears to be a
question of implementation. The standards laid out in the law
for quality, although quite general, are fairly good. For
Mr. Gohmert. Well, but I'm just asking--my question is, do
you see any amendments that would help keep charlatans out of
the consumer counseling business?
Mr. Plunkett. At this point, I would suggest that what's
needed is really tough oversight.
Mr. Gohmert. Okay. You'll go back to my original question.
Mr. Plunkett. Yes.
Mr. Gohmert. Besides oversight. So listen to me. Besides
oversight, what amendments, if any, do you think would help
keep charlatans out of consumer counseling?
Mr. Plunkett. I wouldn't recommend anything at this point.
As I mentioned, the standards are fairly good. However, if it's
not properly implemented, we're still going to have the
charlatans offering credit counseling.
Mr. Gohmert. Okay. Thank you. And you also mentioned that
you want to protect basically tax information from creditors
unless they were to show cause before they got it. And it's
been years, before I ever went on the bench as a judge that I'd
been in bankruptcy court with clients, but--and that was
usually from an FDIC standpoint.
Is it currently required that debtors file any tax
Mr. Plunkett. It will be under this act.
Mr. Gohmert. No, but I mean right now. There is no
requirement like that. Is that correct?
Mr. Plunkett. Not that I know of.
Mr. Gohmert. All right. What, in your opinion, would be
good cause to require the furnishing of the tax information?
Mr. Plunkett. There needs to be either a cause showing that
the trustee, which is allowed access to the tax information,
can't adequately verify the income and expense information
required by the law. General verification of accuracy is the
issue, and it needs to be a creditor, for instance, that is
requesting this tax information needs to show that the trustee
can't do that verification, first and foremost.
Second, the creditor needs to show a particular need based
on the specifics of the individual's, that is the debtor's,
problem. This should not be a form request for all cases that
the creditor is a party and interest to. That is, it needs to
be an individualized decision. We have no problem, of course,
because the law requires it, with the requirement that where
there is cause that creditors have access to this information.
But that is going to--the issue is----
Mr. Gohmert. Well, the question was, though, what cause?
Mr. White--and I'm sorry to be sharp in cutting off when it
is not germane to the question, but our time is so limited. Mr.
White, you know, you've--well, Mr. Plunkett in his written
testimony had indicated that given the ongoing problems in the
credit counseling industry, and I think most of us would
acknowledge there have been some, this is a very dangerous time
to be requiring over a million new consumers to see credit
counselors. What would be your response to that?
Mr. White. I'd look at it in two ways, Congressman. First,
in terms of the possibilities for salutary effect, it's quite
significant because what's being done here, in many respects,
is a consumer protection provision that will ensure that
debtors will come into the system after first receiving
counseling services so they know what their options are to go
into bankruptcy or to develop other budget or alternative
repayment methods. That can be very salutary.
But, as all of us know, there have been significant
problems in the industry. We, at the end of June, just a few
weeks ago, issued for the first time the application materials
under the standards set forth in the statute. What we tried to
do was to strike the appropriate balance, and we'll be
learning. We've learned a lot since April. We'll learn a lot as
we go along and adjust standards as necessary. But what we have
done is we've put forth applications for providers to come to
us to show that they are qualified and in such areas as, for
example, qualifications. Are the counselors certified?
Bonding requirements, which some have suggested and Mr.
Wallace did in his statement. Perhaps he believes they are a
bit too stringent. There are certain background check
requirements for those who are handling money or giving advice
to debtors on what to do with their money. We also are
Mr. Gohmert. But as far as the background check, who does
Mr. White. That would have to be performed by the provider.
So when they hire employees, certain employees whom we define
would have to have a background check. If it is a debt
management plan provider----
Mr. Gohmert. So, in other words, you'd be looking only to
the four corners of what they provide, what information they
provide to determine whether or not they are legitimate, should
be doing consumer counseling. Is that fair?
Mr. White. We've set out certain requirements, and they
would file certifications with this instant backup
documentation. Yes, sir.
Mr. Gohmert. But you're still looking only to what they
provide. You do no background investigation yourself?
Mr. White. We do not do the background checks. No, sir.
Mr. Gohmert. So if they can fill out a form and do it in
such a way that they sound good on paper, then they're in?
Mr. White. Well, the applications will be signed under
penalty of perjury, yes.
Mr. Gohmert. And we all know that keeps everybody from
Mr. White. Right. The point----
Mr. Cannon. The gentleman's time has expired. Does the
Mr. Gohmert. Thank you. Thank you, Mr. Chairman.
Mr. Cannon. Thank you. The Chair recognizes the gentleman
from Massachusetts for 5 minutes.
Mr. Delahunt. Yes, I really enjoyed the line of questioning
by my friend from Texas. Speaking about signing under the pains
and penalties of perjury, just for my information, how many
cases have been referred for criminal prosecution in the course
of the past year, 2 years, 5 years?
Mr. White. I believe in fiscal year 2004, it may have been
in the neighborhood of 700 cases. I can provide for the
Mr. Delahunt. Out of how many, approximately?
Mr. White. Out of how many cases being filed nationally?
About 1.5 million or more cases were filed nationally.
Mr. Delahunt. So that's a very small percent. I bet--I bet
that former judge down there in Texas that he could have
found--you let him loose, he could have done a lot more than
700. I dare say that it's not very reassuring to me that the
only protection in terms of quality control is, you know,
within the four corners of an application form.
Mr. White. Well, if I may say, Mr. Delahunt, if I said that
is all we are doing or will do, then I've misspoken. What I'm
saying is that we have an application; we do not perform
background checks. The application says that the provider will
perform and certify. It performs background checks, and we set
We can get continuing information on an annual basis and,
in addition, as to monitoring that is done between. The
approval period is for 1 year. We have not determined what
monitoring can feasibly be done during the 1-year period. We
are still putting together all of our implementation plans.
But what we did issue in a very short period of time were
application materials that set forth the standards consistent
with what is in the statute and requiring documentation that
would allow us to make a reasoned decision to see whether there
is documentation to support the certifications that the
standards set forth in statute have been met, that the provider
is qualified and should be approved and, therefore, be able to
provide the services and issue the certificates to debtors.
Mr. Delahunt. Mr. White, what's the price tag for this
Mr. White. Well, for the U.S. Trustees----
Mr. Delahunt. No. The whole enchilada?
Mr. White. I don't have a number.
Mr. Delahunt. You don't have a number?
Mr. White. I don't.
Mr. Delahunt. Has CBO scored it different ways? Judge
Judge Small. I don't know. I don't have a number.
Mr. Delahunt. Mr. Wallace, it's good seeing you back here
Mr. Wallace. Nice to see you, sir.
Mr. Delahunt. Good to see you. Mr. Plunkett?
Mr. Plunkett. Don't know.
Mr. Delahunt. You know, there was considerable testimony--I
remember, Mr. Chairman--about $500 million, possibly $1
billion. But none of you panelists have a figure. Mr. White?
Mr. White. Mr. Delahunt, with regard to what the costs are
to--direct costs to Government agencies and any loss to the
Treasury through the----
Mr. Delahunt. Yes, give me that.
Mr. White.--filing fees we'll provide for the record. In
the supplemental appropriation recently enacted, there were
filing fee increases that were designed to address the funding
needs of the U.S. Trustee Program, the court system, and any
other loss from the Treasury.
Mr. Delahunt. What was the percentage of increase in the--
Mr. White. It was a significant percentage. Maybe, in the
filing fee for Chapter 7, maybe in the nature of 25 or 30
percent. The U.S. Trustee cost over 5 years, at least as
reflected in our budget request, is for an additional $37
million for fiscal year 2006. That's what our budget request
The filing fees enacted by Congress, the increase, the
allocation to the U.S. Trustee Program is, over a 5-year
period, $241 million.
Mr. Delahunt. $241 million. To get to the issue of creditor
access to tax returns, the proposal put forth by Mr. Plunkett,
what's your--what's your opinion of his suggestion?
Mr. White. I don't have any instant reaction. We're talking
with our trustees with regard to new responsibilities they'll
have under the Code. So, for example, with regard to the tax
returns, I think there is an assumption in Mr. Plunkett's
testimony, perhaps, that the trustees will retain tax returns
in all cases. I don't know that that's the case at all.
The trustees who we oversee--we appoint and oversee--will
receive tax returns for purposes of verifying information. But
certainly, any privacy concerns with regard----
Mr. Delahunt. But you wouldn't----
Mr. White. I am not endorsing----
Mr. Delahunt. Do you share his concern about creditors
receiving that information?
Mr. White. The bankruptcy bill contains on balance,
including in those provisions, many consumer protections and
other salutary provisions. I'm not suggesting any changes at
Mr. Delahunt. I'm not asking you that. I'm asking you
whether you share----
Mr. Cannon. Would the gentleman like to ask an additional--
unanimous consent for an additional 2 minutes?
Mr. Delahunt. Yes, I would, Mr. Chairman.
Mr. Cannon. Without objection.
Mr. Delahunt. Mr. White, I am asking you a concern about
the privacy implications as it relates to tax returns. Do you
share his concern?
Mr. White. I think I would share a concern that private
information that is provided on debtors ought to be addressed
in the U.S. Trustee's implementation, and our oversight of the
trustees ought to be foremost in our minds. And that is why,
for example, in the bankruptcy bill there are numerous other
privacy provisions: to ensure that private information is not
put out into the public domain.
Section 107 of the Bankruptcy Code was changed, and there
were other provisions. So, there are very important policy
considerations. I don't----
Mr. Delahunt. But----
Mr. White. Go ahead.
Mr. Delahunt. But there is no--as I understand it, it's my
understanding that there's no provision in terms of the release
of tax returns to creditors. There is no privacy protection
incorporated into the act as passed. Is that--is that a fair
Mr. White. I would want to go back before I gave you a firm
answer, but I am not offhand aware of what the restrictions are
that a creditor would have.
Mr. Delahunt. Judge Small?
Judge Small. Well, I think you're right. It is a huge and
important concern, and the director of the Administrative
Office is coming up with guidelines. It is a huge and important
consideration, and the director of the Administrative Office is
coming up with guidelines to help protect the privacy.
personal information should be redacted from documents that are
filed with the court, and also the court system is trying to
devise a system where if a document is filed, it's not
available to anybody.
Mr. Delahunt. Would you agree with Mr. Wallace that the
creditor should have access to the IRS return?
Judge Small. I think the law requires that.
Mr. Delahunt. And is it your opinion, Mr. Plunkett, that
the law requires that?
Mr. Plunkett. It's my opinion that the law requires it. The
law also says specifically that the Administrative Office of
the U.S. Courts, and I am quoting here, ``Shall establish
procedures for safeguarding the confidentiality of any tax
information provided'' and--quote--``shall include restrictions
on creditor access.''
So what I'm commenting on are the kinds of restrictions
that I think the Administrative Office should be placing on
Mr. Delahunt. Okay. Mr. Wallace, I'd feel remiss if I
didn't ask you a question.
Mr. Wallace. I was waiting for you, sir. If I could comment
on this last one, I'd appreciate it.
Mr. Delahunt. No, because I think I know your answer there.
Mr. Cannon. Without objection, the gentleman is recognized
for an additional 1 minute.
Mr. Delahunt. Just one final question. Thank you. What can
we expect in terms of interest rate reduction from the major
credit card companies as a result of the passage of this act?
Mr. Wallace. I'm not----
Mr. Delahunt. Or the correct implementation of it?
Mr. Wallace. That will be handled by the market, sir. And
the marketplace presumably will take into account the savings
that occurs, and competition will lower prices as appropriate
if, in fact, lower prices are justified.
Mr. Delahunt. Right. I don't think I'm too hopeful. But
thank you. I expected that answer, Mr. Wallace.
I yield back.
Mr. Cannon. Thank you.
Mr. Franks? The gentleman is recognized for 5 minutes.
Mr. Franks. Thank you, Mr. Chairman.
Mr. White, I know that there are sometimes people who are
called on in this world to be implementers. And you have a
great challenge in front of you, and I'm sure that, at this
point, you have done more than a cursory analysis of the
legislation that you have to implement. And again, I don't envy
your job because, you know, people who make legislation in
theory, and then you have to turn around and try to turn it
Having said that, did we goof anywhere? Are there any areas
that you feel like are going to especially be challenging in
the logistical implementation?
Mr. White. We have no specific--excuse me. We have no
specific suggestions to make to Congress at this time. If, as
we go forward in the implementation we find there are, we
certainly would discuss that with the Department and provide
them to Congress.
But you're absolutely right, and I appreciate the
sentiment. There is a great deal of work for the U.S. Trustee
Program, and if I just may say that there has been a great deal
of professionalism and enthusiasm on the part of the staff, the
1,100 people of the U.S. Trustee Program, to move forward with
our implementation plans.
We've just finished a round of three regional training
sessions, 2-day programs, with our senior managers going over
the major provisions of the statute and the outlines of our
implementation. And, in a few weeks, we'll embark upon 10
sessions, reaching almost all members of the U.S. Trustee
Program to ensure that they are thoroughly familiar with the
provisions of the law and those responsibilities Congress has
given to us to implement and enforce the law.
Mr. Franks. Let me just, if you had to point to any one
aspect of the legislation as the biggest challenge you had, no
matter what your opinion of it is, what do you think is the
biggest logistical challenge that you have?
Mr. White. Well, there are two major challenges, and they
have been pointed out by the Members and in the statements
we've heard. Cornerstone issues for us, among others, are means
testing, because there is a significant volume of work, and
credit counseling. I do not wish to minimize for one moment the
importance of us eventually being able to strike that right
balance in ensuring that we are protecting debtors from scam
operations or abusive operations, but setting rules that do not
unnecessarily create barriers because we do want the capacity
in the system to serve the debtors.
We've taken our initial effort. We've issued those
applications in June, and we are going to be watching that very
carefully. But we are new to this area, and it is a major
challenge, and we'll keep it at the top of our attention.
Mr. Franks. Well, thank you, sir.
And to that point, Mr. Plunkett, you gave us a couple of
statistics related to I think the majority of the Chapter 7
bankruptcies being for those with a median income of--or an
income of under $20,000.
Mr. Plunkett. Just around.
Mr. Franks. And then the rest of them for Chapter 13, under
$30,000. Is that correct?
Mr. Plunkett. Yes.
Mr. Franks. You mentioned that part of the protocol is that
the creditors, under some type of consumer credit counseling
process, would hopefully offer incentives to the debtor. It
doesn't sound like any incentives are actually required. If not
required, what incentive would be the one that you would call
for if you were writing the regulation that might follow the
Mr. Plunkett. New Section 502(k) of the Code provides an
incentive for creditors to actually reduce the principal that
is owed for people who enter credit counseling debt management
plans. I'm going to summarize here, but it essentially says
that a 60 percent--or a 40 percent reduction, 60 percent of
what you owe, would be deemed a reasonable repayment plan. And
the incentive is that if the creditor doesn't offer such a
repayment plan and the consumer ends up in bankruptcy, they can
seek a 20 percent reduction in what is owed.
So it's an attempt to incent creditors to offer more in the
way of reductions in credit counseling. Right now all they
offer, and it's fairly minimal for many creditors, is a break
in interest, not in principal.
The reason more people don't use credit counseling is
because creditors typically have been fairly stingy in offering
these breaks. So if they do better, then more people will
choose credit counseling as an alternative. If it's not
financially viable for them to do so, they'll end up in
Mr. Franks. So if I understand, those creditors that did
not offer an incentive to the debtor would be diminished in
their position in an actual bankruptcy?
Mr. Plunkett. That's the idea behind the provision.
Mr. Franks. Thank you, Mr. Chairman.
Mr. Cannon. I thank the gentleman.
Mr. Nadler, would you seek recognition?
Mr. Nadler. Yes, I do.
Mr. Cannon. The gentleman is recognized for 5 minutes.
Mr. Nadler. Thank you, Mr. Chairman.
Mr. Wallace, I want to follow up on Mr. Delahunt's
question. We heard for any number of years prior to the passage
of this bill that every adult or maybe it was every family, I
forget which, in the United States paid a $400 premium in
higher interest costs because of the cheating that was going
on, which this bill would eliminate. And we heard that from
you, among others, I think.
So would you agree that we ought to see now a $400
reduction in interest costs per family or per individual if
this bill is properly implemented?
Mr. Wallace. In the event that--although those statistics
were developed back in the early period of the act, yes, I
would assume that on the whole, there would be that kind of
Mr. Nadler. And if we don't see it--and if we don't see it,
then we would assume either that the bill is not being properly
implemented or that the bill was fallacious?
Mr. Wallace. I think implementation is going to be a real
challenge, but I think it can be done well. And if it is done
well, then there will be substantial improvement in the
bankruptcy system that will----
Mr. Nadler. I didn't ask about substantial improvement. I
asked about a lowering of interest rates.
Mr. Wallace. Well, there needs to be an improvement in the
bankruptcy system in order for there to be a lowering to cost.
Mr. Nadler. But you are saying that there will be that
lowering of costs?
Mr. Wallace. If the implementation is effective and as full
Mr. Nadler. And if we don't see it, we can assume that
either the implementation was ineffective in ways that we could
point out or that the bill was defective in some way?
Mr. Wallace. On the whole, that should be the case. Yes.
Mr. Nadler. Okay. Thank you.
Mr. White, when we were considering the legislation, some
Members of the Committee--myself included, former Chairman
Hyde--were concerned that a debtor who was found ineligible for
Chapter 7--he flunked the means test--but who could not confirm
or complete a plan in Chapter 13. In other words, he might be--
would be ineligible for relief under any chapter. In other
words, colloquially, too rich for Chapter 7, too poor for
Mr. Wallace, among others, assured this Committee these
concerns were unfounded. What guidance will the executive
office provide to ensure that the discretion it has under the
legislation will be used so as to make Mr. Wallace's
predictions not untrue? In other words, to make sure that
nobody is too rich for Chapter 7, too poor for Chapter 13.
Mr. White. You are very correct, Mr. Nadler, that although
we are dealing with a formula under the Code with regard to the
presumption on the means test that, in fact, the U.S. Trustee
has a responsibility to exercise some level of discretion in
deciding whether to file a motion or if it doesn't file a
motion to dismiss in Chapter 7, to provide reasons for that.
We've been studying those issues, and we will be working
with our field to try to ensure that all appropriate factors
are taken into account. The Congress has clearly made a change
in the standard. It is also indicated clearly in the statute
that even if the means test shows disposable income, if the
reasons for that were catastrophic medical issues, military
service, and so forth, that should not be the basis for
pursuing a motion based upon a presumption.
I don't have a precise answer to your question----
Mr. Nadler. But I understand that, and I appreciate that.
I'm concerned sort of about the further application of that. In
other words, if someone has enough income so that he doesn't
meet the means test, then you would direct him to Chapter 13
rather than Chapter 7. But he has too much income to be able to
confirm a plan under--not too much income. The Chapter 13,
there are requirements in the law that say that the plan, that
any plan that is confirmed must enable him to pay certain
things, and it may very well be that the income is not
sufficient to enable him to pay those things. So you couldn't
confirm Chapter 13.
How can you make sure that he isn't directed to Chapter 13
when you can't confirm a plan because the means test is just as
rigid in Chapter 13 as it is in Chapter 7?
Mr. White. There is no formula we can then issue to our
field to say that we can take care of all particular
circumstances in every case. Every case, before a motion is
filed, should be the basis of a reasoned judgment by an
attorney looking at the totality of circumstances in a case.
Mr. Nadler. But before you file a motion, what I am really
asking is before you file a motion under Chapter 7, could you
look at whether that means test applied to both Chapter 7 and
Chapter 13 would allow a plan to be confirmed under Chapter 13?
If the answer is no, not file the objection to go into Chapter
Mr. White. I'm not going to suggest that in every Chapter 7
case that we are going to do a hypothetical 13 plan and run it
through to the Nth degree.
Mr. Nadler. Why not? Why not?
Mr. White. I don't think that's a feasible alternative. I
am saying, Mr. Nadler, that you are absolutely correct that we
should not be filing a motion based strictly upon a formula
that doesn't take into account what the statute tells us to
take into account, which are appropriate factors and the debtor
also having an opportunity to rebut.
I just don't want to commit that we can come up with some
formula or some magic wand to say that in all cases that we'll
have properly taken into account all factors and done it right
100 percent of the time the first time around. You are correct.
And we believe, and we've talked to our attorneys. We'll
continue to counsel them and watch the performance in the field
to ensure that we are exercising prudent discretion.
And a debtor in some cases, for example, sir, who perhaps
doesn't qualify for 13 might--and I can not anticipate all
circumstances--might be able to confirm an 11 plan. There are
all kinds of possibilities out there. There is no way we can
reduce it to a simple formula.
Mr. Nadler. I must say, if you can't afford a 13, I can't
imagine how you can do an 11.
Let me ask one quick question to Mr. Small--or to Judge
Small, excuse me. Judge Small, for debtors who fit into one of
the safe harbors, that is debtors not subject to the means test
or whose cases cannot be dismissed under the means test, will
the forms and schedules reflect this fact? Or will debtors be
required to bear the paperwork burden of the means test even if
they're exempt from it?
Judge Small. Well, as I understand the forms, and Mr. White
can answer this as well, I believe that if it's shown that
their income is below the median income, that would be the end
of it. They wouldn't have to go forward and fill out the rest
of the means test because the means test just simply wouldn't
apply to them.
Mr. Nadler. Okay. That applies, I assume, to some of the
Mr. Cannon. Would the gentleman like to ask unanimous
consent for an additional minute or two?
Mr. Nadler. I would like to ask unanimous consent for an
additional 30 seconds. That's all I think I require.
Mr. Cannon. Without objection.
Mr. Nadler. My only other question was that there are a
number of safe harbors. And your answer, I assume, applies to
the other safe harbors, not just the means test?
Judge Small. If the means test is not applicable to them, I
don't see why they should have to fill out the rest of the
Mr. Nadler. Thank you. I yield back.
Mr. Cannon. The gentleman yields back. Mr. Watt?
Mr. Watt. Am I the last one on the horizon?
Mr. Cannon. More or less.
Mr. Watt. Oh, next to you. I'm sorry.
First of all, let me just apologize to the witnesses for
being in and out. Unfortunately, there are a number of other
things going on in the world at the same time.
So I saw some estimates, when we were considering this
bill, that suggested that the amount of paperwork and
administrative obligation to administer this new system was
going to be fairly high. Do you all remember what those
projections were or have an estimate of what the additional
cost of administering our bankruptcy system is likely to be
compared to what it was before this reform?
Mr. White, maybe?
Mr. White. In answering a similar question before, I do not
know the overall number. In the recent supplemental
appropriations bill, Congress has changed the filing fee
structure to provide additional funding for the courts and the
U.S. Trustee. We will get an additional $241 million over 5
years, and the President has requested $37 million for us in
the next fiscal year to implement bankruptcy reform.
Mr. Watt. And what part of that is it anticipated will be
covered by the filing fees?
Mr. White. All of the costs of the U.S. Trustee Program
will be fully covered by filing fees, just as all of the costs
of our previous budgets have been covered by filing fees.
Mr. Watt. So you anticipate that, basically, this will just
be a pass-through then. The appropriation and the income that
comes from filing fees should pay for the entire bankruptcy
Mr. White. Well, the budget we have out, it will have
revenues that will at least match what we expect it will cost
us to administer bankruptcy reform next year. Yes, Mr. Watt.
Mr. Watt. Next year and going forward or----
Mr. White. Well, the President's budget is for fiscal year
2006. With regard to any out-years, all I can say is that there
is the $241 million in the filing fee increase. So we are being
given growth revenues, growth by 20 percent or more because of
Mr. Watt. Okay. How many new additional bankruptcy judges
do you anticipate will be necessary to administer the reform
part of this?
Mr. White. We don't have any estimates on that. The growth
of our staff will be approximately 320 additional staff.
Mr. Watt. Judge Small?
Judge Small. Well, I think the Judicial Conference
projected 47 judges would be needed, and I know 28 were
included in the bill. So I think there is a need for more
Mr. Watt. And the cost of those judges will be offset by
the filing fees also, do you anticipate?
Judge Small. I can't answer that question.
Mr. Watt. Mr. White, do you anticipate the cost of the
judges will be covered by the filing fees also?
Mr. White. That is not a matter within, sir, my knowledge.
Mr. Watt. Mr. Plunkett or Mr. Wallace, have any idea about
Mr. Wallace. No, sir.
Mr. Watt. Okay. The supply of credit counseling agencies--
well, before I get to the supply, let me just try to figure out
who is paying for that cost. Anybody care to venture an answer
for that? Mr. Plunkett, you seem like you were about to say
Mr. Plunkett. Well, the cost will be borne by debtors and
potentially by agencies. There are two requirements in the law.
Fees must be reasonable, but agencies are not allowed to turn
away debtors because of inability to pay.
What I've said in my testimony is that we anticipate that a
significant number of those who are required to go to credit
counseling will have little ability or an inability to pay. And
so, that presents a whole series of problems. For the agencies,
some of them may have to bear that cost if they are properly
complying with the law. If they aren't, they may be doing what
we call cherry-picking. That is finding sophisticated ways to
provide counseling to people they believe can pay whatever fee
it is that they're charging while subtly turning away people
who can't. And that presents a problem.
Mr. Watt. I ask unanimous consent for 2 additional minutes.
Mr. Cannon. Without objection, so ordered.
Mr. Watt. I'm looking at a newspaper article from the
Seattle Times, dated July 24, 2005, Mr. Plunkett, in which you
estimated 2 million to 9 million additional credit counselors
or credit counselors who would be needed. Am I misreading what
Mr. Plunkett. Those are the broad estimates that have been
made over the last few years about how many people seek
Mr. Watt. Oh, that is how many people seek assistance from
Mr. Plunkett. From credit counseling agencies.
Mr. Watt. Before the bankruptcy reform?
Mr. Plunkett. Correct. Now if we look at the number of
people who filed for bankruptcy last year, Chapter 7 or Chapter
13, that would be just under 1.5 million. We assume that some
portion of those people will have already met at least the
first requirement, that they receive a credit counseling
briefing within 6 months of filing.
One can safely assume that somewhere around a million
people, maybe a little more, maybe a little less, are going to
be new to the system.
Mr. Watt. So I'm bankrupt, and then I seek credit
counseling. That's supposed to do something good for me, I
presume. I mean, is your experience with credit counselors that
they can perform those Houdini reversals, or what is your
experience with credit counseling? Maybe I shouldn't lead the
witness. Judge Small is saying I'm leading the witness.
Mr. Plunkett. Well, we've looked at the industry hard for
the last 5 years, and our experience is that if credit
counseling is delivered at the right time by a reputable agency
that provides good quality counseling, it can help some people.
But if they----
Mr. Watt. Okay. Well, let's evaluate the components of
that. What is the right time?
Mr. Plunkett. Well----
Mr. Watt. What is the capable person, and what are the some
Mr. Plunkett. Okay. The right time is early. That is
probably before the person is on the brink of bankruptcy to the
point where they are actually considering bankruptcy. And those
are many of the people that will be seen by credit counselors
So I'm not sure that this requirement is going to work as
those who drafted it think it will because I think many people
are simply going to view the credit counseling requirement as a
college student would a required class that they have to sit
through. They are too far gone financially to benefit from what
counseling can do.
Who are the ``some people?'' Well, if their secured debts
aren't too high and their unsecured debts, creditors offer a
reasonable repayment plan on unsecured debt, a debt management
plan, a credit card consolidation plan over 3 to 5 years can
give those people enough breathing room to pay down their
unsecured debts and start to work their way back away from the
financial brink. That's some people, but that's not many people
who are on the brink of bankruptcy.
Mr. Watt. Just one final question, Mr. Chairman. Now does
the credit counseling requirement apply to people above the
means test and below, or just to people----
Mr. Plunkett. It applies to everyone.
Mr. Watt. Everybody. Okay.
All right. Thank you, Mr. Chairman.
Mr. Cannon. The gentleman yields back.
Is there a more compelling voice than that sotto voce that
we just heard asking insightful questions? I am trying to learn
from the Ranking Member to speak more slowly and carefully
Without objection, the record will be kept open for 5
additional days for any follow-up questions for the witnesses.
Mr. Watt. Would the Chairman consider extending that to 7?
Mr. Cannon. Oh, sure. Without objection, the record will be
kept open for 7 legislative days for follow-up questions for
Mr. Watt. Thank you.
Mr. Cannon. And so ordered.
One concern I have is privacy, and so I'm going to ask a
question to the whole panel, and I hope that you can all
comment. But principally for those organizations that are
involved in overseeing this, what organizational steps are you
taking--and this will be both for you, Mr. White, and for you,
Judge Small--how are you creating a function to evaluate and to
continue evaluating issues of privacy?
And then, Mr. Plunkett and Mr. Wallace, if you could
comment on those comments, and we'll come back for a final
follow-up from the two of you, if you could? Thank you, Mr.
Mr. White. Mr. Chairman, the responsibility in that matter
that falls to us would generally be in the nature of the
oversight of the trustees who would look at the tax returns.
And so we have been discussing and will continue to discuss
with the trustees the protocols for their handling. And it may
well be that the trustees, who need the tax returns primarily
for purposes of verification, should not, in most instances,
retain the tax returns. They should return them at the 341
table or destroy them.
But we're very cognizant of the delicacy of that matter,
and I believe our appointed trustees are as well, and we will
continue to develop the appropriate protocols with them.
Mr. Cannon. Will you have someone assigned to do that in
the structure of your office?
Mr. White. We hadn't decided that that was necessary, but
that is a point well taken.
Mr. Cannon. Let me suggest that for both the Department of
Homeland Security now and the recent reauthorization of the
Department of Justice, we have created a privacy officer. We've
learned a great deal about that. I think Kelly O'Connor, who
has done that job at DHS, has done a remarkable job in
improving the way the whole department works. And this is an
area where I see the potential for a huge problem.
So without a legislatively mandated officer, it may be good
to think in terms of having a person or a place where the
responsibility lies because, over time, you are going to see
new ways of abuse, new permutations of the problem, and
evolution of forms. And so, to have someone to come back and be
responsible to go through a process, saying how does this
affect privacy, might be a good idea.
Did you have anything you wanted to add to that, Mr. White?
Mr. White. No. Point is well taken, Mr. Chairman. I
Mr. Cannon. Judge Small?
Judge Small. The director of the Administrative Office has
the statutory duty to come up with some guidelines to protect
the privacy, and I can give you those guidelines in about 2
weeks. The Judicial Conference is going to approve those
Mr. Cannon. But my concern is not the guidelines so much,
but the person who would be looking at those guidelines over
time to say are these adequate? Given the changes in what is
happening, are we doing an adequate job? In other words, some
person--it could be a part-time position--somebody who exists
there to occasionally come back and look at privacy.
Judge Small. I don't know that there is a specific person
other than the director. And the director's staff has the
obligation to do these guidelines, and I assume that he'll be
constantly reviewing them as we go along.
Mr. Cannon. As you create those guidelines, it might be
good to keep in mind that a place with a job description with
that element of the job description might actually be helpful.
Judge Small. I'll mention that to the director.
Mr. Cannon. Thank you. Mr. Plunkett?
Mr. Plunkett. Mr. Chairman, your point is well taken. I
know under the privacy act, Federal agencies have to have such
a privacy officer, and I think it would help ensure that as
changes are made and as the situation develops that the courts
can respond very quickly.
Just so you know, some of the other steps we're urging the
Administrative Office to take, starting with the obvious, tax
returns and transcripts shouldn't be put on the Internet or
placed in public files. But also there needs to be a system of
transparent record-keeping by interested parties that receive
these tax returns. And they should be able--they should be
required to disclose upon request exactly who has access and
has seen this information. That is a fairly inexpensive way of
We also think interested parties should be completely
forbidden from redistributing this information in any fashion
unless it's approved by the court. What we want to avoid is a
situation, either through sloppiness or intent, where this
information is lying in files or in a database somewhere where
it can be accessed inappropriately. We certainly don't want
creditors to be tempted to include any of this information in
their internal databases.
Mr. Cannon. I suspect, Mr. Plunkett, that you would
actually like to have somebody in the oversight process looking
at privacy so that your groups could contact and say, hey, here
is a thing you ought to look at and maybe you ought to
Mr. Plunkett. I think that would be very helpful.
Mr. Cannon. Mr. Wallace, did you have any comments?
Mr. Wallace. Oh, yes, sir. On the whole, I think that this
discussion assumes that creditors have no interest in seeing
those tax returns, and that's not the case. We approach this
from a history in which despite the good interests and the good
intentions of both the trustees--the Chapter 7 trustees and the
U.S. Trustee--there has not been enforcement of the means test
which was in the old act. That is the substantial abuse
standard under 707(b).
For a number of years, creditors were basically left
holding the bag. And therefore, the bill specifically, the act
specifically provided that creditors could enforce, under
certain circumstances, the means test. And they can also raise
with by reporting to the United States trustee or to a trustee,
a Chapter 7 trustee, if they think that there is an abusive
case for appropriate action to be taken, regardless of whether
the means test is triggered.
In order to perform that function, which is an important
enforcement function and vital to their interests as well as
the society as a whole in keeping the system honest, they need
to have access to those tax returns. And that's important.
That's an important function, a governmental function, which
the bill recognized. Those provisions were contested. These
issues were fully debated during the enactment process. The
privacy concerns with regard to the tax returns were always an
issue, and the compromises were made as described.
Now the bill says creditors have access to those tax
returns. They need to have access to them. It's an important
function for them to do that. They are subject to the Gramm-
Leach-Bliley Act, which once--this is personal, private
information. Once they get that information, there is a whole
host of Federal regulations that are triggered in, that apply
to this information.
They cannot pass it on. They can't disseminate it. There is
no such thing as putting this stuff on a Web site. Nobody is
suggesting that kind of an approach. That would be ridiculous.
So everybody is very sensitive to this information, but
there is a vital function that the creditors have, and this act
preserved the ability of the creditor to do this because
Government had failed, year in and year out, in the enforcement
Mr. Cannon. Thank you. Let me just say that I think
everybody concurs that there's going to be a problem with
privacy, that we need to watch it, that there needs to be input
from outside groups. And having somebody responsible I think
will be very, very important.
Mr. Wallace. And we agree with that, sir.
Mr. Cannon. Yes, in particular, you guys want a system that
will work and be above reproach. So absolutely.
The Ranking Member is recognized for an additional 5
Mr. Watt. No, I don't need 5 minutes. I just wanted to
inquire about one thing, which was the increased filing fee.
What was the cost of the filing fee for bankruptcy under the
old system, under the current system, and what is the projected
cost under the new system?
Mr. White. I'm afraid I don't have right at the tip of my
tongue all of the exact numbers. I think the filing fee for
Chapter 7--all fees put together, filing fees and other fees
that must be paid at filing--is in the neighborhood of $275 for
Chapter 7. It's somewhat less for Chapter 13.
Under the bill, the fee went up for 7. It went down for 13.
Mr. Watt. You mean we set the fee, the new filing fee in
Mr. White. You did, and that----
Mr. Watt. As opposed to you all doing it administratively?
Mr. White. Yes. And the supplemental appropriations bill
made further adjustments in the filing fee structure and
allocation of the filing fees between the court, U.S. Trustee,
and general treasury.
Mr. Plunkett. Mr. Watt, the current fee is $209. It will
rise to $274. So that is a $65 increase.
Mr. Watt. Okay. Thank you, Mr. Chair.
Mr. Cannon. As long as we keep it under $210 and under
$275, I guess that is okay, right?
I want to thank the panel for being here. This is an
important area. We look forward to having input in the future
on this matter. We will continue to oversee it carefully.
And I want to thank the Ranking Member and other members of
the panel who have been here today, and with that, we're
[Whereupon, at 3:36 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Letter to the Honorable F. James Sensenbrenner, Jr., House Judiciary
Committee, from Bruce Leonard, Chair, and John A. Barrett, Chair, Board
of Governors, International Insolvency Institute
Prepared Statement of the International Insolvency Institute
Prepared Statement of Samuel K. Crocker, on behalf of the
National Association of Bankruptcy Trustees, submitted by the Honorable
Mark Green, a Representative in Congress, from the State of Utah
On behalf of the National Association of Bankruptcy Trustees
(NABT), I would like to thank the Subcommittee for the opportunity to
comment on the implementation of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (the ``ACT''). NABT represents the
interests of over 1,200 private panel Trustees who administer cases
filed under Chapter 7. Panel Trustees will have an important role in
the administration of the new provisions of the Act and we are
committed to making the Act work. Our comments today are focused on
issues relating to the implementation of the Act.
First let me say that Chapter 7 panel Trustees are committed to
implementing the changes to the Code which have been proscribed by
Congress. As the ``gatekeepers'' of the bankruptcy system, we will
always utilize the tools provided us to help honest but unfortunate
Debtors get the relief intended them, while being ever vigilant for
fraudulent and abusive filings. The NABT is committed to maintaining
the effectiveness of the system, and to that end we believe there are
several areas of the law that Congress may want to look at with an eye
toward implementation, which may effectively allow us to do what was
Notification of Child Support Claimants
NABT is at work developing methods to implement the new
Sec. 704(a)(10), through which child support claimants will be notified
of their rights as creditors in Chapter 7 cases of Debtors from whom a
support obligation is due. We envision that this provision will, with
the cooperation of the EODST, be effectively implemented through a
series of procedures and notices provided by the panel Trustee
throughout the case. We believe that, through this process, claimants
owed domestic support obligations can and will be made aware of the
options available to them to enforce Court-ordered support.
Additional Information Required of Debtors
NABT believes that the additional information which is required to
be furnished to the Trustee (and others), prior to the first meeting of
creditors, will aid in the identification and liquidation of assets for
the benefit of creditors. We are actively working on methods of
delivery which will allow us to effectively utilize the volume of
information which will be provided to us by each Debtor. Additionally,
we will attempt to insure that this information will remain
confidential, and be used solely for the purposes intended by the
Review of this required information will serve to insure that all
assets are disclosed and, where appropriate, applied to the payment of
creditors' claims. It will also, in many cases, more adequately define
the Debtors' circumstances, which will allow the panel Trustee to
perform the job more effectively.
Waiver of Filing Fee
Amended 28 U.S.C. Sec. 1930(f)(1) provides for the waiver of Chapter
7 case filing fees for individuals with ``income less than 150 percent
of the income official poverty line'' if the Court determines the
individual is unable to pay the fee in installments.
Trustees are paid compensation of $60.00 for administering cases in
which no assets are available for liquidation. The funding for these
fees is derived from the Chapter 7 case filing fee [see 11 U.S.C.
Sec. 330(b)(I)] and Miscellaneous Bankruptcy Court Fees prescribed by
the Judicial Conference of the United States [see 11 U.S.C.
The Act makes no provision for payments to Trustees in those cases
where the filing fees are waived. Some have even suggested that the
statutory language as drafted may prevent Trustees from being paid for
services in such cases. This apparent oversight needs to be corrected,
and a system established to provide adequate funding for payment of
Trustee fees in these cases.
Protecting Patient Records
The Act adds a new Sec. 351 to the Code that provides a procedure
for notification and disposal of patient records in cases where the
Trustee does not have sufficient funds to pay for the storage of
records in the manner required under applicable federal or state laws.
The Act fails to take into account that in some circumstances Trustees
will lack sufficient funds to comply with the procedure established
under Sec. 351. For example, under Sec. 351 Trustees are required to
undertake various costly actions including: storing records for one
year; publishing a notice in one or more appropriate newspapers;
notifying every patient and appropriate insurance carrier by mail;
communicating by certified mail with each appropriate federal agency;
and destroying the records. It is estimated that these costs could
range anywhere from $3,500.00 in smaller cases (500 or fewer patients)
to $35,000.00 in medium cases (10,000 patients) and higher in large
cases (up to 100,000 patients and more). If Trustees do not have the
funds to pay for the storage and notices required in Sec. 351, patient
records may not be administered properly and could be lost.
The problem can be corrected by allowing a court in no asset or
limited asset cases, upon motion of the Trustee, to direct the person
or persons responsible for maintaining, storing or disposing of patient
records under state law, prior to the appointment of the trustee, to
resume the responsibility of preserving the records. In such
circumstances, the responsible party would be directed, by court order,
to perform the functions required under Sec. 351.
Payment in Converted Cases
The Act was intended to provide a mechanism and payment schedule for
Chapter 7 Trustees to receive compensation in cases converted or
dismissed pursuant to 707(b). The Act included changes to Sec. 1326(b)
of the Code specifying the payment schedule to be applied if Trustees
are allowed compensation due to the conversion or dismissal of case
under Sec. 707(b). These changes are inadvertently ineffective,
however, unless Sec. 326 of the Code is also modified to provide for
Trustee compensation in converted or dismissed cases. Under current
judicial interpretations of Sec. 326, Trustees have been denied
compensation in cases converted or dismissed under Sec. 707(b) because
Trustees have not actually disbursed or turned over moneys to parties
in interest in such cases (which that statute requires as a
The problem can be corrected by adding a new subsection (e) to
Sec. 326 to provide that the Court may allow reasonable compensation
for services rendered by the Trustee, if the Trustee in a Chapter 7
case commences a motion to dismiss or convert under Sec. 707(b) and
such motion is granted, or if the case is converted from Chapter 7 to
another chapter, and the actions or positions of the Chapter 7 Trustee
were a factor in the conversion of the case. Since cases are most often
converted from Chapter 7 to 13 without the processing of a formal
Sec. 707(b) motion (a threat of a motion is often sufficient), Trustees
should be allowed compensation if their actions or positions were a
factor in the conversion of the case.
Trustees have and will continue to drive those Debtors who have an
ability to repay some or all of their debts into a Chapter 13 repayment
plan. It was the intent of Congress to reward us for these efforts, and
encourage the continued vigilance.
Avoiding Automatic Dismissal in Asset Cases
The Act modifies Sec. 521 of the Code to compel an automatic
dismissal of cases where certain information is not timely provided. If
a Debtor does not reaffirm or surrender collateral within 45 days after
the first meeting of creditors, the automatic stay under Sec. 362(a) is
terminated and the property ``shall no longer be property of the
estate'', even if there is equity in that property for the benefit of
The automatic dismissal language raises concerns insofar as it
renders valuable property ``no longer property of the estate'' and
places it beyond the reach of the trustee or the court. Trustees may
not be able to determine whether there are unencumbered non-exempt
assets to administer by the deadlines imposed under Sec. 521, in part,
because debtors who are dilatory in reaffirming/surrendering are often
unresponsive to trustees. Although trustees may ask for extensions of
the Sec. 521 deadlines, circumstances may prevent the trustee from
having sufficient information to support a motion for an extension of
Terminating the stay under Sec. 326(a) is adequate to allow a
creditor to take action with respect to property as permitted under
applicable law. This would also serve to avoid decreeing that the
property is ``no longer property of the estate'' and ensure that
valuable property will not be lost to the estate and its creditors in
Increase in ``No Asset Fee''
Under the present law, Trustees receive $60.00 for administering
Chapter 7 cases in which no assets are liquidated. The last increase in
this Trustee compensation occurred in 1996, when the fee was raised
from $45.00 to $60.00.