The issue of increasing bankruptcies was such a concern that Congress became serious about bankruptcy reforms that would make it more difficult to file bankruptcy.  Reforms would also force more debtors, with the ability to repay a portion of their debt, into Chapter 13 bankruptcies.

 

It is exciting to report that the number of consumer bankruptcy filings in 1999 fell by 8.3% and the total number of bankruptcies including business Chapter 7 and 11 bankruptcies decreased by 8.5%, according to the administrative office of the U.S. Courts.  Does this mean that our nation is out of the woods in regards to record bankruptcy filings?  Looking at the last five years, we observe approximately a threefold increase in the number of filings from the 10 years prior.  This continues to concern both creditors and Congress.  Will we see changes in the bankruptcy laws to assist with the decline of filings?

 

Bankruptcy Reform Commission
In 1996, President Clinton put the Bankruptcy Reform Commission into place to make recommendations to Congress about changes to the Bankruptcy Code.  Four years later, creditors are still subject to existing bankruptcy laws and abuses.  Congress has been on the right track, but will creditors see changes in the year 2000?

 

House Resolution 833 (H.R. 833)
Late in 1999, the House of Representatives passed House Resolution 833 (H.R. 833).  The bill presents comprehensive changes in the bankruptcy laws and provides for means testing to prevent a continued string of abusive filings, lien stripping, cram-down restrictions in Chapter 13 bankruptcies, and the elimination of superdischarge in Chapter 13 bankruptcy proceedings.  The House of Representatives approved its legislation by a veto proof margin.

 

Senate Bill 625 (S. 625)
The Senate was next to take up its bill on bankruptcy reform - Senate Bill 625 (S. 625).  The bill addressed the majority of issues contained in H.R. 33, but with some modifications.  The Senate bill, which became politically motivated, also passed by a veto proof margin.

 

The next step in the process is a conference committee between a group of senators and representatives.  The committee will hash out their differences and present a comprehensive bankruptcy bill to both houses.  This process will not be without politics.  Attached to the bankruptcy bill is a minimum wage bill, an area of hot debate.  The year 2000 is an election year, so what will occur is in question.  To date, the conference committee has yet to form; however, their review may have a great impact on future bankruptcies. 

 

Applicability to Creditors 
Creditors have seen increased involvement in bankruptcy proceedings over the last several years.  Faced with scattered bankruptcies by customers, creditors must be knowledgeable concerning the intricacies of bankruptcy and related legislation.

 

A major area of legislation deals with reaffirmation agreements and signature loans.  Many debates have taken place regarding reaffirmations on unsecured loans.  The House bill does not prohibit unsecured reaffirmations of the Senate bill and requires specific disclosures on the agreements. These disclosures will not necessarily diminish the number of reaffirmations, but creditors must be sure that they comply with all requirements.

 

The second area of concern is the limitation of cram-down and lien stripping in Chapter 13 proceedings.  Both bills favor creditors limiting the cram-down on the purchase of automobiles for a five-year period. The Senate bill goes even further by including any automobile transaction within five years.  To the creditor this means that refinancing a vehicle under the Senate bill will not allow the balance on the account to be crammed down in a Chapter 13 proceeding.

 

The initial and major focus of bankruptcy reform legislation was to help prevent increasing abusive filings.  The goal of the legislation was to force debtors who are able to repay some of these debts into Chapter 13 bankruptcies.  Based on projections, the means-based tests will cause approximately 100,000 more individuals to be in Chapter 13 bankruptcy proceedings. The big question is whether the bankruptcy courts and Chapter 13 Trustees are in a position to help enforce the new tests and prevent the abuses.  This is one area where the Senate and House disagree.  The Senate bill presumes that an abusive filing of the debtor can pay $15,000 over a 60-month period to the unsecured creditors.  The House presumes that an abusive filing can pay $6,000 of unsecured debt.  The crucial element under either test will be whether the information set forth in the debtors' budget is accurate. 

 

Another major area of dissent pertains to the presumption of non-dischargeability of debts incurred for luxury goods and cash advances.  The House provision is more favorable to creditors, as it presumes fraud on debts incurred for $250 in luxury goods or cash advances within 90 days of filing.  The Senate bill provides for $250 on luxury goods within 90 days, and $700 in cash advances within 70 days of filing.  Although there is a presumption of fraud, proof of non-dischargeability is still required.  In cases where fraud is presumed, the burden of proof will shift to the debtor.  The court will determine if the said debt is excepted from discharge.  Courts have tended to hold most debt pertaining to luxury goods and cash advances dischargable, as they look to actual intent.

 

The other area of non-dischargeability of debts occurs in Chapter 13 bankruptcy proceedings.  Currently in such a proceeding, a debtor can obtain a superdischarge.  Despite the fact that a debt may be declared non-dischargable in a Chapter 7 bankruptcy, a debtor may still discharge the debt in a Chapter 13 bankruptcy.  A creditor would have to prove a bad faith filing causing a dismissal of the case.  The new legislation eliminates the superdischarge and certain debts in a Chapter 13 bankruptcy can be excepted from discharge.

 

Conclusion
As we enter the next century, creditors are going to face a great deal of bankruptcy legislation.  The effect of the new legislation on creditors seems to be positive, but until the final legislation is in place, no one can be secured.  What we do know is that the creditor will need to be involved with bankruptcies in the years to come.

 

 

Cram-down:  There are certain circumstances when creditors vote in the majority to reject a Chapter 11 plan of reorganization that the court may nonetheless confirm.  This procedure is referred to as a "cram-down" of the plan on the dissenting creditors.  The cram-down is allowed where all other conditions or requirements for confirmation are met and the court determines that the plan does not discriminate unfairly and is fair and equitable with respect to each of the classes of creditors whose claims are to be paid less than loot. 

 

This term is also used any time a debtor forces a creditor to receive less than payment of its entire claim because the value of the collateral is less than the amount of the debt.  This often happens in Chapter 13 bankruptcies where a car is security for a loan, but the car is worth less than is owed.

Means-based Tests:  A test to determine if a debtor has the ability to repay a portion of his or her debts.  A fixed formula based upon income and expenses that may cause a debtor to be forced to file a Chapter 13 instead of a Chapter 7.

 

Reaffirmation: A written agreement between the debtor and creditor that is filed with the court as part of the bankruptcy proceeding.  Generally, all debts that are not reaffirmed are discharged.  The reaffirmation agreement must also be signed by the debtor's attorney or approved by the court.