November 8, 1999

S. 625 - Bankruptcy Reform Act of 1999
(Grassley (R) Iowa and eight cosponsors)

The President supports bankruptcy reform that is balanced, would reduce abuses of the bankruptcy system, and would require debtors and creditors alike to act responsibly. Last year, the Senate produced such a balanced bill with overwhelming bipartisan support. The President is disappointed that, this year, the House failed to produce legislation that he could support. S. 625 reflects some improvements over H.R. 833 as passed by the House. The Administration, however, continues to have serious reservations about S. 625 and strongly opposes some of its provisions. For example, we are deeply concerned about a provision of the manager's amendment that adds an important "safe harbor" that protects low-income debtors from motions to deny them access to Chapter 7 under the means test, but also eliminates an essential "safe harbor" that would protect low-income debtors from coercive creditor motions that might be brought under a under a vague "totality of the circumstances" test more appropriately enforced by bankruptcy trustees and courts. The latter protection eliminated by the managers' amendment was included in the reported version of the Senate bill, the House-passed bill, and last year's conference report. The Administration's other objections to this bill are explained in detail in the Attachment.

Most of the Administration's concerns would be addressed by relevant amendments that the Administration understands will be offered on the Senate floor. The Administration's views on the anticipated amendments are also contained in the Attachment. The Administration remains hopeful that bipartisan cooperation will result in responsible bankruptcy legislation that the President can enthusiastically sign.

Finally, the Administration understands that certain non-relevant amendments will be offered as well. On November 4, 1999, in a letter to the Majority Leader, the President made clear that he strongly supports an increase in the minimum wage of $1 over the next two years; however, if Congress sends him a bill delaying the increase, repealing overtime protections for certain workers, adding costly and unnecessary tax cuts that threaten fiscal discipline and direct benefits away from working families, and thwarting ongoing efforts to enforce pension law, he will veto it.

In addition, the Administration strongly opposes the inclusion of an unrelated education amendment, a version of the Teacher Empowerment Act. When similar legislation passed the House this summer, the President indicated that he would veto it. The Administration's position on this legislation has not changed. The amendment would eviscerate the class size reduction program passed on a bipartisan basis last year and replace it with a block grant that fails to guarantee that any funds will be used to support the crucial work of reducing class sizes in the early grades. In addition, the block grant does not target funds toward the neediest students and does not include important provisions to improve teacher quality. If this amendment is attached to S. 625, the President will veto the bill.

The Administration opposes the drug-related amendment because it would reduce the current disparity between crack and powder cocaine sentences solely by increasing powder cocaine penalties dramatically instead of addressing both crack and powder cocaine penalties. Decreasing the threshold amount of powder cocaine necessary to obtain 5- and 10-year mandatory minimum sentences may be counterproductive because it could significantly redirect Federal law enforcement resources from the highest level offenders. In addition, this amendment would actually exacerbate the disproportionate impact of cocaine sentencing on minorities because, according to U.S. Sentencing Commission statistics, approximately 31% of defendants sentenced at the Federal level for powder cocaine offenses in 1998 were African American, 48% were Hispanic, and only 19% were white.


Detailed Administration Views on S. 625 and Anticipated Floor Amendments

Access to Chapter 7. Any means test used in bankruptcy proceedings should deny access to Chapter 7 bankruptcy procedures only to those debtors who genuinely have the capacity to repay a portion of their debts successfully under a Chapter 13 repayment plan. Debtors who may be denied a discharge of their debts must be given a meaningful opportunity to have their specific circumstances considered by bankruptcy courts with the authority to determine whether they genuinely have the capacity to repay a portion of their debts. In its current form, S. 625 would use a relatively inflexible and arbitrary means test to limit access to Chapter 7. The Administration strongly opposes this provision.

As reported, S. 625 would apply rough guidelines, developed by the Internal Revenue Service (IRS) for tax repayment plans, as standards for determining debtors' ability to repay, with exceptions only for expenses that are both "reasonable and necessary." While some expense standards should be used to guide the determination of ability to repay, they should be tailored for bankruptcy. We should not simply import standards that were developed for a different purpose -- tax collection -- and which are applied for that purpose with far more discretion than S. 625 would allow for bankruptcy. We note that the Congress has criticized the IRS for inadequate flexibility in using these standards for tax collection, yet this bill would use them far more rigidly for bankruptcy purposes. The Administration believes that the IRS expense formulas can be used as a starting point for developing appropriate bankruptcy guidelines, but that each system would be best served by its own appropriate standards. As House Judiciary Committee Chairman Henry Hyde has said, the use of IRS guidelines without flexibility "depriv[es] debtors and their families of the means to pay for their basic needs." As Chairman Hyde noted on the House floor, "The cost of food in Omaha, Nebraska, or Boise, Idaho, is different than in downtown Manhattan. So what is realistic about an inflexible standard?"

The Senate bill creates a largely self-executing mechanism under which elaborate debtor filings will be reviewed by United States trustees, who, based on the filings, will file a motion to deny access to Chapter 7, if the debtor has the capacity to repay or her use of Chapter 7 is abusive. As modified by the managers' amendment, the bill also gives creditors the ability to file motions to challenge the debtors' use of Chapter 7 as abusive under a vague "totality of the circumstances" test. Creditor motions alleging abuse could be used by creditors against low and moderate income debtors -- who have few resources for legal advice -- to coerce or threaten them to forgo their rights. The bill should provide below-median-income debtors with a "safe harbor" from general abuse motions by creditors, as well as with the "means-test safe harbor" that the managers' amendment provides. Both are essential.

Finally, since the bill as amended by the managers' amendment precludes any party from filing a 707(b) motion alleging that a below-median income debtor has the capacity to repay under the means test, there is no justification for requiring that these debtors fulfill the elaborate means test paperwork requirements. The courts will bear unnecessary costs for collection and storage of these useless filings and they impose an unnecessary cost (and increased legal fees) on the debtor as well. These debtors should be required to provide only the information sufficient to verify their income eligibility for the "safe harbor." Similarly, a more streamlined system could screen out those with no capacity to repay before additional paperwork requirements are imposed. All parties should be able to agree that any means test should be implemented efficiently. Burdensome filing and hearing requirements that lead to little or no additional debt repayment are not in the interest of debtors, creditors, or taxpayers.

The Administration understands that a series of amendments will be offered to improve the fairness and efficiency of the means test. The Administration strongly supports these amendments, including:

  • An amendment by Senator Feingold to clarify that the long-term care expenses of a debtor caring for a non-dependent parent or relative are necessary expenses under the means test;

  • A similar amendment by Senator Leahy to clarify that certain expenses for victims of domestic abuse are necessary expenses under the means test;

  • A similar amendment by Senator Schumer to clarify that retraining expenses of displaced or unemployed workers are necessary expenses under the means test;

  • An amendment by Senator Dodd to address special concerns of children and families, which includes a provision to clarify that the expenses associated with adopting a child are necessary expenses under the means test;

  • An amendment by Senators Schumer and Durbin to provide an appropriate safe harbor from all types of creditor motions and unnecessary paperwork requirements for below-median-income debtors;

  • An amendment by Senator Durbin to reduce unnecessary costs and inefficiency in the reformed bankruptcy system by streamlining application of the means test and reducing costly paperwork collections without affecting debt repayment under the system;

  • An amendment by Senator Schumer to authorize the Treasury Department, in consultation with the Executive Office for United States Trustees, to modify certain of the IRS guidelines for use in bankruptcy to account for variations in the cost of living; and

  • An amendment by Senator Schumer to improve the accuracy of the means test calculation by counting all required Chapter 13 expenses (administrative costs, reasonable attorneys fees, and arrearages on other debt) in calculating capacity to repay under the means test.

Abusive Creditor Reaffirmation Practices. Much evidence shows that debtors often reaffirm unsecured debt and low-value secured debt on unfavorable terms even though they do not have the means to meet their own necessary expenses and make more important debt payments, placing such priority debts as child support and alimony obligations at risk. Such reaffirmations frequently are the result of insufficient or misleading information or threats from creditors. S. 625 as reported does little to address these abuses. If we are to provide substantial new opportunities for creditors to challenge debtors' use of the bankruptcy system under Chapter 7 of the Bankruptcy Code, we must limit abusive creditor practices such as coercive reaffirmations and violations of the automatic stay against collection actions. We understand Senator Sessions may offer an amendment to provide some protections against abusive reaffirmations. However, we believe the amendment has significant loopholes, allowing debtors to reaffirm debts they cannot afford and failing to provide creditors with all the information that bankruptcy judges deem necessary and which many are already requiring be provided in their courts. The Administration strongly supports:

  • An amendment by Senator Reed, that protects debtors by giving them adequate information for decisions about significant reaffirmations of unsecured and low-value secured debt.

We understand, however, that Senators Reed and Sessions continue to discuss ways to reconcile their two amendments in a way that might address our concerns.

Credit Card Information and Protection. The Administration continues to believe that reform must address the factor that is most strongly correlated with the rise in personal bankruptcy: rising levels of consumer debt. Americans now receive more than 3.5 billion credit card solicitations per year, many of which are marketed to encourage consumers to carry high balances and incur large interest charges. One of the most effective ways to reduce the number of bankruptcies in this new financial era is to give consumers the information they need to manage their credit card debts effectively, recognizing the creditors' superior information and bargaining ability. Consumers must be given clear information on the terms of their credit and the financial implications of not paying off their credit card balances. The Administration supports:

  • An amendment by Senators Grassley, Torricelli, Biden, and Johnson addressing some abusive credit practices, such as failure to disclose "teaser" rates clearly, and requiring limited generic disclosure of the impact of making only the minimum payment on credit cards. While the Grassley-Torrecelli amendment is an improvement over H.R. 833, much more should be done. The amendment creates a system that is unnecessarily burdensome for consumers who may be reluctant to call their credit card company if they are worried about their finances or are pressed for time. The Administration strongly supports:

  • An amendment by Senator Schumer to expand coverage of the teaser rate disclosures provided under the amendment by Senator Grassley and Torrecelli to apply to applications or solicitations available to the public in catalogs, magazines, and restaurants; and

  • An amendment by Senator Dodd to require additional information specific to the individual consumer to allow them to better understand the impact of making only the minimum payment.

Cramdowns. S. 625 also changes the lien stripping or "cramdown" provisions in current law governing a Chapter 13 bankruptcy, under which the lien underlying a secured debt is reduced to its value at the time of bankruptcy. The Administration agrees that lien stripping should be limited to automobile loans incurred in the period preceding bankruptcy to prevent abuses, but believes that the provisions in the Senate bill are excessive. While the Administration strongly prefers the Senate provisions to the extreme prohibitions in H.R. 833, the five-year prohibition on lien stripping on automobile debts in the current bill will do little more to deter bankruptcy abuses than a more reasonable time limit. Instead, the prohibition will significantly reduce repayment of priority, unsecured debts like child support and taxes. The Administration strongly supports:

  • An amendment by Senator Kohl that would ban cramdowns of secured goods with purchase money security interests incurred within six months of the bankruptcy filing.

Nondischargeable Debts. The Bankruptcy Code makes debts nondischargeable only where there is an overriding public purpose, as with debts for child support and alimony payments, educational loans, tax obligations, or debts incurred by fraud. In an attempt to deal with the possibility of abuse, the bill makes nondischargeable debt incurred on the eve of bankruptcy and certain debts incurred to pay nondischargeable debts. Unfortunately, the amendment will catch those who innocently incur debts as well. Moreover, the additional credit card and other nonpriority debts made nondischargeable by these provisions will compete in some cases after bankruptcy with child support, alimony, taxes, and other societal priorities like educational loans and taxes. The Administration strongly prefers the provisions in S. 625, which offer some protection for child support and alimony, to those in H.R. 833. However, the Administration also strongly supports:

  • An amendment by Senator Moynihan that would preserve the current nondischargeability rules for lower income debtors, those least likely to incur debts on the eve of bankruptcy for abusive purposes; and

  • An amendment by Senator Dodd to address special concerns of children and families, which includes a provision to alter the bill's nondischargeability provisions to make it less likely that debts legitimately incurred to support a family will be made nondischargeable; and

  • An amendment by Senator Schumer that would make court-ordered fines and debts resulting from abortion clinic violence nondischargeable. As the Justice Department noted in a May 14, 1999 letter to Senator Schumer, the Administration generally opposes the expansion of nondischargeable debt unless there is an overriding public policy objective and no other way to achieve that objective, but believes this amendment is a necessary tool in current efforts to end clinic violence and intimidation.

Loopholes for the Wealthy. The Administration supports closing loopholes in bankruptcy law, such as unlimited homestead exemptions, that allow many wealthy debtors to avoid their responsibility to repay a significant portion of their debt. Bankruptcy reform should not place a greater responsibility for debt repayment on moderate- and low-income debtors than it does on high-income debtors. The Administration strongly supports:

  • An amendment by Senator Kohl to place a reasonable limit on homestead exemptions.

Barriers to Entry to the Bankruptcy System. Finally, the bill appears to place unnecessary barriers to entry into the bankruptcy system that will not prevent abuse, but will create burdens on those with a genuine need for speedy bankruptcy protection. The Administration strongly supports:

  • An amendment by Senator Leahy to save the taxpayers an estimated $24 million over five years by eliminating the requirement that every debtor file three years of tax returns and instead permit any party in interest to demand the copies when needed to verify the debtor's assets and income, thus reducing filing and storage costs and unnecessary paperwork burdens; and

  • An amendment by Senator Durbin to allow certain mandatory credit counseling to be provided over the phone.