From : The Raw Story
House Judiciary Democrats' dissent from bankruptcy bill


A copy of the Democratic House Judiciary Staff's dissenting views on the bankruptcy 
bill was leaked to RAW STORY last night. The House vote—in which the bill is 
expected to pass—was scheduled for Wednesday but postponed to next week, likely 
because of members' desires to attend the Pope's funeral.
Dissenting Views on S. 256

Reform of the bankruptcy system, and the principle that every debtor should repay 
as much of her debt as she can reasonably afford, is a sound and uncontroversial 
idea. Were the legislation reported by the Judiciary Committee to bear any remote 
relationship to that laudable goal, this legislation would be wholly uncontroversial. 
Instead, by pressing legislation that is unbalanced and tilted toward specific special 
interest groups, the proponents of S. 256 have created a bill that would: impose 
monumental costs on the parties in the bankruptcy system, including the 
government; subject the “honest but unfortunate debtor” to coercion and loss of their
 legal rights; force businesses into unnecessary liquidation; and favor certain 
creditors over others.

It is a stark fact that the bankruptcy filing rate has almost doubled during the last 
decade. Nonetheless, debtors filed just under 1.6 million bankruptcy cases last year, 
a decline in total bankruptcy filings nationally from 2003 of 3.8%. The bill’s sponsors 
view the long-term increase as evidence of widespread abuse of the bankruptcy 
system by people who otherwise would be in a position to pay their debts. 
Bankruptcy, the bill’s sponsor says, has become a system “where deadbeats can get 
out of paying their debt scott-free while honest Americans who play by the rules 
have to foot the bill.”

The bankruptcy filing rate is a symptom. It is not the cause. While some people 
abuse the bankruptcy system, more than 90 percent of debtors file for bankruptcy 
due to unemployment or underemployment, an illness or accident, or divorce. The 
bulk of the remainder suffered from other legitimate difficulties, including activation 
for military service, being a victim of crime or natural disasters, or a death in the 
family .... an independent study on the subject found that less than four percent of 
debtors who filed under Chapter 7 (where unsecured debt is discharged) could 
possibly repay any of their unsecured debt under Chapter 13.

Our concerns regarding this legislation are procedural as well as substantive. The 
House Judiciary Committee has held no hearings on this legislation in this Congress. 
The Subcommittee on Commercial and Administrative Law has not considered the 
bill. Additionally, Chairman Sensenbrenner made it abundantly clear that, although 
regular order would be followed, in Full Committee, it would be regular order in name
 only. The votes, and the result, were preordained. No amendments were permitted, 
and none would receive consideration regardless of their merit.

The single Senate Judiciary Committee hearing on S. 256 shed light on the major 
factor now driving people into bankruptcy: increasingly high medical expenses. A 
joint study of bankruptcy filings by researchers at Harvard Medical School and 
Harvard Law School revealed that roughly half of all bankruptcies filed in 2001 were 
caused, at least in part, by illness or medical debts. Remarkably, 75 percent of 
bankruptcy filers with medical expenses had health insurance at the onset of their 
bankrupting illness. However, a significant number experienced gaps in coverage and
 high out-of-pocket costs, particularly for prescription drugs.

In the eight years since the credit industry first came to Congress seeking relief from
 the rising rate of personal bankruptcy filings, the extension of credit has not been 
curtailed nor have the industry’s profits been diminished due to bankruptcy filings. 
Instead, credit card solicitations have doubled to five billion a year. The bill still 
ignores the problem of the abuse of consumers by credit card companies.

While bankruptcy filings have increased 17 percent in the last eight years, credit card
 profits have increased 163 percent – from $11.5 billion to $30.2 billion. The cost of 
late and other penalty fees assessed by credit card companies have doubled in the 
last decade and now are more quickly levied (payments arriving after a certain hour 
on the due date are now considered late). Even more damaging have been the 
accompanying penalty rates. These rates jump from usually zero percent to a range 
of 22-29 percent, are retroactive to the entire balance, and, thanks to “universal 
default” policies, now create a domino effect on the consumer’s financial situation. 
Additionally, the average late fee in 2003 for a late payment on a credit card was 

Proponents of the legislation say that the bill will put pressure only on the families 
that have the ability to repay. In fact, the weight of the evidence demonstrates that 
the legislation will increase the cost of bankruptcy for every family, and it will 
decrease the protection of bankruptcy for every family, regardless of income or the 
cause of financial crisis. There are provisions that will: force many honest debtors 
unnecessarily out of chapter 7, make Chapter 13 impossible for many of the debtors 
who file today, protect significant loopholes for wealthy and well-advised debtors, 
raise the cost of the system for all parties, turn the government into a private 
collection agency for large creditors, and force women trying to collect child support 
or alimony to compete with credit card companies that will have more of their debts 
declared non-dischargeable.

The simple reality is that time and changes in the American economy have passed by
 the substance of this bill. Even if it was a flawless bill when it first was introduced 
eight years ago (and it was not), the events of the past eight years have dramatically
 changed the landscape in which we now consider it. The ability to file for bankruptcy 
and to receive a fresh start provides crucial aid to families overwhelmed by financial 
problems. This bill would seriously compromise the bankruptcy protections these 
families need.

This legislation is opposed by organizations and individuals most concerned with the 
bankruptcy system, the rights of consumers, the needs of single parents and 
children, the elderly, working families, and civil rights.

Among the organizations that have opposed, or have expressed serious concerns 
with S. 256 and its predecessors since the 105th Congress are:

(1) groups concerned with the rights of workers including: AFL-CIO, Air Line Pilots 
Association, American Federation of Labor and Congress of Industrial Organizations, 
American Federation of State, County and Municipal Employees (AFSCME), Transport
 Workers Union, Service Employees International Union, Union of Needletrade 
Industrial and Textile Employees (UNITE), United Food and Commercial Workers 
International Union, United Mine Workers of America, United Steelworkers of 
America, Communication Workers of America, International Association of Machinist 
and Aerospace Workers, International Brotherhood of Boilermakers, Iron 
Shipbuilders, Blacksmiths and Forgers, International Brotherhood of Electrical 
Workers, International Brotherhood of Police Officers, International Brotherhood of 
Teamsters, International Union UAW, Laborers International Union of North America, 
National Association of Government Employees, PACE International Union, and 

(2) groups of non-partisan bankruptcy lawyers, judges, academics, physicians and 
banks including: American Association of University Women, American Bar 
Association, American Federation of Teachers, Association of Enterprise 
Organizations, Community Development Venture Capital Association, Klee, Tuchin & 
Bogdanoff LLP, Latino Community Credit Union, National Bankruptcy Conference, 
National Community Capital Association, National Conference of Bankruptcy Judges, 
National Association of Chapter 13 Trustees, National Association of Bankruptcy 
Trustees, Commercial Law League of America, the American College of Bankruptcy, 
and National Association of Consumer Bankruptcy Attorneys, a group of 110 
professors of bankruptcy and commercial law, and a group of 1,700 physicians from 
around the country wrote to Congress in opposition to S. 256 because it would 
remove protections available to patients ruined financially by medical expenses;

(3) groups concerned with the rights of women, children, seniors, and victims of 
crimes and torts including: Alliance for Retired Americans, Business and Professional 
Women/USA, Children’s Foundation, Church Women United, National Council of 
Jewish Women, National Council of Women’s Organizations, National Organization for
 Women, National Women’s Law Center, and OWL – The Voice of Midlife and Older 

(4) groups concerned with consumer protection, civil rights, and social justice 
including: American Friends Service Committee, Association of Community 
Organization for Reform Now (ACORN), Center for Community Change, Commission 
on Social Action of Reform Judaism, Consumer Federation of America, Consumers 
Union, Leadership Conference on Civil Rights, Lutheran Office for Governmental 
Affairs ELCA, NAACP, National Advocacy Center of the Sisters of the Good Shepard, 
National Community Reinvestment Coalition, National Consumer Law Center, 
Neighborhood Assistance Corporation of America, Network – a National Catholic 
Social Justice Lobby, Public Justice Center, and U.S. Public Research Group.

Many of these concerns have been expressed since the introduction of the precursor 
bills beginning with the 105th Congress. The reported bill is virtually identical to the 
conference report on H.R. 333 in the 107th Congress with the exception of an 
important provision that would have prevented the discharge, or the abuse of the 
bankruptcy system to hinder, delay and defraud creditors, of debts arising from 
violations of the Freedom of Access to Clinic Entrances Act. There is no reason for 
the deletion of this amendment that reflects a compromise among Sen. Charles 
Schumer, Sen. Orrin Hatch and Rep. Henry Hyde, other than the conclusion of the 
bill’s sponsors that protecting women’s constitutional rights would interfere with the 
passage of this special-interest legislation.

For all the foregoing reasons, and the reasons discussed below, we dissent from this 

Section I describes concerns about the lack of empirical justification for this bill. 
Section II describes the consumer provisions, including, most notably, the means 
test. Section III discusses flaws in the small business and single-asset real estate 
provisions, Section IV turns to the tax sections of S. 256, and Section V looks at 
corruption in the bankruptcy system. The following is a table of contents summarizing
 this analysis:

Table of Contents


A. Current Law and Proposed Changes 13
    1. Means Testing 15
    2. Exceptions to Discharge & Loan Bifurcations 18
    3. Domestic Support 19
    4. Other Anti-Debtor Provisions 20
B. Principal Problems with Proposed Changes 20
    1. S. 256’s Means Testing is Arbitrary and Unworkable in Practice 20
    2. Means Testing Will be Costly and Bureaucratic 23
    3. Means Testing and the Other Consumer Provisions Will Harm Low-
        and Middle-Income People 26
        a. Concerns Regarding the Means Test 26
        b. Other Concerns 27
    4. The Consumer Provisions Will Have a Significant, Adverse Impact on Women,   
        Children, Minorities, Seniors, Victims of Crimes and Severe Torts, Victims of 
        Identity Theft, and the Military 28
        a. Women and Children 28
        b. Minorities 34
        c. Seniors 34
        d. Victims of Crimes and Severe Torts 35
        e. Victims of Identity Theft 36
        f. Military 37
    5. The Bill Does not Address Abuses of the Bankruptcy System
        by Creditors 40

A. Small Business Provisions 45
B. Single-Asset Real Estate Provisions 47
C. Failure to Safeguard Employee Rights and Stem Employer Abuses 48
D. Other Business Concerns 49





One of the major reasons accounting for the differing views regarding S. 256 relates 
to differing understandings of the quantitative evidence of the causes, costs, and 
effects of bankruptcy. S. 256’s proponents point to (1) the fact that the United States 
has experienced a dramatic growth in the number of personal bankruptcy filings in 
the last decade and (2) credit industry-funded studies by Professor Michael Staten of 
Georgetown University’s Credit Research Center, Ernst & Young, and the WEFA group
 that purport to demonstrate that the bankruptcy laws allow many relatively high 
income individuals to avoid debts they could otherwise pay and that this avoidance 
imposes substantial costs on the economy. Proponents of S. 256 point to the 
“opportunistic personal filings” for bankruptcy and the declining stigma associated 
with doing so to explain the increase in filings.

Despite the earlier trend in higher numbers of bankruptcy filings, the vast weight of 
studies have contradicted the proponents’ rationales and have shown that the filing 
rate is a symptom of financial difficulties. Analysts with the Congressional Budget 
Office, the General Accounting Office, and the Federal Deposit Insurance Corporation
 all have called into question the conclusions of those studies. These critiques focus 
on a number of grounds, including numerous flaws in the analysis and the 
assumptions underlying the studies. Moreover, other analyses indicate that the rise in
 bankruptcies is more properly attributable to a number of changes unrelated to the 
bankruptcy laws, such as unexpected medical costs, family crises like divorce, loss of
 high-paying full-time jobs, and most notably, the deregulation of credit card interest 
rates and the dramatic increase in credit card solicitations and overall consumer 
debt. Even a credit card industry official found that “[t]he majority of bankruptcies in 
[its] file are on customers who have been on the books for more than three years 
and have had some significant change in their financial condition.” It also has been 
shown that the average income of persons filing for bankruptcy has declined from 
the 1980's, further contradicting assertions of widespread abuse by high-income 

One of the most telling studies was performed by the non-partisan American 
Bankruptcy Institute, which commissioned Professors Marianne B. Culhane and 
Michaela M. White of the Creighton University School of Law to conduct a study 
independent of the credit industry. Professors Culhane and White used for their study
 a database of chapter 7 cases; the National Conference of Bankruptcy Judges 
funded the compilation of the database. The study estimated that 3.6% of the 
debtors in their sample had sufficient income, after deducting allowable living 
expenses, to pay all of their non-housing secured debts, all of their unsecured 
priority debts, and at least 20% of their unsecured nonpriority debts. Moreover, in 
making their calculations, Professors Culhane and White assumed that 100% of the 
debtors in chapter 13 would complete a five-year repayment plan even though more 
than 60% of voluntary chapter 13 plans currently do not complete.

The American Bankruptcy Institute study also showed that, while the credit industry 
estimates it may be eligible recover $4 billion under the rigid standards of the means
 test, creditors would receive at best $450 million in actual collections. These figures 
are significantly lower than those of the Credit Research Center and VISA – two 
studies funded by the credit industry – and show that the credit industry may have 
overstated the “problem” by as much as 500%. The Executive Office of United States
 Trustees in the Justice Department conducted a study that reached similar results, 
estimating that passage of the legislation probably would have netted creditors no 
more than 3% of the $400 per household they claim to be losing.

Professor Staten, whose work for the credit industry provided much of the empirical 
fodder for this legislation, has observed that this legislation would only move about 
5% of all chapter 7 cases into chapter 13, and that the legislation would have no 
effect on the number of bankruptcies.

Similarly, according to James Blaine, CEO of the NC State Employees Credit Union, 
“Charge-offs, too, are well under control at .46% of total loans (less than 1%). In 
other words, 99.5% of credit union loans are repaid as promised. According to NCUA 
41.1% of credit union charge-offs related to bankruptcy. Or said another way, just 
.19% (less than 2/10th of 1%!) of total credit union loans result in a bankruptcy loss. 
So taking a the high estimate of 15% rate of abuse, he calculates that total losses on
 loan portfolios are .0385% or less than 3/100ths of 1% (.19% x 15% = .0285% 
(less than 3/100ths of 1%).”

Moreover, there is nothing in this bill to guarantee that any savings realized from this
 bill will be passed on to consumers. The bill does not require it and, quite frankly, 
although real interest rates continue to hover at record lows, very little of the benefit 
of these low rates have been passed on to credit card borrowers. Not surprisingly, 
there is no evidence that the credit card industry would pass on any of the “savings” 
from bankruptcy law changes to individual borrowers. Instead the evidence shows 
that credit card companies, tend to maintain high interest rates, even when their own
 cost of credit declines. In at least some cases, these patters appear to have been 
caused by unlawful behavior on the part of the credit card industry.

An important study from Harvard University recently found that over fifty percent of 
all individuals who filed for bankruptcy did so as a result of some sort of medical 
emergency or situation in the family. This study also found that many of the debtors 
had gone without some sort of privation in the preceding two years before the debtor
 filed for bankruptcy. Such privations included debtors going without: telephone 
service (40.3%), food (19.4%), doctor or dental visits (53.6%), and filling 
prescriptions(43%). This study provides further evidence that certain societal 
problems are causing people to have to file for bankruptcy.

Recently, Demos: A Network for Ideas and Action, released a study contradicting the
 assumptions of this bill’s proponents. The Demos study showed how the amount of 
credit card debt per person has risen in the last 10 years. The study also showed 
how the increase in senior citizens filing for bankruptcy has been the greatest of any 
age group over the years. Credit card debt among young Americans has increased 
dramatically in the 1990s. The average young adult had over $4,000 in credit card 
debt in 2001. The average American family experienced a 53 percent increase in the 
amount of credit card debt that they owed. The main reason that most Americans 
have been incurring much more credit card debt is not because of reckless 
consumption but because of the “growing gap household earnings and the costs of 
essential goods and services.” The Demos study also found that one of the reasons 
for the rising credit card debt was due to the effective deregulation of the credit card 
industry and deceptive credit card industry practices such as excessive late fees and 
aggressive marketing in terms of solicitations. Late fees were the largest jump in 
revenue for credit card companies increasing from $1.7 billion in 1996 to $7.3 billion 
in 2002.


A. Current Law and Proposed Changes

Under current law, individuals facing financial difficulty may seek a variety of forms 
of relief under the bankruptcy laws, with chapter 7 (liquidation) being by far the most
 common form of relief sought. Under this chapter, debtors are required to forfeit all 
of their property other than their “exempt” assets (i.e., assets deemed necessary for
 the debtor’s maintenance, as determined under federal or state law, at the state’s 
option) in exchange for receiving a discharge of their unsecured debts. Creditors are 
entitled to receive any net proceeds from the sale of the debtor’s nonexempt 
property, subject to the statutory priority schedule. The Bankruptcy Code does not 
permit the discharge of certain debts whose payments are considered to be 
important to society. Some of this debt is of the same nature as priority debt (e.g., 
family support obligations and taxes), but the law also exempts from discharge debts
 incurred through the debtor’s misconduct, such as debts arising from fraud and 
intentional injuries.

While the decision to seek relief under chapter 7 or chapter 13 is voluntary at the 
discretion of the debtor, section 707(b) of the Bankruptcy Code grants the court the 
discretion to deny relief where the filing is found to be a “substantial abuse.” Under 
section 707(b), however, there is a presumption in favor of granting relief to the 
debtor. This stems in part from the costs and potential hardships associated with 
developing excessive barriers to chapter 7 eligibility, the belief that the “honest but 
unfortunate debtor” should be entitled to a “fresh start,” the importance of 
encouraging risk-taking and entrepreneurship, and avoiding situations where it is 
impossible for individuals to escape aggressive creditor collection tactics. Section 
707(b) is not the only provision in the Bankruptcy Code that prevents individuals 
from misusing chapter 7. For example, creditors may request that certain debts be 
held nondischargeable under section 523(a), or that the debtor be denied a discharge
 altogether under section 727.

A creditor may also seek dismissal of a debtor’s petition for relief under chapter 7 
under section 707(a), or seek to examine the debtor under Bankruptcy Rule 2004, 
which allows the creditor to examine an entity (including the debtor) as to acts, 
conduct, or property or to the liabilities and financial conditions of the debtor, or to 
any matter which may affect the administration of a debtor’s estate, or to or to the 
debtor’s right to a discharge.” The creditors’ lobby has asserted that it is the job of 
the government to expend funds to investigate a debtor, collect debts, and assert a 
creditor’s rights under the Code notwithstanding the legal right of a creditor to assert 
those rights and powers under current law. In effect, it is the position of the 
proponents of this legislation that the government should assume the role of their 
debt collector gratis.

A separate bankruptcy alternative available to individual debtors is chapter 13, which
 was formerly known as a wage earner’s plan. Under chapter 13, a debtor is 
permitted to retain his or her property, but is required to pay to creditors over a 3S5 
year period out of future income at least as much as the creditors would have 
received under a chapter 7 liquidation, and is also required to pay all priority debts in
 full. To accomplish this, the debtor must propose a plan, administered by a trustee, 
that pays creditors in full or that devotes the debtor’s “disposable income” after 
accounting for necessary support of the debtor, his or her family, or a business. In 
order to encourage the use of chapter 13 plans, which are currently voluntary, 
Congress determined that persons who meet their chapter 13 obligations are entitled
 to a broader discharge of their unpaid debts than is available under chapter 7. In 
addition, debtors are permitted to retain property whether or not the property is 
encumbered by liens and the debtor committed a prepetition default, so long as the 
chapter 13 plan cures any arrearages. In this manner, debtors can use chapter 13 to
 save their homes from foreclosure. In addition, in chapter 13 a debtor is permitted 
to bifurcate a loan on personal property, such as an automobile, into secured and 
unsecured portions based on its present value, and treat only the secured portion as 
a secured claim that must be paid in full with interest. Chapter 13 plans must provide
 for the payment of in full of all priority debts, such as taxes and family support 
obligations. A debtor also has the ability to cure defaults as part of her plan.

S. 256 would institute a number of major changes to consumer bankruptcy, in 
general, and to chapter 7 and 13, in particular, that some have argued may reduce 
the number of bankruptcy filings (but will not reduce the number of cases of financial
 hardship), and that will undoubtedly serve as procedural and legal impediments to 
bankruptcy relief. These changes are purportedly designed to increase pay-outs to 
non-priority unsecured creditors, particularly credit card companies, as well as to 
certain secured lenders, especially those extending credit for automobile loans.

1. Means Testing

The most far-reaching change, set forth in section 102 of the bill, would institute a 
so-called “means testing” approach to consumer bankruptcy. This new standard 
could create a presumption of abuse of the bankruptcy system and deny chapter 7 
relief to debtors who fail a “means test.”

The means test purportedly calculates the debtor’s ability to repay her non-priority 
unsecured debts (such as credit card debts) over a five year period. If the debtor is 
found, using the means test formula, to be able to pay non-priority creditors as little 
as $100 per month for five years, the bill would create a presumption that the debtor
 is abusing chapter 7. In essence, the sole purpose of the means test is to advance 
the position of creditors who have made the riskiest debts, those that, as a matter of 
public policy, have been placed in line behind secured and priority creditors, such as 
single parents holding claims for child support.

Instead of using the debtor’s actual or projected income to calculate the debtor’s 
ability to repay, the bill uses a fictitious “current monthly income,” which, with certain
 exclusions, is the average of the debtor’s income for the six months preceding the 
filing of the case. Even if, as is frequently the case, the debtor’s bankruptcy was 
triggered by the loss of a job, or other precipitous loss in income due to serious 
illness or mobilization for war, the means test would attribute to the debtor the lost 
income for the purposes of determining whether a debtor is abusing chapter 7.

Similarly, instead of using the debtor’s actual expenses to determine the ability to 
repay non-priority unsecured debts, the bill relies on guidelines developed by the 
Internal Revenue Service to aid in the collection of tax debts.

Moreover, where the IRS has specific local expense standards, those standards do 
not always provide adequately for normal expenses. Ironically, Congress itself has 
recognized the inadequacy of such collection standards. The Internal Revenue 
Service Restructuring and Reform Act of 1998 directs the IRS to “determine, on the 
basis of the facts and circumstances of each taxpayer, whether the use of the 
schedules . . . is appropriate” and to ensure that they not be used “to result in the 
taxpayer not having adequate means to provide for basic living expenses.” However,
 neither that law, nor S. 256, grants this safeguard in the bankruptcy context.

Although the means test is only applicable above median income, the contention that 
debtors with income below the median would not be affected by the means test is 

The inflexible and fictitious calculations in the means test are justified by proponents 
who point to a provision that allows a debtor to alter the income or expense 
assumptions of the means test by allowing adjustments for “special circumstances 
that require additional expenses or adjustments of current monthly total income, for 
which there is no reasonable alternative.” Under the revised 707(b), a debtor would 
have to provide extensive documentation to the court, not to establish the debtor’s 
actual financial condition, but to rebut the presumption of abuse, which may be 
challenged by the trustee or any creditor.

The bill also makes substantial changes to chapter 13 by substituting the IRS 
expense standards to calculate disposable income for debtors earning over the 
median income, rather than the existing standard that uses the debtor’s actual 
expenses “reasonably necessary for the maintenance and support of the debtor or a 
dependant of the debtor. Although the bill does allow certain specified adjustments to
 the IRS standards, the formula remains inflexible and divorced from the debtor’s 
actual circumstances.

The means test is also used to calculate a debtor’s income and expenses for the 
purposes of confirming a chapter 13 plan. Unlike the means test in chapter 7, 
however, there is no provision for a debtor to seek adjustments to current monthly 
income for “special circumstances,” making the application of the means test in 
chapter 13 even more inflexible and divorced from reality. Unlike the means test in 
chapter 7, the means test in chapter 13 applies to all debtors, with no exceptions for 
those below the median income.

The bill also requires debtors to calculate the means test using expenses over 5 
years rather than 3 years, and makes other changes to the way plans must be 
presented. These changes will guarantee that, if the means test pushes a debtor into 
chapter 13, the repayment capacity assumptions, and new mandates, would make it 
even less likely that a debtor would be able to complete a repayment plan in chapter 
13 – the ostensible purpose of the means test in the first place. In view of the fact 
that approximately two thirds of all voluntary chapter 13 plans under current law are 
not completed, it is likely that even more debtors would be unable to confirm or 
complete the now-mandatory chapter13. This legislation also greatly curtails the 
broader discharge currently available to debtors who have successfully completed a 
chapter 13 plan, eliminating a significant inducement for voluntary debtor 
participation in chapter 13.

2. Exceptions to Discharge & Loan Bifurcations

S. 256 would make significant additions to the types of debts that a debtor may not 
discharge under chapters 7 or 13, and greatly curtail a debtor’s ability to bifurcate a 
loan into secured and unsecured portions based upon the value of the collateral.

Section 310 would create a presumption of non-dischargeability for credit card debts 
of $500 or more in the aggregate (as opposed to $1,225 under current law) or more 
owed to a single creditor for “luxury goods or services” incurred within 90 days prior 
to the bankruptcy filing (as opposed to 60 days under current law). Additionally, 
section 310 also makes presumptively nondischargeable cash advances aggregating 
at least $750 incurred within 70 days before the order for relief, to one or more 
creditors in an open-ended credit plan. This means that, if a debtor uses several 
cards to purchase basic household needs (there is no requirement that these cash 
advances be used for luxury goods) over a 70 day period, even if the debt to each 
creditor is a fraction of the $750 threshold, all the debts would be presumed 
fraudulently incurred. Current law makes cash advances aggregating more than 
$1,250 nondischargeable if they are incurred within 90 days before the order for 
relief. Section 314 adds another exception to discharge when the “debtor incurred 
the debt to pay a tax to a governmental unit that would be nondischargeable.” 
Therefore, regardless of the debtor’s intent, any debts incurred to pay a 
nondischargeable tax debt would be nondischargeable. This particular change will 
have a devastating impact on taxpayers who, at the urging of taxing authorities, pay 
their taxes electronically using a credit card.

The legislation would also largely eliminate the possibility of loan bifurcations in 
chapter 13 cases. Under current law a debtor is permitted to bifurcate a loan 
between the secured and unsecured portions. The debt is treated as a secured debt 
up to the allowed value of the property securing the debt. The remainder of the debt 
is treated as a non-priority unsecured debt. Section 306 of the legislation prevents 
such bifurcations (including with regard to interest and penalty provisions) with 
respect to any loan for the purchase of a vehicle in the 910 days before bankruptcy, 
as well as all loans secured by other property incurred within one year before 

3. Domestic Support

Sections 211S219 of the bill make a number of changes to current law that are 
purportedly intended to enhance the status of child support and alimony payments in 
bankruptcy. These changes are presumably being made in an effort to offset the 
considerable criticism the legislation has received from children and family 

Section 211 creates a new definition of “domestic support obligation.” In addition to 
applying to debts owed on account of child support and alimony, which are already 
nondischargeable under current law, the new definition includes alimony and child 
support debts owed or recoverable to a governmental unit. This definition is in turn 
relevant to new sections of the Bankruptcy Code that give certain enhanced rights to 
the holders of domestic support obligations in terms of priorities, payments, 
automatic stay, preferences, and foreclosure placing the rights of children and 
custodial parents in conflict with the claims of governmental entities.

Section 212 grants alimony and child care creditors a first priority in bankruptcy 
(they are currently seventh, although most of the higher priority debts are seen 
rarely in consumer bankruptcy cases). Section 213 prevents the confirmation of a 
reorganization plan unless the debtor has paid all domestic support obligations. 
Section 214 provides that the automatic stay does not prevent legal actions enforcing
 wage orders for domestic support obligations and similar actions. Section 215 makes
 nondischargeable all domestic support obligations, including obligations owed to 
government support agencies. Section 216 permits nondischargeable domestic 
support obligations to be collected from property – notwithstanding state laws making
 that property exempt from collection or attachment – after bankruptcy. Section 217 
makes clear that a transfer that was a bona fide payment for a domestic support 
obligation will not be considered a fraudulent or preferential prepetition transfer. 
Section 218 specifies that alimony and child support payments are not included in the
 definition of disposable income in chapter 12 cases. Finally, section 219 of the bill 
requires trustees to send written notice to recipients of alimony and child support 
payments, and to the local and state child support agencies, notifying them that a 
debtor of such payments has filed for bankruptcy.

4. Other Anti-Debtor Provisions

The legislation makes a host of additional changes to the consumer provisions of the 
bankruptcy laws. The majority of the provisions are designed to increase creditor 
pay outs and would greatly harm low- and middle-class debtors. As Harvard Law 
Professor Elizabeth Warren testified, the bill “has 217 sections that run for 239 
pages” and “virtually every consumer provision aims in the same direction. The bill 
increases the cost of bankruptcy protection for every family, regardless of income or
 the cause of financial crisis, and it decreases the protection of bankruptcy for every 
family, regardless of income or the cause of financial crisis.” In 1999, then-Chairman
 Hyde himself noted that the bill contained at least 75 provisions detrimental to 
debtors and favorable to creditors. Among other things, the bill extends the period 
permitted between ch. 7 filings from the 6 years under current law to 8 years; 
expands the ability of residential landlords to evict tenants without seeking 
permission from the court; and significantly narrows the definition of household 
goods exempt from repossession in bankruptcy.

B. Principal Problems with Proposed Changes

1. S. 256’s Means Testing is Arbitrary and Unworkable in Practice

The National Bankruptcy Review Commission’s majority specifically rejected the 
so-called “means testing” approach, observing:

The credit industry has sought means testing consistently for at least 30 years, but 
Congress has consistently refused to change the basic structure of the consumer 
bankruptcy laws. . . . . Access to chapter 7 and to chapter 13, the central feature of 
the consumer bankruptcy system for nearly 60 years, should be preserved.

The 1973 Commission on Bankruptcy Laws similarly considered and rejected industry
 calls for mandatory chapter 13's, noting that Congress had itself rejected similar 
proposals in 1967, and observed:

[B]usiness debtors are not subject to any limitation on the availability of straight 
bankruptcy relief, including discharge from debts, and it was pointed out that, quite 
apart from bankruptcy, business debtors are able to incorporate and to limit their 
liability to their investments in corporate assets. To force unwilling wage earners to 
devote their future earnings to payment of past debts smacked to some of debt 
peonage, particularly when business debtors could not be subjected to the same kind
 of regimen under the Bankruptcy Act. . . . The Commission concluded that forced 
participation by a debtor in a plan requiring contributions out of future income has so 
little prospect for success that it should not be adopted as a feature of the 
bankruptcy system.

The principal problem with the means test is that the rigid one-size-fits-all test used 
in determining eligibility for chapter 7 and the operation of chapter 13 will often 
operate in an arbitrary fashion. Many of these flaws were highlighted in 1999 by 
then-House Judiciary Committee Chairman Henry Hyde when he unsuccessfully 
sought to delete the use of the rigid IRS standards and instead substitute a more 
fact-specific test based on the court’s assessment of the debtor’s actual reasonable 
and necessary expenses.

Rather than relying on the debtor’s actual costs of living, the bill relies upon IRS 
collection standards, which lay out no comprehensive or specific standards for the 
deduction of living expenses. Part of the problem arises from the fact that the IRS 
standards referenced by the bill are not automatic in many cases. Although the IRS 
does set forth national standards for some expenses, such as food and clothing, and 
local standards for expenses such as housing and transportation, it leaves the 
determination of “other necessary expenses” to the discretion of the relevant IRS 

The seemingly arbitrary allowances for such expenses points to another problem with
 the means test under S. 256 – its bias against debtors without secured debts. The 
bill allows all secured debt payments to be deducted from monthly income, but limits 
rental and lease payments to the amount permitted by the IRS standards. This 
means that persons renting apartments and leasing cars may not be able to deduct 
the full amount of their housing and transportation costs in bankruptcy, while persons
 with mortgages and automobile debt will be able to do so. There is no legitimate 
policy rationale for this discrepancy, which appears to punish people who rent and 
lease and nonetheless must resort to bankruptcy.

Also, it is important to note that the IRS collection standards can change the manner 
in which the bankruptcy laws are applied. The collection standards serve as internal 
guidelines for the IRS; they are not regulations that are subject to the Administrative
 Procedures Act. As such, the IRS does not need to provide notice, or seek public 
comment, when introducing new standards or when changing the existing ones. If the
 bankruptcy law was amended to incorporate the collection standards, as S. 256 
proposes, and the IRS were to change the collection standards in the future, the 
alteration in the standards would completely change how the Bankruptcy Code is 
applied. In effect, S. 256 would delegate authority to the IRS to amend the 
Bankruptcy Code without notice.

It is no answer to assert, as the legislation’s proponents have done, that the 
“glitches” in the collection standards can be resolved through the bill’s allowance that 
“the presumption of abuse may only be rebutted by demonstrating special 
circumstances that justify additional expenses or adjustments of current monthly 
income for which there is no reasonable alternative.” This is a new standard with no 
clear definition. It is unclear how the courts will apply it. Establishing “special 
circumstances” will be costly and burdensome. It is the debtor’s burden to show 
special circumstances. The debtor must present detailed documentation for expenses
 for adjustments to income and a detailed explanation of the special circumstances 
that make such expenses or adjustment to income the only reasonable alternative 
for the debtor. These requirements make it very difficult for debtors to claim special 
circumstances, since many expenses are paid in cash and cannot be documented. 
This risk provides a tremendous disincentive for debtors to claim special 
circumstances, let alone incur the legal costs the debtor himself is required to pay to 
defend against a creditor’s motion.

Penalties available against creditors who file abusive motions under section 707(b) 
appear to provide the authority for the court to impose only attorney’s fees and 
costs, not the civil penalties available against debtors’ counsel. No penalties or fees 
could be imposed under the revised 707(b) for motions brought by “small 
businesses” with small claims, even if the court finds that Bankruptcy Rule 9011 had 
been violated.

“Small business” is a deceptive term as used in this section. For the purposes of 
sparing a creditor sanctions under this section, a small business is a unincorporated 
business, partnership, corporation, association or organization that has fewer than 25
 full-time employees (including wholly owned subsidiaries) and is engaged in 
commercial or business activity. A firm engaged whose sole business involves 
purchasing debts and attempting to collect on them in a in bankruptcy cases would 
qualify under this definition of a “small business,” and would not be subject even to 
the lesser penalties imposed on creditors even if they violated BR 9011. Conversely, 
debtors’ counsel are subject to both costs and civil penalties, and must certify that 
the client’s statement about her financial circumstances are true.

There are also several serious interpretive problems caused by the drafting of the 
means test, which combines debt payment amounts with IRS allowances. For 
example, it the language of the bill needs to make clear that a debtor who has two 
payments remaining on a secured car loan is allowed the IRS car ownership 
allowance for the remaining 58 months. If not, the debtor may have no funds to 
replace a car that is already seven or eight years old at the outset of the five-year 
period and is essential for a long commute to work during the five-year term of the 

Finally, making chapter 13 the only avenue for bankruptcy relief for some individuals
 and imposing the bill’s strict income and expense tests will undoubtedly result in an 
even smaller proportion of successful chapter 13 plans. It is also somewhat 
unrealistic to expect many chapter 13 cases to result in successful completion of 
repayment plans. The current chapter 13 completion rate is less than one-third, for 
chapter 13 plans which are voluntary and with disposable income tests are less rigid 
than that proposed in this bill. Moreover, changes to chapter 13, such as the 
curtailment of stripdown, will make it more difficult for even debtors who file for 
chapter 13 voluntarily to confirm or complete a plan.

2. Means Testing Will be Costly and Bureaucratic

The bill’s attempt to impose rigid financial criteria on debtors’ eligibility for chapter 7 
and the operation of chapter 13 will impose substantial new costs on the bankruptcy 
system – both the portions paid for by private parties (through payment for private 
chapter 7 and chapter 13 trustees and higher attorneys’ fees) and the federal 
government (through the bankruptcy courts and the U.S. Trustees Program).

Testifying about the costs to private trustees, the National Association of Bankruptcy 
Trustees has complained:

[U]nder the bill, trustees must (1) review the debtor’s income and expenses prior to 
five days before the section 341 hearing, (2) file a ‘certification’ that the debtor is 
qualified to be a chapter 7 debtor at least five days before the section 341 hearing, 
(3) filed motions to dismiss under section 707(b) where the debtor’s disposable 
income would yield [specified payments] to a chapter 13 trustee over a five-year 
plan. This is a great deal of work for trustees who only receive $60 in the typical 
chapter 7 case. In addition, the plight of the trustee is multiplied when, even if he is 
successful, he cannot count on any compensation.

The most recent CBO estimate of the bill’s cost to the federal government is $392 
million over the next five years. An additional cost of $26 million is estimated for 
additional judges necessary to administer the new rules. The total net increase in 
discretionary spending would be $146 million over the next five years since the bill 
would treat approximately $246 million in fees as an offset to the $392 million that it 
will cost the federal government. The two intergovernmental mandates would cost a 
combined $62 million but the unfunded mandate on private entities would exceed the
 Unfunded Mandates Reform Act (UMRA) threshold at $123 million. CBO’s cost 
estimate for additional bankruptcy judges does not include the additional judges that 
the Judicial Conference estimates will be needed to apply current law, much less the 
additional need for judges to implement the costly and cumbersome changes in the 
bill. This request is based on current needs, not on actual needs if the bill passes. 
Hence the estimate of costs to the judiciary must be considered unrealistically low. 
Part of this cost-estimate derives from implementing the complex and 
paperwork-heavy means-testing program. CBO estimates it will cost some $150 
million over the next five years. However, this estimate may well be far too low. For 
example, Henry E. Hildebrand, Chair of the Legislative Committee of the National 
Association of Chapter Thirteen Trustees estimated that:

Assuming that one out of nine cases filing for chapter 7 relief would be contested and
 further assuming that the contest would require about two hours of pretrial 
preparation and one hour of court time, the litigation would require 276,000 
additional hours, about 90,000 of which would occupy the court.

Another source of higher costs for the government is the requirement that one in 
every 250 cases in each federal district be randomly audited by independent certified
 public accountants or independent-licensed public accountants, at taxpayer expense 
under generally-accepted auditing standards. CBO estimated it will cost the federal 
government $66 million over five years to effectuate this requirement. It is unclear 
whether such costs will yield any comparable benefits. For example, the Honorable 
William Houston Brown, a U.S. Bankruptcy Judge in the Western District of 
Tennessee, testified on behalf of the ABI that the audits required “are likely to be 
very expensive, and such formal audits are likely unnecessary to determine 
significant misstatements in debtors' petitions and schedules.”

Other costs to the government under the bill include, the costs of the U.S. Trustee 
certifying the availability of credit counseling ($17 million over 5 years) and requiring
 the U.S. Trustee to visit sites in chapter 11 cases ($12 million over 5 years).

Another concern is the many, many new opportunities for litigation and confusion 
created by the bill. Judge Randall Newsome testified on behalf of the National 
Conference of Bankruptcy Judges that at least 16 potential sources of litigation are 
contained in the means testing provisions alone, and that another 42 litigation points 
have been identified in the other consumer provisions, noting that “[t]his is probably 
only the tip of the iceberg.”

Costs imposed on the private sector will also be substantial. The CBO said: “S. 256 
would impose private-sector mandates, as defined in UMRA [the Unfunded Mandates 
Reform Act] on bankruptcy attorneys, creditors, bankruptcy petition preparers, 
debt-relief agencies and credit and charge-card companies. CBO estimates that the 
direct costs of these mandates would exceed the annual threshold established by 
UMRA ($123 million in 2005, adjusted annually for inflation).”

Many of the costs and burdens on the private sector are illustrated in the American 
Bar Association’s (ABA) recent letter concerning S. 256. In particular, the ABA 
expressed its concern regarding provisions in the bill that would require attorneys to:
 (1) certify the accuracy of factual allegations in the debtor’s bankruptcy petition and 
schedules, under penalty of harsh court sanctions; (2) certify the ability of the debtor
 to make payments under a reaffirmation agreement; and (3) identify themselves as 
“debt relief agencies” subject to a host of new intrusive regulations.

As the ABA has explained,

The three general types of enhanced attorney liability provisions outlined above, 
when taken together, will have a substantial negative impact on the availability of 
quality legal counsel in bankruptcy. As a result of these burdensome and one-sided 
mandates on debtors’ attorneys, many attorneys who currently represent both 
debtors and creditors will stop handling debtor cases altogether rather than comply 
with these new regulations. With fewer attorneys available to represent debtors, 
many more debtors will be forced to file their bankruptcies pro se, without first 
obtaining adequate advice regarding the necessity or advisability of filing for 
bankruptcy. Therefore, the enhanced attorney liability provisions ultimately will have 
an adverse effect on debtors, creditors, and the bankruptcy system as a whole.

3. Means Testing and the Other Consumer Provisions Will Harm Low- and Middle-
Income People

a. Concerns Regarding the Means Test

It is incorrect to assume that the effect of S. 256’s harmful provisions would be 
limited to individuals seeking bankruptcy relief who earn more than the state median 

The definition of “current monthly income” used in the means test measures a 
debtor’s income based upon how much the debtor earned in the six months prior to 
bankruptcy. If the debtor lost a good job in month three and has been working at a 
low-wage job ever since, the income from that good job, and help from family 
members, would be counted as if that is what his future income would be. The debtor
 would be expected to pay out of income that may no longer exist. Also, the means 
test will pick up a variety of revenue sources – such as disaster assistance, and 
Veterans’ benefits – which will result in lower- and middle-income individuals being 
cast as bankruptcy “abusers” with income above the median.

In addition, due to the fact that S. 256, unlike current law, will permit creditors and 
other parties-in-interest to bring motions to dismiss or convert, more aggressive and 
well-funded creditors will have extremely wide latitude to use such motions as a tool 
for making bankruptcy an expensive, protracted, and contentious process for honest 
debtors, their families, and other creditors. Creditors could use such motions as 
leverage to obtain reaffirmation agreements so that their unsecured debts survive 
bankruptcy. The inability to obtain bankruptcy relief will force more families out of 
the above ground economy and into a permanent state of unmanageable 

b. Other Concerns

The bill makes nondischargeable a wider range of debts including cash advances, 
and debts incurred for so-called luxury goods, and debts incurred to pay 
nondischargeable tax debts. These new exceptions from discharge obviate many of 
the benefits that debtors may realize from filing for bankruptcy, under chapter 7 or 
13 and increase the opportunity for creditor abuse. The provisions were opposed by 
then-President Clinton. In a communication to the Congress, that administration 
wrote that it is “generally inappropriate to make post-bankruptcy credit card debt a 
new category of nondischargeable debt . . . . We remain skeptical that the current 
protections against fraud and debt run-up prior to bankruptcy are ineffective and that
 the additional debts made nondischargeable by [S. 256] meet the standard of an 
overriding public purpose.”

Consumer bankruptcy expert Henry Sommer also has explained that such 

increase the opportunity for creditors to file the types of abusive fraud complaints 
which have been found by many courts to be baseless and unjustified attempts to 
coerce reaffirmations by debtors who cannot afford to defend them. The new 
presumptions of nondischargeability will fall mainly on low income debtors who are 
unsophisticated, do not have the time, budget flexibility, or attorney advice to plan 
their bankruptcy cases carefully, have to file on short notice to prevent utility 
shutoffs or other impending creditor actions and will not have the funds to defend 
dischargeability complaints.”

The new ban on loan bifurcations for car loans less than 910 days old will further 
erode the possibility of obtaining a fresh start through bankruptcy. Automobiles 
depreciate rapidly once they leave the showroom. Before the loan is repaid, the 
value of the vehicle is often less than the unpaid balance of the loan. By prohibiting 
bifurcation, a lender with a secured loan that is underwater would be unjustly 
enriched by being able to treat the unsecured portion of that loan as fully secured to 
the detriment of other unsecured creditors. Such a prohibition on loan bifurcation is 
likely to render many chapter 13 plans unfeasible because a debtor may be able to 
repay the entire secured value, but not the entire purchase price of the car along 
with penalties. The provision also permits the lender to come out of the bankruptcy in
 a superior position than if it had foreclosed on the loan under applicable 
non-bankruptcy law.

Several other consumer provisions also will impose significant hardships on all 
debtors, regardless of income level or degree of culpability. For example, by allowing
 landlords to continue eviction or unlawful detainer actions even after debtors have 
obtained an automatic stay, the bill will force many battered women and families with
 children and seniors out onto the streets, without ever having an opportunity to use 
bankruptcy to catch up on their rent.

Extending the permitted period between bankruptcy discharges to eight years could 
prove a substantial hardship to families in already unstable economic situations. The 
bill’s narrow definition of exempt household goods could allow creditors to threaten 
foreclosure on household tools and children’s sporting equipment, in order to obtain 
preferential treatment for itself. This provision would work to the benefit of predatory
 and subprime lenders that take a security in interest in the borrower’s personal 

4. The Consumer Provisions Will Have a Significant, Adverse Impact on Women,
Children, Minorities, Seniors, Victims of Crimes and Severe Torts, Victims of Identity 
Theft, and the Military

a. Women and Children

S. 256 will have an adverse impact upon single mothers and their children, both as 
debtors and as creditors. On the debtor side, the means test, and all the additional 
paperwork burdens, will make it far more difficult for women to access the 
bankruptcy system. For example, women whose average income was at the median 
during the last 180 days, before the support checks stopped, may be denied access 
to chapter 7 and forced into restrictive chapter 13 repayment plans. Second, the bill 
does not exempt child support or foster care payments from the means test 
definition of disposable income. By eliminating stripdown, the bill will also make it 
more difficult for women to hold onto the car they need to get to work, or the 
refrigerator or washing machine they need to care for their families if a creditor 
claims a security interest in such items. The new nondischargeability categories also 
are problematic. It will be more difficult for custodial parents to discharge basic credit
 card debts. Even if a custodial parent filing for bankruptcy obtained cash advances 
to purchase basic necessities such as diapers or food, she could face litigation 
brought by a credit card company objecting to the discharge of the debt.

The bill will have a particularly adverse impact on the payment of domestic support 
to women and children as holders of claims for alimony and child support. These 
concerns are by no means insignificant given that an estimated 243,000-325,000 
bankruptcy cases involved child support and alimony orders during the most recent 

Under current law, alimony and child support are treated as priority debt and are not 
subject to discharge. This preferential treatment dates from as early as 1903 and is 
based on Congress’s determination that the payment of these debts is so important 
to society that it should come ahead of most general creditors. Although S. 256 does 
not revoke this special treatment, viewed as a whole, the legislation will have the 
effect of diminishing the likelihood of full payment of alimony and child support. This 
arises as a result of several features of the bill: its creation of significant new 
categories of nondischargeable debt, the extension of the length and onerousness of 
chapter 13 plans, and the bill’s general limitations on the availability of chapter 7 

Each one of these changes will make it less likely that a former spouse will be able to
 make his required alimony and child support payments. First, by making significant 
amounts of credit card debt nondischargeable, more of these debts will survive 
bankruptcy. Since most chapter 7 and 13 debtors do not have the ability to repay 
most of their unsecured debts, financial pressure on the debtor will continue after 
bankruptcy, decreasing his ability to handle important support obligations.

Collectively considered, these changes will help foster an environment where 
unsecured and credit card debt is far more likely to compete against alimony and 
child support obligations in the state law collection process. As a Congressional 
Research Service Memorandum analyzing an earlier version of this legislation 
concluded that “child support and credit card obligations could be ‘pitted against’ one 
another. . . . Both the domestic creditor and the commercial credit card creditor 
could pursue the debtor and attempt to collect from post-petition assets, but not in 
the bankruptcy court.”

Outside of the bankruptcy court is precisely the arena where sophisticated credit card
 companies have the greatest advantages. While federal bankruptcy court enforces a
 strict set of priority and payment rules generally seeking to provide equal treatment 
of creditors with similar legal rights, state law collection is far more akin to “survival 
of the fittest.” Whichever creditor engages in the most aggressive tactic – be it 
through repeated collection demands and letters, cutting off access to future credit, 
garnishment of wages or foreclose on assets – is most likely to be repaid. As 
Marshall Wolf has written on behalf of the Governing Counsel of the Family Law 
Section of the American Bar Association, “if credit card debt is added to the current 
list of items that are now not dischargeable after a bankruptcy of a support payer, 
the alimony and child support recipient will be forced to compete with the well 
organized, well financed, and obscenely profitable credit card companies to receive 
payments from the limited income of the poor guy who just went through a 
bankruptcy. It is not a fair fight and it is one that women and children who rely on 
support will lose.”

It is for these reasons that groups concerned with the payment of alimony and child 
support have expressed their strong opposition to the bill and its predecessors. 
Professor Karen Gross of New York Law School stated succinctly that “the proposed 
legislation does not live up to its billing; it fails to protect women and children 
adequately.” Joan Entmacher, on behalf of the National Women’s Law Center, 
testified that “the child support provisions of the bill fail to ensure that the increased 
rights the bill would give to commercial creditors do not come at the expense of 
families owed support.”

Assertions by the legislation’s supporters that any disadvantages to women and 
children under S. 256 are offset by supposedly pro-child support provisions are not 
persuasive. It is useful to recall the context in which these provisions were added. In 
the 105th Congress, the bill’s proponents adamantly denied that the bill created any 
problems with regard to alimony and child support. Although the proponents have 
now changed course, the child support and alimony provisions included do not 
respond to the provisions in the bill causing the problem – namely the provisions 
limiting the ability of struggling, single mothers to file for bankruptcy; enhancing the 
bankruptcy and post-bankruptcy status of credit card debt; and making it more 
difficult for debtors to eliminate debts and devote post-discharge income to the 
payment of domestic support obligations. In some instances, the new sections are 
counterproductive in furthering the goal of payment of support obligations to 
ex-spouses and children.

For example, section 211 provides a definition of “domestic support obligation” that 
includes funds owed to government units. If the government is acting as the debt 
collector for a woman or child, this is appropriate; the benefits of this inure to women
 and children directly. However, if the government is collecting for its own benefit 
(say, for example, the woman recipient is on welfare and the government is 
collecting arrearages to reduce a state or Federal deficit), then the result is 
inappropriate and will put the government collection agency in direct competition with
 single mothers and children, particularly in chapter 13.

Section 212 purportedly increases to first priority from seventh priority obligations 
for domestic support, including debts owed to the government. It is misleading to 
suggest that moving up to "first priority" from "seventh priority" makes a significant 
difference to a custodial parent seeking to collect child support: the debts that have 
second through sixth priorities almost never appear in consumer cases.

In most consumer cases, the place of a creditor in the priority order is meaningless. 
In chapter 13, all priority debts must be paid in full. In approximately 97% of all 
individual chapter 7 cases, the debtor has no non-exempt assets and so is unable to 
pay any priority or non-priority unsecured debts, regardless of their placement in the
 priority order. Outside bankruptcy, of course, the priorities in the Bankruptcy Code 
are inapplicable and unenforceable. It is in state court, after the case is over that the
 custodial parent must compete with newly non-dischargeable credit card debts. 
Being first priority is of no help.

Section 214 creates additional exceptions to the automatic stay that, like other 
provisions in the bill, have the potential of placing women and children at a 
disadvantage. First, these provisions apply only to income withholding orders issued 
by government agencies under the Social Security Act, even though an estimated 
40-50% of all child support cases, and all alimony-only cases, are enforced privately,
 not by government child support agencies. Second, income withholding is helpful 
only if such orders are placed against debtors with regular income. Yet, in 1997, 
more than four out of ten cases in state child support systems across the country 
lacked a support order.

Section 216, which allows domestic support creditors to levy otherwise exempt 
homesteads and other exempt property, also does not go far enough. Like the other 
provisions, it is effective only if a single custodial parent goes to the time and 
expense of hiring an attorney to enforce her new rights.

The bill also fails to address the abuse of the bankruptcy system by individuals who 
systematically violate the constitutional rights of women to safe, legal reproductive 
health care, and the Freedom of Access to Clinic Entrances Act.

Women and their health care providers must live with the fear that violent and 
reckless individuals will be able to terrorize and blockade abortion clinics, and seek 
to eliminate their liability from that action through the bankruptcy process. Although 
the current bankruptcy laws prevent discharge for “willful and malicious injuries,” 
some have questioned whether the law applies to fines and judgements resulting for 
barricading clinic entrances or violating court orders that may fall short of that 
standard. At the same time, notorious clinic bomber and “Operation Rescue” found 
Randall Terry specifically filed for bankruptcy in order to void a $1.6 million judgment
 he owed to the National Organization for Women and Planned Parenthood, and many
 of the notorious “Nuremberg files” defendants have filed for bankruptcy.

Although a bankruptcy discharge has proved elusive for these law-breakers, they 
have succeeded in abusing the bankruptcy courts to hinder, delay and defraud the 
women whose rights they have violated, imposing substantial costs on them to collect
 lawful judgements. As NARAL Pro-Choice America has written, “[d]ebtors whose 
debts arise from their own clinic violence are not honest debtors and should not be 
able to escape the financial liabilities incurred by their illegal conduct.”

According to Maria Vullo, lead counsel for the plaintiffs in Planned Parenthood of the 
Columbia/Willamette, Inc. v. American Coalition of Life Activists, et al., No. 
95-1671-JO (D. Or.), a case in which a Portland, Oregon jury, on February 2, 1999, 
awarded $109 million under FACE against the defendants for their illegal threats 
against the plaintiffs’ lives, the defendants in that case have abused the protection of 
the bankruptcy courts in six districts to avoid paying those judgements. Although 
none of the defendants have been able to obtain a discharge in those cases,

In the now five years since the jury’s verdict, my firm has committed enormous 
resources to enforcing the judgment, including by representing the plaintiffs in six 
different bankruptcy courts. In connection with these bankruptcy proceedings, the 
defendants took the position that the jury’s verdict is fully dischargeable in 
bankruptcy, despite the “willful and malicious injury” exception to discharge that 
currently exists in the Bankruptcy Code. These filings, and the relitigation that has 
followed, demonstrate the utmost importance of an amendment to the U.S. 
Bankruptcy Code . . . . My firm expended over 3,500 attorney hours in litigating 
these bankruptcy proceedings, in addition to the time spent by local counsel in each 
jurisdiction and the substantial expense of filing fees, service fees, and travel around
 the country.

Despite these abuses, the Senate rejected an amendment offered by Senator 
Schumer, that would have dealt with abuse of the bankruptcy system, not just with 
respect to violations of the Freedom of Access to Clinic Entrances Act, but any 
unlawful interference with the delivery of lawful goods or services. Although the 
amendment had been adopted by substantial margins by the Senate in the past, 
opponents of the Schumer amendment argued that, regardless of the merits, it 
should be defeated in order to ensure passage of the larger bill.

In Committee, Rep. Nadler offered an amendment that would have made 
non-dischargeable debts arising from violations of federal or state civil rights laws. It 
too was rejected. The Chairman of the Subcommittee, Mr. Cannon, made a similarly 
practical, if non-substantive, argument against the amendment:

This really, this amendment is just a revised version of the Schumer amendment, 
which has been responsible for scuttling the bankruptcy – passage of the entire 
bankruptcy bill for some time now. And it was defeated, this amendment was 
defeated in the Senate last week by a vote of 46 yeas and 53 noes.

b. Minorities

S. 256 will have a disparate impact upon minorities. The Leadership Conference on 
Civil Rights has warned that “African American and Hispanic American homeowners 
are 500 percent more likely than white homeowners to find themselves in bankruptcy
 court largely due to discrimination in home mortgage lending and housing 
purchases, and to inequalities in hiring opportunities, wages, and health insurance 
coverage.” We know this because the economic struggle for Hispanic-American and 
African-American homeowners is harder than for any other group. While 68% of 
whites own their own homes, only 44% of African Americans and Hispanic Americans
 own their homes. Both African-American and Hispanic-American families are likely 
to commit a larger fraction of their take-home pay for their mortgages, and their 
homes represent virtually all their family wealth. Experience has also shown that 
minorities are also particular targets of predatory lenders. The LCCR also opposes 
this bill because it does nothing about the abusive practices used by the credit 
industry to saddle more people with debt. The LCCR states: “[S.256] also fails to 
address one of the key reasons that bankruptcy filings have increased in recent 
years . . . the aggressive marketing of credit cards to our most financially vulnerable
 citizens . . . .”

c. Seniors

Similar concerns have been raised on behalf of seniors, who could lose their 
retirement savings if forced into chapter 13 plans. The National Council of Senior 
Citizens has warned that legislation of this nature:

[This legislation] would have a harsh impact on a group of people who are often 
subject to job loss or catastrophic health costs; instead of ameliorating these 
problems, this bill will only exacerbate them . . . . Since 1992, more than a million 
people over the age of 50 have filed for bankruptcy; in 2001, an estimated 450,000 
older Americans filed. This number is up from the 180,000 that did so in 2001. For 
seniors it is particularly hard. If they are forced into prolonged repayment schedules,
 they may not be able to maintain or accumulate savings for retirement. As you 
know, approximately two-thirds of voluntary Chapter 13 workout plans fail, and we 
believe that retirement savings must be protected for that purpose.

Furthermore, the Alliance for Retired Americans also opposes S. 256. They stated:

The fastest growing group of Americans filing for bankruptcy is those over 65. This 
unfortunate situation has been caused by skyrocketing health care costs that can 
drain a lifetime of savings in a very short period of time. In addition, many older 
Americans have seen their pensions and retirement savings disappear as well. The 
result has been that many older Americans cannot enjoy financial security in their 
retirement through no fault of their own. The legislation before the Senate actually 
increases the burden on older Americans who undergo financially difficult times 
through health care costs or loss of retirement income . . . . And while millions of 
older Americans have lost pension payments and retirement savings due to 
corporate abuses during the past five years, this legislation does nothing to make 
them whole or prevent future abuses.

d. Victims of Crimes and Severe Torts

With regard to the concerns of victims’ groups, it is important to note that current law
 reserves the nondischargeability of debts for obligations arising out of willful or 
malicious injury, death or personal injury caused by the operation of a motor vehicle,
 or criminal restitution payments. However, making more credit card debt 
nondischargeable, encouraging more reaffirmations of general unsecured debt, and 
discouraging more financially troubled individuals from seeking debt relief will place 
these individual creditors at a relative disadvantage. As the National Organization for 
Victim Assistance has written, “more exempted creditors with rights to the same 
finite amount of resources means lower payments to all. Inevitably, for 
victim-creditors, that means either a smaller return on the restitution owed, or a 
longer period of repayment, or both.” The National Center for Victims of Crime has 
similarly observed, “to equate contractual losses of a commercial creditor with . . . 
personal obligations [for victim claims as the legislation does] is to belittle their 
importance and to directly reduce the likelihood that crime victims will ever be 
financially restored, despite obtaining an order of restitution or a civil judgment.” 
Mothers Against Drunk Driving (“MADD”) has also complained that if “individuals 
[whose lives] have been shattered financially and emotionally by the death or 
serious injury of their family members . . . have to compete with credit card debt 
holders for the limited post-discharge income of debtors available [as the 
predecessor legislation requires], they may themselves end up in bankruptcy.” 
MADD also noted that in contrast to crash victims, “lending institutions have the 
ability to provide some degree of protection to themselves when they issue credit 
cards to individuals and they are in a better financial position to absorb losses, which 
to them is a cost of doing business.”

e. Victims of Identity Theft

S. 256 will also have a significant adverse impact on a growing number of identity 
theft victims who are forced into bankruptcy. In fact, the manager of the 
identity-theft program at the Federal Trade Commission commented a few years ago
 that not only can identity theft wreak havoc on the credit of a victim, but it can even 
force them into bankruptcy. Since then, the problem has grown at epidemic rates, 
topping the list of consumer complaints filed with the FTC for the last four years in a 
row. In September 2003, the FTC released a comprehensive survey concluding that 
a staggering 27.3 million Americans have been victims of identity theft in the last five
 years - costing consumers and businesses an estimated $53 billion in 2002 alone.

Recent news is rife with reports of identity theft scandals. Most notably, reports have 
revealed that identity thieves posing as legitimate customers gained access to 
ChoicePoint's database of 19 billion public records. The company has acknowledged 
that hackers had access to data on 145,000 people and that the stolen information 
has since been used in at least 700 identity theft scams. In recent weeks, databases 
belonging to Lexis/Nexis were also compromised, with hackers stealing information 
on at least 32,000 people. Even further, the University of California, Berkeley has 
revealed that a laptop containing the names and social security numbers of 100,000 
people was stolen just this month.

In all of these cases, criminals have an opportunity to use victims’ identities to apply 
for credit cards, acquire loans and make exorbitant purchases. However S 256 
creates an arbitrary means tests that does nothing to distinguish between the 
creditor claims related to crimes of identity theft and legitimate debt incurred by the 
debtor. Even if more than 51 percent of the creditor claims in bankruptcy are the 
result of identity theft, the debtor will still be subject to the unfair and arbitrary 
means test and forced out of the protections of Chapter 7.

Congressman Schiff offered a narrowly tailored amendment during the mark-up of S.
 256 to directly address the plight of identity theft victims forced into bankruptcy. The
 Schiff amendment required that if at least 51% of the claims against a debtor in 
bankruptcy are a result of identity theft, the debtor should not be forced out of the 
protections of Chapter 7. The majority was unable to state any clear reason to 
oppose this simple amendment and even acknowledged that it was an “an important 
idea”. However, the amendment was narrowly defeated in a party line vote 13-15.

f. Military

S. 256 will have an unfair impact on military families who serve this country by 
imposing an arbitrary means test on these brave men and women that will prevent 
many from receiving needed debt relief. In the of conflicts in Iraq and Afghanistan, 
military families and veterans have faced unusual financial stress because of the 
large numbers of reserve and guard units that have been mobilized. These financial 
hardhips have a number of significant causes.

First, military service constitutes a significant and real hardship for soldiers and their 
families. Groups such as The National Military Family Association and Military Officers
 Association of America report hearing from many servicemembers in the Guard and 
Reserve who have made special sacrifices when called to duty, particularly when 
they own their own business and have experienced hardships with that business 
while they were deployed. According to a 2004 GAO report, in 1999, 16,000 active 
duty members of the military filed for bankruptcy relief over a 12-month period. With
 our military extended from Iraq to Afghanistan, and reservists separated from their 
families and jobs for long stretches of time, that number has undoubtedly increased 
greatly today. The Pentagon reported in 2002 that nearly one-third of all military 
families reported a drop in income when a spouse was deployed. For members of the
 National Guard and Reserve, the rate was even higher – more than 40% reported 
lost income when a spouse was deployed.

There is little doubt that servicemembers are suffering financial hardships because of
 service to their country. Guardsmen and reservists who are also small business 
owners and employees of small companies often suffer grievous setbacks, as their 
carefully built companies lose business, struggle to survive, or simply shut their 
doors. Notwithstanding protection afforded military members and their families 
through other Federal laws, many find that their financial problems still become so 
severe that they have no choice but to file for bankruptcy.

Second, active-duty military members and their families’ hardships are compounded 
by unscrupulous pay-day lenders who target armed service members with 
high-interest loans. A 2003 National Consumer Law Center Report found that “scores 
of consumer-abusing businesses directly target this country’s active duty military 
men and women daily.” These pay-day lenders are modern-day loan sharks, that 
offer small short-term loans at interest rates of 100, 500, even 1000%. They use 
deceptive names like “Force One Lending,” and “Armed Forces Loans.” They go after 
military members because they know that they: have a steady source of income, are
 young, have family obligations, are often strapped for cash, and are easy to find. 
Most offensive, payday lenders target military members because they know these 
are people who are hard-working and honest and believe in personal responsibility 
and integrity.

To a servicemember’s great detriment, S. 256 does not prevent a creditor from 
recovering in bankruptcy amounts owed on a high-cost payday loan made to a 
servicemember or a dependent secured by a personal check for future deposit or 
electronic access to a bank account. The bill would also permit claims based on a 
debt that requires payment of interest, fees, or other charges which would cause the 
annual percentage rate to exceed 36%. In addition, lenders who provide 
servicemember loans at exorbitant interest rates can obtain an assignment of 
military retirement and disability payments. It is unconscionable that these lenders 
can lawfully take military retirement and disability payments from the people who 
spend months often years away from home to protect our nation.

An amendment offered by Sen. Durbin reflected an understanding that service men 
and women who have been mobilized and are serving in Iraq, Afghanistan, and in 
the war on terror are paying a terrible price in the economic well being of their 
families, in addition to the heavy burdens they have been asked to shoulder. Senator
 Durbin’s amendment would exempt disabled veterans filing from dismissal or 
conversion of their ch. 7 petition under the means test if their indebtedness occurred 
primarily while on active duty or performing a homeland defense activity. 
Congressman Meehan offered a broader version of the Durbin amendment by 
exempting disabled service members who accumulated, amounted debt after their 
return home as well as those whose indebtedness was due to their injury or the 
disability sustained while on active duty. The amendment was rejected with 12 ayes 
and 19 noes.

Senator Sessions offered a “Military and Medical” amendment which simply inserts 
“such as a serious medical condition or a call or order to active duty in the Armed 
Forces” as examples of special circumstances that would allow adjustment of income 
or expenses. Senator Sessions did not offer a solution to the problem as the Durbin 
and Meehan amendments did but merely reiterated special circumstances that were 
already allowed by the bill.

In an effort to build on Sen. Durbin’s effort, Rep. Conyers offered an amendment to 
crack down on unscrupulous and usurious payday lenders who prey military 
members with deceptive, high interest rate loans. The amendment would have 
disallowed a claim based on an extension of credit made and secured by a military 
paycheck, pension, or disability payment where the annual interest rate and fees 
exceed 36 percent a year. The amendment was rejected with 15 ayes and 20 noes.

We believe that Congress can provide greater support for military families suffering 
economic distress as a result of their service to our nation. Many servicemembers 
are unable to return to their jobs because of physical or psychological injuries. To 
date, more than 11,000 servicememembers who served in Iraq and Afghanistan 
have been wounded. The means test in this bill establishes completely arbitrary 
expenses that have nothing to do with the types of new expenses a disabled 
servicemember might actually be facing. If any group of people deserves some relief
 from this burdensome means test process, it is America’s disabled veterans who 
suffered both physical and financial devastation while they were wearing a military 

Whether returning home disabled or not, servicemembers oftentimes face their 
greatest challenges within the two years after their service is completed rebuilding 
their families, their businesses, and their finances in general. These men and women 
struggling to get their lives back in order after serving their country need to be 
exempted from the means test if they were called or ordered to active duty since 
9/11 and then forced to file for bankruptcy as a direct result of their military service 
within 24 months of being released from duty. We cannot repay the debt we owe 
these men and women, but we can protect them from having to spend the rest of 
their lives in debt.

5. The Bill Does not Address Abuses of the Bankruptcy System by Creditors

Perhaps the bill’s most glaring omission is its failure to address seriously the problem
 of abusive lending practices. At the same time the legislation responds to scores of 
alleged debtor excesses – whether real or imagined – it largely ignores the 
transgressions of the credit industry. The only significant “reform” with regard to 
lending industry disclosure is that requirement that credit card companies provide the
 consumer with an “800" number to call and unrealistic examples of credit card debt 
paydowns (which may not reflect the actual situation of the debtor and thus prove 
misleading), as well as a series of boilerplate warnings regarding real estate loans 
and teaser rates.

As noted at the outset, the overwhelming weight of authority establishes that it is the 
massive increase in consumer debt, not any change in bankruptcy laws, which has 
brought about the increases in consumer filings. Indeed, there is an almost perfect 
correlation between the increasing amount of consumer debt and the number of 
consumer bankruptcy filings. For example, credit card debt more than tripled 
between 1989 and 2001 from $238 billion to $692 billion, and personal bankruptcy 
filings increased accordingly. The same basic correlation holds from 1946 through 
1998, as the below chart indicates.

Review of this data indicates that the primary factor that led to the increase in 
bankruptcy filings after 1978 was not the enactment of the revised bankruptcy laws, 
but the deregulation of credit. The deregulation resulted from the Supreme Court 
decision in Marquette National Bank of Minneapolis v. First Omaha Service Corp., 
which held that out-of-state banks were not subject to the usury laws of the state 
where the consumer was located. This decision led credit card companies to relocate 
to states with lax usury laws that gave banks the ability to charge exorbitant interest 
rates in all 50 states. Subsequently, other legal changes permitted a broad range of 
new entities to get into the ever-growing, and lucrative, credit card business. Among 
other things, we know that it was this unprecedented increase in high-cost credit, not 
the changed bankruptcy laws, that led to the change by virtue of Canada’s 
experience. In Canada, bankruptcy filings began to explode in the late 1960's, 
simultaneous with the entry of VISA and MasterCard into that nation and the growth 
in credit card lending. There was no change in Canada’s laws that could account for 
the increase.

This deregulation of credit and the accompanying explosion in credit availability – the
 number of credit card solicitations in 2004 reached 5 billion – and in consumer debt, 
have been accompanied by a wide variety of abusive credit card practices, including 
ever growing fees and penalties. As the Wall Street Journal pointed out in a July 6, 
2004 article, “[c]ard users, consumer advocates and some industry experts complain
 that banks are attempting to squeeze more and more revenue from consumers 
struggling to make ends meet. Instead of cutting these people off as bad credit risks,
 banks are letting them spend – and then hitting them with larger and larger 
penalties for running up their credit, going over their credit limits, paying late and 
getting cash advances on their credit cards.”, a consulting group that tracks the card industry, says credit-card fees,
 including those from retailers, rose to 33.4 percent of total credit card revenue in 
2003. That was up from 27.9 percent in 2000 and just 16.1 percent in 1996. A 
November 21, 2004 New York Times article also examined credit card practices and 
concluded that “In the last few years, lenders have more frequently raised 
customers’ rates because of slip-ups elsewhere, like late payment of a phone or 
utility bill, or simply because they felt a customer had taken on too much debt . . . . 
To some cardholders and consumer advocates, credit card companies are acting like 
modern-day loan sharks, strong-arming their customers to pay more – with no legal 
limit on how much they can charge.”

Credit card companies even go so far as to solicit business from the developmentally
 disabled. One developmentally disabled man, aged 35, has the reading and 
mathematic skills of a second-grader and an annual income of $7,000 from Social 
Security disability benefits; nevertheless, he has 13 credit cards, generating a debt 
of $11,745. When his counselor asked the bank to lower his credit limit to $500, his 
limit was instead raised to $4,900. Credit card companies have no answer for how 
this occurs other than to say that they screen all applicants to ensure they can 
handle the risk. Clearly, however, credit card companies have not been doing a 
sufficient job of screening their applicants. Unfortunately, S. 256 does nothing to 
discourage any of these practices.

The bill also ignores the problem of credit card companies lending to individuals with 
already substantial debts and little prospect of repayment. Gary Klein of the National 
Consumer Law Center noted “offering additional credit . . . to families already 
struggling to pay their debts hurts not only borrowers, but also the borrowers' honest
 creditors if the new credit pushes the family over the edge. Similarly, failure by one 
creditor to seriously consider payment arrangements outside bankruptcy for families 
facing hardship may lead to a bankruptcy filing which affects all creditors.” One credit
 card company goes so far as to solicit debt counselors and offers them $10 for each 
chapter 7 client who requests a credit card.

A particularly pernicious credit card practice occurs in the so-called “subprime” 
market, where lenders seek out riskier borrowers and offer home equity financing at 
loan to value ratios in excess of 100%. Another lending abuse targets low-income 
and minority neighborhoods with “serial” refinancing loans that carry high-interest 
rates and other onerous terms. In essence this causes poor individuals to place their 
homes at risk in order to finance their credit card purchases.

These problems are compounded by the fact that credit card companies fail to 
disclose clearly on their account statements the total amount and total time it would 
take to pay off balances if only the consumer only paid the minimum amount due 
was paid each month. Unlike mortgage loans and car loans, credit card loans do not 
disclose the amortization rates or the total interest that will be paid if the cardholder 
makes only the minimum monthly payment. As a result, using a typical minimum 
monthly payment rate on a credit card, it could take 34 years to pay off a $2,500 
loan, and total payments would exceed 300 percent of the original principle. This is 
why many lenders encourage minimum payments that do not pay down the loan.

Finally, the legislation fails to address adequately the problem of abuse in the area of
 reaffirmation agreements, by for example, placing effective and meaningful 
restrictions on their use with respect to unsecured and dischargeable loans. Although 
it requires lengthy and confusing “disclosures,” it exempts credit unions from any 
restrictions on unduly burdensome reaffirmations, defined as requiring the debtor to 
make monthly payments in excess of 100% of the debtor’s post-discharge monthly 
disposable income. This failing is especially glaring in view of the fact that the bill will 
provide numerous opportunities for creditors to coerce reaffirmations making the 
provisions of this bill, which will render it more difficult to obtain effective remedies 
against abusive creditors like Sears, even less defensible.

Neither the witness representing the Credit Union National Association, nor any 
proponent of the bill, has ever attempted to explain why a credit union should be 
permitted to reaffirm a debt requiring payments that, as a matter of simple 
arithmetic, the debtor will be unable to pay. This provision is unconscionable and 
runs counter to the historic commitment of credit unions as defenders of the rights of
 their members.


Under current law, businesses may use chapter 11 of the Bankruptcy Code in an 
effort to obtain relief from the creditors while they seek to develop a plan to reorder 
their affairs and pay as much of their debts as their operations will allow. Under this 
chapter, businesses obtain an “automatic stay,” which forestalls creditor collection 
efforts. During this time period, debtors have an opportunity to examine their 
contracts and leases and determine which ones to assume and which ones to reject 
(with rejection leading to a claim for damages). Debtors are subject to a number of 
requirements during this period, such as the formation of creditor committees and 
various ongoing financial disclosures.

“By permitting reorganization, Congress anticipated that the Business would continue
 to provide jobs, to satisfy Creditors claims and to Produce a return for its owners ....
 Congress presumed that the asset of the debtor would be more valuable if used in a
 rehabilitated business than if ‘sold for scrap.’” United States v. Whiting Pools, Inc.To 
this end, the debtor is given an exclusive 120-day period (unless lengthened or 
shortened for cause) in which to develop a reorganization plan that satisfies a host of
 statutory requirements and convince a majority of the creditors that the plan is in 
their best interests and is preferable to a liquidation “fire sale.”

In 1994, Congress enacted two exceptions to the general rules of chapter 11. The 
first related to “small businesses,” defined as entities engaged in commercial or 
business activities whose aggregate debts do not exceed $2 million. Debtors that 
elect to be treated as small businesses are permitted to dispense with creditor 
committees, receive only a 100-day plan exclusivity period, and are entitled to more 
flexible provisions for disclosure and solicitation for acceptances of their proposed 
reorganization plan.

In 1994, Congress also developed a special set of rules applicable to “single asset 
real estate,” generally defined as cases in which the principal asset is a single piece 
of real estate subject to debt of no more than $4 million. In cases falling within this 
definition, secured creditors are permitted to foreclose on their collateral unless the 
debtor files a reorganization plan which is likely to be confirmed or commences 
payment on the secured loan within a 90-day period. This exception to chapter 11 
procedures was justified on the grounds that single- asset real estate cases were 
seen as essentially private two-party loan disputes, which did not implicate ongoing 
businesses or jobs.

A. Business Provisions

The business provisions of the bill would effectuate a number of changes in the 
manner in which corporations, partnerships, and other business entities are 
permitted to reorganize their financial affairs. With respect to small business, S. 256 
would expand the definition of covered small business to those companies having 
debts of not more than $2 million, subsuming more than 80% of all chapter 11 cases.
 It would also make the small business requirements mandatory (rather than 
optional) and mandate the operation of numerous additional requirements on 
debtors. For example, under S. 256, small business debtors would be required to 
provide balance sheets, statements of operations, cash-flow statements, and income-
 tax returns within three days after filing a bankruptcy petition, the time period the 
debtor has the exclusive right to file a plan of reorganization would be modified (to 
180 days without the possibility of extension), and the standards for being able to 
seek an extension of this time period would be substantially narrowed.

It is for these reasons that the AFL-CIO, and a number of other organizations 
representing both debtor and creditor interests have opposed, or have serious 
concerns with, the small business provisions of the bill. The AFL-CIO warned that the 
small business provisions in the bill will “threaten jobs by placing substantial 
procedural and substantive barriers in the way of small businesses’ access to the 
protections of Chapter 11 . . . . threaten jobs by requiring commercial debtors to 
assume or reject commercial leases within a rigid timetable, which would force 
debtors to favor one class of creditors over others, and threaten their overall ability 
to successfully reorganize.” All of these concerns are compounded at a time we are 
experiencing an economic slowdown, if not an outright recession.

“[T]he bill does little to address the devastating effects of the past seven years of 
business bankruptcies on workers. During this period, worker shave sustained 
unprecedented job loss, endured the termination of pension plans, and faced wage 
cuts, elimination of health care and other benefits, often all in the same bankruptcy 

This new bankruptcy mandate, particularly sections 437 through 439, would impose 
substantial new costs on small businesses, both in terms of document production and
 legal fees, and limit the time frame that the business has to develop a reasonable 
reorganization plan. Section 437 provides an absolute limit on the period the 
business debtor has the exclusive right to file a plan of reorganization. Congress has 
previously enacted laws that have made it far more difficult for debtors to unduly 
delay filing a plan of reorganization, and these appear to have had a salutary effect. 
The proposed rigid deadline goes much farther and could work to detriment of 
debtors involved in complex reorganizations and force unnecessary liquidations and 
job losses. In turn, these changes will lead to the premature liquidation of small 
businesses with the attendant loss of jobs. The provisions are particularly 
unnecessary at a time when business bankruptcies have declined by one-third over 
the most recent ten-year period.

Describing the earlier version of the bill, the SBA’s Office of Advocacy summed up 
the situation as follows: “the proposals in [the legislation] go too far in addressing the
 relatively small number of problem cases.” Even more dangerously, it has been 
noted that many – if not most – of the business cases in the average district would 
fall prey to these harsh new rules.

Prof. Douglas Baird has studied small business bankruptcies and reports:

S. 256 imposes many new burdens on small business. The justification for singling 
them out rests upon an unsound empirical assumption that Chapter 11 offers a 
haven for failing small business and allows them to die a lingering death. Based on 
our study of practices int eh Northern District of Illinois, we believe the realities of 
small business bankruptcies today simply do not support this assumption

More than half of small business Chapter 11 cases that fail (i.e., those that are 
dismissed or converted to Chapter 7 liquidations) are terminated within four months 
of filing. Over 70% are terminated within 6 months. By 300 days, the deadline for 
filing a plan under §347, 90% have already left the system. The burdens that S. 256 
imposes fall not upon the Chapter 11 debtors that are going to fail, but rather on 
those that are likely to succeed. Nearly 40% of these, the ones Chapter 11 is 
intended to help, need more than 300 days to put their plans in place.

By the time the deadlines of S. 256 take effect, the vast majority of failing firms 
have long since been weeded out. The burdens fall disproportionately on exactly he 
wrong debtors – the viable firms Chapter 11 is intended to help.

B. Single-Asset Real Estate Provisions

A similar concern relates to single-asset real estate (“SARE”) debtors. The legislation 
would significantly expand the definition of SARE by eliminating the $4 million debt 
cap pursuant to a “technical correction” in section 1201(5) of Title XIII of S. 256, 
would take in SARE bankruptcies below that cap and treat them as small businesses.

As a result of these changes, a much wider range of real estate operations would be 
required to conform with the SARE and small business requirements when they seek 
to reorganize, notwithstanding the fact that those requirements were drafted with a 
much smaller and simpler entity in mind. Large operating entities such as Rockefeller
 Center, as well as hotels and nursing homes, could be considered SARE and put 
back on the track set forth in section 362(d)(3) of the Bankruptcy Code. It would also
 create new incentives for lenders to require that all of their real estate borrowers 
place their holdings in the single asset form in order to avoid ordinary bankruptcy 
rules in the future. The AFL-CIO noted, “the significant limiting factor in the 
application of these rules has been the $4 million cap. [Eliminating] the cap would 
place a wide variety of properties . . . at risk of foreclosure and threaten jobs at 
these properties. Absent rules that specifically exclude properties such as housing 
and those with significant business enterprises, there should be no expansion in the 
definition of single-asset real estate debtor.”

By design, the SARE changes will “broaden the scope of single asset real estate 
debtors subject to rules which increase the threat of disruptive summary foreclosures
 of commercial property.” This, in turn, would likely lead to significant job losses. 
Even if a hotel or nursing home remains in existence, the new owner would not 
necessarily be required to honor any previously negotiated collective-bargaining 
agreements applicable to employees at the facility. In the case of a large real estate 
operation, premature foreclosure could also allow the new owner to terminate many 
leases, leading to further job losses to the extent the business is relying on these 

C. Failure to Safeguard Employee Rights and Stem Corporate Abuses.

While S. 256 unfairly penalizes small companies and real estate entities and their 
employees, it gives a pass the very real abuse of large corporate debtors.

Testimony presented before the Senate Judiciary Committee hearing described the 
devastating impact corporate bankruptcies often have on the financial well-being of 
the workers and retirees associated with the companies. Indeed, many of the largest
 corporate bankruptcy cases in American history have occurred in the eight years 
since this bankruptcy bill first was written. Some of those cases already are legend 
for the corporate scandals that accompanied them.

Because it was written eight years ago, S. 256 does precious little to deal with these 
abuses and the all too often painful consequences for workers and retirees who have
 their pension plans and health benefits cancelled during the course of a corporate 
restructuring. Corporate collapses such as Enron, Worldcom, Adelphia and Polaroid 
have become all too common. Current bankruptcy laws are inadequate to address 
the resulting financial woes imposed on workers, retirees and stockholders. This bill 
has no meaningful response to the rise in corporate bankruptcy abuses.

The United Steelworkers of America observed that the bill does nothing to stem the 
rapid loss of pension benefits for members and retirees:

In the steel industry alone, 45 steel companies have filed for bankruptcy since 1997. 
This has left over 250,000 USWA members and retirees with greatly reduced 
pensions and the burden of paying out-of-pocket medical expenses, which the Center
 for American Progress (CAP) has found to be one of the key factors that consistently
 leads to personal bankruptcy. We strongly feel that this legislation needs to address 
the effects corporate bankruptcies have on workers and retirees.

According to a coalition of twenty unions,

Provisions affecting business bankruptcies fare no better. Packed with terms that are 
tailored to well-funded creditor interests, the bill does little to address the devastating
 effects of the past seven years of business bankruptcies on workers. During this 
period, workers have sustained unprecedented job loss, endured the termination of 
pension plans, and faced wage cuts, elimination of health care and other benefits, 
often all in the same bankruptcy case. They have watched businesses disappear 
from their communities. No sector of the economy has escaped. Bankruptcies have 
plagued over 45 steel companies and countless other manufacturing, retail, service, 
energy, mining, transportation, textile and telecom businesses since the time the bill 
was first introduced.

Real bankruptcy reform would fix an inadequate wage priority which subjects 
workers’ wages and benefits to arbitrary payment rules. Real bankruptcy reform 
would rationalize the treatment of claims by injured workers. Real bankruptcy reform
 would fix the asset sale rules to prevent companies from simply walking away from 
retiree health care. S. 256 does none of these things. If the goal is bankruptcy 
reform, then S. 256 needs a lot of work and a lot more time. Congress needs to take
 an in-depth look at bankruptcy legislation and address the need for reform as it 
exists now, not as it existed eight years ago.

D. Other Business Concerns

A host of additional concerns have been raised by groups such as the AFL-CIO and 
the National Bankruptcy Conference regarding the business titles of the legislation. 
These include concerns about the expansion of remedies available to secured 
creditors in the transportation industry; the imposition of mandatory deadlines for 
extensions of “exclusivity”; limits on subsequent filings for troubled small businesses,
 and provisions giving utility companies an enhanced position in bankruptcy. In 
general, the AFL-CIO has warned that “the real danger posed by H.R. 3150 [an 
earlier version of S. 256] is the threat it poses to our economy’s ability to weather 
downturns. The bill aims to make access to the bankruptcy process more difficult for 
our economy’s most vulnerable links – small businesses and consumers. This will 
likely result in increased business closures, job loss and home foreclosure, increasing
 the severity and length of any future economic downturn.”

Similar concerns relate to the power of creditors who lease retail property. Section 
404 unfairly grants lessors of commercial property the ability to coerce 
debtor-tenants into deciding prematurely whether to assume or reject a lease. In a 
retail insolvency, a debtor may need to wait beyond the 210-day period – 120 days 
with the ability to gain a 90-day extension upon a motion for cause and with the 
lessor’s consent – until the holiday season is complete to determine which locations 
have a realistic chance to succeed; a trustee or debtor in possession may decide to 
assume and reject some of the leases based upon this practical experience. If the 
trustee or debtor in possession assumes a nonresidential lease in chapter 11, and the
 case subsequently converts to chapter 7, under the bill, the rent due for a one-year 
period following rejection of the lease becomes an administrative expense for 
compensation, gaining priority over all other unsecured claims and limiting the 
opportunity for other unsecured creditors to receive compensation. By giving the 
lessor veto power at the end of 210 days, as the bill now does, the legislation would 
have the effect of giving a single creditor inordinate bargaining power among 
creditors and with the debtor.

Another problematic provision appears in section 442 of S. 256. Section 442 amends 
section 1112(b) of the Code to expand the grounds on which the court can dismiss or
 convert a small business case. For example, a case will be presumptively dismissed 
when the debtor fails to comply with a lengthy list of requirements. To overcome the 
presumption, the debtor must show that a reasonable justification exists for the 
debtor’s action, that the debtor will rectify the situation within a reasonable time 
prescribed by the court, and that the plan will be confirmed within a reasonable 
period of time. Again, the concern is that section 442 may be too inflexible and could 
be used by some creditors to obtain leverage over other creditors, or the case could 
be converted to chapter 7 when it may have successfully reorganized, costing jobs 
and sacrificing going concern value for the creditors and the estate.


The Bankruptcy Code seeks to effectuate a delicate balance between the rights of 
the Internal Revenue Service and state tax agencies to the repayment of any taxes, 
interest, and penalties owed them, and the rights of other creditors and the ability of 
individuals and corporations to be financially rehabilitated for the benefit of all 
parties. Title VII of the bill, on balance, manifests a strong preference for the IRS 
and other taxing authorities to the detriment of other participants in the bankruptcy 
system. Concerns have been expressed that, not only does S. 256 generally 
enhance the rights and position of the IRS and state authorities in bankruptcy, but 
the bill grants the IRS certain rights in bankruptcy cases that it does not enjoy 
outside of bankruptcy, and vests the IRS with new enforcement powers that ordinary
 creditors do not posses. Of particular concern is the fact that the bill varies in many 
significant respects from the nonpartisan, and often unanimous, recommendations of 
the Bankruptcy Commission and its Tax Advisory Committee.

Title VII of S. 256 deals with the treatment of tax debts owed to the government by a
 debtor. It is ironic that the bill, whose sponsors have normally taken such an 
anti-tax posture on most issues, not only uses the IRS collection standards for the 
means test but also presses for changes to the Bankruptcy Code that favor 
governmental collections over the rights of debtors and private sector creditors.

Arguably one of the bill’s most important provisions affecting business bankruptcies 
appears in Section 708 of Title VII. This section provides that a corporation will not 
be discharged from a tax or customs duty where the debtor made a fraudulent return
 or willfully attempted to evade or defeat the tax or duty. More significantly, by 
referencing any debt in section 523(a)(2) of the Code, the provision even would 
encompass claims that were fraudulently incurred that are not tax claims. In its 
critique of section 708, the National Bankruptcy Conference wrote:

“A rule such as the one proposed in section 708 advantages one creditor at the 
expense of others. It is a recipe for certain mischief, especially in large 
reorganizations. There is no public policy reason to grant this kind of leverage to 
some creditors as the purpose in making these assertions transparently will likely be 
to obtain a better deal that other creditors.”

In addition, Paul Asofsky, who served as the Chair of the Task Force on the Tax 
Recommendations of the National Bankruptcy Review Commission of the American 
Bar Association’s Tax Section, testifying about H.R. 3150 on behalf of the American 
Bar Association’s Section on Taxation, observed that: “[T]here are many provisions 
in this legislation with which we agree as a matter of principle, but the specific 
provisions are either ambiguously drafted or cut against the grain of the principal 
proposal, causing us to oppose what should be noncontroversial proposals.”

Mr. Asofsky provided a somewhat more detailed discussion of his concerns in a letter
 to the Subcommittee’s Ranking Member. Section 704 of S. 256 provides for a 
significantly higher uniform interest rate to be applied to tax claims in a bankruptcy 
case. The Tax Advisory Committee, which included governmental representatives, 
concluded that the rate for all types of tax claims should be the regular tax deficiency
 rate for federal income tax purposes. The bill, however, provides that the rate shall 
be determined by applicable nonbankruptcy law. Of greater concern, local 
governments can set their own interest rates, many of which are substantially higher 
than either of the IRS rates.

Section 707 severely limits the broader discharge available to debtors in chapter 13. 
It would prevent a debtor from discharging certain tax debts, which is now permitted 
in chapter 13, but not in chapter 7. Eliminating the benefit of the superdischarge also 
eliminates the single greatest incentive for an individual debtor to choose chapter 13.
 As Mr. Asofsky observed,

[T]he problem faced by many taxpayers who are delinquent in their obligations is 
that the IRS standard allowances for installment payment agreements clearly do not 
leave many taxpayers with the minimum amounts necessary to provide for basic 
necessities, and so called “offers in compromise” are very difficult to obtain. Thus, 
for the most desperate of taxpayers, the chapter 13 superdischarge affords a safety 
net which is the only thing that provides them with the possibility of living somewhat 
of a normal life in dignity . . . elimination of the chapter 13 superdischarge would be 
devastating to large numbers of unfortunate individual debtors.

Section 717 requires disclosure of the tax consequences of a chapter 11 plan of 
reorganization. Although originally an uncontroversial idea, the bill adds extra 
requirements that will likely cause confusion and may be impossible for debtors to 
comply with fully. The section now requires “a discussion of the potential material 
Federal tax consequences of the plan to the debtor, any successor to the debtor, and
 a hypothetical investor typical of the holders of claims or interest in the case.” The 
use of a vague term such as “discussion” – although an improvement over the 
requirement in the earlier version of a “full discussion” – will likely lead to extensive 
litigation as these statements are scrutinized. In some instances, the precise tax 
consequences of a plan at all levels of government, and for a “typical” holder of 
claim, may be difficult to produce with great precision.

Finally, section 718 requires that a debtor actually have commenced an action 
against the taxing authority to determine the amount of a disputed tax before a 
setoff can be prevented. Absent such an action by the debtor, a governmental entity 
generally is free to “setoff” any pre-petition refund with a liability. The Advisory 
Committee had recommended that such setoff should only be permitted in cases 
where the liability was undisputed. The bill goes much further and to the 
disadvantage of the debtor and other, non-governmental creditors.


Although the legislation purports to wring fraud and abuse from the bankruptcy 
system, there are a number of provisions that will open the door to further abuse by 
certain parties.

Section 324 of the bill would overturn the result in the Merry-go-Round case in which 
the accounting firm of Ernst and Young was held liable for fraud, fraudulent 
concealment, and negligence/malpractice for its conduct while serving as 
restructuring accountants and business advisors in the Merry-go-Round bankruptcy. 
The suit was brought in the Circuit Court for Baltimore City, but Ernst & Young 
attempted to move the case to the bankruptcy court. The case was remanded back 
to state court and the remand was ultimately upheld by the District Court. Faced with
 a jury trial in state court, Ernst & Young ultimately settled the case with the trustee 
for $185 million.

The import of the Merry-Go-Round case is the issue of holding professionals, such as 
accounting firms, accountable for their actions in a bankruptcy case. As 
professionals, they are paid by funds from the estate before other creditors. They 
have a duty to the estate and the creditors. When they violate that duty, they can be 
denied fees by the bankruptcy court, or they may face an action for damages. 
Damages paid to the trustee are made available to the creditors.

This change in the law was inserted for the express purpose of insulating accountants
 and other professionals from facing the consequences of their wrongdoing. At a time
 when public policy is moving in the direction of greater accountability, there is no 
excuse for this change.

Section 414 would relieve investment bankers of the duty of being disinterested 
persons before they can be retrained as professionals by the trustee. The 
disinterestedness standard, which has been in existence since 1938, protects the 
estate from conflicts of interest by professionals in the case. Judge Edith Jones of the
 U.S. Court of Appeals for the Fifth Circuit has written, “such a standard can alone 
protect integrity in the bankruptcy process. If professionals who have previously 
been associated with the debtor continue to work for the debtor during a bankruptcy 
case, they will often be subject to conflicting loyalties that undermine their foremost 
fiduciary duty to the creditors. Strict disinterestedness, required by current law, 
eliminates such conflicts or potential conflicts . . . . Section 414, in removing 
investment bankers from a rigorous standard of disinterestedness, is out of character
 with the rest of this important legislation, however, and it should be eliminated.”

Section 102 relieves certain creditors and their attorneys from penalties prescribed in
 the bill even if they violate Bankruptcy Rule 9011. As discussed earlier, there is 
never a justification for violating Bankruptcy Rule 9011. Granting such an exception 
would only encourage inexcusable abuse of the process. Moreover, because this 
exception is embedded in the attorney sanctions portion of the individual debtor 
provisions of this bill, it would open the door to creditors abusing the most vulnerable
 debtors with impunity. There are many instances in which this legislation makes 
such abuse possible. Enshrining this sort of exemption in the law exemplifies the 
dangerous distortion of the bankruptcy system this bill represents.


The Bankruptcy Code has proven to be a model of pragmatism and equity at law. 
The proposed legislation would undermine both of those important principles. It may 
well be that, in the years to come, many of the same interest groups now clamoring 
for this legislation will come to regret the inefficiencies, uncertainties, and distortions 
it will inflict on the bankruptcy system. While the Bankruptcy Code could clearly 
benefit from reforms and modernization, indeed this legislation contains many 
provisions that are both beneficial and uncontroversial, much if it is unnecessary and 
harmful to debtors, creditors, and the economy.

We respectfully dissent, and urge our colleagues to reject S. 256.