Bankruptcy Reform in the 108th Congress

CRS Report for Congress
Bankruptcy Reform in
the 108 Congress
Updated January 29, 2004
Angie A. Welborn
Legislative Attorney
American Law Division

Congressional Research Service ˜ The Library of Congress

Bankruptcy Reform in the 108 Congress
On March 19, 2003, the House of Representatives passed H.R. 975, the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2003. H.R. 975, as
introduced, was substantially similar to the legislation (H.R. 333) approved by bothth
the House and the Senate during the 107 Congress, but omitted the Schumer
Amendment which would have prevented the discharge of liability for wilful
violation of protective orders and violent protests against providers of “lawful
services,” including reproductive health services. As passed by the House, H.R. 975
was amended to add sections to, among other things, increase the cap on wage and
employee benefit claims. The Senate did not consider H.R. 975 during the firstth
session of the 108 Congress.
On November 25, 2003, the Senate passed S. 1920, providing for a six-month
extension of Chapter 12 of the Bankruptcy Code. The House took up S. 1920 on
January 28, 2004, with an amendment in the nature of a substitute consisting of the
text of H.R. 975 as passed by the House on March 19, 2003. S. 1920, as amended,
was passed by the House and conferees appointed to resolve differences with the
S. 1920, as passed by the House, addresses many areas of bankruptcy practice,
including consumer filings, small business bankruptcy, tax bankruptcy, ancillary and
cross-border cases, financial contract provisions, amendments to chapter 12
governing family farmer reorganization, and health care and employee benefits.
This report provides an overview of selected major provisions of the legislation.
It will be updated as events warrant.

In troduction ..................................................1
Overview of Selected Provisions..................................2
Means Test, 11 U.S.C. § § 704, 707...............................3
Additional Consumer Provisions .................................6
Nondischargeable Consumer Debts................................9
Consumer Credit Disclosure....................................10
Business Bankruptcy..........................................11
General Provisions............................................12

Bankruptcy Reform in the 108 Congress
On February 27, 2003, House Judiciary Chairman James Sensenbrenner
introduced H.R. 975, the Bankruptcy Abuse Prevention and Consumer Protection Act
of 2003. Subcommittee hearings were held on March 4, and the legislation was
marked-up and ordered to be reported with technical amendments by the full
committee on March 12.1
On March 19, 2003, the House of Representatives passed H.R. 975 by a vote of

315 - 113. As introduced, the bill was substantially similar to the legislation (H.R.

333) approved by both the House and the Senate during the 107th Congress, but
omitted the “Schumer Amendment” which would have prevented the discharge of
liability for wilful violation of protective orders and violent protests against providers
of “lawful services,” including reproductive health services. Several amendments
were offered pursuant to the rule submitted by the House Rules Committee and
agreed to prior to the debate.2 Three amendments were approved, including one to
increase the cap on wage and employee benefit claims against a corporation that has
filed for bankruptcy.3 An amendment in the nature of a substitute offered by
Representatives Nadler and Conyers did not pass.4
Following passage by the House, the Senate did not consider H.R. 975 during
the first session of the 108th Congress. However, the Senate did pass S. 1920,
providing for a six-month extension of Chapter 12 of the Bankruptcy Code, on
November 25, 2003.5 The bill was passed by the Senate without amendment. On
January 28, 2004, the House took up S. 1920 with an amendment in the nature of a

1 H.Rept. 108-40, 108th Cong., 1st Session (2003).
2 H.Res. 147, 108th Cong, 1st Session (2003).
3 H.Amdt. 8, 149 Cong. Rec. H2051-H2053 (daily ed. March 19, 2003). Other approved
amendments make section 1234 of the bill (related to involuntary cases) applicable to cases
currently pending in the bankruptcy courts (H.Amdt. 10, 149 Cong. Rec. H2055 (daily ed.
March 19, 2003)); and redraft Title IX, entitled Financial Contract Provisions, to make
certain provisions applicable to both bank and credit union federal regulators (H.Amdt. 7,

149 Cong. Rec. H2046-H2051 (daily ed. March 13, 2003)).

4 H.Amdt. 11, 149 Cong. Rec. H2055-H2095, H2096-H2097 (daily ed. March 19, 2003).
An amendment to require corporations to file bankruptcy cases in the district court of the
district in which the corporation’s principal place of business is located also failed (H.Amdt.

9, 149 Cong. Rec. H2053-H2055, H2095-H2096 (daily ed. March 13, 2003)).

5 149 Cong. Rec. S16063 (daily ed. November 25, 2003). For more information on Chapter
12, see CRS Report RS20742, Chapter 12 of the U.S. Bankruptcy Code: Family Farmer
Reorganization, by Robin Jeweler.

substitute consisting of the text of H.R. 975 as passed by the House on March 19,
2003.6 The House passed S. 1920, as amended, by a vote of 265 - 99, and appointed
conferees to resolve differences with the Senate-passed version of S. 1920.7
Overview of Selected Provisions
S. 1920, as passed by the House, addresses many areas of bankruptcy practice,
including consumer filings, small business bankruptcy, tax bankruptcy, ancillary and
cross-border cases, financial contract provisions, amendments to chapter 12
governing family farmer reorganization, and health care and employee benefits.
Certain provisions of the current legislation have received significant attention
in the 108th Congress. The House-approved amendment providing for an increase to
the cap on wage and employee benefit claims was offered in response to the
increased number of high-profile corporate bankruptcies last year. These
bankruptcies often left employees with little or no severance, and greatly reduced or
eliminated any health insurance benefits they may have been entitled to. The
amendment would raise the existing cap of $4,650 to $10,000, giving employees a
priority claim for up to that amount as compensation for services rendered prior to
the bankruptcy. Another provision that has received increased attention is section
414 of S. 1920, which would amend the definition of a disinterested person under the
Bankruptcy Code. Section 414 would eliminate “investment banker” from the
current list of those unable to be identified as a disinterested person. The new
definition would define “disinterested person” as a person that –
(A) is not a creditor, an equity security holder, or an insider; (B) is not and was
not within 2 years before the date of the filing of the petition, a director, officer,
or employee of the debtor; and (C) does not have an interest materially adverse
to the interest of the estate or of any class or creditors or equity security holders,
by reason of any direct or indirect relationship to, connection with, or interest in,
the debtor, or for any other reason.
By eliminating investment bankers from the list of persons who cannot be considered
disinterested, such persons would be able to perform securities work for the debtor
during the debtor’s bankruptcy. This change has not been a focus of the debate thus
far in the 108th Congress, but the provision has received some criticism in the media.8
The following chart provides an overview of selected major provisions of S.

1920, as passed by the House, including provisions related to consumer bankruptcy,

consumer credit disclosure, and business bankruptcy, as well as other general

6 H.Res. 503, 108th Cong., 2nd Session. The only amendments made to the text of H.R. 975,
as an amendment in the nature of a substitute to S. 1920, were technical changes. See
H.Amdt. 457, 150 Cong. Rec. H219 (daily ed. January 28, 2004).
7 Roll Call No. 10, 150 Cong. Rec. H219 - H222 (daily ed. January 28, 2004).
8 See e.g., “Bankruptcy Reform ... with a Thorn,” by Michael I. Krauss, Washington Times,
April 25, 2003.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Means Test, 11 U.S.C. § § 704, 707
Implementation Would amend 11 U.S.C. § 707 to permit creditors, the
trustee, or any party in interest to challenge a debtor’s
eligibility to file under chapter 7. If indicated, the U.S.
trustee must file a statement that the debtor’s case is a
presumed abuse of chapter 7. § 102.
Definition of “currentExcludes Social Security benefits; payments to victims of
monthly income”war crimes or crimes against humanity; and payments to
victims of international terrorism . § 102.
Presumed abuseDebtor presumed to be abusing chapter 7 if current
monthly income, excluding allowed deductions, secured
debt payments, and priority unsecured debt payments,
multiplied by 60, would permit a debtor to pay not less
than the lesser of (a) 25% of nonpriority unsecured debt or
$6,000 (or $100 a month), whichever is greater, or (b)
In addition to the means test, the court may find that the
debtor’s filing was in bad faith or that the totality of the
circumstances demonstrates abuse. § 102.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Calculation of permissibleExpenses to be calculated as specified under the National
monthly living expensesStandards and Local Standards, and the debtor’s actual
monthly expenses for the categories specified as Other
Necessary Expenses issued by the Internal Revenue
Service for the area in which the debtor resides. A debtor
may also subtract, if reasonably necessary, an allowance
of up to 5% of the IRS food and clothing categories.
Individualized expenses may include debts incurred to
protect the debtor’s family from domestic violence; actual
expenses for the care and support of nondependent,
elderly, ill or disabled household or family members;
private or public school tuition of up to $1,500 per year;
administrative expenses for chapter 13 candidates;
average monthly expenses for secured and priority debts;
actual expenses for housing and utilities, if reasonably
necessary; and, charitable contributions of up to 15% of9
gross income.
Dollar amounts will be adjusted at three-year intervals in
accordance with the Consumer Price Index. § 102.
To rebut the presumptionA debtor must demonstrate and justify “special
of abusecircumstances” in order to adjust current monthly income
determination. § 102.
Safe harbor exemptionOnly the judge, U.S. trustee or bankruptcy administrator
from the means testmay bring a substantial abuse motion if the debtor’s
current monthly income is less than the highest national or
the applicable State median family income.
No party may make a motion to convert the debtor to
chapter 13 if the debtor (and spouse combined) have a
monthly income equal to or less than the state median
household income reported by the Bureau of the Census.
The U.S. trustee may also decline to file a motion to
convert if the debtor’s monthly income is between 100%
and 150% of the national or applicable State median
income, and would permit a debtor to pay the lesser of (a)
25% of nonpriority unsecured debt or $6,000, whichever
is greater, or (b) $10,000. § 102.

9 Charitable contributions are permissible under current law, 11 U.S.C. § 707(b), and would
not be altered by the bill.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
IRS Living StandardsA chapter 13 debtor’s “disposable income” which may be
applicable to chapter 13directed to the repayment plan will be calculated in
reorganization planaccordance with IRS Living Standards if the debtor meets
the applicable means test for state median family income.
A chapter 13 debtor may deduct from plan payments the
costs of health insurance; domestic support obligations;
charitable contributions of up to 15% of gross income; and
expenses necessary to operate a business.
§ 102.
Attorney sanctions forIf a panel trustee brings a successful motion for dismissal
improper motion or conversion, counsel for the debtor may be liable to
reimburse the trustee for costs, attorneys’ fees, and
payment of a civil penalty if the court finds a violation of
Bankruptcy Rule 9011.
An attorney’s signature on the bankruptcy petition certifies
that the attorney has performed an investigation into the
circumstances that gave rise to the petition; that the
attorney has determined that the petition is well grounded
in fact and is warranted by existing law; and that the
attorney has no knowledge after an inquiry that the
information in accompanying schedules is incorrect. § 102.
Creditor sanctions for anThe court may award the debtor costs for contesting an
improper motionunsuccessful motion to convert if the court finds that the
motion violated Rule 9011, or was intended to coerce the
debtor into waiving rights under the Bankruptcy Code. A
creditor whose claim is less than $1000 is not liable for
sanctions. § 102
Dismissal of filings byA crime victim or party in interest may request dismissal
persons convicted ofof the voluntary bankruptcy case of the convicted
violent crimes or drugdebtor. The court must grant the dismissal unless the
traffickingfiling is necessary to satisfy a domestic support
obligation. § 102

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Additional Consumer Provisions
Mandatory creditDebtor must undergo credit counseling within 180 days of
counselingfiling, and may not obtain a discharge until completion of
a personal financial management instructional course.
The jurisdictional filing requirement may be waived for 30
to 45 days if the debtor certifies exigent circumstances or
was denied service from an approved counseling agency.
The U.S. trustee or bankruptcy administrator for the
judicial district is directed to oversee and approve
nonprofit budget and credit counseling agencies. § 106
Promotion of alternativeA creditor’s allowable claim may be reduced by 20% if a
dispute resolutioncourt finds that the creditor “unreasonably refused to
negotiate a reasonable alternative repayment schedule
proposed by an approved credit counseling agency that
provides repayment of at least 60% of the debt, and the
debtor can prove by “clear and convincing” evidence that
a creditor unreasonably refused to consider the offer.”
§ 201.
Reaffirmation agreementsImposes enhanced requirements for approval of a
reaffirmation agreement when the debtor is not
represented by counsel but exempts credit unions from
creditor disclosure requirements; requires U.S. Attorney
and FBI to investigate abusive reaffirmation practices. §


Preserving defensesAmends 11 U.S.C. § 363 to add a new subsection
against predatory lenderspreserving defenses that a party to a consumer credit
transaction may have if the contract is sold by a debtor in
bankruptcy. § 204.
GAO reaffirmation studyRequires a study of reaffirmation practices and a report to
Congress. § 205
Domestic support owed toWould move domestic support obligations to first priority,
individuals andwhich is currently allocated to administrative expenses of
government units madethe bankruptcy estate. Administrative expenses would
first prioritybecome second priority.
However, if a trustee is appointed under chapter 7, 11, 12,
or 13, the trustee’s expenses may be paid before domestic
support. § 212.
Trustee notification ofWould direct the trustee to notify a priority child support
child support claimrecipient of the existence of a state child support
holdersenforcement agency, and, upon discharge, the existence of
nondischargeable and reaffirmed debt. § 219.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Priority assigned to claimsA new § 507 tenth priority is created for unsecured claims
for liability incurred byfor liability incurred by a debtor from operating a vessel
the debtor DUIwhile under the influence of alcohol or drugs. Claims of
this nature are also nondischargeable. § 223.
Retirement savingsWould clarify and expand the law to provide that
exemption broadenedretirement accounts that are tax exempt under the Internal
Revenue Code are exempted from the debtor’s estate up to
a $1,000,000 cap, which may be increased if “the interests
of justice so require.” § 224
Exemption for saving forSubject to certain IRS requirements, excludes funds up to
postsecondary education$5000 per specified beneficiary made within a year of
filing in an education individual retirement account and/or
any funds used to purchase a tuition credit or certificate
under a qualified state tuition program. §225
Protection of nonpublicProhibits the transfer by the debtor of personal customer
personal information andinformation unless approved by the court. Provides for the
consumer privacyappointment of a consumer privacy ombudsman if a debtor
ombudsmanwishes to sell or lease such information. §§ 231,232.
Prohibition on disclosureDebtor may not be required to disclose the name of a
of identify of minorminor child in public records. U.S. trustee or auditor may
childrenhave access to nonpublic records maintained by the court.
§ 233.
Lien stripping on securityChapter 13 debtors would not be permitted to bifurcate
interests in consumersecurity interests in an automobile purchased within 910
goods (cramdown)days (2½ years) before the filing; or in other consumer
goods purchased within 1 year of the filing. § 306.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Homestead exemptionDefinition of “debtor’s residence” includes mobile homes
or trailers. § 306.
Imposes lengthened residency requirements to qualify for
state exemption. § 307.
Reduces the value of the exemption if the value is
attributable to property that the debtor disposed of within
10 years of bankruptcy with the intent to hinder, delay or
defraud a creditor. § 308.
Debtors’ electing a state homestead exemption may not
exempt any interest acquired within 1215 days (3.3 years)
of filing which exceeds in the aggregate $125,000, unless
the value in excess of that amount occurs from a transfer
of residences within the same state. Exempts family
farmers from the limit. Limitations may not apply to
amounts reasonably necessary to support the debtor and
any dependents.
Imposes a firm $125,000 cap on individuals who are
convicted of specified felonies (including violations of
federal securities laws) or who commits criminal acts,
intentional torts, or willful or reckless misconduct that
caused serious physical injury or death within 5 years
preceding the bankruptcy filing. § 322.
Residential lease exceptedAdds new provisions permitting a landlord/lessor to
from the automatic staybypass the automatic stay to continue with a residential
eviction of a tenant/lessee. § 311
Restrictions on chapter 7Extends time within which a debtor who has received a
and chapter 13 filings.chapter 7 discharge may not receive another from 6 to 8
Amends chapter 13 to disallow discharge if the debtor
filed under chapters 7, 11, or 12 within 4 years prior to the
13 filing, or under chapter 13, within 2 years of the
subsequent filing. § 312.
Definition of “householdDefines household goods to include clothing, furniture,
goods”appliances, 1 radio, 1 television, 1 VCR, other electronic
entertainment equipment with a market value of under
$500, linens, china, crockery, kitchenware, educational
materials used by minor dependent children, medical
equipment and supplies, furniture used exclusively by
minors and disabled or elderly dependents, personal
effects, 1 personal computer and antiques and jewelry with
a value less than $500. § 313.

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Debtor’s duty to discloseModifies debtor filing requirements under 11 U.S.C. § 521
tax include federal tax returns. § 315.
Plan durationChapter 13 plans to have 5 year duration for families
whose monthly income is not less than the highest state
median family income. Families below the highest state
median income would have 3 year plans. § 318.
Wages withheld by anWithheld wages for contributions to employee benefit
employer for contributionsplans would be excluded from the debtor (employer’s)
to employee benefit plansestate. § 323.
Valuation of collateralA secured creditor’s allowable claim would be the retail
cost to replace the item without deduction for costs of sale
or marketing. Personal property’s replacement value
would be the price a retail merchant would charge for like
items. § 327.
Wages and benefitsMakes specified prepetition and postpetition wages and
awarded as back paybenefits awarded as back pay a high-priority
administrative expense. § 329.
AuditsThe Attorney General is directed to establish a procedure
to ensure random audits of no less than 1 out of every 250
individual filings; the U.S. trustee is authorized to enter
into contracts with auditors, and to take action when
misstatements in the debtor’s petition and schedules are
identified. § 603.
Nondischargeable Consumer Debts
Debts to government unitsDefines “domestic support obligation” to include debts
for domestic supportowed to or recoverable by a governmental unit. §§ 211,


Expanded definition ofAdds qualified educational loans as defined under § 221 of
student loanthe IRC to those educational loans that are currently
nondischargeable. § 220.
Loan repayments toMakes nondischargeable, i.e., allows an employer to
debtor’s retirementcontinue to withhold loan repayments to debtor’s
savings or thrift plansavings/retirement plan from debtor’s wages. § 224(c).
Consumer debts presumed Consumer debts owed to a single creditor for more than
fraudulent$550 for “luxury goods” incurred within 90 days of filing;
and cash advances for more than $750 under an open end
credit plan within 70 days of filing are presumed to be
nondischargeable. § 310
Debts incurred to payDebts incurred to a third party to pay a tax to a state or
nondischargeable debtslocal government unit become nondischargeable. § 314.

are nondischargeable

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Expanded definition ofExpands the types of post-petition condo and homeowners
nondischargeableassociation fees that are nondischargeable by omitting
condominium andrequirement that in order to be nondischargeable the
homeowners associationdebtor must reside in the residence postpetition. § 412.
FEC penaltiesFines and penalties under federal election law are made
nondischargeablenondischargeable. § 1235.
Consumer Credit Disclosure
Amendments to the TruthTILA amended to require enhanced minimum payment
in Lending Actdisclosures under an open end credit plan; enhanced
disclosures regarding the tax deductibility of credit
extensions which exceed the fair market value of a
dwelling for credit transactions secured by the consumer’s
dwelling; disclosures related to introductory “teaser” rates;
disclosures related to Internet-based open end credit
solicitations; and disclosures related to late payment
deadlines and penalties. TILA would be amended to
prohibit termination of a credit account because the
consumer has not incurred finance charges. §§ 1301-1306.
Study of bankruptcyComptroller General directed to study bankruptcy impact
impact of credit extendedof credit extensions to students in postsecondary school.
to dependent students§ 1308
Consumer credit studiesThe Board of Governors of the Federal Reserve would be
directed to study existing protections for consumers for
unauthorized use of a dual use debit card. § 1307

Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Business Bankruptcy
Avoidable preferencesAmends 11 U.S.C. § 547 to liberalize the rules for
defending against an avoidable transfer in the ordinary
course of business; creates a new preference exception to
aggregate transfers of less than $5,000. § 409.
Definition of disinterestedAmends 11 U.S.C. § 101(14) to eliminate investment
personbanker from the list of excluded persons.
Small business bankruptcySubtitle B of Title IV has provisions defining a “small
business” for chapter 11 purposes as one with debts under
$2,000,000. The debtor’s period of exclusivity to file a
reorganization plan is 180 days. A plan and disclosure
statement must be filed within 300 days of the initial
A plan must be confirmed within 45 days of filing in
bankruptcy. § 438
Provisions require establishment of uniform accounting
and reporting standards for small businesses. Grounds for
appointment of a trustee and the trustee’s general
supervisory duties are expanded, as are grounds for
dismissal or conversion of the case. §§ 431-442.
Trustee to appoint retireeAmends 11 U.S.C. § 1114 to provide that in the event that
committeesa retiree committee is appointed, the appointment of
members will be made by the U.S. Trustee, not the court.
§ 447.
Chapter 11 corporateConfirmation of a plan under chapter 11 would not
nondischargeabilitydischarge a corporate debtor from debts under 11 U.S.C.
§ 523(a)(2) that are owed to a domestic governmental unit
for property obtained by false pretenses or representations;
or owed to an individual under subchapter III of chapter 37
of Title 31, U.S.C.; or any debt for taxes for which the
debtor willfully attempted to evade or made a fraudulent
return. § 708.
Wage and employeeCap on wage and employee benefit claims increased from
benefit claims$4,650 to $10,000 and lengthens reachback period for
wage claims from 90 days to 180 days; and increases the
reachback period during which fraudulent transfers can be
rescinded from one to two years and provides that certain
compensation payments to a corporation’s insiders during
this two-year reachback period can be rescinded, under
certain circumstances; also requires the court to reinstate
retiree benefits that a corporate debtor modified within the
180-day period preceding the bankruptcy filing, unless the
balance of the equities justified the modification. §§ 1501-


Selected ProvisionsS. 1920, as passed by the House, 108thnd
Congress, 2 Session (2004)
Title X dealing withMakes chapter 12 permanent, retroactive to the date on
chapter 12 family farmerswhich chapter 12 was last in effect. Includes jurisdictional
debt limit in amount subject to readjustment in accordance
with CPI; subordinates certain high priority unsecured
claims owed to the government to nonpriority claims.
Measure to take effect upon enactment, but will not apply
to pending cases. §§ 1001-1003.
Raises jurisdictional debt limit of family farmers to
$3,000,000 and lowers percentage requirement of income
derived from farming and expands the time frame for
measuring farm income from one to three years. §§ 1004,


Prohibits retroactive assessment of disposable income.
§ 1006
Amends chapter 12 to include “family fishermen.”
§ 1007.
General Provisions
In forma pauperis filings Directs the Judicial Conference to prescribe procedures for
waiving bankruptcy fees for an individual debtor under
chapter 7 whose income is less than 150% of the official
poverty line and who is unable to pay the fee in
installments. § 418.
Bankruptcy judgeshipsCreates new temporary bankruptcy judgeships for
designated districts. § 1223.
Procedure to certifyEstablishes procedures to permit direct appeals from a
appeals from a bankruptcybankruptcy court to a court of appeals if the decision
court to a court ofinvolves a substantial question of law; a question requiring
appealsresolution of conflicting decisions; or, a matter of public
importance. §1233.
Involuntary BankruptcyMakes technical corrections made to 11 U.S.C. § 303
dealing with involuntary bankruptcy. Measure applies
upon enactment, and to cases currently pending. § 1234.
General effective dateSubject to express provisions otherwise, the new law will
take effect 180 days after enactment and will not apply to
cases commenced before the effective date. § 1501.