May 5, 1999
The Administration strongly opposes H.R. 833. If the bill were presented to the President in its current form, his senior advisers would recommend that he veto the bill. However, the Administration strongly supports the Democratic alternative offered by Representatives Nadler, Conyers, and Meehan, which would make a limited number of targeted changes to address the most significant problems with H.R. 833.
The Administration continues to support bankruptcy reform that asks both debtors and creditors to act more responsibly. However, H.R. 833 fails the test of balance between creditors and debtors. As currently drafted, many of the bill's provisions are unfair to middle- and low-income debtors; at the same time, the bill fails to close loopholes in current law that protect the wealthiest debtors. The bill focuses on perceived abuse of the bankruptcy system by debtors without adequately addressing abuses by creditors, and takes an excessively rigid approach to limiting access to discharge of debts under Chapter 7 of the Bankruptcy Code.
H.R. 833 in its current form would limit access to Chapter 7 to debtors who meet an inflexible and arbitrary means test. The Administration agrees that debtors who can repay a portion of their debt should not have access to Chapter 7. The Administration also agrees that some expense standards should be used to guide the determination of ability to repay, analogous to how expense standards are used by the Internal Revenue Service (IRS) to guide the collection of tax debt. However, H.R. 833 simply takes IRS expense standards, which were not developed for bankruptcy purposes, and applies them rigidly to determine ability to repay in bankruptcy. Under H.R. 833, a debtor whose ability to repay according to the IRS formulas was even $1 above the minimum threshold would have to demonstrate "extraordinary circumstances" in order to gain access to Chapter 7.
Representatives Hyde and Conyers will offer an amendment that also includes a means test but which would use expense standards that are tailored for bankruptcy purposes and that would allow bankruptcy judges limited and appropriate discretion in their application. The Administration could support the Hyde-Conyers amendment (provided that one technical and conforming change is made to make the language of the amendment internally consistent).
The Democratic alternative includes a means test very similar to the Hyde-Conyers amendment that would ensure that debtors who genuinely have the ability to repay a portion of their debts would remain responsible for those debts. Moreover, the Democratic alternative would significantly reduce the administrative and legal burden of means testing by limiting paperwork requirements on low-income debtors with little ability to repay.
The Democratic alternative also would address creditor abuses in bankruptcy, especially those abuses that place priority debt such as child support and alimony payments at risk. There is extensive evidence of coerced or abusive reaffirmations of unsecured debt and low-value secured debt. Such reaffirmations frequently are the result of misleading information or threats from creditors. Remarkably, H.R. 833 would ban class actions filed against creditors who violate reaffirmation requirements -- the mechanism that was effectively used to end abusive practices in important consumer protection cases. Rolling back an avenue of consumer redress for such significant creditor abuse is simply unacceptable.
Many bankruptcy experts have advocated either banning or severely curtailing such reaffirmations because they jeopardize both a debtor's "fresh start" and a debtor's ability to pay priority obligations. The Democratic alternative proposes more limited changes to help address this abuse. Reaffirmations of unsecured and low-valued secured debt would be subject to streamlined court review as part of the means-testing process. If the creditor provided certain easily-calculated disclosures about the financial implications of the reaffirmations (such as the effective annual percentage rate and the amount of any fees and penalties that could be applied), and if the means test suggested that the debtor truly could afford to repay all of his priority debts after taking on this additional obligation, then the reaffirmation would be presumed not to create undue hardship and to be fully understood by the debtor. In addition, those persons to whom the debtor owes child support or alimony obligations would have an opportunity to present evidence that the reaffirmation would place payment of their priority debt at risk.
The Administration also remains concerned about provisions in H.R. 833 that put additional credit card and other nonpriority debts in greater competition after bankruptcy with child support, alimony, and other societal priorities like educational loans and taxes. The Democratic alternative is consistent with the view of the Administration that caution should be exercised in the creation of additional types of nondischargeable credit card debt. H.R. 833 also eliminates virtually all "cramdowns" of secured debt to the actual value of the secured item in bankruptcy. While there are good reasons to limit the most dramatic cramdowns that occur for debts incurred close to bankruptcy, barring most cramdowns, as H.R. 833 would do, puts at risk repayment of other secured and priority debts.
The Administration continues to believe that reform must ensure that debtors are treated fairly and responsibly in the bankruptcy process, recognizing creditors' superior information and bargaining power. The Democratic alternative includes provisions adapted from H.R. 900, sponsored by Representative LaFalce, that would provide key information to consumers about credit card debt, including clear notice about the expiration of low "teaser" rates and the length of time to pay off a debt if only the minimum payment is made. Better information will help consumers avoid high debt burdens.
Finally, the Administration supports changes that would close loopholes in current bankruptcy law, such as those enabling unlimited homestead exemptions and exemptions from repayment requirements for individuals who are able to file for bankruptcy under Chapter 11, that protect some of the wealthiest debtors from having to repay a significant portion of their debt. Bankruptcy reform should not place a greater responsibility for debt repayment on moderate- and low-income debtors than it does on high-income debtors.
The Administration remains ready to work with the House to address these concerns, building on the responsible and balanced reform of the Nadler, Conyers, and Meehan Democratic alternative and the bipartisan approach of the Hyde-Conyers amendment.