My Letter to Judge William H. Brown (Ret.) on the ABI Commission on Consumer Bankruptcy

May 4, 2017

by email

Hon. William H. Brown (Ret.)

The ABI Commission on Consumer Bankruptcy



Statement for Consideration

First Public Meeting, May 6, 2017


Dear Judge Brown,
Please submit this Statement to the ABI Commission on Consumer Bankruptcy at the upcoming meeting on May 6, 2017.   The following are my comments to the ABI Commission “recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure.”  These suggestions are mine and not those of any consumer bankruptcy organization.   I have practiced consumer bankruptcy, primarily from the debtor side, for most of my 37 years of practice of law.  My personal resume is attached hereto as Exhibit “A.” 

I offer no scientific support below for my views, just my observations after personally filing or overseeing the filing of about 1,200 consumer cases over the past 30 years or so.

The below suggestions are primarily procedural in nature and do not include the big questions such as whether the debtor should be able to modify his home loan, and the ridiculous notion of paying the auto loan in full no matter what the auto is worth.

A.   Means Test

The means test set forth in section 707(b) should be scrapped entirely.

  1. The means test does not accomplish anything.  While it purports to determine when a chapter 7 is an abuse, the only cases resulting in dismissal as an abuse under section 707(b) are cases that would have resulted in dismissal under pre-BAPCPA law anyway.  But it adds a lot of work to preparing the schedules and giving the proper advice to the prospective debtor.
  2. The means test form is impossible to complete accurately without a sophisticated computer forms system.   This prevents people from filing their own chapter 7 case and send many people to so-called “paid preparers” who have the computer programs.

B.   Credit Counseling

The requirement that an individual receive credit counseling before filing any petition should be scrapped.  Virtually 100% of the time we file any individual chapter anything, the counseling is completed within hours or even minutes before the petition is filed.

C.   Attorney’s Fees in Chapter 7

Attorneys should be allowed to collect attorney’s fees after the chapter 7 case is filed.  Many attorneys would take a smaller down payment if they could collect the remainder of the fees later.  This would reduce the number of chapter 13s filed since many chapter 13 cases are “fee only” cases, that is, the only creditor paid postpetition is the attorney.   This would also reduce the number of pro per chapter 7s because people would be more likely to find an attorney they could afford.

D.   Eligibility Limits in Chapter 13

I have personally filed about 150 individual chapter 11 petitions since the beginning of 2012.  My office has been successful in getting a plan confirmed in about half of the cases that are not still pending.  I estimate that half of those petitions would have been filed as a chapter 13 except that the client was over the liability limits for eligibility for chapter 13 and thus filed a chapter 11.  The costs in terms of attorney’s fees for individual chapter 11s is several times more than chapter 13.

E.   Treatment of Student Loans in Chapter 13

Student loans are unsecured debts and are nearly always non-dischargeable.  Yet the loan is not a priority and thus may receive only a pro-rata share of the plan payment dedicated to unsecured creditors.  The result is that only a portion of the debt is paid under the plan and when the plan is completed, three to five years later, the debtor owes more to the lender than he owed when he filed the case.  This is intolerable.

F.   Student Loans – Modify the Brunner Test

The third factor of the so-called Brunner test is that the debtor establish, when trying to show that repayment of the loan will result in substantial hardship to her or her family, that she tried in good faith to repay the loan.  The debtor’s efforts to repay the loan has nothing to do with whether repayment is a substantial hardship.  The Brunner test is out-dated.

Ideally student loans should be dischargeable after a certain number of years, perhaps ten.  If the debtor has no assets and his case is not an “abuse,” the discharge should include student loans to give the debtor a meaningful chance at rejoining society without the loan collectors calling every day.   This should be so at least in chapter 13 cases.

G.   Projected Disposable Income in Chapter 13

The means test should not be a measuring stick for determining whether or not a chapter 13 debtor is paying their “net disposable income” into the plan, or as I tell my prospective clients, at least as much as they can afford.”  It is ridiculous to think that the means test, especially since it begins with the backwards looking “current monthly income.”   It is my perception that the requirement of using the means test to determine “projected disposable income” is widely ignored.

H.   Employment of Special Counsel in Chapter 13

The courts seem to be split about whether special counsel in a chapter 13 case must be “employed” by the chapter 13 estate and/or debtor.  That should be clarified.

I.     The Automatic Stay in Subsequent Individual Cases

Some judges still take the position that the automatic stay dies 30 days after a second petition is filed within one year – but only as to the estate.  I personally agree that that is what the statute says and is the proper reading but that should be clarified.  Also, the debtor should be given a little more leeway in asking the court to extend the stay.  Our courts are pretty casual about extending the stay but only if there is a hearing within the first 30 days and never after.

J.    Converting Cases in Bad Faith

I am among the believers that the right to convert a case from one chapter to another is unconditional except as the specific conditions set forth in the code, i.e,  the case hasn’t already been converted, the debtor qualifies for the next chapter etc.  Marrama has caused considerable confusion about the right to convert if the debtor has engaged in “bad faith.”  (Those words should be stricken from the code and every published case on everything – or Congress should give us a definition.)

K.    Exemptions

Clarify who has the burden of proof when objecting to an exemption, the debtor or the objecting party.  Clarify whether bad faith (or equitable estoppel) can be a basis for denying the debtor’s exemption claim.

L.     Using Collateral Estoppel to Prove Non-Dischargeability in the Subsequent Bankruptcy Case

I have been involved in three or four of these issues in the past year.   The debtor and creditor fight long and hard in state court and get a lengthy state court ruling.  The debtor then files a petition.  The state court judgment never seems to say exactly what the bankruptcy court requires to establish that the judgment fits into section 523(a).  There should be a totality of the circumstances test or at least some clarity.  It is not uncommon that the judgment says at great length that the debtor lied and cheated and stealed, willfully, intentionally, fraudulently etc etc.  The bankruptcy judges are requiring (based on court of appeals decisions) that the judgment mimic the words of the bankruptcy code including pegging the amount of damages to the specific conduct that the bankruptcy code says is non-dischargeable.  Creditors with these types of judgments are stunned to find out that they must file something with the bankruptcy court much less possibly re-litigate it in bankruptcy court.

As I have said Judge Brown, I would love to be involved in this commission.  It is a great idea.  Let me know.

Very truly yours,

/s/ M. Jonathan Hayes


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