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Proposed Amendments to Bankruptcy Rules

Aid in Case Administration, Enhance Quality of Information


 

By Lawrence A. Friedman, Director

Executive Office for United States Trustees



 

Best Practices for Improved Bankruptcy Administration

In my years practicing bankruptcy law, I have noted a variety of "best practices" that could improve bankruptcy administration by fostering the provision of more accurate information and making bankruptcy proceedings more transparent. On behalf of the bankruptcy community, I have worked with U.S. Trustee Program personnel, private trustees, bankruptcy judges, and practitioners to identify those practices that are most effective in improving bankruptcy administration and curbing fraud and abuse.

Some of these practices can be instituted through amendments to the Federal Rules of Bankruptcy Procedure and the Official Forms. For example, bankruptcy trustees often-but not always-ask debtors to provide supporting documents regarding their reported assets, liabilities, income, and expenses. In a small number of districts, debtors are already required to produce these documents by local rule. Making this a nationwide requirement would foster good bankruptcy practice and improve case administration in all districts.

Similarly, Schedule I currently requires disclosure of the non-filing spouse's income only in Chapters 12 and 13, but not in Chapter 7. There is no justification for ignoring the impact of a non-filing spouse's income on a Chapter 7 debtor's financial situation, and the better practice would be to require that disclosure as well.

Last summer, the Program asked the Advisory Committee on Bankruptcy Rules of the United States Judicial Conference (the "Rules Committee") to consider proposed amendments to the Bankruptcy Rules and Official Forms that would improve bankruptcy administration and enhance the Program's efforts to curb fraud and abuse in the bankruptcy system. We offered four proposals: to require additional supporting documentation from debtors at the meeting of creditors under 11 U.S.C. 341(a); to require disclosure of the non-filing spouse's income in a Chapter 7 case; to require a statement, signed by the debtor and debtor's counsel, enumerating the services to be provided by counsel; and to permit certain actions under 11 U.S.C. 727 to be brought by motion.

These proposals were presented and discussed at the Rules Committee meeting in September 2003. At that time, our proposal to amend Schedule I to include the income of the non-filing spouse in Chapter 7 was tentatively approved. The proposals were referred for further study to the Consumer Subcommittee of the Rules Committee, which held an informal focus group meeting on January 30, 2004, to review the proposals and discuss them with Program representatives.

The subcommittee made a recommendation to the Rules Committee, which met on March 25-26, 2004, and agreed to publish for comment a modified version of our proposal to require debtors to provide documentation at the Section 341 meeting. At press time, the exact language of this modified version is being determined. The committee did not agree to publish the Program's other two proposals.

The committee's decision is subject to further approval by the Standing Committee, which next meets in June. We anticipate it will be approved and published for comment in August, followed by a six-month comment period and further Rules Committee deliberations. If everything proceeds on course, the rule change could be effective in December 2006.

Additional Documentation from Debtors

With this procedural background in mind, let me summarize the purpose and impact of the two proposals approved by the Rules Committee.

In our most significant proposal, we seek to facilitate the performance of duties by debtors and trustees by requiring production of certain documents at the Section 341 meeting. Under all chapters of the Bankruptcy Code, the trustee has a statutory duty to investigate the financial affairs of the debtor. Every debtor has a corresponding statutory duty, under 11 U.S.C. 521(4), to "surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate[.]"

Currently, there is no national rule to implement these obligations. While the absence of a rule does not foreclose the trustee from asking for information or lessen the debtor's duty to be forthcoming, it does affect the process insofar as it places the burden on the trustee to seek out the information. If the trustee requests no information, the debtor arguably has no obligation to be forthcoming, and the trustee's "investigation" consists only of a review of the debtor's petition, schedules, statements, and testimony at the Section 341 meeting.

The better practice, and the one used by most experienced trustees to find assets, confirm valuations, or unravel financial dealings, is to require debtors to produce certain documents to confirm what they have claimed in the petition, schedules, and statements. Correspondingly, the better practice for bankruptcy attorneys and their clients is to assemble documents before filing to ensure, among other things, that accurate information is provided to the bankruptcy court.

Our proposal would amend the Bankruptcy Rules to require every debtor to produce certain documents that have been reported as most useful to trustees and that are required under many local rules, standing orders, or local practice. The proposal requires only core documents that are necessary to determine if assets exist or if the debtor is entitled to a discharge. The proposal grants discretion to the U.S. Trustee or case trustee to waive the requirement. Finally, the proposal does not require the debtor to go to any third party to obtain documents. The debtor need only produce those documents in the debtor's possession.

Information on Spouse's Income

The other proposal accepted by the Rules Committee would require disclosure of the non-filing spouse's income on Schedule I in Chapter 7 cases. The income of a non-filing spouse is relevant to a Section 707(b) analysis and has been for some time. See Matter of Strong, 84 B.R. 541, 543 (Bankr. N.D. Ind. 1988). Nonetheless, Schedule I currently requires its disclosure only in Chapters 12 and 13. This places the burden upon the U.S. Trustee to elicit information on the non-filing spouse's income either before or at the Section 341 meeting.

The simple change made by the proposal will eliminate the need for the U.S. Trustee to make an inquiry at every Section 341 meeting involving a debtor with a non-filing spouse. It will also complement Schedule J, which requires the debtor to state the expenses of the household.

Conclusion

We are optimistic that these Bankruptcy Rule amendments will be approved and will enhance the provision of accurate information, facilitate processing, and help prevent abuse of the bankruptcy system. Too often, people accept the way things are as the way they have to be. Every one of us has the obligation to take an interest in advocating for changes that will improve the bankruptcy system nationwide. We can all contemplate further "best practices" that may improve bankruptcy administration, whether by future Bankruptcy Rule amendments or by other means.

 

Financial Education Works

In September, I had the great pleasure to appear with the Honorable John C. Ninfo II, Chief Bankruptcy Judge for the Western District of New York, before an energetic and high-spirited audience of 500 students at West Bloomfield High School in West Bloomfield, MI. Judge Ninfo gave a captivating presentation based on the Credit Abuse Resistance Program he has developed, for use by volunteers in the bankruptcy community, to teach students the basics of personal money management.

Also attending the presentation were the Honorable Steven Rhodes, Chief Bankruptcy Judge for the Eastern District of Michigan, and Marion "Joe" Mack, Jr., the Assistant U.S. Trustee in our Detroit office. We received invaluable assistance and support from the local school district officials and high school administrators, who recognized the import of this topic and invited us to bring this important message to the students.

The high school students in West Bloomfield may have arrived in the auditorium expecting a dry recitation of budgeting basics, but Judge Ninfo held them in rapt attention with his riveting anecdotes, drawn from years on the bankruptcy bench, of the dire consequences of financial illiteracy and mismanagement of money. Judge Ninfo's message to the students included the following key points: (1) Basic financial education can help consumers protect their future by enabling them to avoid stressful debt and possible bankruptcy; and (2) Students in particular need to understand that new technologies, which reduce our use of cash and increase our use of plastic and other convenient means of purchasing, require new skills in personal restraint and financial planning.

Become Involved!

Since I became EOUST Director in March 2002 I have appeared and spoken at more events than I can remember, but I can honestly state that the West Bloomfield High School outreach event was one of the highlights. To have the chance, however brief, to affect young lives and guide listeners toward financial productivity and prudence was truly gratifying.

I urge you to pursue-or create-financial education outreach opportunities in your own community. Many resources are available to you, including the materials from Judge Ninfo's CARE Program (www.careprogram.us), the curriculum and materials from the Trustees' Education Network (www.nactt.org), and the U.S. Trustee Program's informational brochure posted in the "Outreach" section of the U.S. Trustee Program's website (www.usdoj.gov/ust).

Financial Literacy and Education Commission Update

The Financial Literacy Education Commission is another resource for financial education information. Created in December 2003 by the Fair and Accurate Credit Transactions (FACT), the Commission held its third meeting on September 22. At this meeting, the Commission announced that a national website and toll-free hotline for financial literacy information will be launched on October 12. Visitors to the website and callers to the hotline will be offered a free "tool-kit" from the National Citizen Information Center, which will include financial management brochures from several agencies.

The Commission also announced that it is seeking public comments relating to its mandate to develop a national strategy for financial literacy. This request for comments is published in the Federal Register at 69 Fed. Reg. 52538 (Aug. 26, 2004). The deadline for comments is October 31. Specifically, the Commission seeks comments on these three questions: "(1) What are the three most important issues that the national strategy should address, and why? (2) What existing resources may be used to address those issues, and how could they be employed? (3) What are the best ways to improve financial literacy and financial education in the United States?" I'm confident that, as bankruptcy practitioners, we have well-grounded and valuable opinions on these issues.

The Commission's next meeting is January 13, 2004. I encourage you to keep abreast of the Commission's activities, including the development of the national strategy to promote financial literacy education, through the Treasury Department's website at www.treasury.gov/financialeducation.

BANKRUPTCY BY THE NUMBERS

ED FLYNN Executive Office for United States Trustees (1) Edward.Flynn@usdoj.gov

GORDON BERMANT Burke, Virginia Gordon.Bermant@verizon.net

SUZANNE HAZARD Executive Office for United States Trustees Suzanne.Hazard@usdoj.gov

CHAPTER 7 ASSET CASES: Part II:

This is article continues the review of chapter 7 asset cases that we began in the December/January, 2003 issue. (2) In the earlier article we reported that about 4% of all chapter 7 cases included non-exempt assets which, for the 12 months ending June 30, 2002, resulted in $825 million being returned to pre-petition creditors. Further, we showed that a very large proportion of these funds are collected from a very small proportion of the asset cases. In fact, over 86% of all disbursements arose from only 10% of the cases. In this article we examine more closely the large proportion of small dollar asset cases. We define these "small asset cases" to be those with less than $10,000 in collections and distributions.
 

ADMINISTRATION OF SMALL ASSET CASES: The number of small asset cases that are administered is growing. As the following chart illustrates, the number of larger asset cases closed each year has remained fairly constant since the mid 1990s, while the volume of smaller asset cases closed has nearly doubled. In 2002 small asset cases were nearly three-quarters of all asset cases closed.



 


YEAR
TOTAL ASSET CASES CLOSED LARGE ASSET

($10K OR MORE)

SMALL ASSET (UNDER $10,000) PERCENT SMALL ASSET CASES
1994 29,157 10,006 19,151 65.7%
1995 23,417 8,559 14,858 63.4%
1996 24,617 9,097 15,520 63.0%
1997 25,534 8,657 16,877 66.1%
1998 30,746 9,631 21,115 68.7%
1999 33,884 10,293 23,591 69.6%
2000 38,433 10,962 27,471 71.5%
2001 36,326 10,357 25,969 71.5%
2002 39,368 10,320 29,048 73.8%

 

MONEY IN SMALL ASSET CASES: The total amount of money handled in the small asset cases was just under $100 million in 2002. This compares with the over $1.1 billion that was handled in the larger asset cases, and the over $4 billion that was disbursed in chapter 13 cases during the year. The following table compares the small asset cases with the larger ($10,000 and above) asset cases


 

ASSET CHAPTER 7 CASES CLOSED DURING CALENDAR YEAR 2002
  SMALL ASSET CASES (UNDER $10,000) LARGE ASSET CASES ($10,000 OR MORE)
TOTAL CASES CLOSED 29,048 10,320
TOTAL DISBURSED $99,397,506 $1,165,865,159
TRUSTEE FEES $21,861,969 $59,838,299
ATTORNEY FEES & EXPENSES TO TRUSTEE OR FIRM $3,939,062 $40,759,293
OUTSIDE ATTORNEY FEES $3,075,070 $103,171,646
OUTSIDE PROFESSIONAL EXPENSES $1,629,005 $47,811,796
ADMINISTRATIVE EXPENSES $4,492,136 $120,879,947
PRIOR CHAPTER COSTS $288,361 $41,368,179
PAYMENTS TO SECURED CREDITORS $1,066,059 $324,976,358
PAYMENTS TO PRIORITY CREDITORS $4,419,609 $61,302,006
PAYMENTS TO GENERAL UNSECURED CREDITORS $54,384,778 $278,449,120
OTHER PAYMENTS $4,241,457 $87,308,515

 

The majority of all money collected is paid to general unsecured creditors. In 2002 nearly 55% of the money disbursed in small asset cases was paid to general unsecured creditors, compared to less than 24% of funds in the larger asset cases. Ninety percent of the small asset cases included at least some payments to general unsecured creditors.

Trustee fees are proportionally high in the small asset cases under the statutory scheme. Section 326(a) of the Code allows a trustee fee of up to 25% of the first $5,000 distributed, and 10% for distributions between $5,000 and $50,000. Thus, in a case with $3,000 in distributions a trustee may be awarded up to $750, and in a case with $10,000 in distributions the maximum fee is $1,750. The court allowed the maximum fee in approximately 92% of the small asset cases closed during 2002.

Only about seven percent of total payments in the small asset cases were for attorney fees. In fact, more than three quarters of the cases had no post-petition attorney fees at all. In the cases where attorney fees were reported, they amounted to an average of 22.2% of total receipts. In about 70% of the cases with attorney fees, the attorney was actually the case trustee or his/her firm rather than outside counsel. In the larger asset cases, attorney fees were reported in 73.4% of the cases closed, and these payments accounted for 12.2% of total payments.

What is being liquidated in these cases? Right now the anecdotal data is that the assets are often tax refunds and non-exempt equity in autos. The United States Trustee Program, the chapter 7 trustees, and the trustees' software providers have implemented a new reporting system that will provide an answer to this question in the near future.

Using the new Form 4 data collection tool described in the prior article, we can begin to delve further into the analysis of the small asset cases. Chapter 7 trustees provided Form 4 data for 26,828 of the small asset cases closed in 2002, and 92% of these cases distributed something to the unsecured creditors. These 24,350 cases generated $82 million in funds available for distribution, of which $50.5 million (62%) went to general unsecured creditors, an average of almost $2,100 per case. The average amount of allowed unsecured claims in these cases $30,300, meaning that these creditors, on average, recovered 6.8% as a result of the chapter 7 trustee's efforts.

STATE-BY-STATE VARIATION: In our prior article we noted that there was a wide variation in the percentage of asset cases by state. Closer examination of the data shows that most of this variation is due to the number of small asset cases closed in each state. In some states, small cases are routinely administered, while in others they are almost never administered. For example, a chapter 7 case filed in Louisiana is nearly 50 times more likely to be closed as a small asset case than is a chapter 7 case filed in Mississippi. We surmise that such a dramatic difference in outcomes is not fully attributable to state exemptions and different debtor circumstances in the two states. The following map shows the percentage of chapter 7 cases closed as asset cases in each state. (3)

 

 



Five states accounted for nearly one-half of the small asset cases closed (Florida- 4,365, Ohio-3,305, Arizona-2,167, Nevada-1,803, and Louisiana-1,637). These same five states accounted for just under 20% of the larger asset cases closed (2,029 of 10,320), and less than 16% of all chapter 7 case filings. At the other extreme were six states that each had less than 30 small asset cases closed during the year (Delaware-5, New Mexico-12, New Hampshire-19, Rhode Island-26, Hawaii-28, and Mississippi-29).

 

INTRASTATE VARIATION: It is plausible to believe that differences in state exemption laws may account for some of the variability in the administration of small chapter 7 cases. On the other hand, there is such wide variation within many states that exemption law differences can not possibly explain all of the variation. For example, the proportion of small asset cases in the Eastern District of California is more than 10 times as high as in the Central and Southern Districts of California. In general, the proportion of small asset cases seems to be higher in the less urban portions of a given state. Here are a few examples that show substantial intrastate variation based on cases closed during 2002.

PERCENT CLOSED AS SMALL ASSET CASES

CALIFORNIA:

Eastern District 2.24%

Northern District .87%

Southern District .13%

Central District .09%

FLORIDA:

Northern District 15.7%

Middle District 9.3%

Southern District 3.1%

INDIANA:

Northern District 4.4%

Southern District 1.2%

MISSOURI:

Western District 5.4%

Eastern District 2.6%

MICHIGAN:

Western District 3.1%

Eastern District 1.0%

DIFFERENCES BY TRUSTEE: There are about 1,220 active panel trustees serving nationwide. For the year this works out to about 24 small asset cases closed per trustee. However, our records show that 12 trustees closed more than 200 small asset cases during the year- accounting for more than 10% of the national total. Additionally, 21 other high volume trustees closed at least 125 small asset cases during the year. At virtually every location, one or two trustees closed far more small asset cases than other trustees serving at the same location with similar case draws.CONCLUSION: Most chapter 7 asset cases are involve relatively small amounts of money. A substantial proportion of the money in these small asset cases is paid to general unsecured creditors - a far higher percentage than in the larger chapter 7 asset cases or in chapter 13 cases. Whether or not a chapter 7 case results in collection and payment of funds by the trustee is often a function of where the case is filed, and which trustee from the panel is assigned to the case.


End Notes:

1. All views expressed in this article are those of the authors, and do not necessarily represent the views of the Executive Office for United States Trustees or the Department of Justice.

2. Flynn, Ed, and Bermant, Gordon, and Hazard, Suzanne, "Chapter 7 Asset Cases" 21 Amer. Bnkry. Inst. J. (December/January 2003).

3. Most small asset cases are between one and three years old at the time of closing. To estimate the percentage for each state we divided the number of small asset cases closed in 2002 by average filings in the state during 2000 and 2001.

 

 

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