Consumer Bankruptcy Reform in the 109th Congress: Background and Issues

Consumer Bankruptcy Reform in the 109th Congress: Background and Issues

Order Code RL32741
CRS Report for Congress
Received through the CRS Web
Consumer Bankruptcy Reform
in the 109th Congress:
Background and Issues
Updated April 4, 2005
Robin Jeweler
Legislative Attorney
American Law Division
Congressional Research Service ˜ The Library of Congress

Consumer Bankruptcy Reform in the 109th Congress:
Background and Issues
Summary
2005 marks the eighth year in which consumer bankruptcy reform legislation
is to be considered. Originally introduced in 1998 as part of a large omnibus
bankruptcy reform bill, legislation came close to enactment in both the 106th and
107th Congresses. The legislation appeared to lose some momentum during the 108th
Congress. H.R. 975, 108th Cong., 1st Sess. (2003), was passed by the House early in
2003 but was never taken up by the Senate.
On February 1, Sen. Grassley introduced S. 256, 109th Cong., 1st Sess. (2005),
the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”1 The bill
passed the Senate on March 1, 2005. It was reported favorably by the House
Judiciary Committee on March 16, 2005.
Since its introduction in 1998, the various versions of bankruptcy reform have
incorporated many amendments but have retained core features. Predominant among
them is a complex “means test” for prospective debtors to determine whether they
may file under chapter 7 governing liquidation. Failure to satisfy the means test is
presumptive abuse of chapter 7, and the disqualified debtor either must file for
reorganization under chapter 13 or refrain from filing.
The legislation considered by previous Congresses was broad and addresses
many areas of bankruptcy practice beyond consumer filings. Topics included 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 reviews the historical context which forms the background for
renewed consideration of consumer reform legislation, including a review of the
current law and a survey of selected issues that have been the focus of legislative
debate in the past, such as the scope of the homestead exemption, nondischargeability
for liability incurred by violent activity, and the protection of child support payments.
It will not be updated regularly.
1 151 CONG. REC. S768 (daily ed. Feb. 1, 2005).

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Current Consumer Bankruptcy Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Distinctive Features of the U.S. Bankruptcy Code.
. . . . . . . . . . . . . . . . . . . 3
The Function of Exclusions and Exemptions in Bankruptcy . . . . . . . . . 3
Voluntary vs. Mandatory Reorganization . . . . . . . . . . . . . . . . . . . . . . . 6
Legislative Goals of Consumer Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Legislative Issues Surrounding Consumer Bankruptcy Reform . . . . . . . . . 10

Consumer Bankruptcy Reform in the 109th
Congress: Background and Issues

Introduction
Background. 2005, the First Session of the 109th Congress, marks the eighth
year and the fourth Congress in which consumer bankruptcy reform legislation is to
be considered. Originally introduced in 1998 as part of a large omnibus bankruptcy
reform bill, the legislation came close to enactment in both the 106th and 107th
Congresses. At the conclusion of the 106th Congress, a conference report bill was
passed by both the House and the Senate, but was pocket vetoed by President
Clinton. Late in the 107th Congress, an informal compromise between
representatives of the House and the Senate over the “Schumer Amendment” — a
provision intended to prevent the discharge of liability for willful violation of
protective orders and violent protests against providers of “lawful services,”
including reproductive health services — proved unacceptable to the House.
Consequently, the conference report on H.R. 333, 107th Cong., 1st Sess. (2001), did
not come up for a vote in either chamber. The legislation appeared to lose some
momentum during the 108th Congress. H.R. 975, 108th Cong., 1st Sess. (2003), was
passed by the House early in 2003 but was never taken up by the Senate.
On February 1, Sen. Grassley introduced S. 256, 109th Cong., 1st Sess. (2005),
the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”2 The bill
passed the Senate on March 1, 2005. It was reported favorably by the House
Judiciary Committee on March 16, 2005.
Since its introduction in 1998, the various versions of bankruptcy reform have
incorporated many amendments, but the legislation has retained core features.
Predominant among them is a complex “means test” for prospective debtors to
determine whether they may file under chapter 7 governing liquidation. Failure to
satisfy the means test is presumptive abuse of chapter 7, and the disqualified debtor
either must file for reorganization under chapter 13 or refrain from filing.
The legislation considered by previous Congresses was broad and addressed
many areas of bankruptcy practice beyond consumer filings. Topics included 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 reviews the historical context which forms the background for
renewed consideration of consumer reform legislation, including a review of the
2 151 CONG. REC. S768 (daily ed. Feb. 1, 2005).

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current law and a survey of selected issues that have been the focus of legislative
debate in the past.
Current Consumer Bankruptcy Practice
The current U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq., was enacted in
1978.3 It replaced and repealed in its entirety the pre-existing Bankruptcy Act of
1898.4 In 1970, when Congress perceived the need to modernize the bankruptcy
laws, it created a Commission on the Bankruptcy Laws of the United States to study
and recommend changes in the law. The Commission filed its final report with the
Congress on July 30, 1973.5 In 1994, Congress created another commission, the
National Bankruptcy Review Commission (NBRC), to study and report
recommendations for legislative change. The NBRC issued its report on October 20,
1997.6 In a lengthy report of approximately 1300 pages, the Commission adopted as
many as 172 recommendations dealing with, inter alia, consumer bankruptcy,
business bankruptcy, municipal bankruptcy — as well as bankruptcy jurisdiction,
procedure, and administration. However, in the case of consumer bankruptcy reform,
the Commissioners were generally not in agreement.7
Consumer Filing Options. Consumer debtors usually avail themselves of
one of two operative chapters of the Code. Chapter 7 involves liquidation of the
debtor’s assets and distribution of proceeds. Chapter 13 involves reorganization,
under which a debtor’s debts are restructured and paid over time in accordance with
a set payment plan. Chapter 11 governs business reorganization. Although an
individual may file under chapter 11, its procedures and costs are significantly greater
and more complex.
Chapter 7. Chapter 7 of the Code governs liquidation of the debtor’s estate and
is often referred to as “straight bankruptcy.” Under the supervision of a standing
trustee, the debtor’s assets are liquidated, i.e., reduced to cash, and the proceeds are
distributed to creditors in accordance with the procedures mandated. At the
conclusion, the debtor receives a “discharge,” which operates as a permanent
injunction against any attempt by a creditor to collect discharged debts.

Chapter 13. Chapter 13 has a jurisdictional threshold for filing. It is limited
to an individual (and spouse) with regular income whose aggregate unsecured and
secured debts are less than $307,673 and $922,975 respectively. 11 U.S.C. § 109.
3 The Bankruptcy Reform Act of 1978, P.L. 95-598, 92 Stat. 2549 (November 6, 1978).
4 30 Stat. 544 (July 1, 1898).
5 Report of the Commission on Bankruptcy Laws, H.R. Doc. No. 137, Parts I and II, 93rd
Cong., lst Sess. (1973).
6 “Bankruptcy: The Next Twenty Years,” National Bankruptcy Review Commission Final
Report (Government Printing Office, October 20, 1997).
7 See “Recommendations for Reform of Consumer Bankruptcy Law by Four Dissenting
Commissioners,” id.

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Chapter 13 contemplates a more expedited and streamlined procedure for
individual (i.e., consumer) reorganization than that provided for under chapter 11,
which is designed to accommodate business reorganization.8 In contrast to chapter
11, a chapter 13 reorganization always requires the participation of a standing trustee.
It does not establish creditor committees, nor do creditors vote to accept or reject a
plan of reorganization, although they are given the opportunity to accept certain
provisions and interpose objections. Only the debtor may propose the reorganization
plan, which must be completed within a specified three to five year time frame. A
debtor receives a discharge of indebtedness not upon confirmation, but upon
completion of all payments under the plan.
Plans are generally required to be completed within three years of the first
payment under the reorganization plan, unless the debtor requests and the court
approves a modification to extend it for up to, but no longer than five years. 11
U.S.C. § 1329.
Distinctive Features of the U.S. Bankruptcy Code.
Many features of bankruptcy administration under the Code lead to disparities
in the financial outcome of debtors who undergo reorganization. However, many of
these provisions have their genesis in considered, deliberate policy and political
decisions. We examine several which are relevant to consumer bankruptcy filings.
The Function of Exclusions and Exemptions in Bankruptcy. The
U.S. Bankruptcy Code, by design, is not an equalizer of wealth among all bankruptcy
debtors. Each bankruptcy is highly fact specific; but as a general proposition, a
debtor who enters bankruptcy with more wealth is likely to emerge from bankruptcy
with more assets intact. Any disparity in the outcome among consumer bankruptcy
debtors is, in large part, a function of the bankruptcy system of exclusions and
exemptions.
A legal treatise observes that “[f]ew people would voluntarily take any legal
action which meant the surrender of so much of their possessions as to leave them
destitute and virtually helpless.”9 Hence, when an individual debtor’s assets are
liquidated, the law permits him or her to retain a certain minimum of money and
property necessary to realize a “fresh start.” When a debtor files in bankruptcy, a
bankruptcy “estate” is created. In some cases, the law permits the debtor to exclude
property from the estate altogether; in others, property is included in the estate, but
is exempted from the reach of creditors.
8 Although chapter 11 is clearly designed to facilitate business, i.e., corporate reorganization,
an individual consumer debtor not engaged in business is permitted to file. Toibb v. Radloff,
501 U.S. 157 (1991). The 1994 Bankruptcy Reform Act amendments significantly raised
the permissible debt levels for filing under chapter 13. Hence, many individuals who could
not file under chapter 13 and of necessity filed to reorganize under chapter 11, may now
avail themselves of chapter 13.
9 2 Cowans Bankr. Law and Practice § 8.1 (7th ed. 1998).

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Although it would be within Congress’ authority to establish a uniform set of
bankruptcy exemptions which would be binding upon the states by virtue of the
Supremacy Clause, the Code does not do so.10 Despite recommendations from the
1970 Bankruptcy Commission advising Congress to adopt a uniform system of
national bankruptcy exemptions,11 Congress declined to do so. Congress permits not
just that the debtor make an election between federal and state created exemptions,
but permits the states to deny debtors the use of — or “opt out” from — federal
exemptions.12 There is a significant variance between the states in the generosity of
their exemptions and more than half have enacted laws that deny debtors the use of
federal exemptions.13
When the debtor’s state of domicile has not enacted legislation which precludes
a debtor from electing federal exemptions, the following are available:14
! the debtor’s aggregate interest, not to exceed $18,450, in real or
personal property that the debtor uses as a residence, or in a burial
plot for the debtor or a dependent;
! the debtor’s interest, not to exceed $2,950, in a motor vehicle;
! the debtor’s interest, not to exceed $475, in any one item or $9,850
in aggregate value, in household furnishings, household goods,
wearing apparel, appliances, books, animals, crops, or musical
instruments, that are held for personal or family use of the debtor;
! the debtor’s aggregate interest, not to exceed $1,225, in jewelry held
primarily for the personal use of the debtor;
! the debtor’s aggregate interest in any property, not to exceed $975,
plus up to $9,250 of any unused amount of the exemption for
housing above;
10 The U.S. Constitution expressly delegates to the Congress the power “To establish ...
uniform Laws on the subject of Bankruptcies throughout the United States.” Article I,
section 8, clause 4.
11 Report of the Commission on Bankruptcy Laws, H.R. Doc. No. 137, Part I, 93rd Congress,
lst Session 170-173 (1973).
12 The opt-out program for exemptions was one of many compromises between the Senate,
which advocated retaining exemptions under state law, and the House, which enacted a bill
premised on federal exemptions. See Kenneth N. Klee, Legislative History of the
Bankruptcy Reform Act of 1978, in 1979 Annual Survey of Bankruptcy Law 21 (Callaghan
& Co. 1979).
13 2 Cowans, supra at § 8.2.
14 Pursuant to amendments effected by the 1994 Reform Act, monetary amounts for
exemptions will be adjusted automatically at three-year intervals to reflect the change in the
Consumer Price Index. 11 U.S.C. § 104(b).

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! the debtor’s aggregate interest, not to exceed $1,850, in any
implement, professional books, or tools of the trade of the debtor;
! any unmatured life insurance contract owned by the debtor;
! the debtor’s aggregate interest, not to exceed $9,850, in any accrued
dividend under, or loan value of, any unmatured life insurance
contract under which the insured is the debtor;
! professionally prescribed health aids;
! the debtor’s right to receive social security benefits, unemployment
compensation, public assistance benefits, veterans’ benefits,
disability, illness or unemployment benefits, alimony and support to
the extent reasonably necessary;
! benefits under certain pension, profit sharing, stock bonuses, annuity
or similar plan or contract, to the extent necessary for the support of
the debtor;
! the debtor’s right to receive property traceable to an award under a
crime victim’s reparation law; a payment on account of a wrongful
death of an individual of whom the debtor was a dependent, to the
extent reasonably necessary for the support of the debtor; a personal
injury award not exceeding $18,450 for actual compensation (not
including pain and suffering); and, payment in compensation for loss
of future earnings, to the extent reasonably necessary for support.
In states where federal elections are not permitted, the debtor is limited to his
exemptions under applicable state law and nonbankruptcy federal statutes. The
amount and value of state law exemptions varies enormously. Among the best-
known are those states with homestead exemptions of unlimited monetary value.15
Media attention is frequently given to wealthy debtors who establish pre-bankruptcy
residency in a state with a generous homestead exemption. But what may appear to
be anecdotal illustrations of “abuse” are the result of a deliberate congressional
decision to permit states to limit their residents to state law exemptions, and of the
deliberate statutory policy of various states to permit, for whatever reason, residents
to avail themselves of an unlimited homestead exemption.
Another area which leads to great disparity in the treatment of consumer debtors
is the disposition of pension funds. In some instances, a debtor’s pension funds may
be completely excluded from the bankruptcy estate;16 in others, they may be
15 Homestead exemptions in Florida, Iowa, Kansas, South Dakota, Texas, and the District
of Columbia are of unlimited monetary value.
16 11 U.S.C. § 541(c)(2). See also Patterson v. Shumate, 504 U.S. 753 (1992).

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exemptible under either the Code’s exemptions17 or state law. The net result of the
complex interaction of these laws is that a debtor’s pension assets — often
substantial — may be excluded, or some or all of the pensions funds may be
exempted, from the bankruptcy estate available to satisfy creditor claims. When
assets are excluded from the estate, they are not administered by the bankruptcy
court. When they are exempted, they are beyond creditors’ reach. Thus, the fact that
debtors emerge from bankruptcy with various amounts of assets intact, though often
perceived to be an “abuse” of the law, is often a result of the law’s application.

Voluntary vs. Mandatory Reorganization. Although a debtor may be
forced into chapters 7 or 11 involuntarily by creditors,18 that is rarely the case. The
vast majority of all bankruptcy cases are filed voluntarily by the debtor. Chapter 13
may only be entered voluntarily by the debtor.
Chapter 13 was expressly designed to have built-in incentives to encourage
debtor filing as an alternative to liquidation under chapter 7. Among those features
are the “superdischarge”, i.e., the possibility of paying down and ultimately
discharging some types of debt that may not be discharged under chapter 7, and the
ability to save the debtor’s home by permitting him to cure arrearages in a home
mortgage where defaults may have occurred and foreclosure proceedings
commenced.
Creditors are benefitted by the “best interests of the creditor” confirmation
standard, i.e., the requirement that creditors receive more under the debtor’s proposed
reorganization plan than they would if the debtor were liquidated under chapter 7.
Indeed, creditors generally receive greater repayment when the debtor pledges post-
petition income to debt repayment than is the case under chapter 7 where only pre-
petition assets are dedicated to pre-petition debt satisfaction. That is why creditors
have long sought “mandatory” consumer reorganization.
The “Fresh Start” Policy Implicit in Bankruptcy Law. The question
whether debtors should be compelled to pay creditors from future wages is not a new
one, although it is central to the legislation currently under consideration. The issue
was raised long before the current Code was enacted. Chapter XIII wage earner
reorganization was formally introduced into the Bankruptcy Act of 1898 by 1938
amendments effected by the Chandler Act.19 In 1934, however, the U.S. Supreme
Court, in Local Loan Co. v. Hunt,20 had occasion to consider the question whether
a bankruptcy debtor’s assignment of (future) wages under state law created a lien
that was nondischargeable under the federal bankruptcy law. Creditors argued that
their claim for future wages created a security interest — a statutory lien — that
could not be discharged in bankruptcy. The Court held that an assignment of future
wages did not create a nondischargeable lien in bankruptcy:
17 11 U.S.C. § 522(d)(10)(E).
18 11 U.S.C. § 303.
19 52 Stat. 840 (June 22, 1938).
20 292 U.S. 234 (1934).

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One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest
debtor from the weight of oppressive indebtedness, and permit him to start afresh
free from the obligations and responsibilities consequent upon business
misfortunes.’ ...
When a person assigns future wages, he, in effect, pledges his future
earning power. The power of the individual to earn a living for himself and those
dependent upon him is in the nature of a personal liberty quite as much if not
more than it is a property right. To preserve its free exercise is of the utmost
importance, not only because it is a fundamental private necessity, but because
it is a matter of great public concern. From the viewpoint of the wage-earner
there is little difference between not earning at all and earning wholly for a
creditor. Pauperism may be the necessary result of either. The amount of the
indebtedness, or the proportion of wages assigned, may here be small, but the
principle, once established, will equally apply where both are very great. The
new opportunity in life and the clear field for future effort, which it is the
purpose of the Bankruptcy Act to afford the emancipated debtor, would be of
little value to the wage-earner if he were obliged to face the necessity of devoting
the whole or a considerable portion of his earnings for an indefinite time in the
future to the payment of indebtedness incurred prior to his bankruptcy.
Confining our determination to the case in hand, and leaving prospective liens
upon other forms of acquisitions to be dealt with as they may arise, we reject the
Illinois decisions as to the effect of an assignment of wages earned after
bankruptcy as being destructive of the purpose and spirit of the Bankruptcy Act.21

Both the 1970 and the 1994 Bankruptcy Commissions considered and rejected
the notion of requiring consumer debtors to devote future income to debt satisfaction
as a condition of obtaining relief in bankruptcy.
1973 Report of the Commission on Bankruptcy Laws. The
Commission which helped lay the foundation for the current Code considered
proposals for limiting the bankruptcy relief available to wage earners. The
Commission noted that the frequency of utilization of wage earner reorganization,
chapter XIII under the Bankruptcy Act of 1898, reflected local legal “culture,” that
is, the familiarity of the local bar with and the propensity of attorneys to encourage
debtors to file under chapter XIII.22 In some districts, debtors were advised by
attorneys more knowledgeable in implementing reorganization as to its viability, and
were encouraged by the court and creditors to reorganize; in others, wage earner
reorganization was an unfamiliar, and therefore, nonpreferred procedure.

Nonetheless, the Commission specifically considered and rejected the notion of
requiring wage earner reorganization:
[P]roposals have been made to Congress from time to time that a debtor able to
obtain relief under Chapter XIII should be denied relief in straight bankruptcy,
and the Commission has received communications expressing support for a
change in the Bankruptcy Act to this effect.
21 Id. at 244. Citations omitted.
22 Report of the Commission on Bankruptcy Laws, supra at 157.

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After Congressional hearings in 1967, however, the House Judiciary
Committee determined that it should not recommend the enactment of this
proposed change in the provisions of the Bankruptcy Act applicable to wage
earners. The proposal was opposed by the Judicial Conference of the United
States, the National Bankruptcy Conference, the Association of the Bar of the
City of New York, and spokesmen for labor unions. The measure was supported
by the American Bar Association, the American Bankers Association, the
Chamber of Commerce of the United States, CUNA International, Inc., the
National Federation of Independent Business, and the American Industrial
Bankers Association.
The arguments against the proposal included objections made to the
difficulties of achieving any nationally uniform standard of application by
referees throughout the country, as evidenced by the divergence of their
viewpoints regarding the virtues of Chapter XIII. Another view expressed by
opponents was that fulfillment of a debtor’s commitment made pursuant to a
Chapter XIII plan requires not merely a debtor’s consent but a positive
determination by him and his family to live within the constraints imposed by the
plan during its entire term and a will to persevere with the plan to the end.
Imposition of a Chapter XIII plan on an unwilling debtor, it was said, would be
almost bound to encourage the debtor to change employment and, if necessary,
to move to another area to escape the importuning calls and correspondence of
his creditors. Likewise, those petitioning debtors turned away by the court on the
ground that they failed to show that relief would not be obtainable under Chapter
XIII would be motivated to change jobs and locations to get away from creditors
who would threaten garnishment and other means of collecting debts. In states
where wage garnishment is an unavailable remedy of creditors, the impact of the
proposed legislation would have been minimal. A final argument made in
opposition to the proposed legislation was that business 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 has considered the arguments made for conditioning the
availability of bankruptcy relief, including discharge, on a showing by the debtor
that he cannot obtain adequate relief from his condition of financial distress by
proposing a plan for payment of his debts out of his future earnings. The
Commission has 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.23
Some argue that the Commission’s concerns about national uniform standards
for implementation of reorganization are outdated. However, its concerns with
respect to debtor commitment in a mandatory reorganization, the result of debtor
23 Id. at 158-159. (Footnotes omitted.) Cited with approval by the House Judiciary
Committee in the legislative history of the 1978 Bankruptcy Reform Act. H.R. Rep. 595,
95th Congress, 1st Session 120-121 (1977).

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insolvency absent reorganization, and of a perceived inequity between consumer and
business debtors, remain relevant to many.
1997 Report of the National Bankruptcy Review Commission.
Twenty years of experience with the U.S. Bankruptcy Code did not lead the NBRC
to significantly alter the judgment expressed in the 1973 Commission Report. The
NBRC considered proposals from the credit industry advocating some sort of debtor-
by-debtor scrutiny before permitting debtors to file for chapter 7.24 The NBRC, by
a 5-4 vote, reaffirmed maintenance of the status quo:25
Some witnesses concluded that using a means test to establish Chapter 7
eligibility would fall hardest on families already financially pressed past the
breaking point, with little provable benefit. Others expressed their concern that
with a completion rate of only 32% for voluntary Chapter 13 plans today, forcing
unwilling debtors into Chapter 13 would only burden the system, decreasing both
the overall repayment to creditors and the successful rehabilitation of debtors.
...In a time of increasing strain on judicial resources, questions also have arisen
about the number of judges, clerks, and other staff needed to administer a means
test to hundreds of thousands of debtors annually. 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.
There is no dispute on one point: bankruptcy should be used only by the
needy and not by others. The bankruptcy laws should never invite abuse. When
Congress charged the Commission with its duties, it cautioned that there was no
evidence that the bankruptcy system needed radical reform. It characterized the
system as ‘generally satisfactory,’ and directed the Commission to review,
improve and update the Code ‘in ways which do not disturb the fundamental
tenets and balance of current law.’ The Commission conducted an intensive
review of consumer bankruptcy that resulted in a full set of recommendations,
but the proposals contemplate no change in the basic structure of consumer
bankruptcy. Access to Chapter 7 and to Chapter 13, the central feature of the
consumer bankruptcy system for nearly 60 years, should be preserved.26
In summary, the two Bankruptcy Commissions charged with considering the
prospect of mandatory consumer reorganization cited the following reasons in
support of their rejection of the concept:
! difficulty of compliance by unwilling/unable debtors. Subjecting
those, for whatever reasons, least able to manage finances to an
extremely strict long-term future budget is likely to fail;
24 NBRC Final Report, supra at 89 (“The consumer bankruptcy debates never lacked a
discussion of whether debtors are receiving ‘more relief than they need,’ although the cost
and implementation of a ‘means testing’ system were not developed in specific detail.”).
25 None of the four dissenting commissioners appears to specifically advocate “means
testing” as a consumer bankruptcy reform. They do, however, “disagree most strongly with
the [Commission] Framework proposals that . . .discourage Chapter 13 repayment plans and
encourage Chapter 7 liquidations[.]” Dissent, supra at 3.
26 Id. at 90-91 (footnotes omitted; emphasis in original).

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! current low success rate for voluntary reorganization;
! difficulty of creditor collection where debtors avoid bankruptcy
relief to evade mandatory reorganization;
! no comparable business requirement;
! increased implementation costs.
Congress had also considered and rejected the idea.27
Legislative Goals of Consumer Reform
The high volume of consumer bankruptcy filings during the 1990’s fueled the
argument that the current law is too lenient, i.e., “debtor-friendly.” Proponents of
consumer bankruptcy reform cite many reasons for their support. The legislation is
intended, among other things, to make filing more difficult and thereby thwart
“bankruptcies of convenience”; to revive the social “stigma” of a bankruptcy filing;
to prevent bankruptcy from being utilized as a financial planning tool; to determine
who can pay their indebtedness and to ensure that they do; to lower consumer credit
interest rates; and, to maximize the distribution to both secured and unsecured
creditors. To effect these goals, the proposals implement a “means test” to determine
consumer debtors’ eligibility to file under chapter 7.
Opponents argue that making it more difficult to file will undermine the
rehabilitative purpose of bankruptcy and have a disparate impact on financially less
sophisticated debtors. They believe that there is insufficient evidence of pervasive
abuse to warrant major revisions to bankruptcy law and that consumer filings
continue to be the result of uncontrollable factors such as job loss, catastrophic
medical bills, and/or divorce. Studies from early in the reform legislation’s
consideration attempted to estimate the increase in creditor recovery that would come
about as a result of means testing, but a review of the studies concluded that they
were hypothetically-based and generally inconclusive.28

Legislative Issues Surrounding Consumer Bankruptcy
Reform
The Homestead Exemption. Throughout consideration of bankruptcy
reform, there has been tension between proponents of states rights realized through
27 See, e.g., Oversight Hearing on Personal Bankruptcy Before the House Judiciary
Subcomm. on Monopolies and Commercial Law, 97th Congress, 2d Session (1982);
“Bankruptcy Reform Act of 1978 (Future Earnings), Part 2,” Hearings Before the Senate
Judiciary Subcomm. on Courts, 97th Congress, 1st Session (1981); Hearing on H.R. 1057
and H.R. 5771 Before Subcomm. No. 4 of the House Comm. on the Judiciary, 90th Congress,
1st Session (1967).
28 General Accounting Office, Personal Bankruptcy: Analysis of Four Reports on Chapter
7 Debtors’ Ability to Pay, GAO/GGD99-103 (June 1999).

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the opt out system and those who view the disparities it creates as degrading the
uniformity and equity of a national bankruptcy system.
The breadth of the homestead exemption in a state with an unlimited one was
articulated in Havoco of America v. Hill.29 The Supreme Court of Florida,
responding to a certified question from the Eleventh Circuit Court of Appeals, held
that a debtor who converts nonexempt assets into an exempt homestead with the
specific intent to hinder, delay, or defraud creditors is nevertheless a qualified
beneficiary of the state homestead exemption. The court explained that the State
Constitution recognizes only three exceptions to the exemption: payment of taxes
on the property; contractual obligations for the purchase, improvement or repair of
the property; and, contractual obligations for house, field or other labor performed
on the realty. Nor could Florida’s fraudulent conveyance law expand or limit the
scope of the homestead exemption.
The court was “loathe” to provide constitutional sanction to the debtor’s use of
the exemption to shield his assets from creditors, but viewed the state constitutional
provision as “unqualified:”
These [constitutional] exceptions are unqualified. They create no personal
qualification touching the moral character of the resident nor do they undertake
to exclude the vicious, the criminal, or the immoral from the benefits so
provided. The law provides for punishment of persons convicted of illegal acts,
but this forfeiture of homestead rights guaranteed by our Constitution is not part
of the punishment.30
Conflicting views on an appropriate homestead exemption have been a prime
subject of debate in connection with reform proposals. Although earlier versions of
Senate-passed legislation imposed a firm cap on exemptible home equity, such
provisions have generally been omitted from final versions of the legislation.31 The
preferred solution is to attempt to dissuade potential debtors from venue-shopping
by imposing homestead caps on a resident/debtor who has moved to take advantage
of a generous homestead exemption. Most versions of the bill, however, allow a
debtor to exempt up to one million dollars in pension assets. Pension amendments
attempt to clarify and standardize the current hodgepodge of state and federal laws
covering protectible pension assets. Hence, consumer reform would still permit
debtors potentially to exempt millions of dollars from their bankruptcy estates.
Although this scenario is rare, it is consistent with current law. Critics of the
legislation — many of whom may be critics of the current opt out system — argue
that it would be even more inappropriate in light of means testing. The means test
formula would be implemented to block access to chapter 7 to debtors of average
means and/or to require them to undertake chapter 13 reorganization plans that
require them to live on a budget based on Internal Revenue Service national and local
living standards for three to five years. Imposing strict new standards on asset-poor
29 790 So.2d 1018 (Fla. 2001).
30 Id. at 1022.
31 See, e.g., H.Rept. 107-617, 107th Cong., 2d Sess. (2002), the Conference Report to H.R.
333, 107th Cong., 2d Sess. (2002).

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wage earners while permitting asset-rich ones to continue to shelter wealth in
bankruptcy remained controversial.
Nondischargeability for liability incurred in connection with
violence at reproductive health clinics. On the same day that the Senate
passed its version of reform legislation in the 106th Congress, it adopted an
amendment sponsored by Senator Schumer to prevent the discharge in bankruptcy
of liability incurred as a result of violence at abortion clinics.32 Floor debate at the
adoption of this amendment makes clear that its proponents sought to ensure that
civil liability arising from disruption of and violence against abortion service
providers or consumers could not be discharged in a bankruptcy proceeding.33
Opponents of the provision argued, among other things, that the provision was
unnecessary34 and that its language was overly broad.35
Critics argued that the provision is unnecessary in light of the Freedom of
Access to Clinic Entrances Act (FACE), 18 U.S.C. § 248, the primary federal law
addressing violence at reproductive health clinics. FACE provides both criminal
penalties and civil liability for anyone who intentionally interferes with or injures
someone attempting to access a reproductive health facility or causes damage to the
facility itself. The Code, at 11 U.S.C. § 523(a)(6), prohibits discharge of debts “for
willful and malicious injury by the debtor to another entity or to the property of
another entity[.]” Many believe that FACE and 11 U.S.C. § 523(a)(6) operate
sufficiently in tandem to prevent bankruptcy discharge of liability for abortion clinic
violence. Furthermore, there is scant reported case law sanctioning discharge of this
kind of debt. But every individual’s bankruptcy does not lead to a reported decision.
Senator Schumer gave several examples of individuals who filed in bankruptcy to
avoid payment of judgments for anti-abortion related violence.36
32 146 CONG. REC. S247 (daily ed. Feb. 2, 2000). H.R. 833 (S. 625), 106th Cong., 2d Sess.
(2000), as passed by the Senate, § 328.
33 See, e.g., 146 CONG. REC. S231(“It is wrong to allow court judgments under the Freedom
of Access to Clinic Entrances Act to be discharged under our bankruptcy laws. In fact, 12
individuals who created the Nuremberg Files website filed bankruptcy to avoid their debts
under the law.”) (statement of Sen. Leahy);(“[T]his is an extremely important amendment
to keep a bipartisan law, the FACE law, alive and well. If we don’t pass this amendment,
there will be hundreds and hundreds of instances where people violate the FACE law, and
they will not be held accountable.”)(statement of Sen. Schumer).
34 See 146 CONG. REC. S229(This amendment is unnecessary ... Not only is it poor policy
to segregate certain classes of violence for special status in bankruptcy, but the bankruptcy
code already allows for the nondischargeability of debts for ‘willful and malicious injury
by the debtor.’”)(statement of Sen. Hatch).
35 Id. (statement of Sen. Hatch)(“I urge my colleagues to read the actual text of the
amendment before they vote. If they believe they are voting on an amendment that strictly
covers act of violence at abortion clinics, they are mistaken. Who knows how this
amendment is going to be applied otherwise.”).
36 146 CONG. REC. S226-7 (statement of Sen. Schumer).

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Proponents countered that the language of the expanded nondischargeability
provision was deliberately broader than the above-cited statutes and would
encompass a wider array of federal, state, or local laws designed to protect access to
health care facilities. The activities that could be the source for nondischargeable
liability under the proposed amendment need not have a specific intent requirement
as required by 11 U.S.C. § 523(a)(6). And the existence of the requisite intent need
not be litigated, making it easier for victims who are judgment-creditors to protect
the nondischargeable status of their claim.
During the 107th Congress, language in the Senate bill addressing the issue was
broadened and restyled as “Nondischargeability of Debts Incurred Through
Violations of Laws Relating to the Provision of Lawful Goods and Services.”37 The
version passed by the House did not have a comparable provision. The Schumer
Amendment in the Senate bill provided the basis for a House-Senate compromise.
Extensive negotiations took place under the leadership of Senator Schumer and
Representative Hyde. It was reported in the press that the conference had reached
agreement on the entire bill, but for the Schumer Amendment. Representative Hyde
and Senator Schumer apparently agreed that anti-abortion protesters should not be
able to file for bankruptcy to escape fines and civil penalties for acts or threats of
violence. But they disagreed on the extent to which protesters who file for bankruptcy
should be compelled to pay judgments for non-violent acts of protest. Nevertheless,
a compromise was reached, and the bill was reported out of conference. As in the
Senate bill, reference in the Conference Report was made to “laws relating to the
provision of lawful goods and services.”
Subsequent to the filing of the Conference Report, renewed opposition to the
Schumer Amendment arose. The concerns expressed were those which followed the
provision throughout the 107th Congress — namely, its scope and the extent to which
the language encompasses nonviolent protest. In addition, several unions weighed
in against the measure, saying it would have a chilling effect on labor, civil rights and
environmental demonstrators.
Protection of child support. Throughout the debate over bankruptcy
reform, concern has been expressed about the impact of the proposed changes in
consumer bankruptcy on the ability of debtors as parents to meet and maintain child
and family support obligations.
Previous versions of the legislation make domestic support obligations a top
priority. Yet, some women’s and consumer groups criticized the legislation because
of the adverse impact they believe it would have on debtors’ ability to pay support.
This criticism is not generally directed at the status of support payments within
bankruptcy. To the extent that any creditor gets paid in bankruptcy, child support
creditors are likely recipients. And, child support is nondischargeable. The concern
is directed to competing claims for payment in two situations. First, if or when a
debtor does not file, because he is ineligible for chapter 7 — and won’t undertake or
can’t complete a reorganization plan. Second, when a debtor receives a bankruptcy
discharge, there will be, under the reform legislation, many new classes of
37 S. 420, 107th Cong., 1st Sess. § 329 (2001).

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nondischargeable debt that may compete for payment along with family support
(including money owed by the debtor to government agencies for support). Several
of the new categories of nondischargeable debt are various types of credit card debt.
The legislation’s supporters counter that child support payments are favored
under federal and state law. There are federal and state programs to collect payment
of child support.38 But outside of a bankruptcy court, there is no single forum where
an individual’s debts are assembled and assigned priority of payment. Debt collection
outside of bankruptcy is fact-specific and may depend on many variables, including
an individual’s intent with respect to debt repayment and the creditor’s resources to
pursue debt collection.
Linking bankruptcy treatment of credit card debt to credit lending
practices. Many of the provisions of bankruptcy reform legislation would
significantly enhance the status of credit card lenders in a consumer bankruptcy.
More categories of credit card debt would become nondischargeable and creditors in
general would play a greater role in the bankruptcy. Although it is difficult to
determine the precise relationship between increases in consumer credit and
increased consumer bankruptcy filings,39 many believe that there is a connection
between aggressive credit marketing, debt burdens, and bankruptcy filings.
To address the perceived “linkage” between credit marketing and failure of
credit management, i.e. bankruptcy, many proponents and opponents of reform
insisted upon measures to enhance consumer education about the consequences of
credit card usage. Both the House and Senate versions in the 106th Congress had
provisions requiring studies by the Board of Governors of the Federal Reserve and
amendments to the Truth in Lending Act (TILA), 15 U.S.C. § 1637, requiring
informational disclosures in connection with credit card advertising and billing
statements. Some combination of study and disclosure requirements have been a
fixture in subsequent legislation.
38 See CRS Report 97-408, Child Support Enforcement: New Reforms and Potential Issues,
by Carmen Solomon-Fears.
39 See CRS Report 98-277, Bankruptcy and Credit Card Debt: Is There a Causal
Relationship? by Mark Jickling.