Segment 2 Of 2 Previous Hearing Segment(1)
SPEAKERS CONTENTS INSERTS Tables
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Mr. GEKAS. Thank you, Mr. McKinley. The once-in-a-lifetime that you referred to still takes into consideration the time period after the first one. But can it lapse, and a second one occur?
Mr. MCKINLEY. As far as only being able to file once?
Mr. GEKAS. Yes.
Mr. MCKINLEY. Well——
Mr. GEKAS. You're saying that would be the best of all worlds, to have a once-in-a-lifetime chance at a fresh start.
Mr. MCKINLEY. Right. After that, you would be required to go through the State system of debt collection. A creditor would go through the State system.
Mr. GEKAS. Thank you.
Mr. Feldstein, you heard the testimony of Professor Ausubel as to the income increases of the banking system, et cetera. In your study, does that have anything to do with the causes of bankruptcy?
Mr. FELDSTEIN. Well, when he was mentioning the stock price increases of some of the publicly traded credit card issuers, he left out Advanta Corporation, which, of course, just sold its credit card business because it was doing so poorly. AT&T Universal Card also has just been sold because they didn't want to cope with it anymore.
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In actual fact, although many banks, particularly the larger banks that do multiple lines of business, are in excellent health, the credit card issuers are not nearly as profitable as they have been, and it is due to bankruptcy.
Prof. AUSUBEL. Could I just respond to something?
Mr. GEKAS. You'll have a chance.
Mr. FELDSTEIN. My firm does an annual study on the credit card industry, among other things, and in that we always do a combined income statement on credit card banks from the regulatory reports, the FDIC call and income reports. We can measure the return on average managed assets for a group of credit card banks that represents the majority of the entire credit card industry. We do it every year, and it's been going down fairly dramatically from god-awful rich to normal, is about where it stands.
So credit card profitability right now is about banking industry normal, which is about one percent return on assets, and heading down.
Mr. GEKAS. You refer in your report to some statistics. On page 155 you make a conclusion that needs-based bankruptcy would not by itself fix the entire bankruptcy problem, but it probably would mitigate the problem significantly. Is that correct?
Mr. FELDSTEIN. Yes, we wrote that.
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Mr. GEKAS. And you ascribe two reasons for that: one is that if creditors could get Congress to accept needs-based bankruptcy, there would two beneficial effects on bankruptcy losses. Chapter 7 filings do cost creditors more on average per dollar, therefore, to the extent that the 70–30 ratio would become somewhat less tilted toward chapter 7, the cost of bankruptcy would decline. Or another way, the more debtors that we can get into chapter 13 who are able to pay something, the less loss there would be across the country. Is that correct?
Mr. FELDSTEIN. Yes. There already are, by the way, five States where chapter 13 is predominant. For years, chapter 7 has been predominant nationally, but chapter 13 is predominant right now in five States. So this obviously is possible.
Mr. GEKAS. Right. Professor Ausubel, you were chomping at the bit there. If you want to respond on that, you can do it on my time.
Prof. AUSUBEL. Yes, please. The two hard luck cases that my colleague was referring to, Advanta and AT&T. Advanta, if you look at the same time period that I'm talking about, January 1991 to the present, had a stock run-up of over 1000 percent before its recent setbacks, and as a result, still vastly outperformed the S&P 500. AT&T has just sold its credit card business for several billion dollars.
Mr. GEKAS. The Chair yields back the balance of its time and yields to the gentleman from New York.
Mr. NADLER. Thank you. First of all, Mr. Chairman, I would ask all the witnesses who've produced studies that the authors of these studies make your backup data available to the subcommittee so that we can analyze the studies. Everybody agree to that? Mr. Feldstein, Mr. Lauritano, Mr. McKinley?
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Mr. FELDSTEIN. We've submitted ours.
Mr. NADLER. You've submitted all the backup data?
Mr. FELDSTEIN. We submitted the study.
Mr. NADLER. No, I'm asking about the backup data for the study. I'm saying so we can evaluate the studies.
Mr. LAURITANO. That's right.
Mr. NADLER. These studies say diametrically opposite things, and we're going to have to evaluate them.
Mr. LAURITANO. I think if you read the studies, you'll find that there's plenty of information documenting the results. I don't think that backup data is necessary to evaluate——
Mr. NADLER. Are you embarrassed to let us have the backup data?
Mr. LAURITANO. Absolutely not. Some of that data is proprietary and we don't have the ability to release it. If the people that provided it to us say it's okay, that's one thing. But I don't have the right——
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Mr. NADLER. Would you ask the people if they are hiding things? We are being asked to legislate on the basis of studies which we are now being told we cannot see the backup data on. It seems to me less than reliable, frankly.
Mr. LAURITANO. No one has said that you can't see the data.
Mr. NADLER. So you won't promise it.
Mr. LAURITANO. I'm just saying that I'm not in the position to release that. I can get an answer to that for you.
Mr. NADLER. Okay. Mr. McKinley?
Mr. GEKAS. Do you want us to obtain subpoena powers at a later point in time?
Mr. NADLER. I may ask that, I may ask that.
Mr. Chairman, we've been presented with a number of different studies, some of which have been funded by the credit card industry, some. They present very different views of the problem.
I think it would be best if we made a bipartisan request of our own independent and nonpartisan General Accounting Office to review all these studies and report back to us. Such a bipartisan request was made by our counterparts in the other body, Senators Grassley and Durbin, and I think their request helped illuminate the debate.
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So I am going to ask unanimous consent that the Ernst and Young, WEFA, Ausubel and SMR studies be sent by the Chair and ranking member on behalf of the subcommittee to the Comptroller General for review and assessment.
Mr. GEKAS. I object and do not grant unanimous consent, but not on the basis of the core request that the gentleman has made, only as to the timetable, and that I will be willing to discuss.
Mr. NADLER. Well, I didn't say any timetable in here.
Mr. GEKAS. I know. That's exactly right. So if you're expecting the GAO to report by 1999, then that's a different thing to which I cannot agree. That's why we have to discuss it and I promise I will discuss that.
Mr. CONYERS. Mr. Chairman, please.
Mr. NADLER. I will yield to the gentleman.
Mr. GEKAS. Yes.
Mr. CONYERS. Could I gain the attention of the Chairman. We could agree to this and try to expedite it. We are not trying to interrupt this train we are all on, but the point of the matter is that we should get this sooner or later and sooner is better.
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But I wouldn't want to not get it at all because we don't know when it's going to come back.
Mr. GEKAS. Does the gentleman from Michigan believe the Chair when it says that it will sit with you and others to determine the parameters of that request?
Mr. CONYERS. Completely and totally.
Mr. GEKAS. Then I do not agree to the unanimous consent, and we'll pledge to——
Mr. NADLER. He just said he agrees with you.
Mr. GEKAS. No, no, no. Yes. Does he agree that I would sit down and make an agreement.
Mr. CONYERS. I do agree.
Mr. GEKAS. And he said yes.
Mr. CONYERS. I agree.
Mr. GEKAS. And so I say that will happen, but right now, I do not grant unanimous consent.
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Mr. NADLER. Well, thank you, Mr. Chairman.
Mr. CONYERS. Thank you, Mr. Chairman.
Mr. NADLER. And in reclaiming my time, thank you, Mr. Chairman. Let me ask Professor Ausubel, we have heard repeatedly today, we heard from Mr. Cutler and we heard from a lot of other people this nice free market theory, the statements that the credit card industry is a very competitive business, that it's so competitive and they're losing so much money because of the bankruptcies, that if we pass H.R. 3150, credit card rates or interest rates would go down, saving consumers money. And in fact, credit card rates have come down because of the intense competitiveness of the industry.
You testified that the average credit card rate today is 15.6 percent, the cost of money is 6 percent, and that, of course, credit card interest rates have not come down nearly as much as other rates. And in fact, that the credit card rates seem to be very insensitive to market pressures.
So could you comment on how credit card interest rates have come down or gone up in accordance with the cost of money in the last 15 or 20 years. And second of all, whether there is any evidence at all or any likelihood that if we were to pass H.R. 3150 that interest rates would thereby come down because of less loss because of bankruptcy.
Prof. AUSUBEL. The evidence from the credit card market has been that credit card interest rates have been extremely unresponsive to the cost of funds. This was particularly stark in the 1980's, and this was the subject of an earlier paper of mine that was published in 1991.
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As far as reasons for this, I think the two basic things to look at are that consumers have been relatively unresponsive to credit card interest rates. This is less true today, but still, if you look at the responsiveness to the post-introductory rate, as opposed to the teaser rate, consumers are relatively unresponsive.
The second thing is that banks face an adverse selection problem in issuing credit to customers. Now a couple of other things——
Mr. NADLER. What do you mean by an adverse selection problem?
Prof. AUSUBEL. That customers have private information about their credit quality that's unavailable to banks which tends to modify the competitive process and make it not work so well.
Just a second thing to say that's related to this is that the profitability numbers that I'm indicating are hard and fast, if you see the black and white graph over there on the floor—this is also in my prepared testimony as figure three—what you see is that profits were extraordinarily high from 1983 to 1993.
Now the data since 1993, the direct data, is unavailable. It'll reveal that there are still extranormal profits from credit cards, and if you want to get it, I suggest that you subpoena Visa, which is the organization that generates the numbers.
Mr. NADLER. And the conclusion, and therefore, the answer to my last question is what is the likely impact, if anything, of H.R. 3150 on credit card interest rates? It's been asserted here that if we pass H.R. 3150, because there would be fewer bankruptcies and less loss to credit card companies, consumers would get the benefit of that in lower interest rates. What is the likelihood of that outcome, in your opinion?
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Prof. AUSUBEL. There is very little pass-through. I would anticipate that the banks will get most of the cost savings, not consumers.
Mr. NADLER. Why?
Prof. AUSUBEL. Because the empirical evidence from looking at other cost changes, like cost of funds, is that it is not reflected in any substantial way at all in the prices that are charged to consumers.
Mr. NADLER. Thank you.
Mr. GEKAS. The gentleman from Michigan.
Mr. CONYERS. Thank you, Mr. Chairman. The Cato is having a meeting conference on this same subject next Monday.
Mr. MCKINLEY. Yes, Congressman.
Mr. CONYERS. At what time?
Mr. MCKINLEY. Next Monday at noon, lunch provided, and one of the chairman's staff members will be one of the speakers discussing the bill that we're discussing today.
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Mr. CONYERS. Which chairman?
Mr. MCKINLEY. The chairman of this subcommittee.
Mr. CONYERS. Okay, fine. And there will be no color charts?
Mr. MCKINLEY. No color charts? I'm not a big fan of color charts, so I doubt if I'll bring any.
Mr. CONYERS. It's not that Cato can't spring for color charts if they choose to, it's just that you don't like color charts.
Mr. MCKINLEY. I have no knowledge of Cato's financial capabilities. I don't work there full time. I just do periodic studies for them.
Mr. CONYERS. You're a consultant, part-time?
Mr. MCKINLEY. No, they are more like independent writing projects.
Mr. CONYERS. I see. Are you going to be there?
Mr. MCKINLEY. Yes, I will be one of the speakers at that forum.
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Mr. CONYERS. Okay. Thank you very much for the invitation.
Mr. MCKINLEY. You're welcome.
Mr. CONYERS. Now, we've only talked about one bill. Are you aware that there are at least two bills that are before the committee, Mr. McKinley?
Mr. MCKINLEY. I have some knowledge of the Nadler Bill, yes.
Mr. CONYERS. That's H.R. 3146.
Mr. MCKINLEY. Right, H.R. 3146, the Nadler Bill and H.R. 3150, the Gekas Bill.
Mr. NADLER. Point of personal privilege, Nadler.
Mr. MCKINLEY. I'm sorry, Nadler.
Mr. NADLER. Yes.
Mr. CONYERS. Okay, now I don't want to press anybody's information levels here, but did you look at both bills and come to a conclusion, or how did your processes internally work?
Mr. MCKINLEY. Is that directed——
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Mr. CONYERS. To Mr. McKinley.
Mr. MCKINLEY. I see the Nadler bill, especially the 40 percent provision that limits the ability of collection above a 40 percent unsecured debt-to-income ratio, as pretty blatant government credit allocation. I think we will have a black market in that type of lending, and the only people that it'll make happy are loan sharks.
Mr. CONYERS. That's not good. Let me ask you, were there other aspects of this bill that did not meet your approval? Or can I put it another way, was the rest of the bill okay?
Mr. MCKINLEY. I think the provisions regarding means-testing—although they don't cover as many parties as Chairman Gekas' bill—move in the right direction.
Mr. CONYERS. Yes. So was it a relatively close decision, or was one bill rejected out of hand? I mean what was the procedure?
Mr. MCKINLEY. In a ranking, I would rank the proposal I have in the article in CATO's Regulation magazine first, and then second, the Gekas bill, and then third, the Nadler bill, if you wanted me to rank order the three.
Mr. CONYERS. I'd like that. How did the Gekas bill miss coming up number one in your priorities?
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Mr. MCKINLEY. Well, first of all, I think people who are looking to Chairman Gekas' bill as something that's going to bring down the numbers, so to speak, I think they're going to be pretty unhappy if it passes into law because even the Ernst and Young study said that only about 10 percent of people are going to be impacted by it.
And then, I have some problems with the complexities. I'd like to move toward less complexity in the bankruptcy law. I think there might be some gaming of the system as far as people gaming their income estimates and their expense estimates.
I also have a problem with the 75 percent of median income test. I think it's kind of an elitist notion that people under 75 percent of the median income somehow can't put together a plan, assuming they can come up with $50 a month, and the 20 percent of unsecured claims requirement that are in the other two screens in the Gekas bill.
Mr. CONYERS. So you didn't think they should have much trouble with making those modest quotas—criteria?
Mr. MCKINLEY. I think only about 10 percent of people will make it through all three of those screens, that's according to the Ernst and Young study.
Mr. CONYERS. Well.
Mr. MCKINLEY. And if you knock 10 percent——
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Mr. CONYERS. Isn't that——
Mr. MCKINLEY [continuing]. Sorry.
Mr. CONYERS [continuing]. Isn't that, frankly, as bad as the fault you found with the Nadler bill?
Mr. MCKINLEY. Can you repeat that, please?
Mr. CONYERS. Yes. I mean you described what you didn't like about the Nadler bill, and I accept that. But isn't the problem that you have with the Gekas bill, which made it come in number two, even a more serious fault than the fault you found with Nadler?
Mr. MCKINLEY. I think in my balancing of the three, the fact that more people are caught up in the screens, just rough estimates I would say, about 10 percent of filers now that file chapter 7 would be pushed into chapter 13 under the Gekas bill and probably 4 or 5 percent at the most would fall under that under the Nadler bill.
Mr. CONYERS. Well, that makes the Gekas bill worse than the Nadler bill. That's the point I'm trying to make.
Mr. MCKINLEY. In what sense?
Mr. CONYERS. In the sense that there will be fewer people benefiting from Gekas than will be benefiting from Nadler, even given your criticisms of both of them.
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Mr. MCKINLEY. The Gekas bill would push more people into chapter 13 and require them to get into a debt repayment plan, and that to me is good. I'm not sure what interpretation that you have on that.
Mr. CONYERS. Well, I'm not sure either, sir. Could I get just a little more time? Yes, I'll yield to you.
Oh, I'm sorry, I didn't realize. Could I just get a minute of Mr. Delahunt's time. Mr. Lauritano, what did you find out about the Nadler bill that did not meet your scrutiny, favorably?
Mr. LAURITANO. We specifically did our analysis on a needs-based approach to reform, and did not actually focus on the Nadler bill.
Mr. CONYERS. Yes, you didn't take it into consideration, okay. Mr. Feldstein, how did you treat the Nadler measure?
Mr. FELDSTEIN I'm not familiar with it sufficiently.
Mr. CONYERS. Not familiar with it, okay, all right. Thank you.
Mr. GEKAS. The Chair recognizes the gentleman from Massachusetts.
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Mr. DELAHUNT. Thank you. Mr. Feldstein you made an allusion to unused credit.
Mr. FELDSTEIN Yes.
Mr. DELAHUNT. And I've been sitting here thinking and I'm starting to develop this scenario. Tell me if I'm just way off base, but if we had a significant economic downturn, and the people in that first category whom you referred to, those who don't have health insurance coverage, 44 million Americans and growing, more people getting divorced, you know that catastrophic category. If we had this downturn, is it unreasonable to expect that they—if it came down to crunch-time—would go out and exhibit less restraint to meet the demands that were placed on them and their families, creating a potential financial debacle?
Mr. FELDSTEIN Possibly, yes.
Mr. DELAHUNT. That really makes me nervous.
Mr. FELDSTEIN It should. [Laughter.]
Mr. DELAHUNT. That really makes me nervous. I mean I would hope that other members, and I'm probably not articulating that very well, but, you know, there's a yin and yang here, so to speak, and if we don't have some responsibility in terms of credit, and specifically the credit card industry in this country, I can see where we're planting some seeds of another S & L debacle of the mid-1980's. Or am I just way, way off? Am I just a worry-wart?
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Mr. FELDSTEIN Well, if you're asking me to respond, it would be as follows.
Mr. DELAHUNT. I am.
Mr. FELDSTEIN We don't believe that credit cards are the central cause of bankruptcy filings. The problem, we believe, is that there are many causes, and those people who do get into financial trouble, for whatever reason, have more available credit lines in credit cards, that they——
Mr. DELAHUNT. Than any place else.
Mr. FELDSTEIN That they can then use to forestall, to postpone——
Mr. DELAHUNT. See, because my——
Mr. FELDSTEIN [continuing]. The day of reckoning by the time they show up——
Mr. DELAHUNT. Sure.
Mr. FELDSTEIN [continuing]. In bankruptcy court they can have very large accounts.
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Mr. DELAHUNT. My personal experience is, is it's a hell of a lot more difficult to secure a residential mortgage. I mean there are significant obstacles to overcome. There appears to be a greater sense of responsibility in terms of those lending institutions that make mortgage loans.
Mr. FELDSTEIN Well certainly the underwriting——
Mr. DELAHUNT. Probably as a result of——
Mr. FELDSTEIN [continuing]. Of mortgages is much more complex——
Mr. DELAHUNT. Right.
Mr. FELDSTEIN [continuing]. And time-consuming and there is an income verification——
Mr. DELAHUNT. Right.
Mr. FELDSTEIN [continuing]. And that is a difference. On the other hand, if you want to look at consumer debt, as Professor Ausubel has done, and say, ''Well, debts are rising, therefore bankruptcies are,'' you can't avoid the fact that most of the increase in debt is in mortgage debt, not credit cards.
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Mr. DELAHUNT. Is in mortgage debt?
Mr. FELDSTEIN Oh, yes. The vast amount of——
Mr. DELAHUNT. Right, but that could be precipitated by a variety of other causes.
Mr. FELDSTEIN [continuing]. It costs more to buy a house, housing costs are up—that's why mortgage debt is up—along with higher LTV loans—loan-to-value ratio.
Mr. DELAHUNT. Okay. Have there ever been any studies done of bankruptcy filers in terms of their financial histories? In other words, let's say over a 5-year span, those who go to file bankruptcy, have they been in the lower quintile, the middle quintile, where do they come from in terms of the American economic strata? Mr. Feldstein.
Mr. FELDSTEIN Incomes of bankruptcy filers?
Mr. DELAHUNT. Right.
Mr. FELDSTEIN Okay, first of all, the right way to do that is to go ask them all, and find out what their incomes are. But nobody has done that. [Laughter.] But having admitted that——
Mr. DELAHUNT. Okay.
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Mr. FELDSTEIN [continuing]. Let me fall back on the fact that——
Mr. DELAHUNT. But is that capable of being done? I mean——
Mr. FELDSTEIN [continuing]. If the government would like to finance it, I volunteer to take the money and call them all up. But it's a—that would be a major task and verifying that their incomes really are what they say they are would be a large task——
Mr. DELAHUNT. Okay.
Mr. FELDSTEIN [continuing]. If you wanted to do an awful lot of them. Now, having said that, I would add that we do have bankruptcy filing rates per capita so you can compare all places equally at the county level. When we aggregate counties by median and mean incomes of the households in those counties, using census data for that, and then look at the aggregated bankruptcy filing rates per capita of those places, what we find generally is that the lowest income counties in the United States have the lowest bankruptcy filing rates——
Mr. DELAHUNT. Okay.
Mr. FELDSTEIN [continuing]. By far. The middle income counties have the highest rates, and the higher income counties are in between.
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Mr. DELAHUNT. Thank you. I'd like to just offer into the record, and to support, Mr. Feldstein, your observation about real estate, there is now, I just was given, by one of the Minority staff, a solicitation and it's from Capital Financial Security Corporation, a local mortgage company ''committed to helping people like you to purchase homes, refinance current mortgage loans, consolidate debts, and regardless of how much you owe, to access up to 135 percent of the value of your home.'' Thank you, Mr. Chairman, I'd like to offer this into the record.
[The information follows:]
INSERT OFFSET RING FOLIOS 57 HERE
Mr. GEKAS. Without objection.
Mr. NADLER. Mr. Chairman.
Mr. GEKAS. The gentleman from New York, for the last cry.
Mr. NADLER. Thank you, I ask unanimous consent to ask one question of Mr. Feldstein.
Mr. Feldstein, I was struck by something you said a moment ago in answer to a question by Mr. Delahunt—in you said that it is—that the availability of credit, of unused credit is very high, and that you thought that what was happening is that when people get into trouble for one reason or another, they then started using this available—since they had these lines of credit, they then started over-using them before they filed for bankruptcy. In light of that, or in view of that, what do you think of the provision in H.R. 3146 that seeks to deal with that problem by penalizing lenders who lend to people who already have a very high debt-to-income ratio In other words, by saying don't be an irresponsible lender because you know what you're leading into?
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Mr. FELDSTEIN I haven't read the provision so I can't comment on whether it's good or bad, precisely.
Mr. NADLER. Generally, then.
Mr. FELDSTEIN Generally speaking, I think in order to understand a debt-to-income ratio on a credit card, for example, which is what you've focused a lot of attention on, the problem is nobody has the incomes. I mean the only income—nobody is doing income verification in credit cards except insofar as, you know, on the application they want you to write down what your family income is. Sometimes it says you have to make at least $30,000 to get our credit card, so you just put down $35,000, nobody checks. [Laughter.]
Mr. NADLER. But let's assume they had——
Mr. FELDSTEIN So I don't know how you would verify it.
Mr. NADLER. Let's assume they had the income because people—they ask them for it—and they tell them. Let's assume they're telling the truth. What would you think of the idea generally? Verification aside.
Mr. FELDSTEIN I'd have to think it over, but I could get back to you on that.
Mr. GEKAS. The time of the gentleman has expired.
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Mr. NADLER. Thank very much. Mr. Chairman.
Mr. GEKAS. The gentleman from New York.
Mr. NADLER. Thank you, I ask unanimous consent that all members have seven business days to submit additional questions for the record.
Mr. GEKAS. Without objection.
Mr. NADLER. Thank you, Mr. Chairman.
Mr. GEKAS. The witnesses are dismissed with the gratitude of the subcommittee, and the subcommittee stands adjourned. Thank you.
[Whereupon, at 2:30 p.m., the subcommittee adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
STATEMENT OF THE COMMUNITY ASSOCIATIONS INSTITUTE (CAI)
Mr. Chairman and Members of the Subcommittee, on behalf of the Community Associations Institute (CAI), the only multi-disciplinary alliance representing America's 208,000 condominium associations, cooperatives and homeowner associations, we would like to express our concern relating to 11 U.S.C. Sec. 523(a)(16) and Section 365. Section 523(a)(16) as currently drafted poses several problems for community associations and their 42 million residents. In particular, the current statutory language of the Code permits a debtor, who does not occupy or rent a unit, to avoid his or her obligation to pay post-petition assessments even though the debtor retains ownership of the unit with all attendant privileges. Additionally, the language fails to provide homeowner associations the statutory capability to collect post-petition assessments at all in many areas of the country.
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Moreover, Section 365 often allows post-petition assessments to be discharged in Chapter 13 cases on the basis that they are executory contracts. However, association assessments do not arise out of executory contracts. The obligation of the debtor to pay assessments is a present obligation, as is the duty of the association to use the assessments in maintaining the common property.
ABOUT THE COMMUNITY ASSOCIATIONS INSTITUTE
Unlike many debtor or creditor groups that will testify before you, CAI is a unique organization consisting of a wide variety of consumers and professionals. Established in 1973 to educate and represent America's residential community associations, our membership includes not only individual homeowners, but condominium, cooperative, and homeowners associations, community association managers and management firms, attorneys, engineers, builders/developers, and other providers of professional products and services for community associations.
SECTION 523(a)(16) SHOULD RELATE TO OWNERSHIP, NOT OCCUPANCY
Ownership of a unit in a community association, such as a condominium or cooperative, grants the owner various privileges and responsibilities. In a condominium, each owner owns his or her individual unit, while portions of the property outside the unit are owned commonly by all unit owners. A condominium association manages the common property. In contrast, the owner of a cooperative is entitled to exclusive possession of an apartment by purchasing stock in the cooperative association that retains ownership of the property.
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In both condominiums and cooperatives, every unit owner or apartment resident is a member of the association.(see footnote 11) The association is responsible for the maintenance of the common areas in the association (outside the units for condominiums, the entire property for cooperatives). These maintenance responsibilities include reroofing, repairing the exterior of the building, maintaining common areas inside the building (hallways, stairs, elevators), maintaining utility service, groundskeeping, and maintaining any specialized facilities of the association (swimming pools, tennis courts, laundry facilities, etc.). The association also maintains insurance on the property, so that all owners are protected from uncompensated loss due to property damage.
Mandatory association assessment fees are required to fund the maintenance and management of the condominium or cooperative. The obligation of each owner or resident to pay assessments is specified in the association documents conveyed to the owner upon purchase. If an owner fails to pay assessments, the association retains the authority to seek collection.
Even if a particular owner does not pay assessments, the owner will still obtain benefits from the association. In fact, the association cannot cut off utility services to a particular unit or discontinue maintenance service over common property leading to a particular unit because in most condominiums and cooperatives, the benefits provided by the association are not separately provided to each individual member (the association maintains the common roof, the common hallways, etc.). This inequity harms both the association and the other non-bankrupt residents.
If the association does not obtain payment from all of its residents, it is often unable to fund its maintenance responsibilities and keep insurance premiums on the building current. This situation is often remedied by increasing the community association assessments of other residents.
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The Bankruptcy Reform Act of 1994 inserted Sec. 523 (a)(16) which provided that post-petition condominium and cooperative assessments are not dischargeable in bankruptcy. Nonetheless, this change provided only partial relief for the inequity of debtors continuing to receive the benefits of association services without having to pay for those services. It provided that assessments are nondischargeable to the extent that the debtor either physically occupies or collects rents for the dwelling unit. Many situations fall outside this section. For example, a debtor may vacate the dwelling unit without abandoning title, leaving it unoccupied. The dwelling unit still benefits from the continued maintenance activities of the association, even though the association is not receiving payment. If the debtor returns to recapture control of the dwelling unit (which may occur at any time), the debtor will benefit from the maintenance work that has been undertaken without remitting the assessments that paid for it.
In other situations, the debtor may permit a friend or relative to live in the dwelling unit without paying rent. The resident of the unit enjoys the maintained unit and all of the benefits of the association, including using its amenities, without having to pay for them. Occasionally, a debtor will rent the dwelling unit to several successive renters, each staying for a short period of time. In this situation, it is difficult to determine whether the unit is occupied by a renter or is vacant. In accordance with Section 523(a)(16), the burden is on the association to determine whether or not the unit is rented for remuneration so that the association may collect assessments. Unfortunately, the association does not have access to that information particularly if the debtor has left the area and cannot determine whether it may collect assessments as permitted by Sec. 523(a)(16). The association also may face a contempt action if it undertakes collection activity and the debtor claims that he or she has received no rents.
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To resolve these problems, CAI proposes that Sec. 523(a)(16) be amended to delete subsections (A) and (B), which refer to occupancy requirements.(see footnote 12) CAI also supports the addition of language to ensure that post-petition assessments are not dischargeable as long as the debtor or their Trustee maintains an ownership interest in the unit. Amending the existing bankruptcy Code as suggested would provide more equitable treatment among the association, the debtor, and other unit owners in the association. The association would be permitted to collect assessments to pay for the benefits that it continues to provide to the debtor. The debtor would be paying for services that benefit the debtor's individual unit, whether occupied or vacant. Additionally, if a debtor wishes to abandon or forfeit control and legal rights of the dwelling unit, he or she could do so by taking the legal steps necessary in the particular jurisdiction.
SECTION 523(a)(16) SHOULD BE AMENDED TO INCLUDE HOMEOWNERS ASSOCIATIONS
Section 523(a)(16), as currently written, applies only to assessments collected by condominium or cooperative associations, not those owed to homeowners associations. A homeowners association is a community association in which an individual owns a particular lot of real estate, for which the owner is responsible, while the association owns other portions of real estate as common property.(see footnote 13) Many homeowners associations are organized as subdivisions. Homeowners associations are very similar to condominium and cooperative associations in that they maintain the common property of the association by collecting assessments from individual owners. Nonetheless, in a typical homeowners association, each individual unit owner is responsible for maintaining and insuring each individual lot.
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Homeowners associations face the same problems as condominium and cooperative associations when one of their members files a bankruptcy petition. Specifically, the debtor is still able to enjoy the benefits of association common areas without paying the assessments necessary for their maintenance. Unfortunately, both the homeowners association and other non-bankrupt owners will ultimately bear the cost of the debtor's bankruptcy.
To that end, CAI supports the inclusion of homeowners associations in Sec. 523(a)(16) as modified to relate to ownership and not occupancy. This amendment would ensure that homeowners associations have the same protection afforded condominium and cooperative associations.
SECTION 365 SHOULD BE CLARIFIED TO PROVIDE THAT COMMUNITY ASSOCIATION ASSESSMENTS ARE NOT TREATED AS EXECUTORY CONTRACTS
Finally, Section 365 should be amended to clarify that community association assessments are not to be treated as executory contracts. Executory contracts involve an obligation (performance) which relates to the future. Post-petition assessments are often discharged in Chapter 13 cases on the basis that they are executory contracts. However, association assessments do not arise out of executory contracts. The obligation of the debtor to pay assessments is a present obligation, as is the duty of the association to use the assessments in maintaining the common property. While recurring in nature (e.g. annually, quarterly, monthly), the obligation to pay assessments is generally based on state law of real property and is incurred upon acquisition of the property interest. Both obligations do extend into the future, however, the obligations are enforceable in the present and should not be considered executory contracts.
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Chapter 13 debtors obtain the same benefits from their community associations as do other debtors and community associations should be permitted to collect post-petition assessments in Chapter 13 cases just as they do in Chapter 7 and 11 cases.
CONCLUSION
CAI's members have experienced problems in obtaining the intended relief from Sec. 523(a)(16). In particular, many associations have been unable to collect assessments from a debtor who has vacated the dwelling unit without relinquishing title to the unit, thereby retaining all of the benefits of membership in an association community without bearing its responsibilities. Amending the language of Sec. 523(a)(16) to provide that post-petition association assessments are nondischargeable debts, for as long as the debtor or Trustee maintains an ownership interest in the unit, would prevent associations from bearing the burden of determining when the dwelling unit is occupied or vacant. Importantly, such a change would also protect all other association residents from having to unfairly assume the debts of the bankrupt owner. The burden should be shifted so that the owner filing for bankruptcy is responsible for taking the necessary steps to relinquish ownership and control thereby placing the responsibility for payments on the dwelling unit with another party. It is our strong belief that these proposed amendments would create a more equitable situation for debtors, associations, and non-bankrupt association unit owners.
In addition, homeowners associations should be included in Sec. 523(a)(16), because the benefits to non-paying debtors and the burdens on the associations caused by the nonpaying debtors are the same as those in residential condominium and cooperative associations.
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Lastly, Sec. 365 should be clarified to ensure that community association assessments are not considered dischargeable executory contracts. In this way, community associations would be protected in Chapter 13 bankruptcies.
We applaud you and your colleagues in your ongoing effort to reform the existing bankruptcy system and are delighted that you have given CAI the opportunity to express its concerns.
INSERT OFFSET RING FOLIO 58 HERE
| U.S. Bankruptcy Court, |
| Woodland Hills, CA., March 4, 1998. |
Congressman JOHN CONYERS, JR.,
2426 Rayburn House Office Building,
Washington, DC.
Re: H.R. 2500 and H.R. 3150
DEAR CONGRESSMAN CONYERS: I thought you would find the enclosed to be of interest. Some weeks ago when I met with Congressman Brad Sherman (my congressman) he asked me a series of questions about H.R. 2500, of which he was a co-sponsor. I had only skimmed the Bill, and it became clear to me that I should do a more in-depth analysis and that it would be of interest to him and other members of Congress to have the opinion of a bankruptcy judge concerning the consumer provisions in that Bill. Thereafter, H.R. 3150 was introduced, containing many of the same consumer provisions
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I prepared the enclosed comments on the consumer provisions in both Bills. It was my purpose to analyze how these proposals would actually work if they were law. I found that they will substantially increase the workload of the court, and will have wide-spread effect on the ability of the Chapter 7 Trustee to marshal and liquidate the assets of the estate, and will change the balance of rights between personal property secured creditors and real property secured creditors. I have tried to point these out in my comments and I hope that they are carefully reviewed by interested parties.
If I can be of further assistance or provide further information feel free to contact me.
Very truly yours,
| Geraldine Mund, |
| Chief Judge, Central District of California. |
Opinion on Impact of ''Needs-Based Bankruptcy''
(By Geraldine Mund)
Based on my analysis of the consumer bankruptcy provisions of H.R. 2500 and H.R. 3150 and on my 14 years of experience as a bankruptcy judge in the biggest and one of the busiest bankruptcy courts in the country, the following is my opinion of the impact of needs-based bankruptcy:
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Needs-based bankruptcy, as proposed, will be extremely burdensome on the trustee, the debtor and debtor's counsel, and on the court. It will require a high level of judge involvement in a large percent of the cases filed under chapter 7 and will create many emergency motions within the first weeks of these cases. Chapter 7 cases are being given priority in hearings, which will delay judicial determination in chapter 11 cases and in adversary proceedings.
Because the studies do not include information on debtor's need to repay defaults on secured claims (i.e. the house and the car), the studies do not provide a reliable gauge of what percent of debtors would be required to file chapter 13 instead of chapter 7. Based on my review of a small number of cases selected at random, it appears that most debtors with substantial credit card debt would still qualify for chapter 7 and therefore it is questionable whether chapter 7 filings would decrease as projected by the proponents of needs-based bankruptcy.
Several fairly minor amendments can be made to the bankruptcy code and to the laws which govern consumer credit, which would result in reducing the number of people who file bankruptcy to discharge credit card debt (revolving consumer credit), making the bankruptcy courts less susceptible to abusive filings, and reaching the same result as needs-based bankruptcy without creating the complex system proposed in these bills:
Amend 11 U.S.C. §707(b) to allow chapter 7 trustees to bring a motion to dismiss for substantial abuse [currently this can be brought only by the judge or the United States Trustee].
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Amend 11 U.S.C. §707(b) to define substantial abuse to include a debtor who has the reasonable capacity to repay at least 20% of the debtor's unsecured claims in a chapter 13 case [or if the debtor does not qualify for chapter 13 due to the debt limits, in a chapter 11 case] for three (or five?) years.
Amend 11 U.S.C. §707(b) to create a rebuttable presumption that expenses are unreasonably high if they are in excess of the applicable IRS national standards, local standards and other necessary expense allowance (excluding payments for debts).
Amend 11 U.S.C. §362 to remove from the automatic stay month-to-month residential tenancies or tenancies at will.
Amend 11 U.S.C. §362 to clarify that judges have discretion to grant prospective and in rem relief from the automatic stay if the circumstances warrant.
Amend the consumer credit laws to require that the minimum monthly payment on a consumer revolving credit account must be at least 10% of the outstanding principal balance on the account plus accrued interest and fees.
ATTACHMENT B
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Sample Debtors Summary
The attached charts are summaries of 18 Chapter 7 cases and 6 Chapter 13 cases filed in December 1997 or early January 1998 in the San Fernando Valley Division of the United States Bankruptcy Court for the Central District of California These cases were chosen from the file room at random (the Chapter 7 cases were taken in groups of three). This is not a statistically significant sample of the 1,208 Chapter 7 cases and 297 Chapter 13 cases filed in this division in December 1997.
These cases are presented to show the diversity of debtors income and expenses and the type of financial information that is currently available and how needs-based bankruptcy would work with actual cases. Should H.R. 2500 or H.R. 3150 become law, the current financial schedules are completely insufficient to provide the Trustee and the Court with the information needed to make the determinations envisioned in needs-based bankruptcy.
Under the current law, it is not possible to tell from the schedules whether a Chapter 7 debtor has a mortgage or car arrearage that would be paid through a Chapter 13 plan. For purposes of this summary, that information was obtained from debtors attorney in each case where it appeared that the debtor might be required to file Chapter 13 under the needs-based bankruptcy proposal of H.R. 2500/3150. [Because it is not possible to tell the existence or amount of default on secured debt from the Chapter 7 schedules, studies which attempt to project the amount of repayment and percent of debtors who would file Chapter 13 under needs-based bankruptcy are badly flawed.]
A review of these 24 petitions demonstrates that a few minor amendments to the current bankruptcy law can achieve the same results as needs-based bankruptcy, but without the complex system, the impact on the court and the costs attendant with the needs-based bankruptcy proposal. Those changes are as follows:
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(1) Amend §707(b) so that the Chapter 7 trustee has standing to bring the motion to dismiss for substantial abuse; (2) Amend §707(b) to define substantial abuse to include a debtor who has the reasonable capacity to repay at least 20% of the debtor's unsecured claims in a Chapter 13 case; (3) Remove from the automatic stay residential month-to-month tenancies or tenancies at will (already partially included in H.R. 3150 §163); and (4) Clarify that judges have discretion to grant prospective and/or in rem relief from stay (already partially included in H.R. 2500 §109 and H.R. 3150 §121).
The 18 Chapter 7 cases and 6 Chapter 13 cases group as follows:
Of the 7 Chapter 7 debtors who have credit card debt in excess of one year of average salary (debtors #8, 11, 13, 14, 15, 16, and 17), only 1 would be required to file Chapter 13 under needs-based bankruptcy (debtor #11), with a 24% payout to unsecured creditors over 5 years. Of the 4 Chapter 7 debtors who would not qualify for Chapter 7 under needs-based bankruptcy (debtors #4, 7, 11 and 12), only one of them has credit card debt equal to or greater than one year's income (debtor #11).
Further, of the 4 debtors who would not qualify for Chapter 7 under needs-based bankruptcy, 2 (debtors #7 and 12) would be disqualified under 11 U.S.C. §707(b) if it were clarified to indicate that a case should be dismissed if there would be at least a 20% recover to unsecured creditors under Chapter 13 and if the Chapter 7 trustees were empowered to bring these motions to the court. The other two (debtors #4 and 11) would have too little recovery over 3 years to make this a substantial abuse.
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If the automatic stay did not prevent eviction of residential property for tenants without current leases, one Chapter 7 case and one Chapter 13 case would not have been filed (debtor #12 and #23).
It is interesting to review the 7 debtors who have credit card debt in excess of one year's income. H.R. 2500 and H.R. 3150 put the burden of excessive credit card debt on the debtor. However, it appears that much of the responsibility must fall on the card issuer, as there is no easy explanation how a debtor with an average income of $14,000 could access $73,000 in credit card debt through 9 credit cards or how a debtor with average income of $55,000 per year has 23 credit cards and can charge $89,000 on them. Needs-based bankruptcy will not assist the creditors in these cases to recover under a Chapter 13 plan.
Comments on Individual Debtors
CHAPTER 7 DEBTORS
Debtor #1 Debtor is a divorced electrician, who has been 3 months on this job. The debtor's income has decrease by 36% over the last two years. Debtor has $24,391 in unsecured debt, of which $9,300 is credit card debt (about 50% of one year's average income). This is a pro se filing. Debtor would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #2 The husband is a baker, with one month on this job. The wife is a housewife. Their income has declined by 30% over last year. They have two sons, age 17 and 24. They owe $16,609 in unsecured debt, of which $7,700 is credit card debt (about 20% of one year's average income). This is a pro se filing. Probably filed to save their home. Would qualify for Chapter 7 under needs-based bankruptcy.
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Debtor #3 The debtor is unemployed and single. This is a pro se filing. The financial data is incomplete. Debtor's major debts are back income taxes ($5,100) and medical expenses ($4,600). Of the $9,273 in unsecured debt, $4,531 is credit card debt. Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #4 The husband is an administrator (12 years on the job) and the wife is a part-time teacher (10 years on the job). They have two young children. While their attorney reports that they are current on their home mortgage, they lost a rental house to foreclosure a few months before they filed. They have over $175,000 in unsecured debt, of which $39,000 is from credit cards (which is about 8 months' income). Under needs-based bankruptcy, they would not qualify for Chapter 7, as they could repay 24% under Chapter 13 under a 5-year plan. Under the current 3-year limit, it would be 15% and the court would probably not dismiss under 11 USC §707(b) because of the low payout.
Debtor #5 The husband is a gardener with 9 years on the job. This couple have 9 children and live on a net income of $2,400 per month. Their income is steady. They have practically no unsecured debt ($4,000, none of which is from credit cards). They have a home arrearage of $9,728, which is why they filed bankruptcy. They have no ability to fund a Chapter 13 plan. They may be trying to refinance or sell their house. This is a pro se filing. Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #6 This is a divorced debtor who is a nursing assistant with 5 years on the job. The debtor has a 3-year-old child. The major unsecured debt are medical bills ($14,200) and a car accident ($29,700). He owes $5,700 on credit cards (about 3 months' salary). Would qualify for Chapter 7 under needs-based bankruptcy.
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Debtor #7 Husband is in the aircraft industry for 16 years; wife is in insurance for 10 years. They have 5 children. Their income has been growing each year. They owe back child support. Their credit card debt is $39,000; but they have an annual income of $100,600. They owe $5,000 in back child support. Their total unsecured debt is $45,122. They are not in arrears on their home mortgage. There is no obvious reason why they filed bankruptcy. Under current law, this case could be dismissed under 11 U.S.C. §707(b) as debtors could repay 100% plus interest to unsecured creditors over 3 years.
Debtor #8 Debtor is a single man with 2 toddlers. Debtor works at 1 1/2 jobs and earns a total of $900 per month. These are new jobs. Debtor's salary has dropped by 75% over a two year period. Total unsecured debt is $52,595, of which $13,378 is on a student loan and the balance is credit card debt ($39,000). Credit card debt on 8 credit cards is equal to one year of salary before debtor's salary decline. Debtor is probably trying to save the house. Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #9 Debtor is divorced with a toddler child. Debtor is a self-employed plumber, who had his own business in the past and appears to be starting all over. Debtor's income has declined by 60% over the last two years. It appears that debtor filed to discharge debts of the prior corporation, most of which are listed as a precaution. The total unsecured debt is $126,251 of which $1,000 is from credit cards. Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #10 This debtor is unemployed and the spouse has no income. Almost all of the debt is business debt. There is $65,595 in unsecured debt, none of which is from credit cards. Debtor has a 7-year-old child. Would qualify for Chapter 7 under needs-based bankruptcy.
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Debtor #11 Husband is a debt collector (for 2 years) and wife is a postal carrier (for 17 years). They have one 6-year-old child. They have a home mortgage arrearage. Debtors owe $104,812 in unsecured debt, of which $43,612 is from credit cards. Their credit card debt on 11 credit cards is almost equivalent to one year of salary. But the factor that triggered bankruptcy seems to be a judgment for $60,000. They may be trying to discharge it before it creates a lien on their home. They have an increasing income. Under needs-based bankruptcy, they would not qualify for Chapter 7, as they could repay 24% under Chapter 13 under a 5-year plan. Under the current three year limit, it would be 13% and the court would probably not dismiss under 11 USC §707(b) because of the low payout.
Debtor #12 The husband is disabled and the wife is a housewife. There is no information on income from prior years. They have a 8-year-old child. There is no indication how they got into financial trouble as it appears that they had substantial equity in their condominium. However, they lost this condo to foreclosure and filed to stop eviction. They have $37,555 in unsecured debt, none of which is credit card debt. They seem to have enough income to fund a 100% plan under needs-based bankruptcy or under current 11 USC §707(b). But there is no explanation has to why they lost the condo. This family is not seeking a discharge—this case was filed in bad faith just to get a stay against eviction.
Debtor #13 Husband is a security guard for 8 years; wife is unemployed and previously ran a swap meet store. They have no dependants. Their income has increased slightly over the years and is now $15,864 for the year. They own a condominium and a partial interest in a single family residence. Their monthly expenses regularly exceed their take-home salary. All their unsecured debt is on credit cards ($73,111). This is 5 times their annual salary. Would qualify for Chapter 7 under needs-based bankruptcy.
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Debtor #14 Husband is unemployed and wife is a health care manager on the job for one year. They have a 10-year-old child. Their income has remained steady at about $22,000. Their credit card debt (which is substantially all of their unsecured debt) is $47,300, which is more than twice their annual income. They lost one car to repossession Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #15 Husband is a mail carrier, with 2 months on the job. Wife is unemployed. It appears that they were both unemployed for most of the year as their income dropped from $16,800 total in 1996 to $2,500 total in 1997 (a decline of 86%). They have two children. All of their debt is from 17 credit cards and totals $26,000 (which is well over their annual salary before they were unemployed). Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #16 Debtor is on social security and a navy pension. Debtor is married with no dependants. Income has been steady for the last three years. Debtor owes $26,765 in unsecured debt, all of it on credit cards (9 credit cards). This is equal to the debtor's annual income. It appears that debtor can no longer service the credit card debt and that is why this bankruptcy was filed. Debtor does not own a home. Would qualify for Chapter 7 under needs-based bankruptcy.
Debtor #17 Debtors are self-employed and run a residential care facility in their home. They have done this for 27 years. In 1997 their income dropped by 40%. They owe $95,661 in unsecured debt, $89,472 of which is on credit cards (23 credit cards), which is well over their annual salary before the decline. They owe an unknown amount on a car accident, so it appears that they were not insured. Because they are running a residential care business out of their home, it appears that the national standards do not apply (ie. they are paying $585 per month in utilities and $800 per month for food, which is excessive for two people, but includes their clients). Thus, while it looks like they would not qualify for Chapter 7 under needs-based bankruptcy or the case could be dismissed under 11 USC §707(b), that is probably not the case.
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Debtor #18 Debtor is a grocery clerk, on the job for 8 years. He is married with 4 children. His salary has remained steady at $1,500 per month. He is a pro se filer and co-owns his house. He owes $30,101 in unsecured debt, $8,500 of which is on 5 credit cards. There is no indication as to what triggered this bankruptcy filing. Would qualify for Chapter 7 under needs-based bankruptcy.
CHAPTER 13 DEBTORS
Debtor #19 Husband is a cook, with 8 months on the job; wife is operations assistant with 8 years on the job. They have 2 children. Their income has declined by 22% over the last two years. Husband may have been unemployed for a while. They filed to prevent foreclosure. However, it is possible that the foreclosure already took place as they report $133,978 in unsecured debt ($115,000 related to foreclosure and $1,880 from credit cards). The Chapter 13 plan cures the car and house defaults. There is no payment to unsecured creditors under the plan. Would qualify for Chapter 7 under needs-based bankruptcy. Under proposed Chapter 13 standard, this would be a zero percent plan to unsecured creditors.
Debtor #20 Debtor is a single man with a 13-year-old child. Debtor works as a driver and also gets income from a rental property and from workers compensation. It appears that debtor fell into financial problems because of some job-related injury. The Chapter 13 was filed to cure a home mortgage arrearage. This 5-year plan proposes to pay $296 per month under the plan—all on the home mortgage. There are no unsecured creditors. Under needs-based bankruptcy, debtor has a negative monthly net income. Would qualify for Chapter 7 under needs-based bankruptcy. Under proposed Chapter 13 standard, this would be a zero percent plan to unsecured creditors.
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Debtor #21 Debtor is a married file clerk with 15 years on the job. Debtor makes $12,000 per year and receives another $12,000 from family contributions. Debtor has no credit card debt and only owes $3,420 in total unsecured debt, which is on a repossessed car. Debtor filed to cure the default on debtor's home. There is a 10% payment to unsecured creditors under the plan. Would qualify for Chapter 7 under needs-based bankruptcy. Under proposed Chapter 13 standard, this would be a zero percent plan to unsecured creditors.
Debtor #22 Husband is a driver with 5 years on this job; wife is in sales with one month on the job. This year they had a 10% decline in income. They have three children. They owe $25,066 in total unsecured debt, of which $7,400 is for credit cards. The Chapter 13 plan cures the house defaults. There is no payment to unsecured creditors under the plan. Would qualify for Chapter 7 under needs-based bankruptcy. Under proposed Chapter 13 standard, this would be a zero percent plan to unsecured creditors.
Debtor #23 Debtor is single and unemployed. This is a pro se filing that was done in bad faith merely to stop eviction. Would qualify for Chapter 7 under needs-based bankruptcy. Under proposed Chapter 13 standard, this would be a zero percent plan to unsecured creditors. Total scheduled debt is $2,992 owed to the landlord.
Debtor #24 Husband is a gardener with 24 years on this job. Wife is on disability. They own rental property. Their income has been going up, but they are in default on their home in the amount of $20,000. There is no showing as to how they got into financial difficulty. They owe $7,350 in unsecured debt, of which $1,750 is on credit cards. The Chapter 13 plan cures the house defaults. They would not qualify for Chapter 7 under needs-based bankruptcy. Under the proposed Chapter 13 standard, this would be a 100% plan to unsecured creditors. They propose to pay 10% to unsecured creditors, but this plan will actually be confirmed at 100% as they have sufficient income to handle these payments.
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INSERT OFFSET RING FOLIOS 59 TO 64 HERE
ATTACHMENT C
INSERT OFFSET RING FOLIO 65 HERE
INSERT OFFSET RING FOLIOS 66 TO 77 HERE
ATTACHMENT D
Internal Revenue Manual
Part: 5 Collection Activity
Chapter: 5300 Balance Due Account Procedures
Section: 5320 Collection Information Statements, Financial Analysis and Verification (11–15–85)
SUB-SECTION: 5323 FINANCIAL ANALYSIS (8–29–95)
5323.11 Overview (11–2–95)
(4) The purpose of these procedures is to establish a consistent framework for evaluating a taxpayer's ability to pay.
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5323.42 Allowable Expenses (8–29–95)
(1) Allowable expenses include necessary and conditional expenses.
(a) Necessary expenses, if reasonable in amount, are always allowed. For example, a case would be closed as currently not collectible if there is no disposable income beyond necessary expenses. There are three kinds of necessary expense. These are discussed subsequently in IRM section 5323.43 and in Exhibit 5300–46.
(b) Conditional expenses are allowable if a tax liability can be fully paid within three years through an installment agreement.
(2) A list of typical necessary and conditional expenses appears in Exhibit 5300–46.
5323.43 Necessary Expenses (8–29–95)
5323.431 General (8–29–95)
(1) There is an essential test for necessary expenses. Necessary expenses are those used for taxpayers' and their families':
(a) health and welfare and/or
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(b) production of income.
(3) There are three types of necessary expense:
(a) NATIONAL STANDARDS. Four come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey 1992–93: food, housekeeping supplies, apparel and services, and personal care products and services. One, miscellaneous, has been established by the Service.
(b) Local Standards. Local Standards have been established for housing and transportation. Utilities are included in the housing category.
(c) Other necessary expenses. Unless the three-year rule applies, the Service employee responsible for the case must determine whether the test for necessary expenses is met (health and welfare and/or production of income) and whether the expense is reasonable in amount.
5323.432 Necessary Expenses: NATIONAL STANDARDS (8–29–95)
(1) A number of necessary expenses are categorized as NATIONAL STANDARDS. They are: housekeeping supplies, apparel and services, personal care products and services, food, and miscellaneous.
(a) Except for ''miscellaneous,'' the NATIONAL STANDARDS are derived from Tables 1, 3, 4, and 5 of the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey 1992–93.
1. These expenses are stratified by income level. As income levels increase, the percentage of income provided for these expenses decreases.
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2. These expenses will be updated yearly as the information becomes available through BLS.
3. The miscellaneous expense is a discretionary amount established by the Service. It is $100 for one person and $25 for each additional person in a taxpayer's household.
(b) The NATIONAL STANDARDS appear in Exhibits 5300–48 and 5300–49:
1. The total monthly NATIONAL STANDARDS appear in Exhibit 5300–48. This exhibit provides the total amount allowed a taxpayer, by gross income level and by number of persons in the household.
2. The monthly NATIONAL STANDARDS, by type of expense and by totals, appear in Exhibit 5300–49. Besides providing the total amount allowed, as in Exhibit 5300–48, this exhibit provides a breakdown by individual expense. The exhibit shows the basis for the total amount.
(c) The monthly NATIONAL STANDARDS in Exhibit 5300–49 and their totals in Exhibit 5300–48 are at least as much as those in BLS's Consumer Expenditure Survey. BLS's statistics occasionally contain anomalies in which a higher income level receives slightly less for an expense than a lower income level. Such expenses have been adjusted upward to eliminate the anomalies.
(d) The total monthly NATIONAL STANDARDS also appear in Publication 1854, How to Prepare a Collection Information Statement (Form 433–A), and Form 433–F, Collection Information Statement.
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(2) NATIONAL STANDARDS eliminate the need to require justification or substantiation for a number of recurrent expenses.
(a) We will allow taxpayers the total NATIONAL STANDARDS amount for their income level. Taxpayers making more than the highest income level shown in the NATIONAL STANDARDS will be limited to the maximum amount allowed by the NATIONAL STANDARDS unless they can substantiate and justify a larger amount.
(b) How the amount allowed for NATIONAL STANDARDS is spent is up to taxpayers. For example, they may spend less for clothing and more for entertainment (including cable TV); or more for food and less for clothing. Or they may decide to apply part of the amount to conditional unsecured debts.
(c) That a taxpayer spends more than the total amount allowed by the NATIONAL STANDARDS does not automatically constitute a justification for-the Service to consider the expense to be necessary. A taxpayer who claims more than the total allowed by the NATIONAL STANDARDS must substantiate and justify as necessary each separate expense of the total. For example, a taxpayer may claim much more for food than allowed. Justification would have to be based on special prescribed or required dietary needs.
5323.433 Necessary Expenses: Local Standards (11–2–95)
(1) For some kinds of expenses, the NATIONAL STANDARDS are not feasible: housing and utilities and transportation.
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(3) Local Standards for housing, utilities and transportation have been developed with the assistance of the National Office Research and Analysis (NORA) function and District Office Research and Analysis (DORA) sites. Unlike the NATIONAL STANDARDS, the Local Standards for housing, utilities and transportation serve as a cap. The taxpayer is allowed the local standard or the amount actually paid, whichever is less.
(a) Housing and utilities. The housing and utilities standards appear in Exhibit 5300–50. The standards are derived from census and Bureau of Labor Statistics (BLS) data, and are provided by state down to the county level. One number is given which includes both housing and utilities. Housing includes monthly rent or mortgage payment, property taxes, homeowner's or renter's insurance, parking, necessary maintenance and repair, homeowner dues and condominium fees. Utilities include gas, electricity, water, fuel oil, coal, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning and telephone. The housing and utilities standard will provide the basis for determining whether a taxpayer will be required to pay the Service an amount equal to excessive or not-allowable housing expenses. When deciding whether a taxpayer should be required to pay the Service an amount equal to excessive or not-allowable housing expenses, consider:
1. The increased cost of transportation to work and school which would result from moving to lower-cost housing;
2. The tax consequences which would result from selling a home. Someone moving from an owned home to a rented home would lose the tax advantages of itemizing interest. There would also be the possibility of a capital gain liability; and
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3. The cost of moving to a new residence.
(b) Transportation. The transportation standards appear in Exhibit 5300–51. The transportation standard will provide the basis for determining if the taxpayer will be required to pay the Service an amount equal to excessive or not-allowable transportation expenses.
1. The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area (MSA). Operating costs include insurance, registration fees, normal maintenance, fuel, public transportation, parking and tolls. A conversion chart is provided as part of Exhibit 5300–51 that shows which IRS districts fall under each Census Region, as well as the counties included in each USA. The operating costs are derived from BLS data.
2. Under ownership costs, separate caps are provided for a one person household and, if a second car payment is allowed, a two or more person household. The ownership costs are based on a $17,000 five year loan/lease at 8.5 per cent interest for the first car, and a $10,000 five year loan/lease at 8.5 percent interest for the second car.
3. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment, or no car, only the operating costs portion of the transportation standard is used to come up with the allowable transportation expense.
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4. Factors like the availability of public transportation should be considered if car payments (purchase or lease) will prevent the tax liability being paid in part or in full. Public transportation could be an option if it does not significantly increase commuting time and inconvenience a taxpayer. For example, in some cities, public transportation cuts commuting time and a car is only a personal convenience for a taxpayer, not a necessity.
5323.434 Necessary Expenses: Other (8–29–95)
(1) In addition to those listed under the National and Local Standards, certain other expenses are usually considered to be necessary.
(a) taxes
(b) health care
(c) court-ordered payments
(d) involuntary deductions
(e) accounting and legal fees for representing a taxpayer before the Service, and
(f) secured or legally perfected debts (minimum payments).
(g) accounting and legal fees other than those for representing a taxpayer before the service which meet the necessary expense test of health and welfare and/or production of income.
(2) Depending upon individual circumstances, other expenses may meet the necessary expense test: health and welfare and/or production of income.
(3) A taxpayer may be required to substantiate the amounts and justify these expenses as necessary. Expenses include, but are not limited to:
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(a) child care
(b) dependent care: elderly, invalid, or disabled
(c) secured or legally-perfected debts
(d) life insurance
(e) charitable contributions
(f) education
(g) disability insurance for a self-employed individual
(h) union dues
(i) professional association dues.
(j) accounting and legal fees other than those for representing a taxpayer before the Service which meet the necessary expense test of health and welfare and/or production of income.
(k) optional telephone services (call waiting, caller identification, etc.), or long distance calls, if they meet the necessary expense test of health and welfare and/or production of income.
(4) The last two listed expenses are frequently encountered: charitable contributions and education.
(a) Charitable contributions. These expenses include donations to tax exempt organizations such as civic organizations, religious organizations (tithing and educational), and medical services or associations. To be necessary, charitable contributions have to provide for a taxpayer's or his or her family's health and welfare or be a condition of employment. Otherwise, they are conditional and allowable only if the tax liability, including projected accruals, can be paid within three years.
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(b) Education. To be a necessary expense, a taxpayer must demonstrate that:
1. The education is for a physically or mentally handicapped dependent and must demonstrate that such education is not otherwise provided by public schools; or
2. The education is a condition of employment.
(5) The expenses listed in 5323 43:(1), (2) and (3) do not exhaust the category of necessary expenses. Other expenses may be considered if they meet the necessary expense test: health and welfare and/or the production of income.
5323.435 Necessary Expenses: Other—Unsecured Debts (8–29–95)
5323.44 Conditional Expenses (8–29–9S)
5323.5 One-year Rule for Eliminating Excessive Necessary and Not-Allowable Conditional Expenses (8–29–95)
(1) Taxpayers who cannot fully pay their accounts within three years (see IRM 5323.441) may be given up to one year to modify or eliminate excessive necessary and/or not-allowable conditional expenses.
Exhibit 5300–46 (8–29–95)
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Financial Analysis—Expenses
(Reference: IRM 5323)
NATIONAL STANDARDS
Apparel and services. Includes shoes and clothing, laundry and dry cleaning, and shoe repair.
Food. Includes all meals, home or away.
Housekeeping supplies. Includes postage and stationary; laundry and cleaning supplies; other household products: cleansing and toilet tissue, paper towels and napkins, lawn and garden supplies, and miscellaneous household supplies.
Miscellaneous. A discretionary allowance. The amount is determined by the Internal Revenue Service. It is $100 for one person and $25 for each additional person in a taxpayer's family.
Personal care products and services. Includes hair care products, haircuts and beautician services, oral hygiene products and articles, shaving needs, cosmetics, perfume, bath preparations, deodorants, feminine hygiene products, electric personal care appliances, personal care services, and repair of personal care appliances.
LOCAL STANDARDS
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Housing. Usually, only expenses for the place of residence are considered to be necessary. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues, condominium fees and utilities. Utilities includes gas, electricity, water, fuel oil, coal, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning and telephone.
Transportation. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required vehicle inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure health and welfare are not necessary.
OTHER NECESSARY EXPENSES
Accounting and legal fees for representing a taxpayer before the Service. Fees are necessary only if they are for representation before the Service or they meet the necessary expense test: health and welfare and/or production of income. Other accounting and legal fees are not necessary expenses but are conditional expenses and are allowable if the tax liability can be paid in full, including accruals, within three years.
Charitable contributions. These expenses include donations to tax exempt organizations such as: civic organizations, religious organizations (tithing and educational), and medical services or associations. To be necessary, charitable contributions have to provide for the health and welfare of the taxpayer and his or her family or be a condition of employment.
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Child care. Baby sitting, day care, nursery, and preschool. Expenses are necessary if they meet the necessary expense test: health and welfare and/or production of income. Care should be taken to ensure that only a reasonable amount is allowed. Costs of child care can vary greatly. We should not allow expensive child care if more reasonable alternatives are available.
Court ordered payments. Alimony, child support (including orders made by a state administrative agency), and other court-ordered payments. If the expense is already being deducted directly from a taxpayer's pay, do not include it again as an expense.
Dependent care. For the elderly, invalid, or handicapped. This expense is necessary if there is no recourse except for a taxpayer to pay the expense.
Education. Education is a necessary expense if required for a physically or mentally challenged child and no public education providing similar services is available. It is also a necessary expense if required as a condition of employment; for example, a teacher whose employment is conditioned upon completion of a graduate program.
Health care. Health insurance, medical services, prescription drugs, and medical supplies (including eyeglasses and contact lenses). A guide dog for someone who is visually handicapped would also fall into this category.
Involuntary deductions. Deductions from income include FICA, medicare, and union dues.
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Life insurance. To be a necessary expense, insurance is limited to term policies. Life insurance used as an investment is not a necessary expense. Consider if the payoff of the policy is high compared to the lifestyle of the beneficiaries. Even for term policies, expensive premiums must be justified.
Secured or legally-perfected debts. If the debts meet the necessary expense test of health and welfare and/or production of income, payments will be allowed for these debts. To be allowed, a taxpayer must substantiate that the payments are being made.
Taxes. Current federal (including FICA and Medicare), state, and local tax payments. Back state and local tax payments are necessary and, therefore, allowable depending on the priority of the Federal tax lien and/or Service agreements with state and local taxing agencies.
Unsecured Debts. Minimum payments should be allowed if a taxpayer substantiates and justifies the expense. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.
CONDITIONAL EXPENSES
Accounting and legal fees. Fees are necessary only if they are for representation before the Service or they meet the necessary expense test of health and welfare and/or production of income. Other accounting and legal fees are conditional expenses and are allowable if the tax liability can be paid in full, including projected accruals, within three years.
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Charitable Contributions. These expenses include donations to tax exempt organizations such as civic organizations, religious organizations (tithing and educational), and medical services or associations. Charitable contributions which are not considered to be necessary expenses are conditional expenses and are allowable if the tax liability, including projected accruals, can be paid within three years.
Education. Expenses for private elementary and secondary and public and private college educational are conditional expenses and are allowable if the liability, including projected accruals, can be fully paid within three years.
Housing. Housing other than the principal residence is not a necessary expense. Other housing is a conditional expense allowable only if the tax liability, including projected accruals, can be fully paid within three years. Examples of such housing would include vacation property, owned, rented, leased, or time-shared. Other costs associated with housing are usually conditional: for example, pool service and gardening are optional and could be done by a taxpayer as opposed to the kinds of home maintenance, like roof repair or plumbing, which would qualify as necessary.
Life insurance. Life insurance used as an investment is a conditional expense. A taxpayer should be asked whether it's possible to suspend payments on whole or investment life insurance policies in order to apply the money to the tax liability. If the policy has a cash value, the taxpayer should be asked to obtain it. If the taxpayer will not voluntarily obtain it, enforcement should be considered. Consider if the payoff of the policy is high compared to the lifestyle of the beneficiaries. Expensive premiums should be justified. Whole life/investment insurance will be allowed as a conditional expense if the tax liability, including projected accruals, will be paid in full, including accruals, within three years.
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Retirement—voluntary payments. Payments will be allowed if the liability, including projected accruals, will be paid in full within three years.
Transportation. Transportation not needed for family health and welfare and/or the production of income is not a necessary expense. Other vehicles are a conditional expense allowable if the liability, including projected accruals, will be paid in full within three years. Examples of conditional transportation expenses are a dune buggy or a recreation vehicle.
Secured or Legally Perfected Debts. If the debts do not meet the necessary expense test of health and welfare and/or production of income, payments will be allowed if the tax liability, including projected accruals, will be paid within three years. To be allowed, a taxpayer must substantiate that the payments are being made.
Unsecured Debts. Payments will be allowed if the tax liability, including projected accruals, will be paid within three years. Otherwise, payments will have to come from the total amount allowed under the NATIONAL STANDARDS. Payments on unsecured debts, including credit or charge cards, will not be allowed if omitting them would permit the taxpayer to pay in full within 90 days.
Exhibit 5300–47 (8–29–95)
Questions and Answers to Assist in Financial Analysis
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(Reference: IRM 5323)
Question. It's November when you contact a taxpayer and learn that she has a child in an expensive university. She has already paid the university $25,000 for tuition and housing for the school year, and she intends to pay another $25,000 next July for the following school year. Should this expense be allowed?
Answer. Yes, if we can get a full pay within three years. Otherwise, the taxpayer must be told that the expense will not be included among allowable expenses. Perhaps the amount allowed under the NATIONAL STANDARDS may provide enough to cover the child's enrollment at a local college. The reduced education expense could make it possible for the taxpayer to take advantage of the three-year rule. Tell the taxpayer that we expect an amount equal to the tuition. She is responsible for deciding what expense modifications or eliminations are needed to pay the tax liability.
Question. A taxpayer is contacted who is starting the second year of a three-year lease for a luxury car. Car payments are $1,200 a month. Should the taxpayer be allowed this expense?
Answer. Yes, if we can get a full pay within three years. Otherwise, the taxpayer must justify the expense. There are some occupations which require luxury cars. The type of car can also depend on the location. That is, a real estate agent will probably drive a more expensive car if she is working in a suburb with very expensive homes than in a middle class suburb. If the taxpayer could be expected to drive a more reasonably priced car, then steps should be taken to eliminate the expense. The taxpayer should be asked what the penalty would be to return the car to the dealer. With two years left on the contract, the penalty might be negligible compared to the amount the Internal Revenue Service could receive if the taxpayer leased a -moderately-priced car.
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Question. A taxpayer is living in an apartment which rents for $2,000 per month. Utilities are included in the rent. The lease has another six months to run. The lease agreement includes a termination penalty equal to the lesser of two months rent or the monthly rent due for the balance of the lease. The taxpayer has a $500 security deposit. Local rental data indicates that an acceptable rental apartment in the same general neighborhood can be rented to house the family at a cost of $1,500 per month, utilities included. The taxpayer cannot full pay within three years. Should the taxpayer be required to move to cheaper living quarters as a condition of an installment agreement?
Answer. An installment agreement may be written which allows the taxpayer to live in his present quarters for the balance of the lease but which requires an increase of $500 with the seventh month. In the course of the remaining six months, the taxpayer will pay $12,000 for their current apartment. The less expensive apartment will require $9,000 in rent for the same period. However, the taxpayer will be required to pay $4,000 as an early termination penalty. In addition to the security deposit, the taxpayer will have to produce $2,500 to fulfill the conditions of the lease. Whenever deciding if a housing expense should be partially not allowable, keep in mind the costs involved with moving. Consider the number of years an installment agreement will run. If we are not going to get a full pay within the collection statute, an agreement may run seven or eight years or longer depending on the statute expiration date. Over a long period of time, it may be worth while requiring the excessive amount going to the housing expense.
Question. A taxpayer is a commissioned sales person living in a home with a $3,000 monthly mortgage. The property was bought in 1989 at the peak of the local real estate market and has lost about 25% of its value since then due to local market declines. The present value is about equal to the mortgage balance. A single family rental home large enough to house the family is available in a middle class neighborhood convenient to work and schools for $1,600 per month. Utilities run about $200 per month. If the taxpayer remains in his home, income and expenses are about equal, leaving no disposable income to apply to the delinquent federal taxes. Should the account be reported currently not collectible?
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Answer. The account should not be reported currently not collectible. The difference between the cost of renting and owning indicates that a significant payment can be made if the residence were sold. The loss of the taxpayer's equity is not the primary consideration. The taxpayer should be advised he will have up to one year to adjust his expenses so that the Service will receive, at the end of the allowed time, an amount equal to the excessive housing expense. An installment agreement for a lesser amount should be taken in the interim, with an increase in payment at the date the house is supposed to be sold. It may be manually monitored if the case meets the criteria of Text 323:(1) of LEM V. The taxpayer should also be advised that enforcement may be taken at the end of a year if the installment agreement defaults for any reason, including because the taxpayer didn't begin to pay the required increase in payment. If there is a default, the taxpayer will have to demonstrate that a good faith effort had been made to adjust his expenses, including an effort to sell or borrow on the property.
Question. A taxpayer claims that she needs more than the amount provided by the NATIONAL STANDARDS for clothing because she has five teenage children. Can she get an increased amount?
Answer. Yes, if she can fully pay the tax liability within three years. Otherwise, she has to substantiate and justify all the expenses included within the NATIONAL STANDARDS. The fact that she spends more than the NATIONAL STANDARDS allow for one category of expense, such as clothing, does not in itself constitute a justification.
ATTACHMENT E
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Collection Financial Standards—IRS
General
Collection Financial Standards are used to help determine a taxpayer's ability to pay a delinquent tax liability.
Allowances for food, clothing and other items, known as the National Standards, apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.
Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. Unlike the National Standards, the taxpayer is allowed the amount actually spent or the standard, whichever is less.
Food, Clothing and Other Items
National Standards for reasonable amounts have been established for five necessary expenses; food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. All standards except miscellaneous are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). The miscellaneous standard has been established by the IRS.
Alaska and Hawaii
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Due to their unique geographic circumstances and higher cost of living, separate standards for food, clothing and other items have been established for Alaska and Hawaii.
The allowances for food, clothing and other items in Alaska consist of the National Standards increased by a weight of 1.20.
The allowances for food, clothing and other items in Hawaii consist of the National Standards increased by a weight of 1.10.
Housing and Utilities
The housing and utilities standards are derived from Census and BLS data, and are provided by state down to the county level.
Transportation
The transportation standards consist of nationwide figures for monthly loan or lease payments referred to as ownership costs, and additional amounts for monthly operating costs broken down by Census Region and Metropolitan Statistical Area (MSA). Public transportation is included under operating costs. A conversion chart has been provided with the standards which shows which IRS districts fall under each Census Region, as well as the counties included in each MSA. The ownership cost portion of the transportation standard, although it applies nationwide, is still considered part of the Local Standards.
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The ownership costs provide maximum allowances for the lease or purchase of up to two automobiles if allowed as a necessary expense. The operating costs are derived from BLS data.
If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment, or no car, only the operating costs portion of the transportation standard is used to come up with the allowable transportation expense.
Recent Revisions
The National Standards were revised in 1997 based on the 1994–95 CES, adjusted for inflation using the 1996 Consumer Price Index. The 1994–95 CES is the latest survey broken-out by income levels. The revised National Standards are effective for financial analysis conducted on or after April 14, 1997.
The Local Standards for housing and utilities and transportation were revised in 1997 to:
add family size to the house and utilities allowance (two or less, three, and four or more);
based automobile ownership/leasing costs on the five-year average of new and used car financing data compiled by the Federal Reserve Board of Governors; and,
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reflect updated information from the Bureau of Labor Statistics.
The revised Local Standards for housing and utilities and transportation are effective for financial analysis conducted on or after June 1, 1997.
Collection Financial Standards
ALLOWABLE LIVING EXPENSES FOR FOOD, CLOTHING AND OTHER ITEMS
Allowable Living Expenses for Transportation
The Allowable Expenses for Transportation (Operating Costs and Public Transportation Costs) are provided by Census Region and Metropolitan Statistical Area (MSA). To determine the allowable transportation expense for your location you must:
Find your state in the following table,
Click on the Census Region for your state to link to the MSA Definitions by Census Region table,
Look for your county or city in the MSA Definitions by Census Region table to determine whether your location is in a MSA.
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Click on the MSA or Census Region to go to the Allowable Transportation Expenses table. If your location is in a MSA, then use the MSA operating expense, otherwise the regional operating expense should be used.
This table shows the IRS Region and Census Region for each state, with a link to the MSA Definitions by Census Region table.
Statistical Survey of 100 Chapter 7 Cases From the Oakland Division of the Northern District of California
Prepared by Randall J. Newsome,
U.S. Bankruptcy Judge, Northern District of California
Late in 1997 I directed Gloria Franklin, Deputy-in-Charge of the Oakland Division of the United States Bankruptcy Court for the Northern District of California, to instruct her case administrators to pull 100 individual Chapter 7 cases and 100 Chapter 13 cases closed over the preceding twelve months. The case administrators were not told of the purpose for my request, and were not given any other instructions as to how the cases were to be pulled.
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After the cases were pulled and delivered to my office, I began the process of reviewing the case files as to some 34 categories of information. The review was done by me personally, and occurred primarily during evenings and on weekends. This survey sets forth the results of my review of 100 Chapter 7 cases.
The categories of information I reviewed, and explanatory notes for each of those categories, is as follows:
1. Name. The last name of the debtor appears in this column. If a husband and wife filed, and the wife's name is different, then both names are listed.
2. Case Number and Date of Filing. The first two digits in the case number indicate the year of filing, the 4 is the division number, and the last four digits identify the case in the sequence of cases filed since January 1 of that year. The first letter represents the judge to whom the case has been assigned (''J'' for Judge Edward Jellen, ''T'' for Judge Leslie Tchaikovsky, and ''N'' for Judge Randall Newsome). The next letter is the first letter of the case administrator's last name.
3. Place of Residence. The Oakland division covers Alameda and Contra Costra counties, which have a combined population of over 2 million. This column sets forth the city in which the debtor resides as set forth on the bankruptcy petition. One debtor listed San Francisco as her residence. The case was probably filed in the Oakland division because that is where the debtor resided for most of the 180 days prior to filing.
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4. Chapter and individual (I) or joint (JO); marital status. This column lists whether the petition was filed as an individual petition under §301 or a joint petition under §302. Marital status was obtained from Schedule I.
5. Previous bankruptcies within six years. This information was obtained from page 2 of the petition. If the question was not answered, a question mark was recorded.
6. Filing fee in installments? This column indicates whether the debtor was given permission by the court to pay the filing fee in installments pursuant to 28 U.S.C. §1930(a).
7. Represented by a Bankruptcy Petition Preparer (BPP) or Counsel (C), and the amount of the fee charged. Information regarding representation by counsel was taken from the form required by Fed. R. Bankr. P. 2016(b). Information regarding bankruptcy petition preparers was derived from a number of sources.
8. Gross income per month and occupation. This information was taken from Schedule I.
9. Income for previous calender year. This number was obtained from the answer to question one on the Statement of Financial Affairs. A question mark was entered in this column if the information wasn't provided.
10. Income for two previous calender years. Taken from the answer to question one on the Statement of Financial Affairs. A question mark was entered in this column if the information was not provided.
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11. Number of dependents or children. Only children are included in this number unless otherwise noted. Spouses are not included.
12. Single parent with custody? This question was answered based on whether the debtor was receiving or paying some kind of support and whether they listed dependents. If the answer was not clear from the file, a question mark was recorded.
3. Alimony or child support received or paid. Taken from the appropriate lines on Schedules I and J.
14. Homeowner or renter? This question was answered based on the information in Schedules A and C. If the debtor did not fit into either category, N/A or a question mark was recorded. An explanatory note was provided in the last column if additional information could be gleaned from the file.
15. Rent or mortgage payment per month. This number was taken from the first line on Schedule J.
16. Monthly food expense. This number was taken from Schedule J.
17. Monthly clothing expense. This number was taken from Schedule J.
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18. Monthly utilities—gas and electric/water/telephone. These numbers were taken from Schedule J.
19. Recreation expense per month. This number was taken from Schedule J.
20. Excess monthly net income over expense. This number is arrived at by subtracting the debtor's total expenses on Schedule J from the debtor's net income stated on Schedule I. Net income consists of the debtor's gross income from all sources minus payroll deductions for taxes, union dues, etc.
21. Number of credit cards and total credit card debt. These numbers are derived from Schedule F. Only all-purpose credit cards, such as Visa, Mastercard, American Express, Discover, etc. are included. Lines of credit, small loans, retail store cards, gasoline cards or any other kind of unsecured indebtedness are not included. If there was some doubt as to whether the debt listed was in fact a credit card debt, the debt was not included. Thus, the numbers given in this column are probably under-reported.
22. Number of shopping or gas cards and total debt from such cards. These numbers are also derived from Schedule F. Only cards issued for use in a particular retail establishment or service station are included.
23. Medical debts and amounts. Includes debts to hospitals, doctors, dentists, etc. Obviously, medical debts that were paid for with a credit card are not reflected in these numbers.
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24. Priority tax debt. This number is taken from Schedule E. It does not include any other kind of priority debt.
25. Vehicles. This category includes year and model of any automobiles, motorcycles or pick-up trucks listed on Schedules B, C or D.
26. Vehicle debt. This category includes all debts secured by an automobile, motorcycle or pick-up truck listed on Schedule D. The entire amount of the debt is included, even if the debtor has bifurcated it into secured and unsecured components.
27. Mortgage debt. This category includes all mortgages for all real property, including nonresidential real property.
28. Total unsecured nonpriority debt. This category includes all unsecured debts listed in Schedule F.
29. Total secured debt. This category includes all secured debts listed in Schedule D. The entire amount of the debt is included, even if the debtor has bifurcated it into secured and unsecured components.
30. Discharge entered? This category sets forth the date the discharge was entered. If the debtor did not receive a discharge, the question is answered ''No.''
31. Converted? If the case was converted to another chapter, that fact is recorded in this category. If the case was not converted, a dash (-) is noted.
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32. Dismissed? Dismissal of the case is so noted. If the case was not dismissed, a dash (-) is noted.
33. Reaffirmations—Dollar values. Generally the name of the creditor with whom the reaffirmation was agreed to, the nature of the reaffirmed debt (''sec.'' for secured, ''uns.'' for unsecured) and the dollar amount are noted.
34. Notes. Information which is unique or which will provide a greater understanding of the case is set forth in this category.
INSERT OFFSET RING FOLIOS 78 TO 99 HERE
52–831
1998
BANKRUPTCY REFORM ACT OF 1998
PART I
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
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OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
ON
H.R. 3150
BANKRUPTCY REFORM ACT OF 1998
PART I
MARCH 10, 1998
Serial No. 70
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
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CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
LINDSEY O. GRAHAM, South Carolina
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JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN Counsel
JAMES W. HARPER, Counsel
C O N T E N T S
HEARING DATE
March 10, 1998
OPENING STATEMENT
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and Chairman, Subcommittee on Commercial and Administrative Law
WITNESSES
Ausubel, Lawrence M., Professor of Economics, University of Maryland
Boucher, Hon. Rick, a Representative in Congress from the State of Virginia
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Cosgrove, Karen, Vice President, Kemp Management, Austin, TX, on behalf of the National Multi Housing Council and the National Apartment Association
Cutler, Lloyd N., Esq., Wilmer, Cutler and Pickering, Representing the Bankruptcy Issues Council
Feldstein, Stuart A., President, SMR Research Corporation
Gleason, John J., Vice President of Credit, Bon-Ton Department Stores, on behalf of the National Retail Federation
Hammonds, Bruce L., Senior Vice Chairman and Chief Operating Officer, MBNA Corporation
Heitkamp, Heidi, Attorney General, North Dakota, on behalf of the National Association of Attorneys General
Jones, Hon. Edith Holland, Judge, U.S. Court of Appeals for the Fifth Circuit
Kosturko, William T., Executive Vice President and General Counsel, People's Bank, Bridgeport, CT, on behalf of America's Community Bankers
Kubica, Janet, Chief Executive Officer, POSTMARK Credit Union, Harrisburg, PA
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Lauritano, Mark, Senior Vice President, WEFA, Inc
Mason, Matthew J., Esq., on behalf of the United Auto Workers-General Motors Legal Services Plan and the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW)
McCollum, Hon. Bill, a Representative in Congress from the State of Florida
McKinley, Vern, Esq., Regular Policy Contributor to the CATO Institute
Moran, Hon. James P., a Representative in Congress from the State of Virginia
Newsome, Hon. Randall J., U.S. Bankruptcy Judge, Northern District of California
Russell, Nicholl, Sioux Falls, SD
Shulman, James Ike, Esq., National Association of Consumer Bankruptcy Attorneys
Sommer, Henry J., Esq., Miller, Frank & Miller, Philadelphia, PA, on behalf of the Consumer Bankruptcy Assistance Project
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LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Ausubel, Lawrence M., Professor of Economics, University of Maryland: Prepared statement
Cosgrove, Karen, Vice President, Kemp Management, Austin, TX, on behalf of the National Multi Housing Council and the National Apartment Association: Prepared statement
Cutler, Lloyd N., Esq., Wilmer, Cutler and Pickering, Representing the Bankruptcy Issues Council: Prepared statement
Feldstein, Stuart A., President, SMR Research Corporation: Prepared statement
Gleason, John J., Vice President of Credit, Bon-Ton Department Stores, on behalf of the National Retail Federation: Prepared statement
Hammonds, Bruce L., Senior Vice Chairman and Chief Operating Officer, MBNA Corporation: Prepared statement
Heitkamp, Heidi, Attorney General, North Dakota, on behalf of the National Association of Attorneys General: Prepared statement
Jackson Lee, Sheila, a Representative in Congress from the State of Texas: Prepared statement
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Jones, Hon. Edith Holland, Judge, United States Court of Appeals for the Fifth Circuit: Prepared statement
Kosturko, William T., Executive Vice President and General Counsel, People's Bank, Bridgeport, CT, on Behalf of America's Community Bankers: Prepared statement
Kubica, Janet, Chief Executive Officer, POSTMARK Credit Union, Harrisburg, PA: Prepared statement
Lauritano, Mark, Senior Vice President, WEFA, Inc: Prepared statement
Mason, Matthew J., Esq., on behalf of the United Auto Workers-General Motors Legal Services Plan and the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW): Prepared statement
McCollum, Hon. Bill, a Representative in Congress from the State of Florida: Prepared statement
McKinley, Vern, Esq., Regular Policy Contributor to the CATO Institute:
Additional information
Prepared statement
Moran, Hon. James P., a Representative in Congress from the State of Virginia: Prepared statement
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Newsome, Hon. Randall J., U.S. Bankruptcy Judge, Northern District of California: Prepared statement
Russell, Nicholl, Sioux Falls, SD: Prepared statement
Shulman, James Ike, Esq., National Association of Consumer Bankruptcy Attorneys: Prepared statement
Sommer, Henry J., Esq., Miller, Frank & Miller, Philadelphia, PA, on Behalf of the Consumer Bankruptcy Assistance Project: Prepared statement
APPENDIX
Material submitted for the hearing
(Footnote 11 return)
For convenience, both condominium unit owners and cooperative apartment residents will be referred to as owners.
(Footnote 12 return)
The full text of CAI's suggested amendments are attached as Appendix A.
(Footnote 13 return)
Common property in homeowners associations includes such amenities as roads, sewage systems, lighting, recreational centers, playgrounds, parks, and swimming pools.