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The Administration supports bankruptcy reform that requires responsibility
of debtors who have the ability to repay a portion of their debts and
prevents abuse of the bankruptcy system by all relevant parties. However,
the Administration strongly opposes H.R. 3150 in its present form.
One provision of the bill would establish a rigid and arbitrary means test
to determine whether a debtor could file for discharge of most debts under
Chapter 7 or would be required to establish a repayment plan under Chapter
13 rules. The Administration does not oppose limiting access to Chapter 7
for debtors with the ability to repay a portion of their debts. However,
the formulaic mechanism in H.R. 3150 will not always distinguish accurately
those debtors who have the capacity to repay from those that do not have
that capacity. A properly structured system would give bankruptcy courts
greater discretion to consider the specific circumstances of a debtor in
bankruptcy.
The formulaic approach in this bill, as currently written, could result in
moving to Chapter 13 those debtors who are likely to fail to complete
required repayment plans. These debtors would return to Chapter 7 with a
diminished ability to repay their nondischarged debt -- including child
support and alimony. There are other approaches to limiting access to
Chapter 7 that would not have this result. If debtors truly have the
ability to repay a portion of their debt, after taking into account all
relevant factors including child support and alimony payments, a
successful, supervised repayment plan under Chapter 13 rules could result
in more reliable payment of child support and alimony than would the
unsupervised situation after a Chapter 7 discharge.
H.R. 3150 also still would make nondischargeable certain credit card debt,
although the manager's amendment makes a helpful change by eliminating one
of three such provisions. The Bankruptcy Code generally makes debts
nondischargeable only where there is an overriding public purpose, as with
debts for child support and alimony payments, educational loans, tax
obligations, or debts incurred by fraud. There has been no sufficient
finding that current protections against fraud and debt run-up prior to
bankruptcy are ineffective and that the additional debts made
nondischargeable by this bill rise to that level of public priority.
Moreover, by making these credit card debts nondischargeable, the bill puts
them in competition with payments to a former spouse or custodial parent
after the debtor leaves bankruptcy. This competition could diminish the
ability of debtors to fulfill their child support and alimony obligations.
Amendments made during the Judiciary Committee mark-up and in the manager's
amendment would make it easier to collect child support and alimony during
bankruptcy, but do not sufficiently address the problems created by the
bill's new nondischargeability provisions, particularly in the period
following bankruptcy.
The Administration looks forward to working with the Congress on a balanced
package of reforms that addresses these and other concerns and that
requires responsibility on the part of both debtors and creditors.
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