Pending Bankruptcy Reforms Will Impose Unnecessary New Costs on Debtors and Taxpayers

S.1301 Needs Further Evaluation

The bankruptcy system must not impose unnecessary costs on families with severe financial problems.

• Unnecessary costs prevent people with limited resources from using the system.
• Higher costs reduce the resources available to pay back creditors.

Taxpayers should not fund a collection process designed to raise money for big business.

• Lenders must take responsibility for bad business decisions which encourage American families to get financially overextended.

The following provisions of S.1301 will raise the costs of the bankruptcy system for debtors, trustees, and taxpayers:

• IRS-style audits of tens of thousands of debtors will be required each year even if there is no suspicion of debtor misconduct (section 307).
• Hundreds of thousands of motions to determine whether small debts are discharged would flood the courts (sections 314, 316, 317).
• To prevent being tarred as "fraudulent", American families using the system would have to pay attorneys’ fees and litigation costs.
• Debtors would be required to pay fees for pre-filing credit counseling even when such efforts may be futile (section 322).
• Court clerks and trustees would be required to review and store millions of new documents including up to ten years of tax returns for each debtor (section 318).
• New litigation opportunities for creditors would result in thousands of new motions on issues such as:whether debtors with no financial resources engaged in an adequate pre-bankruptcy credit counseling process (section 322);
  • whether a debtor could use the system a second time after a case is dismissed for inadvertent conduct such as filing the wrong paperwork (section 303);
  • whether a child's bicycle is protected from seizure by a creditor or the trustee (section 318);
  • whether notice actually received by creditors was sent to the correct address (section 309); and
  • whether income received by a child must be counted toward a family's ability to pay (section 102).

These new procedures would add to the cost of every case. Judges, law professors, trustees, bankruptcy professionals and consumer groups agree that more study is needed to establish whether there would be any benefit to anyone associated with this overhaul of the existing system. Only the credit industry has said otherwise. We have also included a CRITIQUE OF S.1301 For more information contact:

National Consumer Law Center, (617) 542-8010

Maureen Thompson, The Hastings Group, (703) 276-1116

Norma Hammes, National Association of Consumer Bankruptcy Attorneys, (408) 297-8750

Mary Rouleau, Consumer Federation of America, (202) 387-6121