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HR 3150 -- 06/10/98

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Office of Management and Budget


June 10, 1998

H.R. 3150 - Bankruptcy Reform Act of 1998
(Gekas (R) PA and 75 cosponsors)

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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