Section 727(a) (ll)--Modest Proposals for Change.

• Author: Bartell, Laura B.

TABLE OF CONTENTS I. The Requirement of Debtor Education II. How is the Postfiling Requirement Affecting Debtors--An Empirical Study III. Why Not Prefiling Financial Education? IV. Modest Proposals for Change V. Conclusion An individual is not eligible to file for bankruptcy protection under [section] 109(h)(1) of the Bankruptcy Code unless he or she "has, during the 180-day period ending on the date of filing of the petition by such individual, received ... an individual or group briefing ... that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis." (1) The debtor is permanently excused from that requirement under the circumstances described in [section] 109(h)(4). (2) Having completed the required briefing and filing for bankruptcy, the debtor is not eligible for a discharge if "after filing the petition, the debtor failed to complete an instructional course concerning personal financial management described in section 111" subject to the permanent exemptions described in [section] 109(h)(4). (3)

These requirements for debtor financial education were inserted into the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). (4) Without entering the debate about the efficacy of the educational requirements of BAPCPA, (5) in this article I suggest that they could be imposed in a way that ensures that more debtors actually complete the courses and therefore get their discharges, either through amendments to the Code or by amendments to the Federal Rules of Bankruptcy Procedure.

In this article I will first review the historical background of the debtor education requirements. Next, I will demonstrate through a survey of individual Chapter 7 and Chapter 13 cases filed in 2019, data evidencing that thousands of debtor discharges are withheld annually solely because of failure to file a certificate evidencing postfiling financial education. In the third section, I propose that, if debtor education is to continue to be a requirement for individual debtors in bankruptcy, Congress should consider amending [section] 109(h)(1) of the Bankruptcy Code to consolidate the debtor education courses into a single prefiling requirement. In the fourth section, in recognition of the political difficulties in making statutory changes to the Code, I make more modest proposals for changes to administrative procedures and amendments to forms and a rule designed to increase the probability a chapter 7 debtor will complete the financial education requirement and receive his or her discharge.

1. THE REQUIREMENT OF DEBTOR EDUCATION

   In the Bankruptcy Reform Act of 1994 (6) Congress established the National Bankruptcy Review Commission to "investigate and study issues and problems relating to title 11." (7) The Commission was directed to submit a report to Congress not later than two years after the date of its first meeting containing "its recommendations for such legislative or administrative action as it considers appropriate." (8) The report was submitted in 1997. (9) One of the proposals in the report was the suggestion that "[a]ll debtors in both Chapter 7 and in Chapter 13 should have the opportunity to participate in a financial education program." (10) However, the Commission declined to recommend mandatory postbankruptcy debtor education programs, which they suggested "may be unduly coercive and difficult to administer" and "might also impose a hardship on a debtor whose job interferes with the class schedule, or who lives in a rural area." (11) But the Commission also expressed support for "other financial education programs that might avert financial crises in the first place."

   The first bill to implement the results of the Commission Report was introduced in 1998 (12) and included a requirement that the Director of the Executive Office for United States Trustees develop a financial management training curriculum and conduct a test of those materials in three judicial districts for a one-year period. (13) No other debtor education provisions were included in the bill. But by the time the bill was passed by the House of Representatives, it included an amendment to [section] 109 precluding an individual from filing for bankruptcy "unless such individual has, during the 90-day period preceding the date of filing of the petition, made a good faith attempt to create a debt repayment plan, through a credit counseling program offered through credit counseling services "approved by the United States trustee or bankruptcy administrator. (14) When the bill passed the Senate, (15) both elements of debtor education that were eventually enacted in BAPCPA were included: an amendment to [section] 109 to make completion of a credit counseling briefing a requirement for an individual to be eligible for bankruptcy, (16) and amendments to [section] 727 and [section] 1328 conditioning discharge on completion of an instructional course concerning personal financial management. (17) Those two provisions remained in some form in all subsequent bills to amend the Code until the enactment of BAPCPA. (18) There is nothing in the legislative history that discusses why the financial management course is required to be taken after the bankruptcy filing, although the Commission Report had noted that some chapter 13 trustees had established (postpetition) financial education programs in their districts (19) and the drafters may have been influenced by those examples. The only reference to the financial management course requirement in the legislative history was a comment in the House Report stating that "[t]he bill also requires debtors, after they have filed for bankruptcy, to participate in financial management instructional courses so they can hopefully avoid future financial distress." (20)

   As enacted, [section] 109(h)(1) makes an individual ineligible for bankruptcy "unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency ... an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis." (21) BAPCPA also added as a new condition to discharge for a debtor under chapter 7 (in [section] 727(a)(11) or chapter 13 (in [section] 1328(g)) that the debtor, "after filing the petition," has completed "an instructional course concerning personal financial management described in section 111," (22) subject to certain exceptions. (23) The newly-enacted [section] 111 sets out the requirements for approval of a nonprofit budget and credit counseling agency or an instructional course concerning personal financial management by the United States trustee or bankruptcy administrator, and requires the clerk to maintain a publicly available list of those entities. (24)

   The Director of the Executive Office for United States Trustees (EOUST) was directed to "develop a financial management training curriculum and materials that can be used to educated debtors who are individuals on how to better manage their finances" and conduct a test of the effectiveness of those materials in six judicial districts for an eighteen- month period. (25) At the end of that period the Director was required to submit a report to Congress containing the findings of the Director regarding "the effectiveness of such curriculum, such materials, and such programs and their costs." (26) The EOUST Report to Congress concluded that almost all the consumer bankruptcy debtors were satisfied with the curriculum and "almost half of the consumer bankruptcy debtors in the pilot study reported their intention to change at least one financial practice." (27) The EOUST then issued regulations that describe the learning materials required to be provided by approved providers, including instruction on budget development, money management, wise use of credit, consumer information, and coping with unexpected financial crises. (28)

   To implement the new provision in [section] 727(a)(11), interim amendments to the Federal Rules of Bankruptcy Procedure were approved on an expedited basis in 2005 (29) and subsequently approved for publication for an abbreviated six-month period in 2006. The rules were given final approval by the Committee on Rules of Practice and Procedure in June 2007. Three amendments related to the new condition to discharge for the financial management certificate. (30)

   First, Rule 4004(c) (Grant of Discharge) was modified. That Rule in subdivision (1) directs the court in a chapter 7 case "on expiration of the times fixed for objecting to discharge and for filing a motion to dismiss the case under Rule 1017(e)," (31) to "forthwith grant the discharge" unless one of the itemized paragraphs is applicable. The amendment added a new paragraph (c)(1)(H) to direct the court not to grant a discharge if "the debtor has not filed with the court a statement of completion of a course concerning personal financial management if required by Rule 1007(b)(7)." (32) It should be noted that the Code makes no reference to a statement of completion; it requires only that the debtor have actually completed a postpetition instructional course concerning personal financial management. The requirement of a statement was intended to provide evidence that the statutory test was met.

   Second, Rule 1007(b) was amended to change its title from "Schedules and Statements" to "Schedules, Statements, and Other Documents" and, among other changes, to add a new subdivision (b)(7) requiring submission of evidence of completion of the financial management course. (33) The new subdivision read as follows:

   "(7) An individual debtor in a chapter 7 or chapter 13 case shall file a statement regarding completion...