Filling in the Blank (Forms)

The last thing I was going to mention from last week's Senate hearing was this somewhat surreal exchange about the structure of the forms used to compute the application of the new means test in bankruptcy court. Before I get into the details of last week's Senate hearing, it should be noted that Sen. Carl Levin has announced that he will hold hearings next year about abuses in the consumer credit industry. These hearings will go beyond the bankruptcy law and address broader issues about the lending practices of credit card companies and other consumer lenders.

Returning to a narrower issuer that was vetted at last week's Senate hearing, Senator Grassley appears quite concerned about the new forms used to decide whether someone has passed the means test to be eligible to file bankruptcy. For the nonspecialists, this issue requires only a basic understanding of the means test. To decide whether someone is eligible for chapter 7, the law requires two basic calculations: (1) is your income over the state median for a household of your size and (2) do your expenses leave you $100 month (generally speaking) with which to pay your creditors. The bankruptcy law calculates your monthly expenses based on guidelines the IRS uses in making determinations whether to compromise on tax liabilities.

Senator Grassley expressed his displeasure with the forms used in the federal courts to compute the application of the means test. After railing against the "powerful special interests here in Washington that opposed bankruptcy reform," Grassley's next stated, "For example, the federal courts produced a bankruptcy form that is supposed to measure repayment ability. But it's my understanding that this form actually directs consumers to claim deductions for expenses a debtor may not even have." The federal courts are an example of special interests opposed to bankruptcy reform! What logic could possibly twist the federal judiciary into a special interest group on this particular issue? I suppose we can chalk the statements up to more rhetorical excess--if you oppose me, you're a special interest--but what was Grassley talking about?

In March 2006, Senators Grassley and Sessions sent a letter to the federal court committee that was considering the bankruptcy forms required by the 2005 law. They wanted all debtors to have to complete the entire means test form, even if they had incomes below the state median. (Fellow Credit Slips blogger Elizabeth Warren discussed this letter at the time it was sent.) If Senators Grassley and Sessions had their way, all debtors would have to had to gather the information to complete five pages of detailed information about their expenses even if it was pointless to do so, because they were excused from the means test under the income requirement. It would have just been more paperwork and more hassle to make it more difficult for debtors to get into bankruptcy court. Debtors represented by attorneys would have found it cost a little more, and many pro se debtors may not have been able to complete the forms at all. The committee rightly rejected the senators' suggestion.

At this most recent Senate hearing, there was concern about parts of the means testing form like line 22. It allows debtors to include in their monthly expenses an allowance for the operating expenses of an automobile. I've previously posted on the related issue of an allowance for automobile ownership expenses. Senators Sessions and Grassley seemed outraged that the form would allow a deduction for automobile operating expenses even if the debtor did not own an automobile. Of course, they miss the obvious point that the deduction is for transportation expenses generally, whether it be public transportation or for operating an automobile, but we all understand the point of the means test is to be as mean to debtors as possible.

There were a lot of things said at that hearing with which I disagreed, but the one point I thought was particularly unfair was when Senator Sessions said that the courts should just apply the law as written rather than allowing these sorts of deductions for expenses the debtor is not actually incurring. The forms do apply the law precisely as Congress wrote it. The relevant passage (in § 707(b)(2)(A)(ii)(I) for the bankruptcy mavens) states, "The debtor's monthly expenses shall be the debtor's applicable monthly expenses amounts under the "National Standards and Local Standards" (referring to the IRS Guidelines). The word Congress used is "shall," and the forms implement that.

The problem stems from how Congress used the IRS Guidelines. The IRS, which I understand is less-than-thrilled that these Guidelines are now enshrined in the Bankruptcy Code, established the Guidelines as informal agency operating procedures to determine when to compromise a tax debt based on inability to pay. The IRS Guidelines were intended as a ceiling, used to determine when a taxpayer could afford to cut back on expenses and repay a tax debt. They also were intended as guidelines, not hard-and-fast rules. Congress, however, has used the IRS Guidelines as a hard-and-fast floor for the Bankruptcy Code. The Guidelines establish minimum amounts of expenses to which debtors are entitled to deduct in determining their eligibility for chapter 7, and the Bankruptcy Code then allows debtors to deduct some expenses above those minimums. The Guidelines do not work well when applied to situations where debtors have hypothetical as opposed to actual expenses, but those are the rules that Congress chose. Given the widespread criticism of Congress for failure to consult with bankruptcy experts in drafting the 2005 law, it is very unfair to criticize the courts for applying the words they wrote.

UPDATED: My spellchecker and an itchy mouse-clicking finger caused me to mistakenly change the word "Grassley" to "Crassly" in the first part of this post when it originally appeared. That was unintended and a mistake on my part.

Comments

[Adrian Lapas]

I just wish to note that you started misspelling our esteemed senator's name about halfway down the third paragraph. It was correctly spelled in the first two and one-half paragraphs--"Crassley."

[Bob Lawless]

Thanks. That was completely a typo on my part and not intended as a slight at Senator Grassley. The spellchecker got me. Like Senator Sessions, despite his profound disagreements with some of the witnesses at the hearing, he treated everyone with courtesy and respect.

[Piper121]

Hi Bob,

It looks like Senator Levin is acting on his promise. I just hope his committee takes a good look at the credit card industry's bad practices like interchange fees for one.

From Congress Daily...
The Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations will hold a hearing Wednesday into alleged abuses into the credit card industry. Subcommittee Chairman Carl Levin, D-Mich., has been a consistent critic of the industry that he complains takes advantage of poor and at-risk consumers.

His panel will hear from the three largest credit card issuers, Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc., as well as consumer witnesses. The American Bankers Association said it would work with lawmakers and regulators for strengthened disclosure requirements for customers about their monthly bills, but some lawmakers like Levin want to go further to curb some lending practices found to be abusive by many consumer activists.