Good morning. I appreciate the opportunity to be with you this morning to talk about the work of the United States Trustee Program (USTP or Program) and its efforts to ensure that the bankruptcy laws are followed by all participants – debtors, creditors, attorneys, and others involved in the bankruptcy system.
Along with your Board member, Alane Becket, I returned last night from the annual meeting of the National Conference of Bankruptcy Judges in Las Vegas. I must say that the venue did strike me as a bit incongruent in that bankruptcy certainly is not a game of chance. Rather, it is a system governed by laws written by Congress and uniform procedural rules, which should be consistently followed by the courts and parties alike.
THE BANKRUPTCY SYSTEM
I have not previously spoken to the National Creditors Bar Association, so I am especially grateful to be here with you today. You are an important constituency. Although most of you work outside the bankruptcy system, I think it is safe to say that your work is profoundly affected by the bankruptcy system. There were about 1.7 million bankruptcy cases administered last year. That represents more than two-thirds of all cases pending in the federal court system.
In Article I, Section 8, of the Constitution, our nation’s Founders recognized that a robust national economy required a legal regimen to address economic failure. As modern bankruptcy law developed, several key legal principles emerged. Two of them are foremost. First, the system provides that honest debtors should receive a “fresh start” to allow them once again to become productive members of our economic system. Along with that basic principle, Congress also recognized that bankruptcy should provide an efficient means for repayment of debt out of a debtor’s available assets.
Bankruptcy is far more efficient and equitable than a “race to the courthouse” in which the creditor who gets a judgment first gets paid first. Instead, when a debtor files a bankruptcy petition, by operation of law, a stay is imposed to stop most collection activities and, in consumer cases, the debtor is entitled to an expeditious discharge of most kinds of debts. Creditors are then paid out of non-exempt assets in the order of priority set forth in statute, not based on who sued first.
The work performed by debtors’ attorneys to ensure that their clients receive their fresh start, and the work you do to ensure that creditors recover on debts owed to them, benefit the economy. Credit would not be available without a legal process to allow collection. And our economy does not work without credit that allows both individuals and businesses to prosper. In sum, we are all in this together.
ROLE OF THE UNITED STATES TRUSTEE PROGRAM
Thirty years ago, Congress established the permanent, nationwide United States Trustee Program (USTP or Program) within the Department of Justice to serve as the “watchdog” of the bankruptcy system. Our mission is to ensure the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders – debtors, creditors, and the American public. By statute, we carry out a wide variety of administrative, regulatory, and enforcement responsibilities. Our role is a critical one if we are to have a properly functioning bankruptcy system.
The USTP performs its responsibilities through a headquarters here in Washington, DC, and 92 field offices located throughout the country. We have jurisdiction in all judicial districts except those in North Carolina and Alabama where the courts perform some of these functions through bankruptcy administrators.
In the area of administration, the USTP appoints and oversees private trustees who administer nearly all consumer bankruptcy cases. Currently, about 1,400 private trustees disburse nearly $10 billion annually in available debtor assets.
In the regulatory sphere, we prescribe financial reporting by private trustees, as well as businesses that operate in chapter 11. We also approve credit counselors and financial educators to provide services to individual debtors who are required to take a counseling course before filing a bankruptcy petition and a financial education course after filing as a condition of receiving a discharge of debts.
As to enforcement, the Program takes a balanced approach to ensuring that debtors, creditors, professionals, and others comply with the Bankruptcy Code and Rules. Each year, we take about 30,000 formal and out-of-court actions to investigate or litigate compliance. Among other things, we file motions to dismiss the cases of debtors who have excess disposable income under a statutorily defined “means test.” We also take more severe actions to deny a discharge to debtors who engage in serious misconduct, such as the concealment of assets. Importantly, we also refer more than 2,000 cases of suspected criminal conduct annually to United States Attorneys and have approximately 25 USTP lawyers who are cross-designated to prosecute bankruptcy crimes.
The USTP enforces the bankruptcy laws on several fronts. Let me share with you some of our enforcement priorities. This is by no means an exhaustive list of actions we take. In fact, it excludes a very large segment of our practice – that is, chapter 11 business cases in which we often are the only party to take actions such as seeking to oust errant management, policing exploding professional costs, limiting bonuses given to executives and insiders of bankrupt companies, opposing deviation from the statutory scheme for creditor payments, and ensuring that the Code’s protections are extended to smaller creditors in a case whose voices may not be heard above the din of large institutional creditors and entrenched company management.
In carrying out our enforcement activities, in both consumer and business cases, the USTP exercises prudence and sound judgment. Last month, for example, in the wake of the recent hurricanes, I reissued our “Enforcement Guidelines for Bankruptcy Debtors Affected by Natural Disasters.” In that guidance, we state that we will exercise prosecutorial discretion and avoid taking actions related to document production, filing deadlines, and other requirements, if the cause of the non-compliance was dislocation or other hardship caused by the natural disaster. We also exercised our statutory authority to temporarily waive the credit counseling and debtor education requirements in the districts of Puerto Rico and the Virgin Islands due to the effects of Hurricanes Irma and Maria.
A key priority of the USTP is to curb debtor abuse of the bankruptcy system. Most of our enforcement actions are taken to address violations by debtors who have excess disposable income available to pay creditors, who fail to provide accurate and complete financial information, or who conceal assets.
The bankruptcy system depends upon voluntary, full, and complete disclosure. According to audits of consumer bankruptcy cases performed by private accounting firms under contract with the USTP, about 20 percent of the audited schedules and statements filed by debtors contain “material misstatements.” As a practical matter, most of these errors are not actionable because they would not change the outcome of the case or because they do not rise to the level of fraud. But they nonetheless reflect a serious problem.
Sometimes, a debtor’s lawyer may be partially or even significantly at fault for simply failing to perform due diligence to assist the debtor in providing necessary information. In other instances, it is the conduct of the debtor that is the problem. For example, after we completed a two-day trial on a complaint to deny discharge, the bankruptcy court denied a chapter 7 debtor’s discharge of $6.3 million in unsecured debt. The debtor had not disclosed the transfer of five vehicles valued at $60,000 to a family member shortly before the bankruptcy filing, an interest in real estate, and ownership of season basketball tickets worth more than $10,000. The debtor also failed to explain the decline in net worth from more than $7 million two years before the bankruptcy filing to a negative $6.5 million as stated in the bankruptcy documents.
We remain vigilant in identifying and addressing abuse by those who avail themselves of the bankruptcy process.
Consumer Debtors’ Attorney Abuse
By statute, consumer debtors’ attorneys and non-attorney bankruptcy petition preparers (BPPs) are subject to sanctions for violating standards of practice and ethical conduct imposed by the Bankruptcy Code and Rules. Consumer lawyers are subject to disgorgement of fees for a range of misconduct, including failure to appear at section 341 meetings of creditors, which are mandatory in every case and in which debtors are questioned under oath; failure to properly and fully disclose the amount and terms of compensation; and failure to provide reasonable value for services. Non-attorney preparers who give legal advice or fail to disclose their participation and/or fees in a case are subject to disgorgement and penalties.
The USTP has a long-standing history of enforcing these provisions of law. But after speaking with judges and private trustees, and following a series of town hall meetings with USTP staff, it became clear that attorney misconduct was an ongoing problem that needed more consideration. Professional misconduct ill serves the debtor clients, often adds costs to creditors, and wastes judicial resources. That is why, last year, the USTP embarked on an initiative to focus the Program’s attention on deficient and harmful practices by consumer debtors’ attorneys. Through focused efforts, we took about 30 percent more formal enforcement actions against poorly performing attorneys under the disgorgement provisions of section 329 and the debt relief agency provisions of section 526. This includes actions against firms operating nationwide that recruit clients through advertisements on the Internet and take advantage of their clients and the bankruptcy system. We investigated and litigated over conduct such as failure to disclose fees, failure to file required documents, unreasonable delay, failure to attend required meetings and hearings, the unauthorized practice of law, and violations of minimal standards of practice.
We also uncovered suspected fraudulent schemes, including a scheme in which attorneys joined with a third party to defraud secured creditors and convert their collateral. About a year ago, a bankruptcy court sanctioned an attorney for participating in such a fraudulent scheme. Our field office had discovered that the debtor’s attorney had counseled the debtor client to “surrender” a vehicle – which was subject to a secured claim and in which the debtor had no equity – to an out-of-state towing company under color of an agreement with the towing company. The towing company then asserted a statutory warehouseman’s lien against the vehicle that trumped the secured creditor’s interest, and attempted to sell the vehicle. In exchange for the vehicle, the towing company paid the debtor’s bankruptcy fees, in full, directly to the debtor’s attorney. Both the secured creditor, whose collateral was jeopardized and only recovered at the creditor’s effort and expense, and the debtor, whose discharge was endangered, were victimized by this scheme. Calling it “one of the worst things I think I have ever seen,” the court approved an agreement between the parties for full disgorgement of fees and restitution to the secured creditor. The court also issued a show cause order to the attorney as to whether there was a violation of the applicable rules of professional conduct.
In spite of our continued efforts in this area, new schemes arise every day, and we remain vigilant to redress misconduct by unscrupulous attorneys and other parties who impose undue burdens and costs across all parties in the bankruptcy system.
Now, let me turn to a problem we have identified that hits a little closer to home for you. For more than 10 years, the USTP has engaged in a robust creditor enforcement practice. Improper conduct, such as submitting inaccurate or incomplete information and committing other violations of the Bankruptcy Code and Rules, is not confined to debtors. After we began investigating creditor practices, we were surprised and disappointed to discover that creditors, too, were guilty of filing faulty information.
As we all know, to be paid in a bankruptcy case, a creditor generally must file a proof of claim that sets forth the amount owed, including principal, fees, and interest. And those proofs of claim, if properly completed, are prima facie evidence of the underlying claims’ validity. While, unlike debtors, creditors do not enter the bankruptcy system voluntarily, they still must play by the rules to be able to collect repayment in bankruptcy. Let me give you some examples.
We found many mortgage servicers filed inaccurate claims, imposed fees that were not documented or justified under the mortgage agreement, or failed to provide notices required under the Bankruptcy Rules before mortgage payments were increased. Sometimes this was the result of robo-signing claims without adequate verification of the truth of the facts asserted in the claims.
To date, we have entered into numerous settlements with national creditors providing for remediation far in excess of $125 million. That excludes recoveries by debtors as a result of USTP litigation in conjunction with our federal and state partners. Most recently, in early May, we filed a settlement with Chase Bank under which Chase agreed to remediate about 16,000 homeowners in bankruptcy by making approximately $2.8 million in refunds or credits for two kinds of violations. First, Chase sent inaccurate account statements to customers in bankruptcy; and, second, Chase filed certificates of service with inaccurate dates of mailing that resulted in debtors receiving less than the mandatory 21-days’ notice before imposing a mortgage payment change.
We still have a number of actions pending and are in discussions with several mortgage servicers seeking to resolve disputes. Our field offices remain vigilant in monitoring mortgage servicer misconduct.
In addition to mortgage servicer violations, we also have discovered instances of violations by unsecured creditors, such as credit card lenders. Robo-signing without proper verification of the accuracy of claims, the improper disclosure of privacy protected information, and the collection of debt that was previously discharged in bankruptcy are examples of the kinds of violations we have pursued.
The first major creditor abuse case we brought involved Capital One Bank (USA) N.A. The bank was filing erroneous claims for debt that had been previously discharged in bankruptcy. As part of the settlement, Capital One agreed to an audit to ensure that all monies improperly received by the bank as a result of the erroneously filed claims were returned to the consumer debtors or their bankruptcy estates. That audit identified nearly triple the number of improper claims than Capital One originally had acknowledged. In the end, the bank provided remediation and corrected its internal systems.
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As disappointed as I have been about national creditors failing to comply with bankruptcy law standards, I am pleased that, over time, self-reporting of violations to the USTP has increased. As a result, we can achieve a more expeditious resolution consensually and avoid protracted and expensive litigation.
I would ask all attorneys for the credit industry to remember that you have an obligation to help ensure that your clients comply with the bankruptcy laws. Quite simply, how can we expect that debtors who fail to play by the rules and who fail to provide the court and creditors with a complete and accurate financial accounting be subject to enforcement actions, unless creditors in the bankruptcy process are held to that same standard? The answer is, “we cannot.”
Your clients depend upon diligence by debtors and their attorneys. But debtors and their attorneys should expect that same level of diligence from creditors.
Stale Debt Claimants
Beyond the enforcement areas I just covered involving creditors, the USTP also has investigated and taken action against the practice of a small number of consumer debt buyers and collectors who are filing a large volume of stale debt claims knowing that those claims must be withdrawn or denied upon objection. These claims are beyond state statutes of limitations and may not be pursued through state court action.
While this practice may harm debtors, its greater harm is to legitimate creditors and the integrity and efficiency of the bankruptcy system. Stale debt claims can cause legitimate creditors to receive a lower distribution because either the claim is paid from their share of the distribution or the trustee’s cost of objecting to such a claim is passed on to creditors. Furthermore, judicial resources are wasted in processing these claims and objections.
In mid-May, the Supreme Court ruled in Midland Funding, LLC v. Johnson, __ U.S. __, 137 S. Ct. 1407 (2017), that filing stale debt claims in bankruptcy does not violate the Fair Debt Collection Practices Act. In reaching its conclusion about a non-bankruptcy statute, the Court did describe the bankruptcy process and the expectation that trustees would object to these claims in bankruptcy court.
Just about a month ago, a bankruptcy court made a similar point when declining to impose sanctions requested by the U.S. Trustee against a volume stale debt filer. The court described the relevant conduct at issue as “unsettling and perhaps even distasteful or unseemly in some respects.” But the court decided that the sole remedy it could impose was disallowance on a claim-by-claim basis.
That leaves us with the issue of the trustees’ obligation to object to stale debt claims. With tens of thousands of stale debt claims filed each year, this is a monumental task. The USTP is currently considering the best approach to addressing the system-wide problem of stale debt claims, carefully weighing both the integrity of, and costs to, the bankruptcy system.
CREDIT COUNSELING AND DEBTOR EDUCATION
The final point I want to raise with you today is the debate within the bankruptcy community over the utility of the mandate that debtors take both credit counseling and a financial education course in order to enter and then exit bankruptcy with a discharge of debts. These requirements were imposed under the 2005 amendments to the Bankruptcy Code, and the USTP was given the responsibility to approve qualified providers of these services.
The USTP approached this new task largely as an extension of our consumer protection work. Those in financial distress are highly vulnerable to predatory schemes, including from non-attorney petition preparers who offer to file unnecessary bankruptcy petitions as a means to extract additional payments. These schemes sometimes involve mortgage and other fraud that harms both debtors and creditors alike. Also, attorney and non-attorney bankruptcy mills sometimes fail to advise their clients properly on non-bankruptcy alternatives. Honest and needy debtors deserve comprehensive advice and assistance about their financial options, including bankruptcy.
The purpose of the credit counseling is to ensure that debtors are made aware of any feasible alternatives to bankruptcy, including repayment plans; and the debtor education requirement is intended to provide debtors with the tools to avoid future financial catastrophe when they exit bankruptcy. But many debtor lawyers and others have been critical of these mandatory financial education requirements. I think it is time to take a more balanced look at this issue.
The good news is that there are about 120 credit counseling agencies that provide services through 700 walk-in facilities, over the telephone, and over the Internet. Basically, there is universal access to credit counseling. The other good news is that the average cost of credit counseling is about $25. While that is not inconsequential to a consumer in dire financial straits, it is as affordable as anyone would have imagined when the law was passed. Moreover, that average cost calculation excludes about 19 percent of debtors whose fees are reduced or waived entirely based upon income, as required by our regulations.
Bankruptcy commentators often opine upon the effectiveness of the counseling. That is a legitimate inquiry that deserves scholarly research. Initial reviews comparing the number of petitions to the number of certificates issued indicated that about 10 to 15 percent of debtors seeking a bankruptcy certificate do not file bankruptcy, at least not immediately. There are challenges to calculating this percentage, including our inability to track the same debtor through the process. But the number does suggest that counseling may assist debtors in identifying non-bankruptcy options to resolve their financial turmoil.
There probably are a number of reasons why credit counseling does not lead to more debt repayment plans or other alternatives to bankruptcy. Let me suggest two possible explanations. First, most debtors choose bankruptcy as a last resort, not as a preferred option out of extreme financial difficulties. As almost every consumer practitioner will tell you, by the time debtors visit a lawyer, their situation is usually pretty dire. The second reason I suggest may be a bit more subject to dispute. Consumer lawyers generally are very critical of credit counseling. If that is reflected in their legal counsel to their clients or in their interactions with counseling providers, then perhaps the counseling process becomes less valuable, thereby only adding to the criticism of its ineffectiveness.
Loss mitigation by mortgage servicers, fair and reasonable debt repayment plans, and other alternatives to bankruptcy are worthwhile pursuits. I think that current commentaries about credit counseling would benefit from a more balanced consideration of the potential consumer benefits of counseling and more consideration of how the content of the counseling sessions could be more useful for debtors and creditors alike.
I am grateful for your time and attention. My colleagues and I in the USTP always are interested in hearing from stakeholders about issues in the bankruptcy system that we might be able to address and ways in which we can do a better job.
Your work and that of the USTP fit together. Although you hope your clients do not have to pass through the doors of the bankruptcy courthouse, sometimes they do. And when they do, they are entitled to the statutory rights given to them by Congress, just as debtors are entitled to their rights. I hope I have explained how the USTP tries to ensure that both sides are treated fairly and that the legal rules are followed by everyone. The integrity of our legal system demands nothing less.
I wish you a successful conference here in our Nation’s Capital.
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