Hello and thank you for inviting me to participate in the 55th Annual Seminar of the National Association of Chapter Thirteen Trustees (NACTT). On many occasions over many years, chapter 13 trustees and this organization have successfully met significant challenges on behalf of the bankruptcy system. And that has never been truer than this year.
This meeting traditionally brings together about one thousand trustees, judges, and bankruptcy professionals. For obvious reasons, that was not possible this year. But I am very pleased that the NACTT was able to innovate and bring us together virtually. This video forum gives me the opportunity to update you on some of the key activities of United States Trustee Program (USTP). Even more importantly, it allows me to express my appreciation for all that you are doing―individually and collectively―to keep the bankruptcy system running effectively.
I extend my deepest gratitude to your President, Byron Meredith, your incoming President Linda Gore, and the other members of the NACTT leadership team for confronting the problems created by the COVID-19 pandemic and preparing for the various contingencies that we may face as the American economy recovers from this national health emergency. Based on the many meetings and conversations I have had with the chapter 13 trustee community over these past few months, I have no doubt that we will successfully navigate the swirling economic waters and continue to serve the public interest by ensuring effective bankruptcy administration for debtors and creditors alike.
USTP Efforts to Make the Bankruptcy System Work During the Pandemic
Let me take a few minutes to describe some of the steps taken by the USTP to address the special challenges presented by the pandemic. Working in close collaboration with the courts, clerks, practitioners, and, of course, the private trustees, the USTP has achieved a great deal. The collaborative and independent efforts of all the components of the bankruptcy system have allowed the system to operate remarkably well under incredibly difficult circumstances. Even amid a national health emergency, petitions are being filed, hearings are being held, and bankruptcy relief is being granted. I cannot express enough my appreciation for the cooperation and assistance that the USTP has received.
Section 341 Meetings
Among the first steps the USTP and private trustees had to take was to transition from in person section 341 meetings to telephonic or video meetings. As you know, the section 341 meeting is generally the only formal proceeding most debtors ever participate in during the bankruptcy process. That elevates its importance in fact-finding and reminding all participants that bankruptcy is a federal court process that imposes both benefits and obligations on parties seeking relief.
Although the USTP has long allowed alternatives to in-person appearance in special circumstances, those exceptions traditionally have been rare and often related to an individual’s inability to travel, illness, and the like. With the public health necessity of social distancing, it simply was not possible to schedule in-person meetings in a safe manner. Crowding debtors, creditors, and professionals into a conference room for a section 341 docket would have violated public health guidance and defied common sense.
Immediately after the President’s declaration of the national emergency concerning COVID-19, we mandated that all section 341 meetings scheduled through April 10th be continued and held by telephone or video. We later extended this policy twice and it now covers cases filed through October 10th.
This action required the USTP to work with you to ensure the necessary resources were in place to conduct meetings remotely. Among other things, we quickly procured 1,200 conference lines and 500 portable digital recorders for distribution to trustees.
Because initially this change affected cases that already had been scheduled as in-person meetings, it also was necessary to re-notice hundreds of thousands of parties with rescheduled dates. Without the immense cooperation of the courts and the chapter 13 trustees, this would have been an impossible task. It involved new templates for notices to provide connection instructions and the expansion of the long-standing Handbook guidance to trustees on “best practices” for administering the oath, verifying debtor identification, questioning the debtor, and efficiently presiding over telephonic meetings.
While some of you had experience with audio and video section 341 meetings, many chapter 7 and 13 trustees had to adapt to an entirely new way of conducting meetings. And, though much of this sounds largely administrative and ministerial, you and I both know that this was hard work requiring creativity, a deep knowledge of the rules, and a keen practical sense about how to accomplish mission. It was a herculean task and it has continued to be refined as we have worked through issues. I cannot thank you enough for getting the job done.
In addition to ensuring social distancing during section 341 meetings, we also looked at other areas to limit in-person contact. For example, we suspended debtor audits to reduce the need for personal interaction between debtors, their attorneys, and custodians of financial information. The pandemic was not the time to require even a small number of debtors to have to locate and produce additional financial paperwork without specific cause. As public health conditions improve, we will look to resume these audits, which have value in detecting fraud, abuse, and errors. But for the immediate future, they remain on pause.
Another important step we took was to issue a statement of position that trustees should protect recovery rebates provided in the CARES Act from loss in the chapter 7 and chapter 13 process. While disposition of recovery rebates was more of an issue in chapter 7 cases, it also was relevant to the administration of chapter 13 repayment plans. I hope that this guidance assisted trustees by providing arguments against any assertions that there was an obligation to redirect the rebates away from their intended purpose of assisting consumers and, thereby, the national economy.
Finally, I am very proud of the United States Trustees and the standing trustees in showing restraint and discretion in carrying out their customary compliance responsibilities. Undoubtedly, the pandemic brought a significant, but hopefully only a short-term, economic shock for many Americans, including chapter 13 debtors working their way through the debt repayment process.
United States Trustees generally have avoided bringing compliance motions during this time, such as for delays by chapter 11 debtors in filing operating reports, as long as the assets of the estate were not at imminent risk. This does not mean that debtors do not have to comply; it just means that we recognize that the impact of stay-at-home orders and the resulting economic jolt should be weighed heavily and debtors given a little extra time to meet their obligations. I know that you too have acted in a similar fashion regarding the requirement to make timely plan payments, and I commend you for that sensible approach.
A Look Ahead
Looking ahead, there is still uncertainty. The financial health of chapter 13 trustee operations is critical to the effective functioning of the bankruptcy system. And I know that chapter 13 trustee offices have not been immune to the economic shock that none of us could ever have anticipated.
Let’s look at some numbers. From mid-March (when social distancing orders became nationwide) through June 7th, overall bankruptcy filings fell by 39 percent compared to the same period in 2019, and the number of new chapter 13 petitions fell by 58 percent. Together with reductions in planned payments caused by unemployment and the deteriorated financial condition of many debtors, there will be downward pressure on trust operation receipts.
In consultation with NACTT leadership, the USTP has taken a number of steps to assist chapter 13 trust operations in weathering the economic storm so they can remain robust and able to handle a return to normal filing levels or, as some predict, substantially increased filings. For example:
- We encouraged trustees to review their offices’ financial condition and projected cash flow needs so that, if necessary, they could amend their budgets and request an increase in the case percentage fee for the remainder of the fiscal year. The USTP implemented a streamlined process to expedite our review of these requests. To date, we have approved and issued more than 130 amended compensation notices, resulting in percentage fee increases for 125 out of 170 chapter 13 trustees.
- We suspended the 25 percent operating reserve limitation for chapter 13 trustees for the balance of this fiscal year. This provided a greater financial cushion so that trustees would have needed funds to cover additional expenses incurred during this emergency or to cover potential decreases in their receipts.
- And we worked to allay concerns about the impact of unavoidable changes to customary internal controls on the annual audit resolution process. Let me confirm for you today―United States Trustees will not take corrective actions based solely on annual audit findings that can be justified or explained by the disruptions in the trustee workplace. This includes disruptions caused by the imperative to keep employees safe by having staff work at home.
In these and other ways, the USTP has strived to take aggressive actions to bolster chapter 13 trust operations and help ensure that the infrastructure for administering cases remains intact for the future. To be sure, some of these actions are purely short-term in nature. For example, we likely will reduce plan percentage fees as soon as prevailing economic conditions allow. But, in our view, to have done anything less would have been to compromise the future of debtors and their families, creditors who need repayment, and the integrity of the bankruptcy system.
We are grateful to the leadership of the NACTT for raising alarm bells and looking beyond the immediate horizon so that both trustees and the USTP could evaluate present problems and future contingencies and take decisive actions now in the hopes of avoiding problems later.
In the coming months, I expect that we will confront many new consumer bankruptcy issues. In addressing those issues, I hope that the spirit of cooperation that has prevailed among the bankruptcy system stakeholders continues. These last few months have shown how much more we can accomplish when we work together. The relationship between the USTP and NACTT is stronger than ever and that bodes well for us both.
I thank you for your extraordinary service. I know you will handle the future challenges in a spirit of professionalism and service. And my colleagues in the USTP and I are proud to work alongside you.
I look forward to the day when we once again will meet in person. In the meantime, stay safe and take care.