Thank you for welcoming me to the 56th Annual Seminar of the NACTT. It has been my honor over the past 15 years to address the trustees, judges, bankruptcy professionals, and scholars who attend this important educational program. When I spoke to you last year via a pre-recorded video, I was hopeful that we would all be in the same room today. Unfortunately, that is not the case. But we are getting closer. Public health indicators are improving and the NACTT’s innovative hybrid program does have at least a portion of you attending the seminar in person. I am confident that this time next year we will all be together again.
I extend my appreciation to Linda Gore for her leadership of the NACTT over this past year. In difficult times, she has been a proven leader and I am grateful for the effective working relationship she has fostered with the United States Trustee Program (USTP or Program). I admire her, the NACTT leadership team, and all of you for the way you navigated the abrupt changes to bankruptcy practice caused by the COVID-19 pandemic. You made sure that the chapter 13 system continued to meet the needs of stakeholders.
As we move towards life after the pandemic, I look forward to working productively with Mary Viegelahn, your incoming President. Together, we will address the many challenges and issues that still lie ahead.
Appointment of Mary Ida Townson as United States Trustee
I think you know from our many years of working together how much I admire the professionalism and dedication of chapter 13 trustees. The latest example of that high regard is the recent appointment of Mary Ida Townson as the United States Trustee for Region 21.
I got to know Mary Ida both during her tenure as President of the NACTT and in working with her on several initiatives to improve the bankruptcy system. Those projects included streamlining document production requirements imposed on consumer debtors; policing bad debtor lawyers who harmed their clients; and exposing mortgage servicer violations and providing proper remediation to homeowners in bankruptcy.
Mary Ida is a professional of many talents. She is a skilled administrator and a respected lawyer. She knows Region 21 from her many years of service as a standing trustee in Atlanta, and I know that she will bring great energy and insights into her expanded role overseeing chapter 7 and chapter 11 cases in the region, as well as assisting on national USTP projects. So, while Mary Ida may have left her position as a standing trustee, you will still see and hear a lot from her in her new capacity with the Program.
FILING TRENDS AND CHALLENGES TO CHAPTER 13 TRUSTEE OPERATIONS
The cooperative spirit that has marked the NACTT-USTP relationship is even more important during the current days of challenges and change. Among other things, we have had to deal with significant fluctuations in bankruptcy filing rates that affect trustee operations and the bankruptcy system.
In the immediate aftermath of the pandemic (mid-March to September 2020), consumer bankruptcy filings plummeted. Chapter 7 and 13 filings fell by more than 35 percent combined. In contrast, chapter 11 filings increased overall. Small business filings increased by more than 20 percent and large public company filings were at their highest levels since the Great Recession.
In the first six months of Fiscal Year 2021, chapter 7 filings were down by 29 percent compared to the same period one year earlier and chapter 13 filings were down by a whopping 57 percent. Many experts attribute the decrease in consumer filings to the significant financial assistance provided by the Government, including direct payments to individuals, business loans that kept workers employed, higher unemployment checks, the moratoria on home foreclosures and evictions, and other relief. Of course, it is always good news for the national economy when the drivers of chapter 13 filings, such as impending foreclosures, are reduced. But those lower filing rates can create cash flow problems for chapter 13 trustee operations.
As we discussed last year, one of the actions we took to shore up chapter 13 offices was to lift the 25 percent cap on operating reserve funds so that trustees could accumulate funds to help smooth over any cash crunch and avoid short-term layoffs. The steps we took have had their intended effect of keeping chapter 13 trust operations financially healthy and poised to absorb a future increase in caseload. While we have not reinstated an across-the-board cap, we are conducting case-by-case reviews and working with individual trustees whose operations have accumulated larger reserves than anticipated to make adjustments as appropriate.
It is noteworthy that the marked decrease in chapter 13 filings has not had the severe consequence on chapter 13 receipts we anticipated. There are many reasons for this, including that property sales and cash-out plans have allowed many debtors to complete their repayment obligations. It will take a bit of time before the slowdown negatively impacts receipts. But in the longer term, particularly if filings do not rebound, the impact is inevitable.
Together with you, the USTP will carefully monitor the financial condition of trust operations, reduce excess reserves where prudent, and maintain higher reserves where necessary. Your continued flexibility and careful financial management are essential and appreciated.
POST-PANDEMIC CHANGES TO BANKRUPTCY ADMINISTRATION
As we begin to move beyond the pandemic, all of us should apply lessons learned, big and small, to improve bankruptcy administration. Let me discuss three areas where the USTP is making some changes to practices that may be of interest to chapter 13 trustees.
First, there will be some updates to trustee audits. For example, the 30-day test for timely filing trustee final reports in converted cases will be eliminated. This change stems from comments raised by the NACTT that caused us to reexamine this metric. We learned that the requirement was not particularly meaningful and generated technical, non-substantive findings that created unnecessary work for trustees in responding to audits. We will continue to work with the NACTT and auditors to identify additional areas where we can achieve efficiencies and streamlining. We also demonstrated during the pandemic that audits can be done remotely without sacrificing overall effectiveness. Our experience generally has been positive, and I understand you share that view. Post-pandemic, we intend to retain the flexibility to incorporate a hybrid approach whereby remote audits will be a viable component of our system of review.
Second, like trustee audits, we will streamline the statutory debtor audits. As you know, the USTP contracts with independent audit firms to sample consumer filings to determine the accuracy, veracity, and completeness of filings and to identify any “material misstatements” made by the debtor. Debtor audits are just one element of our overall fraud and abuse detection and enforcement program. These audits were suspended during the pandemic and that cessation will continue until a future date when we are less concerned about the additional personal interaction and other steps that are less practical under current emergency conditions. When debtor audits do resume, they will be conducted under modified procedures designed to streamline the process.
Third, we have no plans to change current remote section 341 meeting protocols before the Presidential public health emergency declaration lapses. We are, however, hard at work and consulting internally and with external stakeholders to assess the effectiveness of remote meetings. Among the options being considered are for initial section 341 meetings for consumer debtors to proceed remotely. After the initial meeting, the trustee or United States Trustee would have the option to continue the meeting to either another remote meeting or to an in-person meeting as circumstances dictate. In addition, we are reviewing the practicality of requiring that initial meetings be conducted by videoconference, instead of the currently prevalent telephonic means.
While our current pandemic emergency procedures have shown that most meetings can be concluded without ever meeting face-to-face, virtual meetings are not a perfect substitute for in-person meetings. For example, they present real challenges with respect to debtor identification that, if not handled properly, could impact the evidentiary value of testimony—admissibility, weight, and credibility. Furthermore, having the opportunity to sit across from a debtor at the section 341 meeting can be advantageous with respect to questioning, reviewing documents, and conducting other fact finding. And insofar as most debtors never set foot in a courtroom, there is intrinsic value in an in-person meeting because it can convey the solemnity of the bankruptcy process in a way that is not otherwise easily replicated in a remote meeting. These aspects must be balanced against the benefits of virtual meetings.
Assuming remote meetings will largely continue post-pandemic, we will have to bolster our current guidance for trustees governing the conduct of these meetings to promote consistent procedures and criteria for determining whether to continue meetings in-person. In addition, if the overwhelming number of meetings is to be conducted remotely, as I suspect they will, then we need to ensure that appropriate security protocols are in place, determine which section 341 meeting sites should be closed, and make a whole host of other technical and practical decisions. Until then, the current USTP directive issued on August 28, 2020, will apply and all meetings shall continue to be conducted by telephone or video appearance.
BEST PRACTICES FOR DOCUMENT PRODUCTION REQUESTS
Apart from the changes we are making to chapter 13 administration based upon lessons learned from the COVID pandemic, we also are finally going to incorporate into the Handbook for Chapter 13 Standing Trustees the “Best Practices for Document Production Requests by Trustees in Consumer Bankruptcy Cases” that was issued by the USTP in 2010. These best practices were twice endorsed by the NACTT and the National Association of Bankruptcy Trustees (NABT). In addition, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy recommended that they be elevated into the Handbook.
We understand that trustees, by and large, have embraced the best practices. But there is a small number who continue to routinely make requests for information from debtors beyond what the Bankruptcy Code and Rules require and without a particularized need for additional information. By adding the best practices to the Handbook, we want to make clear that there is an expectation that they should be followed, except where the specific facts of a case warrant further investigation and thus additional documents. With that said, we have received some suggestions for minor modifications that we are considering and will incorporate them before the Handbook is updated.
DIVERSITY AND INCLUSION INITIATIVE
Last but not least I want to discuss with you the need for greater diversity and inclusion in the bankruptcy system. I think that all of us who have attended professional bankruptcy conferences, and especially gatherings of chapter 11 business reorganization professionals, can agree that the lack of diversity is apparent. With about 1.3 million pending bankruptcy cases on average annually in the United States, it is fair to say that bankruptcy affects a broad cross-section of our populace—not only debtors who file for bankruptcy, but the tens of millions of creditors who are parties in cases.
In an effort to promote greater diversity and inclusion, the USTP is taking steps to broaden outreach, recruitment, and training for trustees. I am grateful for the interest and assistance of the NACTT, the NABT, and the National Conference of Bankruptcy Judges in this endeavor. If we are to attract the widest pool of talent to the bankruptcy profession, then we need to enhance our efforts. This will involve participating in career and job fairs, including at high schools, colleges, and law schools, to showcase the opportunities for service as a bankruptcy trustee. We also will sharpen our trustee recruitment procedures to target less represented populations through affinity publications and the like. If experts are right that bankruptcy filings will rise in the near future, then we will need to replace departing trustees and, in some districts, expand the number of trustees. Conducting broad searches for potential trustee talent will be critical.
Beyond outreach and recruitment, we also plan to enhance our training regimen for trustees. The USTP’s National Bankruptcy Training Institute is developing a module that every local USTP office will deliver as part of its regular training to sensitize trustees on the special impacts that case administration may have—or be perceived to have—on disadvantaged communities. Each of us can do a better job when we better understand the effect our actions have on real people in real life. We look forward to working closely with the NACTT’s leadership team on promising new approaches we can take to ensure that the bankruptcy laws are applied strictly, equitably, and with appreciation for the diversity of our fellow citizens whom we serve. So stayed tuned.
I hope that you have found this update helpful and that my remarks conveyed how much I admire the incredible work you have done over the past 16 months to keep the chapter 13 system afloat and to help debtors and creditors alike. The work you do is important and the way you do it reflects the strength of your character, compassion, and professionalism.
There is still much to be done and, as public health conditions allow, I will begin visiting USTP offices, which hopefully will include an opportunity to meet with many of you as well.
Thank you very much for the generosity of your time today.
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