Remarks of Director Tara Twomey at The 32nd Annual Convention of the National Association of Consumer Bankruptcy Attorneys

Remarks as Prepared for Delivery

INTRODUCTION

Good morning and thank you. As I was preparing for these remarks, I thought back to the first NACBA Convention that I attended in Boston nearly two decades ago. At that time, I was a legal services attorney and clinical instructor who had unexpectedly found myself in bankruptcy court to address the early wave of subprime foreclosures sweeping across low-income communities and to combat foreclosure rescue scams. Over the past 20 years, I have attended every NACBA Convention except one, and it is an honor to be back. I am humbled to join the amazing list of keynote speakers at this event, which includes Jerry Patchan, former Director of the Executive Office for United States Trustees, Professors Jay Westbrook and now Senator Elizabeth Warren, and most recently Associate Attorney General Vanita Gupta. Again, it is an honor and privilege to be here. Today, I stand before you wearing a different hat than I have in years past, but I can assure you that I am no less passionate about the Bankruptcy Code and its promise of relief to financially struggling Americans.

When I think about bankruptcy in the United States, I think of how the system has evolved significantly since Congress created the first bankruptcy law in 1800. As originally enacted, that law was limited to traders and only to involuntary proceedings—it was very narrow in its application. Many iterations and 224 years later, we have a remarkable bankruptcy system that touches all corners of society from large corporations and mass tort victims to mom-and-pop businesses and individuals who have fallen on hard times. Based on the idea that the honest but unfortunate debtor should be given a fresh start, and that failing businesses can be reorganized into successful operations, our bankruptcy laws have shaped American society and our economy. For individuals and companies alike, bankruptcy can be a powerful engine of economic renewal.

I want to start today by telling you about some real people—people like your clients—who have benefited from a fresh start. I want to tell you about a recently divorced father living in an apartment with his two children. He had a steady job as an assistant manager for a retail clothing store in a large metropolitan area. His monthly gross income of $3,700 was well under the area median income, and his $1,500 a month rent consumed about half of his take-home pay. When he filed his chapter 7 petition, he was facing a number of collection lawsuits. This dad got his discharge and his fresh start.

And then there is the single mom who lived in a mobile home with her son and drove a 2009 car. She worked for 14 years as a cashier at a local store and her monthly gross income was $1,265. That works out to about $7.90 an hour for a 40-hour work week, which is just 65 cents more than the federal minimum wage. At the time she filed for bankruptcy, her unsecured debt was more than $10,000. Ten thousand dollars may not seem like a lot of money to some, but if your annual gross income is just over $15,000, it may feel like a hopeless mountain of debt. This mom got her discharge and her fresh start.

And finally, I want to tell you about a retiree whose monthly household income was $1,500, most of which was Social Security. At the time of filing, he had a homestead and a 20-year-old car with 170,000 miles on it. His wife’s 13-year-old car had over 127,000 miles. He had no retirement accounts and few other assets. When he filed for chapter 7, he had some credit card debt, but more than 80 percent of his unsecured debt, over $36,000, appeared to be a third-party loan for solar panels. This senior also got his discharge and his fresh start.

Bankruptcy does not solve the underlying social conditions that make it difficult for hard-working families to make ends meet. It does, however, provide the ultimate safety net for hundreds of thousands of debtors each year. And these cases are a reminder that the work you do has the power to transform lives, offering individuals and families a chance to rebuild and thrive.

CIVIL AND CRIMINAL ENFORCEMENT

We know that the vast majority of debtors, like those I have described, are honest but unfortunate. That said, we also know that there are a small number of debtors and other actors who jeopardize the integrity of the bankruptcy system by being less than honest and at times committing outright fraud. The USTP takes civil enforcement actions against these individuals and works with our law enforcement partners when appropriate.

Undisclosed Assets

Let me give you some examples. We are nearing the end of a case involving a debtor who failed to disclose over $300,000 in cashier’s checks that were property of his bankruptcy estate. Instead, he gave them to his sister, an attorney. She deposited them into her trust account and then withdrew funds from that account for her brother. A subsequent demand for turnover of the funds by the chapter 7 trustee led to fabricated client ledgers and backdated retention agreements. In the end, the debtor was not only denied his discharge, but he and his sister were both criminally prosecuted for, among other things, bankruptcy fraud.

Another debtor failed to disclose $40,000 of fitness equipment and cryptocurrency trading accounts despite having submitted multiple amended schedules. In the year before filing, there were over 66,000 crypto transactions using more than 50 wallets in the undisclosed cryptocurrency accounts with gross proceeds of $20 million. The debtor was unable to account for funds representing his net gains and was ultimately denied a discharge.

Bankruptcy Petition Preparers

Fraudsters can also be those who would prey on debtors—taking advantage of their dire financial circumstances. The Program has recently taken several successful enforcement actions against bankruptcy petition preparers in Florida, Oregon, Virginia, and Maryland. These are no mere administrative typists. Instead, we have seen schemes to exploit debtors fearful of losing their homes to foreclosure. For example, in Oregon, a disbarred California attorney led his victims to believe that he was an attorney who could help save their homes from foreclosure. He directed them to hand copy information that he provided onto blank forms and then file those forms with the bankruptcy court. He then attempted to avoid detection by impersonating a licensed attorney in communications with the chapter 13 trustee. The Bankruptcy Court permanently enjoined the disbarred attorney and his company from acting as bankruptcy petition preparers in Oregon, fined them $22,500, and ordered them to return $3,995 in fees and pay $7,990 in statutory damages to the debtor.

I share these examples with you because fraud and abuse in the bankruptcy can take many different forms, and the U.S. Trustee Program wants to ensure the integrity of the system for all stakeholders.

BUILDING BRIDGES

When former Associate Attorney General Gupta was with you last year, she talked about building bridges with other parts of the Department of Justice and other federal agencies to protect consumers, in bankruptcy and beyond. I wanted to spend a few minutes following up on items that she identified.

Blanket Information Requests and Challenges to Fee Waivers

First, she noted the USTP’s efforts to eliminate unnecessary form questionnaires and document checklists to ensure compliance with best practices developed in coordination with NACBA, NACTT, and NABT. If there are ongoing issues or concerns with these blanket information requests, please reach out to your local U.S. Trustee’s office. The same goes for challenges to fee waivers by chapter 7 trustees. As the Associate Attorney General noted, the USTP updated its trustee handbook last year to make clear that the trustees are not expected to scrutinize fee waiver requests unless local rules or procedures require otherwise. As with blanket information requests, please let your local U.S. Trustee’s office know if low-income debtors are being met with objections to fee waivers by trustees.

Video 341 Meetings

Second, she told you about the USTP’s pilot for video 341 meetings. The pilot, which ultimately spread across several USTP regions, showed significant benefits; virtual meetings resulted in greater debtor attendance and fewer continuances. Creditor participation also improved, and stakeholders, including trustees and debtor’s counsel, saw substantial time and cost savings. Based on the success of the pilot, the USTP began moving towards video 341 meetings in all chapter 7, 12 and 13 cases in USTP jurisdictions. We divided nationwide expansion into two waves. The first wave began late last year and generally covered the eastern half of the United States; the second wave covers the remaining western half. Almost all first-wave jurisdictions have completed the transition, and most second-wave jurisdictions will soon begin noticing virtual meetings. Just as in the first wave, the USTP will offer outreach sessions to attorneys, primarily debtor’s counsel, in each district.

At the same time, the USTP partnered with the Department of Justice’s Office for Access to Justice in conducting a listening session with attorneys from Colorado Legal Services. The session provided an opportunity to better understand the video 341 meeting experience of debtors from underserved communities and their attorneys. While the attendees confirmed that video 341 meetings improve attendance and participation by debtors, we recognize that some debtors face special challenges in using the video technology—particularly those who lack a reliable method to connect to the Internet. Although parties have successfully resolved most connectivity issues, exceptions to the video requirement are possible. Finally, we also heard from some listening session participants that the ability to observe other 341 meetings when attending in person relieved anxiety experienced by debtor clients. To this end, we are creating videos of sample meetings that will be posted to our website, justice.gov/ust, along with a video explaining the 341 process and logistics. In addition to reducing debtor anxiety, we hope that these videos will be a useful reference for you and your clients.

Taken together, we remain excited about both the progress and promise of virtual 341 meetings. We would not be here without the substantial efforts undertaken by bankruptcy courts and clerks to make necessary noticing adjustments and the bankruptcy trustees who have adapted to the new format. I want to extend my sincere gratitude to all of you in this room as well. You are key players in this effort, and we appreciate your partnership. Please continue to provide feedback on this new effort.

Student Loans

Third, Associate Attorney General Gupta focused on DOJ’s student loan guidance, which is intended to provide a more consistent process to handle student loan discharge requests. We are seeing more debtors using the guidance process each quarter, and I can tell you that a substantial majority of debtors who complete the process are receiving full or partial discharges of student loan debt. The Department of Justice and Department of Education continue to evaluate the procedures and welcome your ideas on how the process can be improved.

Elder Fraud

Finally, she noted that combating elder fraud in all its forms is a priority of the Attorney General and the Justice Department. In just the last two weeks, a Florida man has been sentenced for laundering proceeds of romance scams and other fraud schemes and transferring the funds to co-conspirators in Nigeria, and a North Carolina man was sentenced and ordered to pay hundreds of thousands of dollars in restitution for laundering proceeds of an elaborate series of romance scams that included impersonating romantic love interests, diplomats, customs personnel, military personnel, and other fictitious personas. And last month, a Los Angeles trio was sentenced for laundering gift cards purchased by victims of telephone scams. These scammers included imposters falsely claiming to be policy and other government personnel and retail and tech support impersonators falsely offering to fix nonexistent issues with the victims’ online accounts or computers. The group acquired more than 5,000 gift card numbers and access codes.

I share these stories with you because I know that almost all of you have seen a debtor who has fallen victim to one type of scam or another. We have seen these debtors too. Let me tell you about a chapter 13 debtor who I will call Marge. During Marge’s 341 meeting, she testified that she had been in an online relationship with a person she believed to be a high-ranking member of the military who was supposedly serving overseas and who she believed would someday marry her and take her to live in California. At the request of this scammer, Marge made a number of wire transfers to countries in Europe. She also took out an SBA loan for more than $25,000 and sent a check to an entity in the United States that she believed was connected to the officer. The local U.S. Trustee office was alerted to the fraud by the chapter 13 trustee and Marge’s bankruptcy counsel and took appropriate action.

Another senior debtor who I will call Betty filed a chapter 7 and reported few assets but did disclose an account receivable from a virtual acquaintance. At her meeting of creditors, Betty testified that the person had contacted her through social media and that they had established a friendship. At his request, she loaned him $150,000 to help him pay business debts. To make the loan, the debtor cashed out her savings and retirement account. After she sent him the money, she never heard from him again. Ultimately, the trustee filed a no asset report, and the debtor received her discharge.

The U.S. Trustee Program regularly screens for cases that may involve elder fraud. When we suspect such wrongdoing, we refer the conduct to law enforcement and, when appropriate, to civil agencies charged with protecting the welfare of certain victims. I also encourage you to play a role in combating the scourge of elder fraud by exploring the resources provided by the Department’s Elder Justice Initiative (www.elderjustice.gov), including the Elder Fraud Hotline (1-833-Fraud-11).

Let me wrap up by talking a bit about filing trends and credit counseling.

TRENDS AND CREDIT COUNSELING

Filing Trends

Over the last few years, we have collectively faced immense challenges with a global pandemic disrupting every aspect of our lives. The consumer bankruptcy community saw filings drop to historic lows. Stimulus money, expanded unemployment benefits, and payment pauses provided a lifeline for many families, keeping them afloat. But the tide is turning.

Rising mortgage interest rates means that mortgage modifications are harder to structure. The sweeping student loan payment pause, which offered temporary relief to tens of millions of borrowers, ended. Additionally, a significant portion of individuals who benefited from continuous Medicaid coverage during the pandemic lost that safety net because of recertification requirements.

In the first two quarters of Fiscal Year 2024, chapter 7 filings in U.S. Trustee Program districts were up 21 percent compared with those quarters in FY 2023. I believe that trend will continue. There may not be a tsunami of filings, but I think we can expect consumer cases to gradually return to our pre-pandemic baseline.

Credit Counseling

The 2005 amendments to the Bankruptcy Code require individuals to obtain credit counseling before filing for bankruptcy. The implementing regulations state that counseling services are typically at least 60 minutes in duration. NACBA has stated that many credit counseling sessions are excessively long, and it has advocated for shorter sessions for certain debtors. It has also suggested that there is a perception that the rule requires credit counseling sessions to be a minimum of 60 minutes. In promulgating the final rule, the USTP stated that “the rule does not require all counseling sessions to last 60 minutes … in some instances, less or more time may be appropriate.” The USTP did not establish a required minimum duration or required average duration in the final rule.

To avoid any potential confusion, we are revising the FAQs on our website regarding the length of time that a typical counseling session should last to state that there is no required minimum duration or required average duration for counseling sessions. We understand that counseling sessions may vary in duration depending on each client’s particular circumstance. The guiding principles, regardless of duration, are those contained in the statute.

Our hope is that this clarification dispels any misperception about the duration of the required credit counseling sessions, and I look forward to a continued collaboration in improving access to justice for debtors in bankruptcy.

CONCLUSION

I will close by first letting you know that I am lucky to have such a great team in the USTP who has helped to get me acclimated, including those at the Executive Office and many others like Greg Garvin, who is also attending the convention and speaking on subchapter V cases. Second, I want to thank you again for the opportunity to speak with you today and for inviting me to be here two decades after my first introduction to NACBA. And, finally, thank you for making a difference in the lives of the hundreds of thousands of people struggling to make ends meet every year.

I wish you all the best for a productive and successful meeting.