Remarks of Director Tara Twomey at the 41st Annual Conference of the National Association of Bankruptcy Trustees

INTRODUCTION

Good morning and thank you for the warm welcome. It is my honor to be here with you for your annual conference. I have known and worked with many of you over the past two decades but today I stand before you wearing a different hat. You can rest assured, however, that I still have the same passion towards the Bankruptcy Code and the promise of relief it brings to financially struggling Americans.

The bankruptcy system in the United States has evolved significantly since Congress created the first bankruptcy law in 1800. As originally enacted, the law was limited to traders and only allowed involuntary proceedings; it was very narrow in its application. Many iterations and 223 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 should have the opportunity to reorganize 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 talking about that engine of economic renewal. I want to tell you about a neighborhood bar and grill that fell on hard times, closed its doors, and ultimately filed for chapter 7 bankruptcy. The liquor license was sold; the neon lights, booths, tables, and memorabilia were auctioned. Secured creditors and priority creditors were paid in full and unsecured creditors were paid 93 cents on the dollar. This was a business failure, but it also was a bankruptcy success. The assets were put back into productive use and the creditors were paid fair and equitably from the proceeds. This process happens thousands of times each year, but it does not happen without you—the chapter 7 trustee.

I also want to tell you about a divorced father living in an apartment with his two children. He has a steady job as an assistant manager for a retail clothing store in a large metropolitan area. His monthly gross income of $3,700 is well under the area’s median income and his $1,500 a month rent consumes about half of his take home pay. When he filed his bankruptcy, he was facing several collection lawsuits. And then there is the single mom who lives in a mobile home with her son and drives a 2009 car. She has worked for 14 years as a cashier at a local store and her monthly gross income is $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. Both of these debtors received a chapter 7 discharge and a fresh start.

Bankruptcy does not solve the underlying social conditions that make it difficult for hard-working people like this father and mother to make ends meet. It does, however, provide the ultimate safety net for hundreds of thousands of debtors each year. These cases and so many others like them are a reminder that the bankruptcy system has the power to transform lives, offering individuals and families a chance to rebuild and thrive. For many debtors, you are the only touch point that they have with the bankruptcy system. The work you do is important. And I thank you for playing an instrumental role in the system and shepherding these cases through the process.

CIVIL AND CRIMINAL ENFORCEMENT

I think we all share the view that the vast majority of debtors, like those I have just described, are honest people who have faced unfortunate challenges in their lives and want the opportunity to turn things around. There are, however, a small number of debtors and other actors that jeopardize the integrity of the bankruptcy system by being less than honest and, at times, committing outright fraud. In partnership with each of you, the U.S. Trustee Program (USTP) has been successful in bringing both civil and criminal enforcement actions against those who attempt to misuse the bankruptcy system.

For example, we are nearing the end of a matter involving a debtor, who was an attorney and who failed to disclose numerous assets that were property of his bankruptcy estate. The chapter 7 trustee discovered that the debtor had given more than $300,000 in undisclosed cashier’s checks and other funds to his sister, also an attorney, who deposited them into her trust account. In a scheme with her brother, she would then withdraw those funds to purchase real estate and make other transactions for her brother’s benefit. When questioned about the funds, the sister provided fabricated client ledgers and backdated retention agreements and made false statements to the bankruptcy court. In the end, the debtor was denied his discharge and both he and his sister were successfully prosecuted for bankruptcy fraud, among other things.

I share this example with you because as trustees you are the first line defense in ferreting out fraud and abuse. And, when you see it, whether by debtors, creditors, or third parties, we encourage you to let us know.

SMALL BUSINESS REORGANIZATION ACT (SBRA)

Before I move onto filing trends, I want to say a word about SBRA. Since its effective date in February 2020, and notwithstanding a global pandemic, SBRA has dramatically changed the way small business debtors reorganize. By all accounts, it is working remarkably well and has resulted in a more efficient and lower cost solution for distressed small business owners. This is critically important since small businesses are the lifeblood of our economy, creating jobs, innovating, and serving local communities. There are approximately 33 million small businesses in the United States that employ more than 60 million Americans, or roughly 46 percent of all private sector employees.

When a small business becomes financially distressed, SBRA provides a second chance that may not have been previously available to them. Since its enactment, thousands of individuals and companies have used SBRA to put themselves and their businesses on sounder financial footing. A wide range of businesses—such as a BBQ restaurant, a nail salon, a funeral home, a spice seller, and companies providing a variety of services like marketing, IT consulting and even shrimp processing and bail bonds—have all benefited from SBRA.

As we move forward, we are pleased to be participating in the American Bankruptcy Institute’s Subchapter V Task Force with other stakeholders to evaluate how subchapter V is working and if there are ways it could be improved. In addition to eligibility and confirmation issues, we are glad to see the task force focused on the role of the subchapter V trustee and trustee compensation. We are similarly glad to report that the general consensus of the witnesses who have testified at the Task Force’s public hearings is that the subchapter V trustees the USTP appoints are of high quality and are helpful to the process. More to come on this in the near future.

FILING TRENDS AND RECRUITMENT

Filing Trends

Over the last few years, we have collectively faced immense challenges with a global pandemic disrupting every aspect of our lives. We saw filings drop to historic lows. Stimulus money, expanded unemployment benefits, and payment pauses provided a lifeline for many families that helped to keep them afloat. Under the Paycheck Protection Program, the federal government distributed nearly $800 billion to more than 11 million small businesses. That extraordinary relief is no longer available.

The rise of mortgage interest rates means that mortgage modifications are harder to structure. The student loan payment pause, which has offered temporary relief to tens of millions of borrowers, is coming to an end. Additionally, a significant portion of individuals who have benefited from continuous Medicaid coverage during the pandemic will lose that safety net because of recertification requirements.

In the first three quarters of Fiscal Year (FY) 2023, chapter 7 filings across the nation were up seven percent compared to those same quarters in FY 2022. I believe that trend will continue. There may not be a tsunami of filings, but I think we can expect chapter 7 cases to gradually return to our pre-pandemic baseline.

As for SBRA, which became effective shortly before the global pandemic, we saw a good early start but then chapter 11 filings began a steady downward trend. Even today, chapter 11 filings remain low relative to historic levels, but there has been a 43 percent increase in filings during the first three quarters of FY 2023. Notably, subchapter V cases make up a larger percentage of chapter 11 filings than in previous years, comprising about 30 percent of all chapter 11s through the first three quarters of this fiscal year.

Recruitment

With this slight rise in chapter 7 filings, we continue to evaluate the “health” of our chapter 7 panels across the country. We have seen some attrition due to retirements and low-case filings, and we are recruiting both chapter 7 and subchapter V trustees across the country. However, we are monitoring local conditions to ensure long-term sustainability prior to moving forward with panel recruitments.

When we do recruit, we are committed to efforts that will attract trustee candidates who reflect our nation’s rich diversity and represent a broad range of personal and professional backgrounds, experiences, and perspectives. Why? Because the people we serve—both debtors and creditors—are not limited to those of a particular race, color, religion, sex, national origin, age, sexual orientation, or physical ability. We cannot ignore the diversity that surrounds us in our day-to-day work. And I believe that inclusivity among bankruptcy professionals reinforces a sense of fairness and justice for all stakeholders.

VIDEO SECTION 341 MEETINGS

Lastly, let me turn to the ongoing project of our transition to video 341 meetings, which impacts all of you. I know that you have been hearing about this for a while now. Indeed, some of you even led the way, pivoting to video 341 meetings during the pandemic.

We have certainly learned a lot from our collective experiences. For instance, we learned that the statutory obligations of section 341 can be satisfied in most cases without requiring that a debtor take a day off from work, travel long distances, or secure childcare to attend an in-person 341 meeting. And we have learned that the virtual format not only makes it easier for debtors, but also, in many cases, makes it easier for creditors to participate.

Building on our experience, earlier this year we piloted Zoom 341 meetings in Region 19 (Colorado, Utah, and Wyoming). I think it is fair to say that the feedback from the pilot was universally positive. I want to recognize your colleagues from the pilot region. In addition to completing a comprehensive survey on each 341 meeting, they helped troubleshoot and test features of the video platform and provided valuable feedback on the interim procedures. Their efforts were instrumental in helping us build a better video protocol.

With the successful effort under our belt, we recently expanded video meetings to Region 9 (Ohio and Michigan) and Region 15 (the San Diego area, Hawaii, and the Pacific Island territories) and noticing of the Zoom 341 meetings there have begun. And we are now moving forward with the nationwide expansion, which will occur in two waves. Wave 1 will cover our eastern regions—generally east of the Mississippi—and Wave 2 will cover the western regions. The goal is to have trustees in all USTP regions conducting Zoom 341 meetings by early next year. I want to thank you all for your cooperation in moving this project forward.

CONCLUSION

I greatly appreciate the opportunity to speak with you today. It has been a good first six months on the job. I am lucky to have a great team in the USTP who has helped to get me acclimated, especially Deputy Director/General Counsel Ramona Elliott who has provided invaluable support. And I want to thank the leadership of the NABT for their partnership with the Program. Since coming on board, I have had the opportunity to engage several times both with your outgoing President, Gary Seitz, and with the NABT liaison group to address system-wide challenges. I am grateful for their insights. I now look forward to working with your new President, Marc Albert, and building on those positive results.

We have several people attending the full conference and I want to specifically mention Mike Bujold, our Acting Deputy Director for Field Operations, and Bob Gebhard, our Assistant Director for Oversight. I encourage you to seek Mike and Bob out to share your ideas and suggestions on how we can improve the bankruptcy system.

Best wishes for a productive and successful meeting.