WSJ: Bankruptcy Watchdogs Push Congress for a Raise

By Katy Stech Ferek

WASHINGTON—The legal professionals who ensure people going through bankruptcy aren’t hiding assets are pushing lawmakers for their first pay raise since 1994, saying the robust oversight of the country’s personal-bankruptcy system is at stake.

In a House hearing on Wednesday, consumer-bankruptcy experts said the pay for the watchdogs, called bankruptcy trustees, should be doubled to $120 per case.

The experts said trustees play a vital role in the bankruptcy process by making sure people don’t hide valuable possessions and by returning recovered money to people and small businesses who are awaiting payment. Many are drawn to the work not for the pay, but for the prestige or public-service aspect. For most bankruptcy cases, they get only a flat fee, currently $60—far less than what they could earn for other legal work.

Roughly 1,100 trustees monitor chapter 7 cases, the most widely used form of bankruptcy for individuals. But during the hearing before a subcommittee of the House Judiciary Committee, experts testified they worried that the stagnant pay would lead to fewer competent, honest applicants. Last year, 20 candidates applied for every open chapter 7 trustee position, down from 58 in 2010, according to the Justice Department, which runs the program.

At the hearing, Rep. Tom Marino (R., Pa.) agreed with witnesses, calling trustees “vitally important” to the bankruptcy system. Mr. Marino is co-sponsor of a bipartisan bill that would raise trustees’ pay.

He said lawmakers agree the increase is necessary but they have “different paths to getting there,” referring to who should pay for it.

Trustees can uncover money and return it to pay off a bankrupt person’s debt to small businesses, credit-card companies and other individuals such as ex-spouses, Illinois trustee Neville Reid testified at the hearing. Taxpayers also benefit, he said, noting that chapter 7 trustees distributed roughly $170 million to state and federal tax authorities in 2016.

“Trustees frequently uncover schemes and wrongdoing that lead to prosecutions that prevent further injury or achieve justice for innocent people, even though the trustees frequently do not recover the value of their time investigating such matters,” Mr. Reid said.

The bill discussed at Wednesday’s hearing has support from two influential blocs, the American Bankers Association trade group and consumer-bankruptcy advocates. Several similar proposals have failed in the past.

The latest legislation would fund the pay increase by making bankrupt individuals pay higher fees.

Some lawyers and consumer-focused nonprofits are urging Congress to find another source of money to pay for the increase, such as a new fee for those filing requests for payment from someone going through bankruptcy.

Chapter 7 allows a financially troubled individual to sell property to repay certain bills before a judge cancels some unpaid debt, such as credit-card and medical bills. Last year, 472,190 individuals and couples filed for chapter 7 protection.

Trustees can also receive a second form of compensation beyond the flat fee: money from selling possessions and property valued above the limits of what a bankrupt person is allowed to keep. But cases with trustee sales are rare, occurring less than 10% of the time.

Under federal law, chapter 7 trustees review lists of individuals’ possessions and expenses and later question them in person. The compensation structure gives trustees incentives to look for hidden assets, but the model isn’t always successful. Jason Gold, a Washington, D.C., trustee, said that in at least 2,000 cases—nearly 8% of the total he has taken since 1989—he has spent a few hours to several days on a case only to realize there are no additional assets to sell.

Overall trustee compensation has fallen over the past six years, including an 18% drop in annual pay last year, Justice Department officials said. The decline comes as the number of people who file for bankruptcy each year has fallen since a 2010 peak.

Meanwhile, the number of bankrupt people who are so poor that they don’t have to pay the fee has increased in recent years. The number of chapter 7 cases with waived fees has grown to 4.7% in 2016 from 1.9% in 2007, testified Raymond Obuchowski, a Vermont-based trustee. Mr. Obuchowski has grown a long beard in protest of trustees’ pay, saying he won’t shave until Congress authorizes a raise.

Some consumer advocates say the low pay and drop in filings have driven trustees to be more aggressive in an attempt to boost their compensation.

Tara Twomey, executive director of the National Consumer Bankruptcy Rights Center, said trustees have gotten more creative in their recovery efforts since 2010, including by trying to sell property that bankrupt people would have historically been able to keep. Others have sued colleges to claw back tuition that bankrupt parents paid for their children.

Ms. Twomey supports the compensation increase but doesn’t want bankrupt people to pay for it. She and other consumer advocates said that a 2005 law already increased the costs of a system designed to help people who are financially struggling.

Rep. David Cicilline (D., R.I.) said he wouldn’t vote for the bill in its current form, saying the cost of bankruptcy is already “a great challenge for many people.”
 
Corrections & Amplifications

Jason Gold became a chapter 7 trustee in 1989. An earlier version of this article incorrectly said it was in 1998. (Sept. 26, 2018)

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