[Joint House and Senate Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                           BANKRUPTCY REFORM

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                    HOUSE COMMITTEE ON THE JUDICIARY

                                AND THE

                            SUBCOMMITTEE ON
                ADMINISTRATIVE OVERSIGHT AND THE COURTS

                                 OF THE

                   SENATE COMMITTEE ON THE JUDICIARY

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 11, 1999

                               __________

                              Serial No. 2


         Printed for the use of the Committees on the Judiciary

                                 _______

                    U.S. GOVERNMENT PRINTING OFFICE
61-368 CC                   WASHINGTON : 2000

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402



                       COMMITTEE ON THE JUDICIARY

                   HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        BARNEY FRANK, Massachusetts
BILL McCOLLUM, Florida               HOWARD L. BERMAN, California
GEORGE W. GEKAS, Pennsylvania        RICK BOUCHER, Virginia
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
LAMAR S. SMITH, Texas                ROBERT C. SCOTT, Virginia
ELTON GALLEGLY, California           MELVIN L. WATT, North Carolina
CHARLES T. CANADY, Florida           ZOE LOFGREN, California
BOB GOODLATTE, Virginia              SHEILA JACKSON LEE, Texas
ED BRYANT, Tennessee                 MAXINE WATERS, California
STEVE CHABOT, Ohio                   MARTIN T. MEEHAN, Massachusetts
BOB BARR, Georgia                    WILLIAM D. DELAHUNT, Massachusetts
WILLIAM L. JENKINS, Tennessee        ROBERT WEXLER, Florida
ASA HUTCHINSON, Arkansas             STEVEN R. ROTHMAN, New Jersey
EDWARD A. PEASE, Indiana             TAMMY BALDWIN, Wisconsin
CHRIS CANNON, Utah                   ANTHONY D. WEINER, New York
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama

         Thomas E. Mooney, Sr., General Counsel-Chief of Staff
       Julian Epstein, Minority Chief Counsel and Staff Director
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                GEORGE W. GEKAS, Pennsylvania, Chairman

ED BRYANT, Tennessee                 JERROLD NADLER, New York
LINDSEY O. GRAHAM, South Carolina    TAMMY BALDWIN, Wisconsin
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama              ANTHONY D. WEINER, New York
MARY BONO, California                WILLIAM D. DELAHUNT, Massachusetts


                  Raymond V. Smietanka, Chief Counsel
                     Susan Jensen-Conklin, Counsel
                        James W. Harper, Counsel



                   SENATE COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Delaware
JON KYL, Arizona                     HERB KOHL, Wisconsin
MIKE DEWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire

              Manus Cooney, Chief Counsel & Staff Director
          Bruce Cohen, Minority Chief Counsel & Staff Director
                                 ------                                

        SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

                  CHARLES E. GRASSLEY, Iowa, Chairman

JEFF SESSIONS, Alabama               ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina       RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            CHARLES E. SCHUMER, New York


                       Kolan Davis, Chief Counsel
                         John McMickle, Counsel
                           Rita Lari, Counsel



                            C O N T E N T S

                              ----------                              

                              HEARING DATE

                                                                   Page
March 11, 1999...................................................     1

                           OPENING STATEMENT

Gekas, Hon. George W., a Representative in Congress from the 
  State of Pennsylvania, and chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1

                               WITNESSES

Hammonds, Bruce L., Senior Vice Chairman and CEO, MBNA America 
  Bank, N.A., Wilmington, DE.....................................    29
Jones, Edith Hollan, Judge, U.S. Court of Appeals for the Fifth 
  Circuit, and Member of the National Bankruptcy Review 
  Commission, Houston, TX........................................    86
Kenner, Carol J., U.S. Bankruptcy Judge, District of 
  Massachusetts, Boston, MA......................................    33
Klein, Gary, Esquire, Senior Attorney, National Consumer Law 
  Center, Boston, MA.............................................    67
Miller, Judith Greenstone, representing the Commercial Law League 
  of America, Birmingham, MI.....................................    91
Nuss, Larry, CEO, Cedar Falls Community Credit Union, Cedar 
  Falls, IA, representing the Credit Union National Association, 
  Inc............................................................    37
Sheaffer, Dean, Vice President and Director of Credit, Boscov's 
  Department Store, Inc., Laurel Dale, PA, representing the 
  National Retail Federation.....................................    24
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law 
  School, Boston, MA.............................................   103
Zywicki, Todd, Professor, George Mason University School of Law, 
  Arlington, VA..................................................    97

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Boucher, Hon. Rick, a Representative in Congress from the State 
  of Virginia: Prepared statement................................    22
Chabot, Hon. Steve, a Representative in Congress from the State 
  of Ohio: Prepared statement....................................    19
CUNA Publication: Issue of savingteen magazine...................    39
Dodd, Hon. Christopher J., a U.S. Senator from the State of 
  Connecticut: Prepared statement................................     6
Gekas, Hon. George W., a Representative in Congress from the 
  State of Pennsylvania, and chairman, Subcommittee on Commercial 
  and Administrative Law: Prepared statement.....................     2
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa: 
  Prepared statement: Prepared statement.........................     4
Hammonds, Bruce L., Senior Vice Chairman and CEO, MBNA America 
  Bank, N.A., Wilmington, DE: Prepared statement.................    31
Jones, Edith Hollan, Judge, U.S. Court of Appeals for the Fifth 
  Circuit, and Member of the National Bankruptcy Review 
  Commission, Houston, TX: Prepared statement....................    88
Kenner, Carol J., U.S. Bankruptcy Judge, District of 
  Massachusetts, Boston, MA: Prepared statement..................    35
Klein, Gary, Esquire, Senior Attorney, National Consumer Law 
  Center, Boston, MA: Prepared statement.........................    70
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin: 
  Prepared statement.............................................     8
McCollum, Hon. Bill, a Representative in Congress from the State 
  of Florida: Prepared statement.................................    21
Miller, Judith Greenstone, representing the Commercial Law League 
  of America, Birmingham, MI: Prepared statement.................    93
Nadler, Hon. Jerrold, a Representative in Congress from the State 
  of New York: Prepared statement................................    16
Nuss, Larry, CEO, Cedar Falls Community Credit Union, Cedar 
  Falls, IA, representing the Credit Union National Association, 
  Inc.: Prepared statement.......................................    64
Sessions, Hon. Pete, a Representative in Congress from the State 
  of Texas: Prepared statement...................................    10
Sheaffer, Dean, Vice President and Director of Credit, Boscov's 
  Department Store, Inc., Laurel Dale, PA, representing the 
  National Retail Federation: Prepared statement.................    26
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law 
  School, Boston, MA: Prepared statement.........................   106
Zywicki, Todd, Professor, George Mason University School of Law, 
  Arlington, VA: Prepared statement..............................    99

                                APPENDIX

Material submitted for the record................................   119



                           BANKRUPTCY REFORM

                              ----------                              


                        THURSDAY, MARCH 11, 1999

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
Room 2141, Rayburn House Office Building., Hon. George W. Gekas 
[chairman of the subcommittee] presiding.
    Present: Representatives George W. Gekas, Ed Bryant, Steve 
Chabot, Asa Hutchinson, Jerrold Nadler, Tammy Baldwin, Anthony 
D. Weiner, and William D. Delahunt, and Senators Charles E. 
Grassley and Christopher J. Dodd.
    Also present: Congressman Nick Smith of Michigan and 
Senator Joseph Biden, Jr.
    Staff present: Raymond V. Smietanka, Subcommittee Chief 
Counsel; Peter Levinson, Full Committee Counsel; Susan Jensen-
Conklin, Subcommittee Counsel; Audray Clement, Subcommittee 
Staff Assistant; David Lachmann, Minority Professional Staff 
Member; Perry Apelbaum, Minority General Counsel, and Julian 
Epstein, Minority Chief Counsel and Staff Director.

              OPENING STATEMENT OF CHAIRMAN GEKAS

    Mr. Gekas. [presiding.] The hour of two o'clock having 
arrived, this extraordinary session of the Judiciary 
Subcommittee on Commercial and Administrative Law will come to 
order.
    It is extraordinary in several different aspects, not the 
least of which is that it is and will become a bicameral joint 
session for the first time in several generations, as we have 
been told.
    Thus, we make our imprint on history right at the outset. 
The plans for the day are going to be altered somewhat, through 
no fault of our own, in that the Senate of the United States is 
engaged in a series of votes, which are stacked, one after 
another. And our Senators, who will be participating in this 
hearing, are sharing the time between this chamber and that of 
their own. And so we will expect them to walk in and out 
throughout the whole entire process.
    But in the meantime, we are going to, even though we lack a 
quorum for the purposes of a hearing on the House side, we are 
going to entertain now an opening statement by Senator 
Grassley, who is not bound by the House rules. And he reminds 
me of that quite often. So we now welcome to our chamber and 
introduce to you, Senator Grassley, who has been a monumental 
leader in the world of bankruptcy and, particularly, in his 
efforts in the last Congress and the ones that have so famously 
begun now in this session of Congress. He is, whether he knows 
it or not, whether he will acknowledge it or not, an expert in 
this field. And he has proved, especially during the conference 
wrangling of last year, his ability to put various elements 
together and to allow us to emerge with a saleable product, 
which was the conference report of the last session.
    With that, I allow or I switch the microphone to Senator 
Grassley so that he may address our gathering.
    [The prepared statement of Mr. Gekas follows:]
    Prepared Statement of Hon. George W. Gekas, a Representative in 
Congress from the State of Pennsylvania, and chairman, Subcommittee on 
                   Commercial and Administrative Law
    A hearty welcome to Chairman Grassley and our colleagues from the 
other body. Chairman Grassley is to be commended for his tireless 
leadership and hard work on behalf of bankruptcy reform.
    Today is truly a most auspicious occasion for several reasons. 
First, it marks what may very well be a historical occasion--a 
bicameral hearing on bankruptcy reform. Second, it brings to full 
circle the bicameral efforts that culminated in the last session in the 
conference report on H.R. 3150, the Bankruptcy Reform Act of 1998. In 
fact, the bill that I introduced last month is identical to the 
conference report.
    Third, this hearing marks more than four years of careful analysis 
and review of our nation's current bankruptcy system--a review that 
began with the creation of the National Bankruptcy Review Commission 
back in 1994. The Commission then spent two years studying our 
bankruptcy laws and produced a report with numerous recommendations, 
many of which are memorialized in my bill.
    Today's hearing on bankruptcy reform is the first of a series of 
four that my Subcommittee will hold on the subject of bankruptcy 
reform. Over the course of these hearings, it is anticipated that we 
will hear from more than 50 witnesses, representing nearly every major 
viewpoint on bankruptcy reform. These hearings complement the extensive 
series of hearings that the Subcommittee held last year, during which 
more than 60 witnesses testified.
    Like last year, it is important to note that I have made every 
effort to ensure that these hearings are fulsome and inclusive of 
divergent views. To that end, I actively solicited recommendations from 
our minority colleagues with respect to witnesses who represent a broad 
cross-section of viewpoints. In fact, there are several witnesses that 
I have invited who ardently oppose my views of bankruptcy reform.
    To further ensure bipartisan involvement, we have invited our 
colleagues and their staffs to several press conferences and briefings 
on important issues dealing with the treatment of child support and 
needs-based bankruptcy relief.
    And these efforts will continue. We hope, in the near future, to 
hold a comprehensive bipartisan briefing on my bill, H.R. 833, and the 
bill that Mr. Nadler is reportedly preparing to introduce shortly. The 
purpose of this briefing will be to assist Members and their staff in 
their understanding of both bills as we undertake their consideration.
    In the midst of economic well-being, we continue to be shocked by 
the ever-escalating rate of bankruptcy filings, which last year topped 
1.4 million. These statistics evidence that there is an overwhelming 
need for comprehensive reform, not just some tinkering or minor 
refinement of the current system.
    Our mandate is clear and unequivocal: to reduce abuse and restore 
public confidence in the integrity of the bankruptcy system. It is my 
sincere hope that we can work cooperatively to achieve these goals.

    Mr. Grassley. Well, most importantly, not only to 
acknowledge your leadership for this meeting and to echo what 
you said about me, but to say the same thing about you in the 
last Congress. Because of your leadership, moving such a 
comprehensive bill through the House of Representatives by such 
a wide bipartisan margin made possible our moving a bill 
through the Senate.
    I thank you very much for your leadership, and, once again, 
acknowledge a close working relationship, not only during the 
last Congress, but particularly as the last Congress ended and 
extending into this Congress. I thank you very much for the 
sort of communication we have had that have been able to move a 
bill in a more parallel fashion this time as opposed to last 
time. Although in the final analysis, things worked out fairly 
well as far as our compromise was concerned, but we started out 
at very different points.
    So I acknowledge that, and thank you once again. And I look 
forward to that close working relationship hopefully over just 
the next few months as opposed to the next several months to 
get something to the President of the United States. And I 
would apologize for not only myself by my colleagues that we do 
have these nine votes coming up, and it will probably preempt 
almost any involvement in this hearing beyond my statement.
    I would say to you that if we do get done soon, and you are 
still going, I intend to come back after the Senate's complete. 
So thank you for that. And I know that we have an Iowan 
testifying today, so it is my privilege also to welcome Mr. 
Larry Nuss from Cedar Falls--head of a credit union that I used 
to belong to when I was a factory worker in Cedar Falls, Iowa. 
And I am glad that he is coming to give some Iowa common-sense 
approach to the bankruptcy issue.
    The Library of Congress tells me that this is the first 
joint hearing on bankruptcy reform since 1932. With today's 
scheduling problems, I think that I understand why because this 
is an historic moment, and we should all recognize it as such.
    I think that the need for real bankruptcy reform is pretty 
obvious. You don't need an army of scientists or law professors 
or anybody else from academia or outside to tell us that we 
have a serious bankruptcy problem. These are good times in 
America. Thanks to hard work of our Congress, we have the first 
balanced budget in a generation, and that came since 
Republicans took over the Congress. As a result, unemployment 
is low. We have a solid stock market. And most Americans are 
optimistic about the future.
    Despite the successes I just cited, we still need to shape 
up our economy. Our taxes are too high. Our bankruptcy system 
needs to be fixed. About one and one-half million Americans 
will declare bankruptcy this year if previous trends continue.
    Since 1990, the rate of personal bankruptcy filings are up 
an amazing 94.7 percent. That's almost 100 percent increase in 
bankruptcies--and all during a time of very high prosperity.
    Of course, bankruptcy and taxes are linked, since consumers 
who pay their own way are penalized by having to pick the tab 
for irresponsible bankrupts who walk away from debt.
    Over 30 years ago, Senator Albert Gore, Senior, described 
this connection between tax burdens and bankruptcies on the 
Senate floor. He said that chapter 7 is like a special interest 
tax loophole. Like tax loopholes, chapter 7 allows someone to 
get out of paying his fair share and to shift costs to the hard 
working Americans who play by these rules.
    I think that Senator Gore had it exactly right. Bankruptcy 
reform is all about closing loopholes so well-to-do scoundrels 
can't get out of paying their fair share.
    In the last Congress, we almost closed the chapter 7 
loophole. The Senate and the House both passed good bills, and 
we made them both better in conference that received 
overwhelming bipartisan support.
    In the conference report, we have a means testing with an 
overlay of judicial discretion. We have new consumer 
protections, and I think that is why the conference report 
received such overwhelming support in the House of 
Representatives last Congress.
    In my view, last year's conference report is a good 
starting point. With some modifications, I think it is a 
package that will continue to have broad bipartisan support. I 
have been working with Senator Torricelli, my ranking member, 
and his staff on this basis, and I think that things are going 
well.
    I want to close with a quote on the need of bankruptcy 
reform. ``I realize that we cannot legislate morals. But we, as 
responsible legislators, must bear the responsibility of 
writing laws which discourage immorality and encourage 
morality; which honesty and discourage deadbeating; which make 
the path of social malingering and shirker sufficiently 
unpleasant to persuade him''--and a I can say parenthetically 
or her--``at least to investigate the ways of an honest 
person.''
    Now, who do you think said that? Some cold-hearted 
conservative? Some Republican spindoctor? No, that was Senator 
Albert Gore, Senior, the Vice President's father. He said that 
on January the 19th, as we was introducing at that time a bill 
that was called S. 613, to impose a means test on chapter 7 
bankrupts. My point is that the need to tighten up bankruptcy 
laws in a meaningful way has deep roots on both sides of the 
aisle. And it is based on common sense.
    Last year, we came very close. This year, I hope that we 
can work together on the people's business and get meaningful 
bankruptcy reform finally done and to the President for his 
signature. Thank you very much.
    [The prepared statement of Senator Grassley follows:]
Prepared Statement of Hon. Charles E. Grassley, a U.S. Senator from the 
                             State of Iowa
    At the outset, Mr. Gekas, I want to apologize for the votes in the 
Senate which have prevented me from being here or being more involved 
in this hearing. I know we have an Iowan testifying today. I'm certain 
that Mr. Larry Nuss from Cedar Falls, Iowa will grace this joint 
hearing with some good Iowa common-sense.
    The Library of Congress tells me that this is the first joint 
hearing on bankruptcy reform since 1932. With today's scheduling 
problems, I think I understand why. But this is an historical moment 
and we should all recognize it as such.
    I think that the need for real bankruptcy reform is pretty obvious. 
You don't need an army of so-called scientists, law professors and 
pointy-heads to tell us that we have a serious bankruptcy problem.
    These are good times in America. Thanks to the hard work of a 
Republican Congress, we have the first balanced budget in a generation. 
Unemployment is low, we have a solid stock market and most Americans 
are optimistic about the future.
    Despite the successes I just cited, we still need to shape up our 
economy. Our taxes are too high and our bankruptcy system needs to be 
fixed. About one and a half million Americans will declare bankruptcy 
this year if previous trends continue. Since 1990 the rate of personal 
bankruptcy filings are up an amazing 94.7 percent. That's almost a 100% 
increase in bankruptcies during a time of prosperity.
    Of course, bankruptcy and taxes are linked since consumers who pay 
their own way are penalized by having to pick up the tab for 
irresponsible bankrupts who walk away from their debts. Over 30 years 
ago, Senator Albert Gore, Sr. described this connection between tax 
burdens and bankruptcy on the Senate floor. He said that chapter 7 is 
like a special interest tax loophole. Like tax loopholes, chapter 7 
allows someone to get out of paying his fair share and shift costs to 
hardworking Americans who play by the rules.
    I think that Senator Gore had it exactly right. Bankruptcy reform 
is all about closing loopholes so well-to-do scoundrels can get out of 
paying their fair share.
    In the last Congress we almost closed the chapter 7 loophole. The 
Senate and House both passed good bills, and we made them both better 
in a conference that received overwhelming bi-partisan support. In the 
conference report, we have means-testing with an overlay of judicial 
discretion. We have new consumer protections. And I think that's why 
the conference report received such overwhelming support in the House 
of Representatives last Congress.
    In my view, last year's conference report is a good starting point. 
With some modifications, I think it's a package that will continue to 
have broad bi-partisan support. I have been working with Senator 
Torricelli, my new Ranking Member, and his staff on this basis and I 
think that things are going well.
    I'll close with this quote on the need for bankruptcy reform:

        ``I realize that we cannot legislate morals, but we, as 
        responsible legislators, must bear the responsibility of 
        writing laws which discourage immorality and encourage 
        morality; which encourage honesty and discourage deadbeating; 
        which make the path of the social malingerer and shirker 
        sufficiently unpleasant to persuade him at least to investigate 
        the way of the honest man.''

    Now, who do you think said this? Some cold-hearted conservative? 
Some Republican spin doctor?
    No, Senator Albert Gore, Sr.--the Vice-President's father--said 
this on January 19, 1965 as he was introducing S. 613 to impose a 
means-test on chapter 7 bankrupts. My point is that the need to tighten 
up bankruptcy laws in a meaningful way has deep roots on both sides of 
the aisle and is based on common sense. Last year we came very close. 
This year, I hope that we can work together on the people's business 
and get meaningful bankruptcy reform done.

    Mr. Gekas. We thank the Senator for that statement, and, of 
course, he has the run of the mill here. He may leave at any 
time to answer the call of the Senate. In the meantime, we 
acknowledge the presence of the gentleman from Arkansas, Mr. 
Hutchinson, and the gentleman from Tennessee, Mr. Bryant, their 
presence accounting for a hearing quorum for the House of 
Representatives, thus permitting us to proceed with this 
hearing.
    We also want to acknowledge the visitation by Congressman 
Smith of Michigan who was the author of and for the impetus 
providing a short-term extension of chapter 12 until we can 
deal with it in the comprehensive way we plan to do as part of 
this bankruptcy reform effort. We can report to him that the 
Senate seems poised to act on the bill at a propitious stage in 
their proceedings.
    We acknowledge the presence of Senator Dodd. Does the 
Senator wish to make a 2-minute statement?
    We recognize the Senator.
    Mr. Dodd. I am going to ask unanimous consent, Mr. 
Chairman, that these remarks be included in the record.
    Let me thank you for doing this. I think it is a wonderful 
idea to have a joint hearing and to invite those of us who were 
involved in last year's bankruptcy reform effort. I am not a 
member of the Senate Judiciary Committee. I did, however, sit 
in this very committee room as a freshman member of the House a 
number of years ago. As you know, several of us here today were 
very involved in last year's bankruptcy reform and were 
responsible for a number of provisions in the Senate adopted 
legislation, which, as you know, passed 97 to 1, and represents 
a strong bipartisan commitment to bankruptcy reform.
    Clearly, we need to reform the bankruptcy laws. You've been 
over the statistics, the 400 percent increase in the number of 
bankruptcies since 1980. The social stigma of going bankrupt 
appears to be gone--and this is obviously a serious problem.
    My statement today, Mr. Chairman, is really an effort to 
highlight the provisions that the Senate included in its 
bipartisan bill, a bill that passed the Senate by such an 
overwhelming majority. I urge you in the House bill--we do not 
have a Senate bill yet--to include some of these provisions.
    For instance, we requested that the credit card companies 
give a real life example to consumers in their credit card 
statement. If Senator Dodd or Chairman Gekas have a $3,000 
credit card obligation, how long will it take us to pay it off 
if we pay just the minimum payment on this obligation. We 
wanted to give consumers a sense of what their obligations are 
going to be so they act more responsibly when they go into 
financial arrangements.
    Your bill has a hypothetical disclosure using a $500 
example. We think it is more instructive for consumers to know 
exactly what their own obligations are going to be.
    We also want to raise our concerns during today's hearing 
about child support and alimony. Since the turn of the century, 
we have always prioritized certain creditors and spouses and 
children have been at the top of the list. We now have $43 
billion in child support arrears and $16 billion in current 
child support due in this country. We do not want to make it 
more difficult for child support payments to be made. We think 
that these creditors still need to be protected and the Senate-
passed bill had some good, strong, bipartisan language that did 
just that. We appreciate how helpful Senator Grassley was in 
helping us to place this language in last year's bill. Again, 
you are going to hear from a lot of different people today, and 
I apologize for sort of racing along here this morning, but I 
don't want to miss the vote in the Senate.
    I will leave this testimony for you to take a look at and 
urge you to consider what would get us closer to a bipartisan 
proposal in both Chambers on these provisions. I commend you 
again for holding this hearing today. I am sorry we didn't get 
bankruptcy reform done last year. It is critically important 
and necessary legislation.
    [The prepared statement of Senator Dodd follows:]
Prepared Statement of Hon. Christopher J. Dodd, a U.S. Senator from the 
                          State of Connecticut
    I would like to thank Chairman Gekas, Chairman Grassley, Senator 
Torricelli and Representative Nadler for scheduling today's hearing on 
bankruptcy reform.
    Clearly, we need to reform our bankruptcy laws. There has been a 
400 percent increase in personal bankruptcies since 1980. The most 
recent statistics from the Administrative Office of the U.S. Courts 
state that in the year ending June 30, 1998, more than 1.4 million 
people filed for bankruptcy, an all-time high. This alone represents an 
8.5% increase from the previous year.
    Senators Hatch, Leahy, Grassley and Durbin worked hard last 
Congress to craft a strong, bipartisan and balanced bankruptcy reform 
bill, a bill which passed the Senate overwhelmingly by a 97-1 vote. 
While not perfect, S. 1301 took into account the interests of both 
consumers and creditors.
    While asking consumers to take more responsibility for their 
personal debt, S. 1301 also gave consumers access to information that 
would help them make better financial choices pre-bankruptcy. These 
principles were agreed to on a bipartisan basis in the Senate. 
Regrettably, time was short at the end of last session, and a 
conference report was somewhat hastily concluded. As a result, a number 
of strong provisions supported by 97 members of the Senate were 
excluded from the conference report.
    One of the consumer protections in the Senate bill was co-authored 
by me, Senator Sarbanes and Senator Durbin--an important new consumer 
protection regarding credit card debt. Today, many consumers are 
unaware of the implications of carrying credit card debt and making 
only the minimum monthly payment on that debt.
    For instance, assume a consumer has $3000 in credit card debt. Then 
assume the interest rate that the consumer is paying on that debt is 
17.5%, which is roughly the industry average. If the consumer makes 
only the monthly minimum payment on that debt, it will take 396 months 
or 33 years to pay it off. And with interest, the consumer will have 
paid a total of $9,658.
    Our amendment, which we also worked on with Senators Grassley and 
Hatch, would have required credit card issuers to inform consumers on 
their monthly billing statement not only how long it would take them to 
pay off a debt at the minimum monthly rate, but also how much money 
they would have paid in interest and principal on that debt. This 
amendment was based on a simple premise: the better-informed the 
consumer, the better that consumer's financial decisions will be.
    No one can argue with the goal of increasing personal 
responsibility. However, we need to realize that a carrot sometimes is 
preferable to a stick: giving consumers more information about the 
long-term impact of their short-term credit decisions will encourage 
them to act more responsibly.
    The credit disclosure provisions included in the Senate bill last 
year were balanced and fair. Yet they were replaced in the conference 
report with provisions that actually could confuse consumers. For 
instance, instead of the Senate provision requiring credit card issuers 
to disclose specific information about a consumer's specific debt, the 
conference report only required a hypothetical disclosure about a 
hypothetical $500 debt. Such a disclosure would be unhelpful--and maybe 
even confusing--to a consumer trying to understand the implications of 
carrying a specific debt with a much larger balance over a longer 
period of time. This problem is exacerbated if the disclosures are 
based on a teaser rate of interest rather than the interest rate that 
actually will be applied to the consumer's charges. Other provisions 
were replaced with requests for future study by the Federal Reserve. I 
hope that instead of studies and unhelpful disclosures, bankruptcy 
reform will contain the meaningful disclosures agreed to by 97 senators 
last fall.
    It is also my hope that we enact bankruptcy reform that properly 
protects children and families. As you know, for nearly 100 years our 
bankruptcy laws have adhered to a fundamental principal: that children 
and their innocent parents--to the extent possible--should not be 
impoverished by bankruptcy proceedings. Last year, I and others raised 
some concerns that perhaps this historical balance in favor of children 
was being shifted somewhat toward creditors.
    I worked with Chairman Grassley, Chairman Hatch, Senator Durbin and 
others to address these concerns. We were largely successful. For 
instance, we:

        1. LProtected income from sources legitimately dedicated to the 
        welfare of children, such as child support payments, foster 
        care payments or disability payments from being dissipated and 
        misdirected towards the payment of debts unrelated to the care 
        and maintenance of children;

        2. LEnsured that in bankruptcy, children and families are able 
        to keep certain household goods which typically have no resale 
        value. I am speaking about items such as toys, swings sets, 
        video cassette recorders or other items used to help them raise 
        their children; and

        3. LAdded provisions that should help children and families 
        collect child support debts such as permitting the conditioning 
        of a chapter 13 confirmation upon the payment of child support 
        payments and allowing the conditioning of a chapter 13 
        discharge upon the payment of all post-petition child support 
        obligations.

    I hope that we can retain these and like provisions in this 
Congress.
    I am aware that the National Partnership for Women and Families, 
the National Women's Law Center and a variety of other women's 
organizations continue to object to provisions regarding the non-
dischargeability of certain types of unsecured debt in the newly-
introduced House bill, H.R. 833. These groups continue to express their 
concerns that such provisions will impede the ability of debtors to pay 
both for their post-bankruptcy expenses and to care for their 
dependents. I hope both the House and Senate subcommittees look into 
these issues very carefully.
    Finally, section 115 of the newly-introduced House bill entitled, 
``Protection of Savings Earmarked for the Postsecondary Education of 
Children,'' appears to be a version of my educational savings amendment 
from last year's Senate bill. As most of you know, I am a lawyer, and 
that provision fails, as best I can tell, to provide the exemption I 
intended. And it also appears to fail to protect against the commission 
of fraud. I would encourage appropriate committee staff to meet with 
members of my staff regarding this particular provision so that we can 
truly protect duly established college savings accounts, which were set 
up for the benefit of children, from being distributed to creditors. 
Just because a child's family has gone through a bankruptcy does not 
mean a child should not be able to go to college.
    Again, I thank you for calling this hearing. I look forward to 
working with colleagues in both bodies to enact strong and balanced 
bankruptcy reform that strengthens the responsibilities not just of 
consumers, but also of creditors, and that protects innocent children 
from impoverishment.

    Mr. Gekas. Without objection, the statement of the Senator 
will be included in the record. He can return to the Senate 
with the assurance that the hearing--this one and the ones to 
follow, plus the final version of the bill--will address the 
concerns that he has addressed.
    Mr. Dodd. Thank you, Chairman, very, very much. Thank you.
    Mr. Gekas. We thank you. The Chair now notes the presence 
of the gentleman from New York, Mr. Nadler, the ranking member 
of the committee; the lady from Wisconsin, Ms. Baldwin; and the 
gentleman from Massachusetts, Mr. Delahunt. Mr. Manager 
Hutchinson and Mr. Manager Bryant--to revive memories--have 
already been recorded in their presence. We will begin with 
hearing from Congressman Sessions, who was going to be joined 
by Senator Kohl to present the pros and cons of the homestead 
exemption solution that we arrived at last year. Congressman 
Sessions has been in the forefront of pressing for bankruptcy 
reform and, indeed, is a co-sponsor of the current legislation. 
He and Senator Kohl were to be supplying opening statements. 
Because Senator Kohl is not here, we will instruct staff to 
inform the Senator's staff that his statement will be made a 
part of the record, and that we will hear from his opposite 
number, Congressman Sessions at this juncture.
    [The prepared statement of Senator Kohl follows:]
Prepared Statement of Hon. Herb Kohl, a U.S. Senator from the State of 
                               Wisconsin
    Thank you, Mr. Chairman. As the number of bankruptcies continues to 
rise, there is little doubt that we need bankruptcy reform. Last year, 
I was pleased to support the Senate reform bill, which in my view was a 
balanced measure that eliminated the worst abuses without overburdening 
honest debtors. As we consider reform this year, we should continue 
trying to be both balanced and fair.
    One provision that to my mind is essential to any meaningful 
bankruptcy reform is a cap on the homestead exemption. Today, Senator 
Sessions and I are reintroducing our bipartisan measure to cap the 
homestead exemption at $100,000. Last year, this proposal was strongly 
supported in our reform bill, although it was defeated by a very, very 
narrow margin in the House. We intend to offer it as an amendment to 
the Senate bill either in Committee or on the floor. I know that 
Senator Grassley is a longtime supporter of this measure.
    Our bipartisan measure closes an inexcusable loophole that allows 
too many debtors to keep their luxury homes, while their legitimate 
creditors--like children, ex-spouses owed alimony, state governments, 
universities, retailers and banks--get left out in the cold.
    Currently, a handful of states allow debtors to protect their homes 
no matter how high their value. And all too often, millionaire debtors 
take advantage of this loophole by moving to expensive homes in states 
with unlimited exemptions like Florida and Texas, and declaring 
bankruptcy--yet continuing to live in a style that is no longer 
appropriate. Let me give you a few examples:

         LThe owner of failed Ohio S&L, who was convicted of 
        securities fraud, wrote off most of $300 million in bankruptcy 
        claims, but still held on to the multimillion dollar ranch he 
        bought in Florida.

         LA convicted Wall Street financier filed bankruptcy 
        while owing at least $50 million in debts and fines, but still 
        kept his $5 million Florida mansion with 11 bedrooms and 21 
        bathrooms.

         LAnd last year, movie star Burt Reynolds wrote off 
        over $8 million in debt through bankruptcy, but still held onto 
        his $2.5 million Florida estate.

    Now, don't get me wrong. I loved Burt Reynolds in ``Smokey and the 
Bandit.'' But while the homestead exemption may not be the most common 
abuse of the bankruptcy system, it is the most egregious. If we really 
want to restore the stigma attached to bankruptcy, these high profile 
abuses are the best place to start.
    Chairman Gekas, you should be commended for imposing a two-year 
residency requirement in your bill, which will prevent people from 
moving to Florida or Texas solely to take advantage of the exemption. 
But that only addresses half of the problem: it doesn't stop longtime 
residents--like Burt Reynolds--from using an unlimited exemption to 
shortchange honest creditors from their home states. That's why I hope 
this Congress will reconsider including the homestead cap. Because, to 
my mind, this isn't about states' rights. Anyone who files for 
bankruptcy is choosing to invoke federal law in a federal court. It's 
fair to impose federal limits.
    A cap is not only the best policy, it also sends the best message. 
It says that bankruptcy is a tool of last resort, not just a tool for 
financial planning. And it gives credibility to reform by going after 
the worst abuses, no matter who is involved. So I hope you will give a 
homestead cap the full consideration it deserves. Thank you.

    Mr. Nadler. Mr. Chairman?
    Mr. Gekas. Yes.
    Mr. Nadler. Before Congressman Sessions, what about opening 
statements?
    Mr. Gekas. I thought that we would accommodate Congressman 
Sessions.
    Mr. Nadler. Do we have the----
    Mr. Gekas. And will right afterwards, we will accommodate 
the opening statements.
    Mr. Nadler. Thank you.
    Mr. Gekas. We did so for Senator Dodd, and we will do it 
for Congressman Sessions. You may proceed.
    Mr. Sessions. Mr. Chairman, thank you. I would ask 
unanimous consent that my entire write-up here, testimony, be 
considered for inclusion into the record.
    Mr. Chairman, thank you for allowing me to be here today. I 
find it very interesting that my officemate, Mr. Delahunt, the 
gentleman from Massachusetts is here. He has a great expertise 
in what I am preparing to discuss today.
    Mr. Chairman, that is that I am aware that there is a bill 
being considered in the Senate which would place a $100,000 
homestead cap on the amount that a family is allowed to exempt 
from bankruptcy laws.
    This is not an inconsequential change. This cap on the 
homestead exemption was seriously debated last year, when the 
bill reached the floor of the House of Representatives. A 
bipartisan majority of members voted for an amendment on the 
floor last year to replace the cap with a provision to prevent 
the fraudulent use of the homestead exemption. That amendment 
effectively targeted homestead exemption abuses without hurting 
honest debtors and also without overriding State laws by 
removing the exemption in cases of fraudulent conversion of 
non-exempt assets into exempt homestead property within 1 year 
of filing for bankruptcy, with the intent to avoid paying 
creditors.
    If the goal is to restrict further fraudulent abuse of our 
bankruptcy laws, this year's bill goes even further toward that 
goal by having a 2-year residency requirement before a debtor 
can claim the homestead exemption available in a particular 
State.
    This will strengthen current laws by discouraging debtors 
from what I call carpetbagging into a State with more generous 
homestead laws and then pouring their assets into an exempt 
home.
    This, I believe, is an important States' rights issue. 
Since 1792, Federal bankruptcy laws have deferred to States to 
decide what property is exempted from bankruptcy. We should not 
interfere with the decisions that States have made to protect 
the equity that a person has in their own home. If the proposed 
homestead cap is put into law, this could force a person who 
owns a $110,000 home, with no mortgage, and who files for 
bankruptcy to lose their home. This is because creditors 
wanting the $10,000 over the $100,000 exemption can force the 
individual to sell his home.
    Senior citizens frequently have most of their net worth in 
their homes, not in liquid assets. They could be forced to sell 
their homes, even if a creditor is seeking just a small amount 
over the homestead exemption.
    As legislators, I believe we should not only seek to write 
laws that provide needed solutions to a problem, but we should 
also ensure that these laws do not have unintended 
consequences.
    I am for having people pay all the debts that they owe. As 
you have alluded, I am a very strong supporter of bankruptcy 
reform, and that is why I have co-sponsored this bill. However, 
a homestead cap would do nothing toward providing the fresh 
start we all in believe in, but rather would force honest 
debtors into selling their homes.
    I am confident that the anti-fraud provisions contained in 
the House bill will provide the perfection we need without 
being punitive or infringing on States' rights, such as those 
we enjoy in Texas and in other States. Thank you, Chairman.
    [The prepared statement of Mr. Sessions follows:]
Prepared Statement of Hon. Pete Sessions, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman, thank you for your leadership on the issue of 
bankruptcy reform. I appreciate the opportunity to testify about how 
changes to the homestead exemption provision of this bill will greatly 
affect citizens in my home state of Texas as well as several other 
states.
    I am a cosponsor of this bill and fully support the House version 
that you, Mr. Chairman, have introduced. This legislation received the 
bipartisan support of 300 Members last year, and I believe that this 
compromise reform of the bankruptcy system will require high-income 
debtors to pay their debts if they have the ability to do so, while 
protecting those with low incomes and those who truly need the 
protection that our bankruptcy system has to offer.
    However I am concerned about a proposal that is reportedly being 
considered by the Senate which would place a $100,000 homestead cap on 
the amount that a family is allowed to exempt from the bankruptcy laws.
    This is not an inconsequential change--this cap on the homestead 
exemption was seriously debated last year when this bill reached the 
floor of the House. A bipartisan majority of members voted for an 
amendment on the floor last year to replace the cap with a provision to 
prevent the fraudulent use of the homestead exemption. That amendment 
effectively targeted homestead exemption abuses without hurting honest 
debtors and without overriding state laws by removing the exemption in 
cases of fraudulent conversion of non-exempt assets into exempt 
homesteads property within 1 year of filing for bankruptcy with the 
intent to avoid paying creditors.
    If the goal is to restrict fraudulent abuse of our bankruptcy laws, 
this year's bill goes even further toward that goal by having a two-
year residency requirement before a debtor can claim the homestead 
exemption available in a particular state. This will strengthen current 
law by discouraging debtors from ``carpetbagging'' into a state with 
more generous state homestead laws and pouring their assets into an 
exempt home.
    This is an important states-rights issue. Since 1792, federal 
bankruptcy laws have deferred to the states to decide what property is 
exempted from bankruptcy. We should not interfere with the decisions 
that states have made to protect the equity a person has in their home.
    If the proposed homestead cap is put into place, the law could 
force a person who owns a $110,000 home with no mortgage and who files 
for bankruptcy, to lose his home. This is because creditors wanting the 
$10,000 over the $100,000 exemption, can force the individual to sell 
his home.
    Senior citizens frequently have most of their net worth in their 
homes, not in liquid assets. They could be forced to sell their homes 
even if a creditor is seeking just a small amount over the homestead 
exemption. As legislators, we should seek not only to write laws that 
provide a needed solution to a problem, but we also must ensure that 
these laws do not have unintended consequences.
    I'm all for having people pay the debts they owe. That is why I 
cosponsored this bill because I believe it targets debt relief only at 
those who need the help and works with others to pay a portion to their 
creditors. However, a homestead cap would do nothing toward providing 
the ``fresh start'' we all believe in, but rather would force honest 
debtors into selling their homes.
    I'm confident that the anti-fraud provisions contained in the House 
bill will provide the protection we need without being punitive or 
infringing on states rights.

    Mr. Gekas. We thank you very much, and we excuse you with 
our gratitude.
    Mr. Delahunt. Mr. Chairman? Before my friend departs, may I 
just have a----
    Mr. Gekas. I didn't hear the gentleman from Massachusetts 
as he rose--to be recognized for what?
    Mr. Delahunt. I would just like to inquire of my dear 
friend and my corridor mate, Mr. Sessions, as to the issue that 
he addressed.
    Mr. Gekas. If the gentleman wishes to respond to questions, 
I am willing to----
    Mr. Sessions. Mr. Chairman, I would be pleased to respond 
to the gentleman.
    Mr. Gekas. The gentleman from Massachusetts is recognized.
    Mr. Delahunt. Yes, thank you, Mr. Chairman. Is it my 
understanding, then, that you would object to any caps 
whatsoever?
    Mr. Sessions. That would be what I--support the testimony 
that I have given. I believe that States have addressed these 
issues and decided by themselves, on a State by State basis, 
what is necessary. And I would ask that the Federal Government 
not do anything in this bankruptcy protection other than those 
that we have advanced here. And that would be correct.
    Mr. Delahunt. Right. But, Pete, you are aware of the fact 
that States like Texas and Florida have no caps whatsoever?
    Mr. Sessions. That would be correct.
    Mr. Delahunt. And that there have been a number of 
instances where individuals, and let us not call them 
carpetbaggers, but under your proposed 2-year residency 
requirement, there have been instances in which individuals 
have had a primary residence worth millions of dollars--
millions of dollars. You are aware of that?
    Mr. Sessions. I am aware of that, and, in addressing that 
issue, I would like to say that so are the people who have 
extended credit to these people; and they are aware of the laws 
of the State of Texas. And we will always be able to find 
people that do try and hide their assets in their homes like 
this. The fact of the----
    Mr. Delahunt. But I am not even suggesting that anyone, you 
know, intended to defraud here. I am not even suggesting that 
particular scenario. But you know there are people who hit hard 
times that who, if this legislation should pass, will be 
contrasted in the public's mind with some of those individuals.
    Mr. Sessions. My observation in response would be then 
since we are talking about millions rather than thousands that 
if you put a cap at millions of dollars, then that would be the 
appropriate level. I am not advocating that. I am advocating 
that we defer to States. I simply believe that----
    Mr. Delahunt. And I understand your concern about States' 
rights and----
    Mr. Sessions. Well, sir, but what I am suggesting to you is 
if you are talking about millions of dollars, then put the cap 
at millions of dollars, not $100,000. That is very punitive for 
people who live all across this country, who are middle-class 
people, who are many times people who retired, as my 
grandfather did in 1971. And I don' think it is fair that we 
place these types of very onerous dollar amounts on people. So 
if you want to talk about millions of dollars, then address it 
as millions of dollars. But please do not address it as a 
million dollar problem and put it as a $100,000 answer.
    Mr. Delahunt. So then you see some flexibility there in 
terms of what I think most Americans would consider fair and 
equitable to everyone involved so that you would not rule out 
entirely any kind of cap whatsoever, since this is a Federal 
statute.
    Mr. Sessions. Congressman, what I have suggested to you is 
that I wanted to respond to you very openly, and that is----
    Mr. Delahunt. And you have, and I appreciate it.
    Mr. Sessions. That is that I believe there should not be a 
cap at all and that we should defer to States' rights. My point 
is to say if you are talking about millions of dollars, then it 
would seem that that would be the way the law was written and 
then I would take a look at that. I think that millions of 
dollars are more reasonable than $100,000.
    Mr. Delahunt. Like maybe $1 million as opposed to----
    Mr. Sessions. Perhaps that could be closer, but a hundred 
thousand dollars simply is an unfair and unreasonable 
assumption on my part.
    Mr. Delahunt. Well, thank you, and I appreciate your 
thoughtful testimony.
    Mr. Sessions. I thank the gentleman.
    Mr. Gekas. The gentleman from New York indicates that he 
has a question for you. Do you wish to respond?
    Mr. Sessions. Mr. Chairman, I will stick around for this.
    Mr. Nadler. Thank you. I just want to follow up on what Mr. 
Delahunt was asking. It seems to me one of the things that 
people are always puzzled by, and I am puzzled by, is the 
fairness of a bankruptcy system. I remember when Donald Trump 
went bankrupt, the court said he could live on an expense 
account of $400,000 a month, I think it was. So he could 
maintain some sort of standard of living, and that money 
obviously wasn't available for his creditors. And I don't 
understand that kind of reasoning.
    But I also don't understand the reasoning of a system in 
which we say we are going to have a bill to crack down on 
people who don't pay their bills. And we are going to have a 
means test. And we are going to refuse chapter 7 relief for a 
lot of these people, but at the same time someone can legally 
shelter millions of dollars, as was said, in a homestead.
    I frankly think a hundred thousand dollars is too little, 
too. But I think a quarter of a million dollars should be more 
than ample for any State, and I don't see why this as opposed 
to anything else in bankruptcy is a matter of States' rights 
except by tradition. And this House invades States' rights all 
the time. I think many of the people on the other side of the 
aisle think we should override States' rights on access to 
their courts, and we should have tort reform that says who can 
sue whom and under what circumstances and what kind of legal 
fees they can pay in State courts. So it is sort of strange to 
hear States' rights only here.
    So how would you justify in a bill in which we are cracking 
down on people, because we are saying that people are abusing 
the bankruptcy system, allowing people to exempt, let us say 
more than a half a million dollars in homestead?
    Mr. Sessions. I thank the gentleman for his question. First 
of all, I was not trying to set an arbitrary figure. I believe 
it should be no cap. But I believe that if you look at, since 
1792, that the Federal Government, the Congress of the United 
States, has allowed these States, individually, to determine 
how they would like to approach homestead exemptions in their 
own States in dealing with bankruptcy. I believe it is very 
important. I happen to live in a neighborhood where probably 
the average house is $250,000. That is perhaps a lot of money. 
But we are--what we are dealing with here is the essence of 
individuals and their home, and the old saying that a person's 
home is their castle I believe is a true statement; that that 
which you have should be protected. You should not be thrown 
out of your own home for something that you have done. And 
creditors recognize this. They know that when they extend 
credit to you. And I think that there is simply a balance. I am 
simply saying to you, I believe that a hundred thousand dollars 
is incorrect, and I believe that it is not unreasonable to 
assume that we would not put a cap on. I thank the gentleman.
    Mr. Gekas. The time of the gentleman has expired. We thank 
you very much.
    Mr. Sessions. Thank you, Chairman.
    Mr. Gekas. And you are excused with our gratitude. And I 
think that the gratitude of the gentleman who is looking down 
at us from that portrait up there is also visited upon you. In 
fact, he is looking askance at us up here as we continue. He 
agrees with you, I am sure, on your position. We thank the 
gentleman.
    Mr. Sessions. Thank you, Chairman.
    Mr. Gekas. It is now time to return to the full-blown 
hearing to which we are committed. We note the presence now of 
the gentleman from Ohio, Mr. Chabot, and the gentleman from New 
York, Mr. Weiner. As has been said in many different ways thus 
far, this is a historic moment in that the joint hearing 
scheduled between the Senate and the House and those who are 
engaged in bankruptcy reform signifies--signals a blending of 
wills and a blending of concepts as we pursue bankruptcy reform 
in the current session of the Congress.
    From the very first, back in the last session and now 
replicated here, this has been a bipartisan effort judging from 
the votes, both the House and the Senate, and on the conference 
report in the House last year. Further evidence that it is a 
bipartisan approach is the fact that at the outset in this 
session, we have fought consistently to bring about a 
bipartisan study of the measures that and the standards that 
are going to be applied. We have had several briefings for 
staff for the minority and the majority. We have had visiting 
lecturers on the very vexing problem of child support and its 
role in the primacy that we accord certain entities in the 
bankruptcy reform measures. We have had a breakfast and a 
luncheon for all those purposes. These staff briefings will 
continue, and the next one will be held Tuesday I am informed, 
is that correct? All of these in the spirit of and in the 
necessity of bringing about bipartisan understanding and 
support of bankruptcy reform.
    The briefings that will begin Tuesday, by the way, will 
include not just the bill that we have introduced that is 
before us now, but that which is potentially to be introduced, 
as I understand, by Mr. Nadler, if there be one. And if there 
be one, it will also be part of the presentation that will be 
made to staff and to members in preparation for these hearings.
    We have two concepts that have not changed and will not 
change and which form the foundation of bankruptcy reform: to 
guarantee the fresh start to those who are so burdened by debt 
that they cannot and their families cannot survive without 
giving them that fresh start; and two, an earnest effort on the 
part of our society to make certain that those who are able to 
repay all or part of their debt should be given a mechanism and 
compelled to enter the halls of bankruptcy with a view for 
repayment of some of that debt over a period of time.
    Those two precepts are unarguable in their meaning. And the 
debate will fasten on that I am sure as we proceed. But let no 
one criticize anyone for looking at ways and means to grant a 
fresh start where it is needed; nor should one be criticized 
for looking at methodologies for providing repayment of some of 
the debt by those who are able to pay it.
    With that, I will entertain opening remarks by the 
gentleman from New York, Mr. Nadler.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, today we 
begin our hearings on bankruptcy legislation. As you know, our 
Senate colleagues will be unable to participate in today's 
hearing, or most of it, because of floor votes. Senators who 
had intended to present testimony to us today will be unable to 
do so. I would hope that we could accommodate them when we hear 
from members next week. I think our colleagues from the other 
body have something to contribute. I hope we can accommodate 
them.
    Mr. Chairman, as you well know, I have not reintroduced the 
legislation that Mr. Conyers and I introduced last year, 
because I thought it necessary to take a fresh look at some of 
the issues before us and approach this matter with an open 
mind. To that end, we have been in contact with professionals 
from across the spectrum, from business lawyers to creditor 
representatives, to administrators in an effort to gain a 
better understanding of what they think we ought to do to 
ensure fairness, balance, honesty, and efficiency in our 
bankruptcy system.
    I know we have had some rather strong differences over some 
parts of this legislation; that is, the legislation that you 
introduced last year and that you have reintroduced. As you 
know, I think it is one of the most unbalanced and one-sided 
piece of legislation I have ever seen. But I would hope that we 
could use these hearings as an opportunity to learn and perhaps 
find creative approaches to some of these difficult questions.
    Next week, I know that you have scheduled nine panels in 3 
days and that our staffs have been discussing possible 
witnesses to provide members with a broad spectrum of views. I 
am concerned that these hearings, packed so tightly--three 
panels a day in 3 days, with a possible markup the following 
week--in such a short period of time may leave little time for 
deliberation. Some may conclude that they are window dressing 
for a pre-determined outcome. I will not say that. I hope that, 
in fact, there will be some time after those hearings before 
the markup; that you will not schedule a markup for the week 
after so that people will have time--since they won't have time 
to think between those hearings 1 day to the next, to think 
about what we have heard and to talk to each other so that we 
could actually reflect what we have heard in those hearings in 
the legislation.
    Obviously, were markups scheduled for the following week, I 
would certainly conclude that there was a pre-determined 
outcome and that the hearings were window dressing. I hope that 
will not happen. I hope that we can actually review the 
testimony and have the time to do that, and shape legislation 
together that reflects the best advice we have received.
    We may not agree on all points, but we may be able to 
narrow the range of issues and at the very least to clarify our 
points of disagreement.
    I certainly hope that these hearings will not be merely an 
exercise in creating the appearance of fact finding prior to a 
pre-determined course of action. I hope that we do not simply 
rush last year's product through the process without any heed 
to the many thoughtful comments we have received and will 
receive from across the professional spectrum, especially 
during these hearings.
    I know I was, as were many professionals, deeply 
disappointed to see the reintroduction of last year's 
conference report, down to all the typos, which were not 
corrected, and without even correcting the technical errors 
that I know had been brought to the attention of the majority 
staff. I hope it does not portend the future course of this 
legislation.
    Mr. Chairman, despite my uneasy feeling that American 
families may be about to get the bum's rush from Congress, I 
begin these hearings hopefully, with an open mind and a strong 
desire to work with you to improve our nation's bankruptcy 
system. I know that any such attempt will result in a bill that 
has yet to be written. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Nadler follows:]
Prepared Statement of Hon. Jerrold Nadler, a Representative in Congress 
                       from the State of New York
    Thank you, Mr. Chairman. Well, it's deja vu all over again. Or as 
someone once observed, if history repeats itself, the first time is 
tragedy, the second time is farce. Unfortunately, for millions of 
Americans whose families, businesses, jobs, communities and futures 
will be touched by the Bankruptcy Code today's travesty may be 
farcical, but it is far from funny.
    Let us review: The Chairman has reintroduced his conference bill 
from last year, without so much as correcting the typos or the 
technical errors, much less attempting to deal with the many serious 
policy problems pointed out by professionals from across the spectrum--
judges, trustees, debtor attorneys, unsecured trade creditors, creditor 
attorneys, academics. Anyone who does not have a special interest 
provision in this bill, or who is not on their payroll, has criticized 
this bill, but the Chairman has ignored the unified voice of the 
profession.
    We did have a hurried hearing schedule over four days. I will give 
the Chairman credit for inviting some very good witnesses whose 
testimony was thoughtful and informative. Unfortunately, the hearings 
appear to have been merely for show and do not appear to have had any 
impact on the proponents of this legislation. They were, quite simply, 
hearings without listening--the legislative equivalent of one hand 
clapping.
    We have before us a substitute which the minority received late 
last night. I hope the Chairman will not be offended to discover that 
we have not had the opportunity to comb carefully through all 310 
pages. Perhaps, after the markup, we will have the chance to find out 
what it was we were being asked to vote on.
    We really have reached a crossroads today. I wish to share with the 
Chairman and the members of the Subcommittee a letter I received from 
Jack Lew, the Director of OMB, reiterating the President's strong 
objections to the Conference Report from last year, which is embodied 
in this bill, and reiterating the President's determination to veto 
this bill and work for real fair and balanced reform. Let me quote:

          ``We were disappointed that the Conference Report failed to 
        include key provisions of the Senate bill, thus failing the 
        test of balance. In my letter to Congressional leadership dated 
        October 9, 1998, I noted that the President's senior advisors 
        recommended that the President veto the Conference Report. Our 
        position from last year has not changed.''

    Now, Mr. Chairman, you know that I did not introduce my bill from 
last year, but have decided to take a fresh start and work with 
professionals from across the spectrum, with a broad variety of 
interests affected by the Code--indeed, just yesterday I met with 
representatives of Visa to open a dialogue--in an effort to find a 
common ground. I urge you and my colleagues on both sides of the aisle 
to join me in that endeavor so that we can achieve real, balanced and 
workable bankruptcy reform by the end of this Congress. Another futile 
war of words will accomplish nothing.
    I will not offer many amendments today, but I hope that after this 
markup, we will have the opportunity to work together, to start anew, 
to work with the experts, with the President and with our colleagues to 
get it right this time.
    Thank you, Mr. Chairman. I yield back the balance of my time.

    Mr. Gekas. We thank the gentleman. Time has expired. Does 
anyone from the--the gentleman from Ohio indicates that he 
would have an opening statement. The gentleman from Tennessee 
if recognized for 5 minutes.
    Mr. Bryant. Mr. Chairman, I just simply want to say that 
based on the positioning here, I am honored to be senior to 
Senator Thurman, who is not here. Perhaps that is a classic 
example of the bankruptcy fresh start. [Laughter.]
    Mr. Gekas. The gentleman from New York, does he wish to 
make an opening statement?
    Mr. Weiner. I have no opening statement.
    Mr. Gekas. The gentleman from Massachusetts is recognized 
for 5 minutes.
    Mr. Delahunt. Yes, thank you, Mr. Chairman. I am not going 
to take all 5 minutes. But I want to express similar concerns 
that were expressed by the ranking member, Mr. Nadler.
    We had two members, two brand new members, speaking to the 
concept of fresh start on this side of the aisle, Ms. Baldwin 
and Mr. Weiner. This is very complicated material. Last year, 
you and I had this discussion about the scheduling of hearings. 
And I think it is a grave mistake to schedule three consecutive 
days on this subject, with three different panels. You and I 
know that there will be--it will be impossible for members to 
attend to each and every one of these panels. I think that is a 
mistake.
    I also want to note that last year, myself and Mr. Nadler 
filed a request in January 1998 with the Congressional Budget 
Office for information, an analysis on the issues surrounding 
personal bankruptcy. And I want to enter into the record a 
letter dated March 10, 1999. It is addressed to Congressman 
Nadler. Dear Congressman, I am writing in regard to your 
request of January 14, 1998, for background information on 
issues surrounding personal bankruptcy. The staff analysis is 
almost complete. And I will review it carefully or soon get it 
done. Although we have many other assignments from Congress, I 
am sure that the material will be ready for release to you by 
the end of March.
    I think it is appropriate, since we made this request, 
since there is serious disagreement in terms of various 
analysis by both the credit industry and others that we wait 
clearly in terms of markup until the CBO has provided us with 
an independent analysis of the information I think that is 
absolutely essential before we can make a reasoned, thoughtful 
decision in terms of where we go.
    And I would also recommend, and I think it would be very, 
very fruitful, Mr. Chairman, that we consult in an informal 
basis to see among members--among those of us that serve on 
this committee to see where there are areas of agreement. We 
didn't do it last year, and we failed to have a bill. I think 
if we sit down with each other and work--in fact, my friend and 
colleague from New York just asked me. He said, gee, it looks 
to me as I become conversant with the issues that we are going 
to be addressing here is that there is a lot that we can agree 
on. I think if there is a sincere and genuine intent to do 
something that would come out of the committee where we could 
all support--and maybe there would be some dissatisfaction--
that it would be appropriate for us to sit down and consult in 
good faith in a reasonable period of time to determine whether 
is areas that we can agree on.
    And I yield back.
    Mr. Delahunt. Would the gentleman yield for a moment? I 
yield to the chairman.
    Mr. Gekas. I'll yield myself what time I may consume. I 
simply refer back to my opening statement in which I took 
special aim at the fact that we have provided the staff 
briefings, the breakfasts, the luncheons, more staff briefings. 
We have been accommodating in any request that any member of 
the minority has been making. This bill is a replication, by 
and large, of the issues of last year. Those that were in the 
last session have a head start like all of us. Those who, like 
Mr. Weiner, need to catch up are given fresh opportunities 
every day to do so, with these briefings. I will not refuse to 
meet with anyone on any subject at any time. And informal 
discussions following staff briefings may be appropriate. But I 
will not abide by any comment that we are bludgeoning our way 
through this process. This is well-calculated to inform every 
member, to allow full study by every member, to allow full 
participation by every member, to allow full presentation of 
individual views, to ask for special meetings between 
interested parties, to bring outside consultants in at any time 
as we have strenuously attempted to do, and we will continue to 
do so. So the issue is joined. We will be accommodating, and we 
will continue to be accommodating.
    Mr. Nadler. Will the chairman yield?
    Mr. Gekas. Not at this time. We want to proceed with the 
hearing. Well, all right, Mr. Nadler, you may proceed?
    Mr. Nadler. Thank you. I appreciate hearing these 
sentiments. I want to pick up on one thing the gentleman from 
Massachusetts said and ask the chairman if he would join me in 
something. The CBO has sent me a letter dated a few days ago in 
response to our request of 14 months ago that their study will 
be completed by the end of March after these hearings will be 
completed. We have asked if they could make available to the 
committee as a witness for next week's hearings, the expert on 
their staff who has been doing all the work. And they have said 
that they didn't think so.
    Frankly, my suspicion is someone doesn't want that 
information before the committee. I don't know who that is, not 
necessarily anyone on the committee. So I would ask the 
chairman if he would join me in requesting the CBO to allow its 
own person who is writing that report, who is largely, 
according to them, has completed it, to appear as a witness 
before our committee next week?
    Mr. Gekas. I have no objection to your calling any witness 
that you want. And I will join with you----
    Mr. Nadler. Thank you.
    Mr. Gekas [continuing]. On the CBO and also the Surgeon 
General if you like.
    Mr. Nadler. Well, I think that's a little far afield, but I 
appreciate the chairman's response.
    Mr. Delahunt. I would appreciate the Surgeon General, Mr. 
Chairman.
    Mr. Gekas. Me, too. Because my blood pressure is going up.
    Mr. Delahunt. Maybe he could cut out some of the fat.
    Mr. Gekas. In any event, we shall proceed with the opening 
statement of the gentleman from Ohio, Mr. Chabot?
    Mr. Chabot. Thank you, Mr. Chairman. My distinguished 
colleague from New York, he mentioned I think he said this was 
the most unbalanced and one-sided legislation that he had ever 
seen. I would take issue with that. I don't think that's 
accurate. I think it's good legislation. And I think it's 
interesting to note that there are 23 Democratic cosponsors to 
this legislation. I think if it was that one-sided, we wouldn't 
see that much support from Democrats on this bill.
    I would agree with Chairman Gekas that it's vital that we 
work together in a bipartisan and bicameral manner to move this 
legislation forward as expeditiously as possible.
    This reform legislation will protect consumers and 
businesses from irresponsible debtors who are capable of paying 
their debts, but choose to hide behind bankruptcy protection 
instead. In particular, this legislation would re-establish the 
link between a debtor's ability to pay and the availability of 
a legal remedy to discharge debt through bankruptcy. Under the 
need-based reforms, those that have the ability to pay back 
either $5,000 or 25 percent of their debts will be required to 
file under chapter 13 and work out a repayment plan.
    There are, of course, some people who truly have a 
legitimate need for bankruptcy. At times, hard-working families 
may face a serious family illness, a disability, unemployment 
or the loss of a spouse which may necessitate the need for 
bankruptcy protection. Too frequently, however, people who have 
the financial ability or earnings potential to repay their 
debts are seeking an easy way out as a growing number of 
financially secure individuals attempt to use chapter 7 
bankruptcy as a way simply to walk away from their debts. While 
this may prove convenient for the debtor, it's not fair to 
their friends and their neighbors who ultimately are stuck with 
the bill.
    Consumer bankruptcies have a dramatic impact on businesses 
and consumers, reducing the availability of credit, and 
increasing the price of goods and services in this Nation. For 
example, it is estimated that the consumer bankruptcies in 1997 
alone wiped out about $40 billion in consumer loans costing 
every American household, we used to say $400, we now come to 
find out it's $550 per family. That's essentially a hidden bad 
debt tax on every single American family. That's money that 
American families could use for a vacation, to go toward 
education, or their children's clothing or a movie or whatever. 
But that's money that we take away from American families right 
now and I think that's wrong.
    Nationally, consumer bankruptcies reached a record $1.4 
million back in 1997 and it's projected that they'll go even 
higher this year. What makes these numbers particularly 
alarming is the fact that this trend began back in 1994 during 
a time of solid economic growth, low inflation, and low 
unemployment. The primary culprit for this dramatic increase is 
a system I believe that allows consumers to evade personal 
responsibility for their debts too easily. Our current 
bankruptcy system allows many who can't afford to pay a 
significant portion of their bills to walk away essentially 
scot-free.
    Mr. Chairman, I believe that your bill, H.R. 833, makes 
significant steps in closing this loophole. I also believe that 
the means-testing equation included in this bill will prove to 
be a fair one. Despite criticism, the means-test proposed 
actually protects low-income debtors, maintains flexibility to 
take an individual filer's needs into account, and respects 
judicial discretion in these matters.
    I believe we should work closely with our colleagues to 
pass this legislation quickly so that we can finally give hard-
working Americans protection from those who abuse the 
bankruptcy system and leave their fellow Americans holding the 
bill.
    I yield back the balance of my time.
    [The prepared statement of Mr. Chabot follows:]
 Prepared Statement of Hon. Steve Chabot, a Representative in Congress 
                         from the State of Ohio
    Let me just take this time to welcome the esteemed members of the 
Senate who have joined us today to discuss this important legislation.
    I agree with the Subcommittee Chairman, Mr. Gekas, that it is vital 
that work together in a bipartisan and bicameral manner to move this 
legislation forward expeditiously.
    This reform legislation will protect consumers and businesses from 
irresponsible debtors who are capable of paying their debts, but choose 
to hide behind bankruptcy protection instead. In particular, this 
legislation would reestablish the link between a debtor's ability to 
pay and the availability of a legal remedy to discharge debt through 
bankruptcy. Under the ``needs-based'' reforms, those who have the 
ability to pay back either $5,000 or 25% of their debts will be 
required to file under Chapter 13 and work out a repayment plan.
    There are, of course, some people who truly have a legitimate need 
to declare bankruptcy. At times, hardworking families may face a 
serious family illness, disability, unemployment, or the loss of a 
spouse, which may necessitate the need to seek protection. Too 
frequently, however, people who have the financial ability or earnings 
potential to repay their debts are seeking an easy way out, as a 
growing number of financially secure individuals are attempting to use 
Chapter 7 bankruptcy as a way to simply walk away from their debts. 
While this may prove convenient for the debtor, it is not fair to their 
friends and neighbors who ultimately stuck with bill.
    Consumer bankruptcies have a dramatic impact on businesses and 
consumers--reducing the availability of credit and increasing the price 
of goods and services. For example, it is estimated that consumer 
bankruptcies in 1997 wiped out over $40 billion in consumer loans, 
costing every American household $400. That's a hidden ``bad debt'' tax 
on every single American family.
    Nationally, consumer bankruptcies reached a record 1.4 million in 
1997 and are projected to be even higher in 1999. What makes these 
numbers particularly alarming is the fact that this trend began in 
1994, during a time of solid economic growth, low inflation and low 
unemployment.
    The primary culprit for this dramatic increase is a system that 
allows consumers to evade personal responsibility for their debts too 
easily. Our current bankruptcy system allows many who can afford to pay 
a significant portion of their bills to walk away debt free.
    Mr. Chairman, I believe that your bill, H.R. 833, makes significant 
steps in closing this loophole. I also believe that the ``means 
testing'' equation included in this bill will prove to be a fair one. 
Despite criticism, the ``means test'', proposed actually protects low 
income debtors, maintains flexibility to take an individual filer's 
needs into account, and respects judicial discretion in these matters.
    I believe we should work closely with our colleagues in the Senate 
to pass this legislation quickly so that we can finally give hard-
working Americans protection from those who abuse the bankruptcy 
system, and leave them holding the bill.

    Mr. Gekas. We thank the gentleman for the opening 
statement. We acknowledge the presence now of a fighter in the 
world of bankruptcy reform, the Congressman from Virginia, Mr. 
Moran, who wants to make a brief opening statement I think.
    Mr. Moran. Thank you, Mr. Chairman. We're marking a 
supplemental appropriations bill, but I felt it was important 
to have at least some Democratic presence in favor of this bill 
because I believe it is a balanced bipartisan bill. We have a 
system that is out of control now. We ought not have 1.4 
million bankruptcies. We should not have such an escalating 
trend under chapter 7 where you wipe out your debts instead of 
working them out.
    And the fact is that people like the chairman and 
Congressman Boucher, a Democrat, another Democrat from 
Virginia, and Mr. McCollum have been working on this for many 
years. But each year that we don't pass it, the situation gets 
worse. I know you've heard the statistics but it just is not 
fair for every household to be paying about $400 a year to meet 
the bad debts incurred by other people who, in fact, are using 
the system. And we estimate that for everybody that uses 
bankruptcy as a financial management tool, if you will, as a 
convenience to wipe out their debts, it costs about 15 other 
families to be able to make up that cost. Families who would 
never think of reneging on their debts.
    So that's not the kind of system that we can be proud of 
nor can we accept as being sanctioned by Federal law. Fifteen 
responsible borrowers are more important than the person who is 
using the system which is occurring today.
    We've got lots of provisions here. It is need-based. If 
you're a family of four with income of $51,000, you can choose 
what you want to do, clearly. And most, if they are having 
financial problems, they'll choose chapter 7. We're going after 
people who can clearly afford to pay off their debts. We've 
added more provisions that makes it an even more palatable bill 
for those who want to look out for the rights of consumers.
    This bill did pass overwhelmingly. It should pass with an 
even greater margin this year because a number of the 
provisions, for example, a lot more information available for 
debtors where we provide financial counseling for them, all 
kinds of different options for working out their debts. We've 
got a Debtor's Bill of Rights. And this is something that I 
think is important. People who think the principal problem is 
credit cards and, in fact, the statistics show that it really 
isn't because only 3.7 percent of consumer debt is accounted 
for by credit cards. But nevertheless, we require credit card 
companies to make it clear that if you only pay the minimum 
balance, then you could be paying for the rest of your life. 
They have to make it clear how long the debt will be sustained 
if you only pay the minimum balance. That's the kind of 
consumer information that is terribly important that I think is 
a very progressive addition to this bill. We also are going to 
make it very difficult for these bankruptcy mills to operate 
that prey upon people who are in desperate situations.
    We got 300 votes on the House floor last October 9th. This 
is an even better bill from the standpoint of people are 
concerned about consumer's rights, rightfully so. So we've 
added even more. And it retains the discretion of bankruptcy 
judges. It protects low-income debtors. It takes into account 
the unique circumstances of individual debtors. It really only 
goes after people who are using the system. We ought to be 
going after them because it's not fair for 15 families who are 
paying off their debts to also have to pay off the debt of 
people who are not paying their debts, who are gaming the 
system today.
    So it's a good bill and it's bipartisan and it's balanced 
and it ought to pass this committee.
    Thank you, Mr. Chairman.
    Mr. Gekas. We thank the gentleman for his commentary and to 
thank him for being one of the chief cosponsors, which provides 
the Chair with a segue into asking unanimous consent to permit 
the statements of Bill McCollum and Congressman Boucher, also 
original cosponsors of the legislation, to be entered into the 
record?
    [The information referred to follows:]
Prepared Statement of Hon. Bill McCollum, a Representative in Congress 
                       from the State of Florida
    I commend Chairman Gekas and Chairman Grassley for holding this 
joint hearing on the need for bankruptcy reform. Members from both 
sides of the aisle and both Houses of Congress have dedicated enormous 
time and energy to reforming the existing bankruptcy system. The 
Bankruptcy Reform Act of 1999, which has been introduced in the House, 
is the product of that effort.
    The Bankruptcy Reform Act of 1999 clearly strikes a balance between 
House and Senate reform proposals. The legislation retains the needs-
based test supported by the House but uses the Senate procedure to 
determine if someone should be in Chapter 13 rather than Chapter 7. The 
bill includes the most protective provisions in both House and Senate 
bills to safeguard support payments to women and children. There are 
expanded protections for retirement savings and education savings 
accounts. There are also new protections concerning reaffirmations and 
penalties against creditors who act improperly. In addition, the 
legislation includes new consumer protections regarding credit lending.
    The Bankruptcy Reform Act of 1999 is a well-balanced compromise 
which protects support payments to women and children, provides 
additional consumer protections, and restores increased personal 
responsibility to the bankruptcy system. Our nation's bankruptcy laws 
play an important and necessary role in our society but we must ensure 
that our bankruptcy system does not unintentionally encourage those who 
can take responsibility for their financial obligations not to do so. 
Such an abuse of our bankruptcy laws is fundamentally unfair to those 
who play by the rules and take responsibility for their personal 
obligations.
    Congress has a special responsibility to address this issue and to 
ensure that our bankruptcy laws operate fairly, efficiently and free of 
abuse. I am confident that this hearing will highlight the need for 
Congress to pass bankruptcy reform legislation and look forward to 
working with my colleagues towards that end.
 Prepared Statement of Hon. Rick Boucher, a Representative in Congress 
                       from the State of Virginia
    Chairman Grassley and Chairman Gekas, thank you for the opportunity 
to appear before you and the Members of the Subcommittee on Commercial 
and Administrative Law of the House Judiciary Committee and the 
Subcommittee on Administrative Oversight and the Courts of the Senate 
Judiciary Committee.
    I was pleased to join in a bipartisan effort with Chairman Gekas 
and my friends and colleagues Rep. Bill McCollum and Rep. Jim Moran in 
introducing the Bankruptcy Reform Act of 1999. This legislation is 
intended to ensure that our bankruptcy laws operate fairly, efficiently 
and free of abuse. Our legislation is virtually identical to last 
year's conference report which garnered the support of 300 of our House 
colleagues. That report was the product of nearly two years of 
hearings, mark-ups, deliberation and compromise.
    In an era where real per-capita annual disposable income is 
growing, unemployment rates are low and the economy is strong, 
bankruptcies should be rare. However, bankruptcy filings are increasing 
dramatically. In fact, in 1998, filings reached a record high of 1.4 
million, with an estimated $50 billion in consumer debt discharged.
    Bankruptcies of convenience are driving this enormous increase. 
Bankruptcy was never meant to be used as a financial planning tool, but 
it is becoming a first stop rather than a last resort because our 
current bankruptcy system encourages people to walk away from their 
debts regardless of whether they have the ability to repay any portion 
of what they owe.
    Responsible borrowers and the consumers of all goods and services 
pay the price for bankruptcies of mere convenience. The typical 
American family pays a hidden tax of $500 each year because of 
increased charges for credit and higher prices for goods and services 
attributed to bankruptcies of mere convenience.
    Today's consumer bankruptcy system is fundamentally flawed. The 
current Bankruptcy Code makes virtually no attempt to calibrate the 
level of bankruptcy protection to the level of each debtor's need. 
Rather, it allows a debtor to discharge debts even if the debtor can 
repay a large portion of them. Currently, approximately 70 percent of 
bankruptcy filers use Chapter 7, which has no provision for debt 
repayment even if the filer can repay. Only 30 percent use Chapter 13, 
which sets up repayment plans. At present, individuals with significant 
income and the ability to repay some of their debts can obtain the same 
full discharge of debts as individuals with little or no income and 
assets.
    Our legislation addresses this problem by requiring that a debtor 
demonstrate that he or she actually needs bankruptcy relief and, if so, 
provides only the amount of relief that is needed. This needs-based 
system would create a simple formula, based on a debtor's income and 
obligations, to determine exactly how much relief the debtor needs. 
Individuals with no means to repay their debts could file for 
bankruptcy under Chapter 7, thereby obtaining complete debt relief and 
a fresh start. Individuals who can repay a portion of their debts would 
file under Chapter 13 and begin a repayment plan based on what they can 
afford.
    With this change in the Bankruptcy Code, the bankruptcy system 
would protect consumers in financial difficulty without unfairly 
imposing inappropriate additional costs and burdens on consumers who 
continue to pay their debts.
    All consumers should benefit from this legislation--every consumer 
pays higher prices for goods and services and higher interest rates as 
a result of bankruptcy losses. Enactment of the ``Bankruptcy Reform Act 
of 1999'' will reduce the level of those bankruptcy losses, thereby 
reducing the cost of credit and goods and services for all consumers.
    I am pleased to be a sponsor of this legislation and look forward 
to working with each of you to ensure its passage.

    Mr. Moran. Thank you, Mr. Chairman.
    Mr. Gekas. Thank you. Now we are poised to hear the first 
panel. And we invite to the witness table Dean Sheaffer. Mr. 
Sheaffer is vice president and director of credit at Boscov's 
Department Stores, Inc., a regional department store chain, 
located primarily in New York, New Jersey, Maryland, Delaware, 
and Pennsylvania. In addition to his responsibilities with 
Boscov's, Mr. Sheaffer is vice chair of the Pennsylvania 
Retailer's Association and vice president of Pennsylvania's 
first statewide economic development corporation, Grow 
Pennsylvania Capital.
    He is testifying here today on behalf of the National 
Retail Federation, which is the world's largest retail trade 
association with a membership representing every facet of the 
retail industry. The Federation represents an industry that 
encompasses 1.4 million American retail establishments, which 
in turn employ more than 20 million individuals across our 
Nation.
    He is joined at the table by Bruce Hammonds, who has 29 
years of experience in consumer lending. His current 
responsibilities include overseeing MBNA credit loss prevention 
and consumer finance and technology services. A graduate of the 
University of Baltimore, Mr. Hammonds is a director of the 
Delaware State Chamber of Commerce, the Delaware Housing 
Partnership, and the Delaware Business Roundtable. He also 
serves on the board of trustees of Goldey Beacom College and is 
a member of the College of Business and Economics Visiting 
Committee at the University of Delaware.
    MBNA America Bank, N.A. is the largest independent credit 
card lender in the world and one of the two largest credit card 
lenders overall. It has more than 20,000 employees in 28 
offices located in the United States, Canada, and the United 
Kingdom. MBNA and its subsidiaries have $60 billion in managed 
loans outstanding.
    With them at the table is the Honorable Carol J. Kenner, 
United States bankruptcy judge, District of Massachusetts. 
Judge Kenner was appointed a bankruptcy judge for the District 
of Massachusetts in 1986 and served as chief judge from 1994 
through 1996. She also has served on the Bankruptcy Appellate 
Panel for the First Circuit since 1996. Prior to her 
appointment to the bench, Judge Kenner practiced exclusively in 
the areas of corporate reorganization and bankruptcy law in 
private firms in Boston and New York City. Judge Kenner 
obtained her Juris doctor degree magna cum laude from the New 
England School of Law in 1977.
    To the left of the judge is Larry Nuss, the manager and CEO 
of the Cedar Falls Community Credit Union since 1979. Cedar 
Falls Community Credit Union is an employee-based credit union, 
which currently serves 83,000 members. Prior to his assuming 
his responsibilities with Cedar Falls, Mr. Nuss was employed as 
a collection manager for Rath Employees Credit Union from 1976 
to 1979. Since 1981, Mr. Nuss has served as the director for 
the Iowa Credit Union League. And in addition, currently is 
vice chairman of that League.
    Mr. Nuss is appearing today on behalf of the Credit Union 
National Association, an organization that represents more than 
11,000 State and Federal credit unions nationwide.
    The final member of this panel is Gary Klein, who is well-
known to this committee. He is a senior attorney at the 
National Consumer Law Center, where he specializes in consumer 
bankruptcy, consumer credit, and foreclosure law. He is also 
director of the Center's Sustainable Home Ownership Initiative, 
which represents low-income homeowners. Mr. Klein has authored 
several books on bankruptcy, on foreclosure, and on the Truth 
in Lending Act.
    The National Consumer Law Center is a nonprofit 
organization that specializes in consumer credit issues on 
behalf of low-income people.
    As is our custom, we will produce for the record any 
written statement that you may have offered, as you've already 
submitted. Without objection, they'll be included in part of 
the record. We'll ask each one of you to speak for about 5 
minutes in summarization of your full statement.
    We'll begin with Mr. Sheaffer.

  STATEMENT OF DEAN SHEAFFER, VICE PRESIDENT AND DIRECTOR OF 
   CREDIT, BOSCOV'S DEPARTMENT STORE, INC., LAUREL DALE, PA, 
          REPRESENTING THE NATIONAL RETAIL FEDERATION

    Mr. Sheaffer. Good afternoon. My name is Dean Sheaffer. I'm 
vice president and director of credit for Boscov's Department 
Stores. Boscov's is a family-owned regional department store 
chain operating in the Mid-Atlantic States. Our largest number 
of stores is in Mr. Gekas' home State, Pennsylvania.
    I'm testifying on behalf of the National Retail Federation. 
Boscov's is a member of the NRF, and I'm an active member of 
its Credit Management Advisory Council.
    I would like to thank the chairman for providing me with 
the opportunity to testify before these distinguished 
committees. I would also like to take just a moment to thank 
the chairman, Mr. Gekas, for all of your hard work last year on 
H.R. 3150. Your unique understanding of the retail position and 
the retail issues is truly appreciated.
    The National Retail Federation is the world's largest 
retail trade association. The NRF members represent 1.4 million 
U. S. retail establishments, employs 20 million Americans, 
about one in five American workers, and registered 1998 sales 
of $2.7 trillion.
    NRF's members and their customers are greatly affected by 
the recent surge in consumer bankruptcies. In the past 3 years, 
national filings have risen more than 60 percent. In 
Pennsylvania, our home State, chapter 7 bankruptcies have grown 
by 90 percent in that same time period. Last year, there were 
nearly 1.5 million bankruptcy filings. The overwhelming 
majority of which were consumer bankruptcy filings.
    Today, we have a strong economy. We set another record in 
the stock market yesterday. We had the lowest unemployment in a 
quarter of a century. And, yet, at the current rate of 
bankruptcy filings, within the next decade one in seven 
American families will have filed bankruptcy.
    At Boscov's in 1994, we wrote off $1.2 million in 
bankruptcy losses, about 35 percent of our total credit losses. 
In 1997, that number had nearly quadrupled to $4.6 million, and 
50 percent of our total credit losses. It is estimated that 
over $40 billion nationwide was written off in bankruptcy 
losses last year. That amounts to a discharge of $110 million 
every single day.
    When an individual declares bankruptcy rather than paying 
the $300 they may owe Boscov's or the thousands of dollars they 
may owe in State taxes or other bills, it forces the rest of us 
to pick up their expenses. Last year to make up for these 
losses, it costs each of our households hundreds of dollars.
    I want to be clear, we cannot eliminate all of these 
losses. Some of them are unavoidable. Bankruptcy must remain an 
option for those who have experienced serious financial 
setbacks and who have no other means for recovering. Most 
people who file for bankruptcy need the relief. We must be very 
careful to distinguish the average filer who uses the system 
properly from the smaller but important group of others who 
mis-use the system for their benefit. It is with this trend 
that we must be concerned, with those who use the system to 
wipe out their debts without ever making a serious effort to 
repay them.
    In my experience at Boscov's, the vast majority of our 
customers pay as agreed. In the past we would occasionally see 
a few customers whose payment patterns were more erratic. They 
might fall behind a few months, make a few payments, catch up, 
go back and forth. Today, however, we see a very different 
picture. Often our first indication that a customer is in 
serious financial difficulty is when we receive their petition 
of bankruptcy.
    Recently, we did a study and found that almost half of our 
petitions for bankruptcy came from customers who were not 
seriously delinquent on our account when they made the decision 
to declare bankruptcy.
    Last year, we strongly supported the bill introduced by Mr. 
Gekas and Mr. Moran. It provided a simple, up-front, needs-
based formula that allowed the overwhelming majority of those 
who needed bankruptcy relief in chapter 7 to have it with 
virtually no questions asked. But for that sub-group of filers, 
for those higher income individuals who would use chapter 7 to 
push their debts on to others regardless of the filer's ability 
to pay, the up-front, needs-based approach would have said, 
``No, pay what you can afford.'' The Senate took a different 
approach in S. 1301. They relied far more heavily on tweaks to 
the current system to address the problem.
    For retailers such as Boscov's, a typical balance on our 
card in bankruptcy may be $500 or $600. With a recovery in a 
chapter 13 bankruptcy being maybe 30 cents on the dollar, it 
would not make economic sense for Boscov's to spend hundreds of 
more dollars, it not thousands, to try to move a customer from 
chapter 7 to chapter 13 to receive maybe $3 a month or $150 in 
total recoveries.
    In closing, on behalf of the National Retail Federation, we 
urge Members of Congress to take swift legislative action to 
address the problems confronting the Nation's bankruptcy 
system. If we are not careful, the costs of the rising tide of 
discretionary filings may tax society's compassion for those in 
genuine need. We must not allow that to happen. I believe that 
it is imperative for Congress to pass common sense bankruptcy 
reform legislation this year consistent with H.R. 3150.
    Thank you very much.
    [The prepared statement of Mr. Sheaffer follows:]
  Prepared Statement of Dean Sheaffer, Vice President and Director of 
Credit, Boscov's Department Store, Inc., Laurel Dale, PA, representing 
                     the National Retail Federation
    Good Morning. My name is Dean Sheaffer. I am Vice President for 
Boscov's Department Stores. Boscov's is a regional department store 
chain primarily located New York, New Jersey, Maryland, Delaware, and 
Pennsylvania. I am testifying on behalf of the National Retail 
Federation. Boscov's is a member of NRF, and I am an active member of 
its Credit Management Advisory Council. I would like to thank the 
Chairmen for providing me with the opportunity to testify before these 
distinguished committees.
    The National Retail Federation (NRF) is the world's largest retail 
trade association with membership that comprises all retail formats and 
channels of distribution including department, specialty, discount, 
catalogue, Internet and independent stores. NRF members represent an 
industry that encompasses more than 1.4 million U.S. retail 
establishments, employs more than 20 million people--about 1 in 5 
American workers--and registered 1998 sales of $2.7 trillion. NRF's 
members and the consumers to whom they sell are greatly affected by the 
recent surge in consumer bankruptcies.
    Bankruptcies are out of control. In the past 3 years, national 
filings have risen more than sixty percent (60%). In Pennsylvania where 
we are based, Chapter 7 bankruptcies have grown by 90 percent in that 
same time period. Nationally, we continue to exceed the one million 
filing record set in 1996. Last year there were nearly 1.5 million 
bankruptcy filings, the overwhelming majority of which (more than 95 
percent) were consumer filings.
    Mr. Chairman, I would like to put these numbers in perspective. 
Bankruptcy filings are nearly four times higher now than they were 
during the much worse economic conditions that existed in 1980. Now, we 
have a strong economy, a record setting stock market, the lowest 
unemployment in a quarter of a century; the public is optimistic about 
the future. And yet, if the current rate of filings holds (and it's not 
going down) within the next decade, 1 in every 7 American households 
will have filed for bankruptcy. The system is out of whack.
    It is estimated that over $40 billion was written off in bankruptcy 
losses last year, which amounts to the discharge of at least $110 
million every day. This money does not simply disappear. The cost of 
these losses and unpaid debts are borne by everyone else. When an 
individual declares bankruptcy rather than pay the $300 they may owe to 
Boscov's, or the thousand dollars they may owe in state taxes or other 
bills, they force the rest of us to pick up their expenses. Everyone 
else's taxes are higher, everyone else's credit is tighter, and 
everyone else pays more for merchandise as a result of those who choose 
to walk away. The nation's 100 million households ultimately pay that 
$40 to 50 billion. Last year, to make up for these losses, it cost each 
of our households several hundred dollars. This year's number threatens 
to be even higher.
    Now I want to be clear. We cannot eliminate all of these losses. 
Some of them are unavoidable. Bankruptcy must remain an option for 
those who have experienced serious financial setbacks and who have no 
other means of recovering. The bankruptcy system exists to help those 
who have suffered a catastrophic accident, illness or divorce, or those 
who have experienced the loss of a business or job from which they 
cannot otherwise recover. It is both the safety net and the last resort 
for people in trouble. The knowledge that the bankruptcy system exists 
to catch them in a financial fall, even though it might never be used, 
is important. Finally, most people who file for bankruptcy need relief. 
We must be very careful to distinguish the average filer, who uses the 
system properly, from that smaller, but important group of others who 
misuse the system for their benefit.
    It is this trend with which we must be concerned. We believe 
changing consumer attitudes regarding personal responsibility and 
inherent flaws in our bankruptcy process have caused many individuals, 
who do not need full bankruptcy relief, to turn to the system 
regardless. They use it to wipe out their debts, without ever making a 
serious effort to pay. Some of this change in usage results from a 
decline in the stigma traditionally associated with filing for 
bankruptcy. Some of it results from suggestions by others who urge 
individuals to use bankruptcy to ``beat the system.'' Whatever the 
cause, it must be stopped.
    My experience at Boscov's, and that of credit managers at other 
stores with whom I have spoken, convinces me of this fact. For example, 
for many years we tracked the payment history of those of our customers 
who carry and use the Boscov's card. The vast majority of our customers 
pay as agreed. In the past, however, we would occasionally see 
customers whose payment patterns were more erratic. They might fall 
behind by a few months, make payments to catch up, fall behind again, 
attempt to recover, and so forth. This kind of payment history 
suggested to us that the customer was experiencing some sort of 
financial difficulty. We would monitor the account and intervene as 
necessary, perhaps by suggesting consumer credit counseling or by 
limiting their credit line so as to minimize the amount of damage, 
prior to their possibly experiencing a financial failure.
    Today, however, we see a very different picture. Often the first 
indication we receive that an individual is experiencing financial 
difficulty is when we receive notice of his bankruptcy petition. 
Recently at Boscov's, almost half of the bankruptcy petitions we 
receive are from customers who are not seriously delinquent with their 
accounts. The first indication of a problem is the notice that they 
have filed for bankruptcy. It appears that bankruptcy is increasingly 
becoming a first step rather than a last resort.
    Individuals must have a good credit history to qualify for and 
continue to use a Boscov's card. Yet we, and other retail credit 
grantors, have been receiving bankruptcy filings without warning from 
individuals who have been solid customers for years.
    We all experience temporary financial reversals in life. Most of us 
learn that, if you grit your teeth and tighten your belt a notch, you 
can get through it. But many people no longer see it that way. The 
rising bankruptcy filings reflect this. Professor Michael Staten at 
Georgetown University analyzed thousands of Chapter 7 petitions in 
courts all over the country. His review of debtors' own financial 
statements gives a strong indication of what is going wrong.
    Individuals have a choice as to whether to file in Chapter 7, which 
generally wipes out all their unsecured debts, or if they file in 
Chapter 13, often known as a wage-earner plan. Instead of wiping out 
everything, a Chapter 13 filer attempts to pay as much as he or she can 
afford and the court discharges the rest. Not surprisingly, most people 
choose to file in Chapter 7.
    But many people who are filing in Chapter 7 do have the ability to 
pay some or all of what they owe. I understand that various studies 
have pegged this number as being anywhere from 30,000 filers per year 
to eight times that number. Whatever the figure, we should not treat 
bankruptcy as a ``get out of debt free'' card that can be used by 
thousands of filers every month, with virtually no questions asked.
    Why are so many persons asking the court to make others pay their 
debts for them? Why aren't they ashamed to go into bankruptcy court? We 
think that there are a number of factors.
    Part of it is lawyer advertising. We have all seen the ads on TV by 
lawyers promising to make individuals' debts disappear. Some don't even 
mention bankruptcy--they talk about ``restructuring'' your finances. I 
question whether these aggressive advertisers inform their clients 
about the serious downsides of filing for bankruptcy. There are also 
bankruptcy petition preparers: clerk typists who simply fill out forms 
for filers. The client may never meet a lawyer. And with the widespread 
use of the Internet, websites that proclaim ``File bankruptcy for as 
little as $99'' are multiplying. I firmly believe these low cost 
``bankruptcy mills'' are part of the problem.
    I also believe that part of the problem is the declining social 
stigma associated with filing for bankruptcy. At a time when 1 in every 
75 households files for bankruptcy, everyone knows someone, or knows of 
someone, who has recently declared. Many of these individuals keep 
their house and their car. They seem to have access to credit (although 
in many cases what they actually have is a secured credit card--they 
put $500 in the bank and they get a card with a $500 ``credit line''). 
And their friends and neighbors, not seeing the details of their life 
that bankruptcy disrupts, assume that bankruptcy is not the devastating 
situation they always thought. And there have been a number of high 
profile celebrity bankruptcies in recent years. I can't help but think 
that this sends a message to the public that the stigma of bankruptcy 
is fast disappearing.
    Finally, these changes have revealed a flaw in the system itself. 
Our bankruptcy code allows individuals to choose the chapter they wish 
to file in, regardless of need. If shame won't keep the subgroup of 
filers who could pay from either filing, or from filing in the wrong 
chapter, Congress needs to establish a mechanism that will. It must be 
simple, fair and efficient.
    Last year, we strongly supported the bill introduced by Mr. Gekas 
and Mr. Moran, H.R. 3150. It provided a very simple, up front needs-
based formula that allowed the overwhelming majority of those who 
needed bankruptcy relief in Chapter 7 to have it with virtually no 
questions asked. But for that subgroup of filers, for those higher 
income individuals who would use Chapter 7 to push their debts onto 
others regardless of the filer's ability to pay, the up front, needs-
based test would have said, ``No. Pay what you can afford, and society 
will wipe out the rest.''
    If individuals made less than the median income, or couldn't afford 
to pay 20 percent of their unsecured debts, H.R. 3150 would allow them 
to file in Chapter 7 without question. On the other hand, if an 
individual could afford to pay 40 percent of what he owed, H.R. 3150 
would require him to pay what he could afford and the court would wipe 
out the remaining 60 percent. We strongly urged Congress to adopt that 
approach.
    The Senate took a different approach in S. 1301. It relied far more 
heavily on tweaks to the current system to address the problem. I 
believe that in some cases, that approach could work. Where their were 
individuals who owed large amounts to single creditors and had the 
ability to pay that amount, that creditor might undertake the risks of 
legal action to seek payment. But in most cases, and especially for 
companies like mine, it wouldn't work.
    For retailers such as Boscov's, a typical balance on a Boscov's 
card for a customer in bankruptcy is approximately $500. A recover in a 
Chapter 13 proceeding might be 30 cents on the dollar. It would not 
make economic sense for Boscov's to spend hundreds or more dollars in 
an uncertain effort to move a petition from Chapter 7 to Chapter 13 to 
recover $150 at $3 a month. This is not to say that $150 isn't 
important to us. With tens of thousands of individuals filing for 
bankruptcy, those losses add up. It is just that the up front approach 
was far more efficient. This is why the National Retail Federation so 
strongly supported the simple, up front approach.
    Congress reached a compromise last year. Congress abandoned the 
simple, up front approach for a more discretionary system. It added 
numerous provisions designed to ensure that child support obligations 
were the highest priority. It also added a number of Truth in Lending 
provisions. We support some of these changes. Others will make it more 
expensive or difficult for us to operate. Nevertheless, we believe that 
Congress should pass legislation consistent with the conference report 
of H.R. 3150.
    In closing, on behalf of the National Retail Federation, we urge 
members of Congress to take swift legislative action to address the 
problems confronting the nation's bankruptcy system. Otherwise, in the 
not too distant future, we may find that among a large segment of our 
society, bankruptcy filings will become the rule rather than the 
exception. If we are not careful, the costs of the rising tide of 
discretionary filings may tax society's compassion for those in genuine 
need. We must not allow that to happen. I believe that it is imperative 
for Congress to pass common sense bankruptcy reform legislation this 
year, consistent with HR 3150, that is fair, simple, and workable.

    Mr. Gekas. We thank the gentleman. Now we interrupt this 
program to introduce to the body Senator Biden, who has a long 
history of involvement in the bankruptcy issues facing our 
Nation, and who is here not only as a part of the joint panel 
that we have produced for today's hearing, but also because he 
has a personal interest in introducing a witness. Senator 
Biden?
    Mr. Biden. Mr. Chairman, thank you very much. I would like 
the record to show my personal history in bankruptcy does not 
mean I have ever filed. [Laughter.]
    And I want to assure Mr. Nadler I haven't switched sides. 
It was the most convenient seat.
    Thank you, Mr. Chairman. I know you know the absence of 
Senators here in this joint hearing is because we have 11 votes 
in a row stacked. But I did want to come over, I know several 
of my colleagues have been here, because I'm particularly glad 
to have the opportunity to introduce Mr. Bruce Hammonds, the 
senior vice chairman and chief operating officer of MBNA.
    MBNA is headquartered in my hometown, Mr. Chairman, and is 
one of Delaware's most important and responsible corporate 
citizens, and, quite frankly, one of our largest employers in 
the State.
    And I just want to state for the record that Senator 
Grassley and I, as you well know, Mr. Chairman, have been 
working closely on the Senate side to craft a piece of 
bankruptcy legislation that we believe can stand the test that 
you do not have to stand over here called a filibuster. And 
stand the test of bipartisan support. I'm sure it will be 
different to some degree from what the House reports out, but 
it is my hope that everyone recognizes there is a need for 
serious reform of the system. And Senator Grassley, myself, and 
Torricelli and others on the Judiciary Committee are trying to 
duplicate the outcome we had last year as it related to the 
vote count anyway to make sure we have an overwhelming vote in 
the Senate side.
    So I look forward to working with you and all of our 
colleagues in the House Judiciary Committee to see if we can 
come up with a serious piece of legislation that addresses the 
problems. It will not be, as we say, all everyone wants, but I 
do think there's an urgent need for us to move. And I might add 
we've been told by the leadership on our side, Mr. Chairman, 
that if we don't get something moving on our side in the very 
near term, we are not going to have it brought up this year. 
Now that is not your problem, that's our problem. But we're 
working very hard at it.
    And the last thing I'll say, Mr. Chairman, I always enjoy 
coming over to the House Judiciary Committee. For years and 
years of having chaired the Senate Judiciary Committee, I've 
envied you in a number respects, one of which is your platform 
is so much higher than ours. [Laughter.]
    I always feel so much more important when I'm here than 
when I'm in the Senate side. But I realize I'm taken as 
seriously here as I'm there, so it's probably better I go back 
and vote.
    But thank you very much, gentlemen and ladies, for the 
interruption.
    Mr. Gekas. By all means. We thank you for your 
participation, brief as it has been. And we'll keep you posted, 
which is a segue into an announcement by the Chair that the 
Senate practice and many times a House practice is that the 
witnesses who appear acknowledge and are willing to submit 
answers to questions, written questions posed by members of the 
panel, be it from the Senate or the House side. I assume by 
your presence here that you're willing to answer such 
questions. You can report to your colleagues that any written 
questions submitted will receive answers.
    Mr. Biden. I thank the entire panel. Thank you, Mr. 
Chairman.
    Mr. Gekas. By all means. We now proceed to the testimony of 
Mr. Hammonds, if he can live up to all of this.

 STATEMENT OF BRUCE L. HAMMONDS, SENIOR VICE CHAIRMAN AND CEO, 
            MBNA AMERICA BANK, N.A., WILMINGTON, DE

    Mr. Hammonds. I don't know. Thank you, Senator.
    Mr. Chairman and members of the subcommittees, my name is 
Bruce Hammonds. I'm senior vice chairman and chief operating 
officer of MBNA America Bank, a national bank, which is the 
third largest credit card lender in the world. I appreciate the 
opportunity to appear today before the subcommittees.
    The skyrocketing rise in consumer bankruptcies has impacted 
nearly every lender, large and small, in every segment of the 
lending community. In fact, more than $40 billion in consumer 
debt, about $400 for each American family, was erased as a 
result of bankruptcy in 1998. This underscores the fact that 
while bankruptcy is an important protection for debtors who 
need it, today's system lacks adequate concern for the great 
majority of Americans who continue to pay their debts and who 
ultimately bear the cost of bankruptcy losses in the form of 
higher prices for goods and services.
    The current bankruptcy system needlessly harms everyone 
because of a fundamental flaw: it allows a debtor to discharge 
debts even if the debtor can repay some or all of those debts. 
In fact, today, a debtor may discharge his or her debts without 
ever demonstrating actual need for such relief.
    To address this flaw, the Bankruptcy Code must be amended 
so that a debtor who needs bankruptcy protection will receive 
it, but only to the extent of that need. This is essential to 
ensure fairness for consumers and creditors alike. We believe 
that a need-based bankruptcy approach of the type contained in 
H.R. 833 would efficiently and fairly implement the kind of 
needs-based bankruptcy that is necessary. Such an approach 
would establish clear, objective standards for determining a 
debtor's repayment capacity.
    These standards are as follows. If the debtor can pay all 
of his or her secured debt payments, priority debts, and living 
expenses, and still have sufficient remaining income to repay a 
portion of unsecured debts, the debtor will be required to 
enter into a chapter 13 repayment plan. If the debtor cannot 
repay, the debtor could freely choose to fall under chapter 7. 
Needs-based bankruptcy also would assign debtors to the 
appropriate chapter, that is to chapter 7 or to chapter 13 at 
the start of the bankruptcy case. This would drastically reduce 
the number of costly and needless disputes that occur in 
today's system.
    This brings me to an important point, needs-based 
bankruptcy would create enormous efficiencies. It would 
actually reduce the overall cost of consumer bankruptcy by 
decreasing the litigation and disputes that result from today's 
system. A needs-based system would largely run itself. The vast 
majority of cases would move routinely through the system and 
disputes would be limited to exceptional cases.
    Without systematic needs-based bankruptcy relief, the 
system will continue to be arbitrary, wasteful, and unfair to 
the great majority of consumers who pay for the system, but 
don't use it. Unless this flaw is addressed, controversy about 
consumer bankruptcy will continue to intensify.
    Finally, I would like to address several myths that you are 
likely to hear: one, is that the bankruptcy system is not 
broken. Instead, some say that credit cards are the real cause 
of the explosion in personal bankruptcies. This claim is 
absolutely false. The evidence does not support it. More than 
96 percent of credit card accounts pay as agreed and only about 
1 percent end up in bankruptcy. Bank card debt comprises less 
than 16 percent of total debt on the average bankruptcy 
petition. And in 1997, a Federal Reserve Board survey found 
that credit cards account for a mere 3.7 percent of consumer 
debt. Obviously, those figures are not large enough to be the 
cause of the bankruptcy crisis.
    Another myth is that lenders are offering credit willy-
nilly to people who cannot handle it. Once again, this simply 
is not true. Card issuers use sophisticated underwriting 
techniques to ensure that those who receive credit offers have 
a demonstrated ability and willingness to repay their debts.
    Let me tell you how we do it at MBNA. When we receive a 
customer application, we pull a full credit card and do a debt 
to income analysis. We call back over 20 percent of the 
customers to obtain additional information. Then an analyst 
makes a decision to approve or decline the account. If it is 
approved, a risk rating is applied and often a senior lender 
sign-off is also required. We believe we are making the right 
decision every time. In fact, the majority of bankruptcies in 
our file are on customers who have been with us for more than 3 
years.
    I thank the subcommittees for the opportunity to present 
these views, and I would be happy to answer any questions you 
may have.
    [The prepared statement of Mr. Hammonds follows:]
Prepared Statement of Bruce L. Hammonds, Senior Vice Chairman and CEO, 
                MBNA America Bank, N.A., Wilmington, DE
    Chairman Gekas, Chairman Grassley and Members of the House and 
Senate, my name is Bruce L. Hammonds and I am Senior Vice Chairman and 
Chief Operating Officer of MBNA America Bank, N.A. (``MBNA''), 
headquartered in Wilmington, Delaware.\1\ My responsibilities include 
overseeing MBNA's credit, loss prevention, customer satisfaction, 
consumer finance and loan review activities. I have 29 years of 
experience in consumer lending, and have been a member of the MBNA 
management team since 1982.
---------------------------------------------------------------------------
    \1\ MBNA America Bank, N.A., a national bank, is the largest 
independent credit card lender in the world and one of the three 
largest credit card lenders overall. MBNA America Bank, N.A. and its 
subsidiaries have $60 billion in managed loans outstanding and almost 
20,000 employees in 28 offices located in the U.S., the United Kingdom 
and Canada.
---------------------------------------------------------------------------
    I appreciate the opportunity to appear today before this joint 
hearing of the Commercial and Administrative Law Subcommittee of the 
Committee on the Judiciary, United States House of Representatives, and 
the Administrative Oversight and the Courts Subcommittee of the 
Committee on the Judiciary, United States Senate (the 
``Subcommittees''), to discuss our views on consumer bankruptcy issues. 
I hope that this statement will be helpful to the Subcommittees in your 
deliberations on the nature of the consumer bankruptcy reforms that are 
presently needed.
                                overview
    Despite an extraordinarily strong economy, personal bankruptcy 
filings in the U.S. have skyrocketed in recent years. During 1998, an 
all-time record 1.4 million personal bankruptcy petitions were filed, 
which represents about one for every 100 households nationwide. By 
comparison, the number of consumer bankruptcy filings in 1980 totaled 
287,570. This means that the number of consumer bankruptcy filings in 
1998 represents an increase of nearly 400% since 1980.
    These bankruptcy filings generate huge losses. While MBNA's credit 
card losses have consistently been among the lowest in the business, 
this precipitous increase in the number of consumer bankruptcy filings 
has impacted virtually every lender, large and small, in nearly every 
sector of the credit granting community. In fact, it is estimated that 
more than $40 billion in consumer debt--approximately $400 for each 
American family--was erased as a result of bankruptcy in 1998. 
Inevitably, these losses are passed on to all consumers in the form of 
higher rates and higher prices for goods and services.
    Despite the magnitude of these losses, bankcard issuers and the 
credit granting community more broadly believe that bankruptcy is an 
important protection for consumers who are severely overburdened 
financially. It should be noted, however, that as bankruptcy losses 
grow, it is those American consumers who continue to pay their debts 
who ultimately suffer the most because it is they who bear the cost of 
bankruptcy losses in the form of higher credit prices. Consumers also 
are harmed by increased bankruptcies when creditors, in an effort to 
reduce losses, tighten their credit standards and thereby decrease 
credit availability. As the Congress considers reform of the Federal 
bankruptcy system, it is critically important to keep in mind the 
adverse consequences bankruptcy has on the vast majority of consumers 
who continue to pay their debts. The basic requirements of fairness 
demand that a balance be restored between the interests of these 
consumers and the interests of those consumers who need bankruptcy 
relief.
                          the fundamental flaw
    Unfortunately, today's consumer bankruptcy system does not strike 
that balance. The current bankruptcy system unnecessarily harms 
consumers and creditors alike because of a fundamental flaw--it allows 
a debtor to discharge debts even if the debtor can repay some or all of 
those debts. In fact, under the current Bankruptcy Code, an individual 
debtor may obtain a discharge from contractual debt obligations without 
ever demonstrating actual need for this relief. To put it in context, 
this means that in 1998 alone, the Federal consumer bankruptcy system 
provided an estimated $40 billion of relief to debtors without either 
objective standards or systematic procedures for determining the actual 
relief needed by debtors.
    This flaw undermines not only the integrity of the U.S. bankruptcy 
system, but also traditional obligations of individual responsibility. 
Moreover, the current bankruptcy system also fails the debtors it is 
intended to help, because it provides short-term relief without helping 
debtors avoid the same financial failure in the future. In short, the 
lack of objective and systematic procedures for determining debtor 
relief produces a bankruptcy process which, for both debtors and 
creditors, is needlessly costly and time consuming. The bottom line is 
that this flaw must be remedied if the consumer bankruptcy system is to 
be workable and fair to consumers and creditors alike.
             fair, effective needs-based bankruptcy reform
    To address this flaw, the Bankruptcy Code must be amended so that a 
debtor who needs bankruptcy protection will receive it, but only to the 
extent of that need. This approach would match the bankruptcy relief 
provided by the Code to the debtor's actual need and is essential to 
ensure fairness for all parties impacted by the bankruptcy process. 
Bankcard issuers believe that a needs-based approach of the type 
contained in H.R. 833, a bill introduced by Chairman Gekas and 
Congressman Boucher with over thirty bi-partisan original co-sponsors, 
would efficiently and fairly implement the kind of needs-based 
bankruptcy approach that is necessary. We are joined in our strong 
support for this reform by representatives of virtually every segment 
of the consumer credit granting community.
    The reformed Bankruptcy Code should establish clear and objective 
standards for determining a debtor's repayment capacity. These 
standards are as follows: if the debtor can pay all of his or her 
secured debt payments, priority debts and living expenses and still 
have sufficient remaining income to repay some portion of his or her 
unsecured debts above a statutory minimum, the debtor would be required 
to repay that portion through a Chapter 13 repayment plan, if the 
debtor seeks the protection of the Bankruptcy Code. If the debtor 
cannot repay, the debtor could freely choose to file under Chapter 7.
    Moreover, a needs-based system would assign debtors to the 
appropriate chapter--that is, to Chapter 7 or to Chapter 13--at the 
start of the bankruptcy case. This would drastically reduce the number 
of costly and time-consuming disputes that occur in today's system, in 
which a debtor's Chapter 7 filing usually may be challenged only after 
the case is well under way and only through a separate judicial 
procedure. Once the needs-based bankruptcy system is established, the 
Federal bankruptcy system will largely run itself and disputes will be 
limited to exceptional cases.
    systematic needs-based bankruptcy creates enormous efficiencies
    This brings me to a very important point. While fundamental 
fairness alone dictates that a needs-based bankruptcy system be 
adopted, it should be noted that its implementation also would 
introduce enormous efficiencies into the bankruptcy system. A needs-
based bankruptcy approach would actually reduce the overall costs of 
consumer bankruptcy by decreasing the litigation and disputes that 
result from today's arbitrary bankruptcy system. Under such an 
approach, based on a simple calculation which is easily verified by the 
trustee, individuals who can repay some portion of their debt would 
automatically enter a Chapter 13 repayment plan, and those who cannot 
would be free to enter into Chapter 7. As noted above, a needs-based 
bankruptcy system would largely run itself: the vast majority of 
bankruptcy cases would travel routinely and efficiently through the 
system, and disputes would be limited to exceptional cases.
    Without systematic needs-based bankruptcy relief, the U.S. 
bankruptcy system will continue to be arbitrary, wasteful and 
fundamentally unfair to the great majority of consumers who pay for the 
system but do not use it. Unless this flaw is addressed, controversy 
surrounding consumer bankruptcy will intensify, not diminish.
                             several myths
    Finally, I would like to take a moment to address a couple of myths 
that you are likely to hear repeated, possibly today and certainly in 
the coming months. One is that bankruptcy reform legislation is 
unnecessary because the system is not broken. Some will claim that 
credit cards are the real cause of the explosion in personal 
bankruptcies, and that restricting the availability of credit through 
credit cards would solve this nation's bankruptcy crisis. I understand 
that for many this is a tempting and popular position, but it is false. 
The evidence simply does not support such a contention.
    Instead, let's look at the facts. More than 96% of credit card 
accounts pay as agreed, and only about 1% end up in bankruptcy. 
Moreover, bankcard debt represents less than 16% of total debt on the 
average bankruptcy petition and, according to a 1997 Federal Reserve 
Board survey, credit cards account for a mere 3.7% of consumer debt--
hardly large enough figures to be the cause of the bankruptcy crisis.
    Another popular myth is that credit grantors are intentionally 
offering credit willy-nilly to people who cannot handle it. Once again, 
this contention simply is not true. Card issuers use highly 
sophisticated and expensive ``prescreening'' underwriting techniques, 
which involve consideration of as many as hundreds of factors about a 
consumer, to ensure that consumers who receive ``pre-approved'' offers 
of credit have a demonstrated ability and willingness to repay their 
debts.
    Let me tell you specifically how we do it at MBNA. MBNA is the 
second largest lender through credit cards in the world. We receive an 
application from every customer, pull a full credit report on that 
customer, and do a debt-to-income analysis. We call back over 20% of 
the customers to develop additional information. A credit analyst will 
then make a decision to approve or decline the account. If the account 
is approved, a risk rating is applied and, in many cases, a senior 
lender sign-off is also required. We believe we are making the right 
decision every time. The majority of bankruptcies in our file are on 
customers who have been on the books for more than three years and have 
had some significant change in their financial condition.
    The fact is, the overwhelming majority of Americans use credit 
wisely and successfully. Americans use their cards to pay at the gas 
pump, the grocery store and literally millions of other places. With 
the advance of on-line security systems, consumers are increasingly 
using their cards to conduct business and make purchases over the 
Internet. And credit has made opportunities available for millions of 
Americans who might not otherwise have had them, across a huge range of 
income levels.
    In addition, the lending industry spends millions of dollars every 
year on education programs designed to help consumers use credit 
wisely. The bankcard industry works particularly closely with the more 
than 1,200 Consumer Credit Counseling Services offices around the 
country, which help many thousands of consumers get control of their 
finances and repay their debts. We are proud of the lending community's 
far-reaching efforts to inform, educate and assist consumers.
    Once again, I want to thank you for the opportunity to appear 
before you today. Please let me know if we can be of any further 
assistance to the Subcommittees or their staff.

    Mr. Gekas. We thank the gentleman. And we turn to Judge 
Kenner for the proscribed 5 minutes?

 STATEMENT OF CAROL J. KENNER, U.S. BANKRUPTCY JUDGE, DISTRICT 
                  OF MASSACHUSETTS, BOSTON, MA

    Ms. Kenner. Thank you, Mr. Chairman, and members of the 
subcommittee. My name is Carol Kenner. I've been on the 
bankruptcy bench for 12 years. During that time, I've presided 
over approximately 35,000 bankruptcies. And I'm honored to be 
here today.
    The current Bankruptcy Code on the whole is a well-
balanced, well-conceived statute, given that it must arbitrate 
and balance the diverse needs of creditors, debtors, and 
others. I think it works remarkably well. It is a law that 
Congress should be justifiably proud of because it provides an 
effective mechanism for paying dividends to creditors while 
affording debtors a fresh start. It does provide an essential 
safety net for American families and individuals who have hit 
hard times. And these hard times can be a job loss. They can be 
divorce, separation, health problems, and other causes. But the 
people I see on a day-to-day basis are compelled to file 
bankruptcy because of those reasons. I'm not suggesting that 
the law is perfect, but I think it only needs to be fine-tuned.
    I would like to focus on the subject of reaffirmation 
agreements because I think this is an area where Congress may 
want to consider making some changes. A reaffirmation agreement 
is an agreement between a debtor and a creditor whereby the 
debtor agrees to pay part or all of the debt that would 
otherwise be dischargeable. Congress put some safeguards in the 
law to make sure the debtors didn't reaffirm debts imprudently 
and without fulling understanding what they're doing. 
Unfortunately, some of those safeguards I believe aren't 
fulfilling the goals the Congress designed them for.
    For example, today a reaffirmation agreement only requires 
court approval if the debtor's attorney doesn't sign the 
affidavit saying that he has explained to the debtor all of his 
rights. But the affidavit procedure isn't working. In fact, it 
drives a wedge between the debtor and his counsel because what 
typically happens, as I see on a day-to-day basis, is that the 
debtor says, ``I want to reaffirm the debt on my washing 
machine and in order to do that, I've got to pay the $300 value 
of the washing machine.'' The lawyer says, ``You can't afford 
this.'' The client says, ``Sign here, please.'' And that 
reaffirmation agreement escapes scrutiny of the bankruptcy 
court.
    I think all reaffirmation agreements should go before the 
bankruptcy judge. And I know that that's going to put a burden 
on me and my colleagues, but it's a burden I think we must bear 
because it has such a substantial impact on whether the 
bankruptcy system fulfills its goals.
    Another way that reaffirmations have to be re-looked at is 
I think debtors have to know what the bottom line cost is. They 
come before me and they say, ``I want to reaffirm a debt on 
this gas grill that's currently worth $100.'' But they're going 
to pay for it over time in increments of maybe of $10, $15. The 
bottom line is that the cost of that gas grill might very well 
be $500 and the debtors don't understand what they're getting 
into.
    Sometimes debtors reaffirm debts in the mistaken belief 
that it will provide them with a line of credit in the future 
and that otherwise it will be difficult or impossible after 
bankruptcy to obtain that credit line. That's simply 
inconsistent with my experience.
    My time is short, but I think the treatment of secured debt 
requires some special attention. And I think that Congress 
needs to examine whether there is truly a secured debt interest 
in a household good, such as a mattress or a baby crib. Because 
if the creditor is going to repossess the baby crib only to 
take it to the town dump, then I think we need to re-examine 
the protections that we're providing for American families.
    As you consider the Bankruptcy Code revisions and these 
questions, I ask that you address these concerns.
    Thank you.
    [The prepared statement of Judge Kenner follows:]
Prepared Statement of Carol J. Kenner, U.S. Bankruptcy Judge, District 
                      of Massachusetts, Boston, MA
    Mr. Chairmen and members of the Subcommittees, my name is Carol J. 
Kenner. I have served as a United States Bankruptcy Judge for the 
District of Massachusetts for the last 12 years and during that time 
presided over more than 35,000 bankruptcy cases. I am honored to be 
here today.
    The current Bankruptcy Code, on the whole, is a well-balanced and 
well-conceived statute, given that it must arbitrate and balance the 
diverse needs of creditors, debtors and other constituencies. It works 
remarkably well. It is a law that Congress should be justifiably proud 
of because it provides an effective mechanism for paying dividends to 
creditors while affording debtors a fresh start. My purpose today is to 
offer observations, gleaned from daily administration of this law over 
the last twelve years, as to whether, in practice and with respect to 
discrete concerns, the current law is fulfilling the goals that 
Congress intended.
    I would like to focus on the subject of reaffirmation agreements. A 
reaffirmation agreement is an agreement between a debtor and a creditor 
where the debtor agrees to pay a debt that would otherwise be entirely 
or partially discharged in the debtor's bankruptcy case. When Congress 
enacted the Bankruptcy Code, it sought to protect financially-burdened 
families seeking chapter 7 relief from compromising their fresh start 
by making unwise agreements to pay dischargeable debt.
    For example, suppose the debtor files a chapter 7 case. At the 
meeting of creditors, a Bank creditor or credit card company asks the 
debtor if he wants to reaffirm his $3,000 unsecured debt in exchange 
for the Bank's agreeing to let him keep the credit card after the 
bankruptcy. By reaffirming the $3,000, the debtor is giving up his 
right to discharge that debt.
    The reaffirmation agreement REVIVES the legal enforceability of the 
debt. So when a debtor chooses to reaffirm a debt, that agreement 
negates one of the primary goals of bankruptcy: giving the debtor a 
fresh start and enabling him or her to resume a role in the economic 
mainstream. Instead of exiting bankruptcy with a fresh start, the 
debtor remains liable on a debt that otherwise would have been wiped 
out.
    Congress very wisely established safeguards that are intended to 
insure that debtors do not reaffirm debts imprudently and without full 
understanding of what they are doing. Most notable among these is the 
requirement that, before a reaffirmation agreement can become 
effective, the debtor's attorney must certify, or (if the debtor is not 
represented by counsel or counsel refuses to make the necessary 
certification) the Court must find, that--

        1. Lthe agreement represents a fully informed and voluntary 
        agreement by the debtor;

        2. Lthe agreement does not impose an undue hardship on the 
        debtor or a dependent of the debtor; and

        3. Lthe debtor has been fully advised of the legal effect and 
        consequences of--

                (i)  a reaffirmation agreement and

                (ii) any default under such an agreement.

As paternalistic as this safeguard may sound, experience demonstrates 
that it is necessary. Unfortunately, for various reasons, the present 
safeguard is not enough. The current law on reaffirmation agreements 
often does not fulfill the goals that Congress intended.
    Debtors often make the decision to reaffirm (1) without 
understanding the legal effect of what they are doing, (2) without 
understanding its financial cost, and (3) without understanding their 
alternatives. Often, they must make the decision in intimidating 
circumstances. Often the creditor is suddenly threatening to repossess 
a necessary asset that the debtor can't afford to replace--such as the 
car they need to get to work or their family refrigerator. Debtors tell 
me that they feel intimidated by having to appear for their meeting of 
creditors (many reaffirmation agreements are obtained at the meeting of 
creditors) and by the creditor seeking the reaffirmance. Often they 
have no advance warning that they will have to face this issue. And 
often their attorney is not with them when the creditor approaches, if 
they have an attorney at all. Although the current statute gives 
debtors time to rescind agreements made imprudently and requires that 
the agreement advise the debtor of this option, the creditor does not 
leave a copy of the signed agreement with the debtor, so the debtor 
does not know of his or her option to rescind.
    Another problem is that the requirement of the attorney declaration 
can drive a wedge between the attorney and client. The attorney may 
recognize that the client can't afford to pay the monthly charge, yet 
the client insists that the car or refrigerator is essential. 
Understandably, very few attorneys resolve this tension by standing 
firm against the client; most simply facilitate the client's decision 
to reaffirm by providing the necessary declaration.
    Congress may want to consider the following:

        a.
           LToday, a reaffirmation requires court approval only when 
        the reaffirmation agreement is filed without an affidavit from 
        the debtor's attorney. I believe Congress should consider 
        requiring court approval for ALL reaffirmation agreements. I 
        recognize that such a provision would place a burden on 
        bankruptcy judges, but this is a burden I am willing to bear 
        because it has such a substantial impact on whether our 
        bankruptcy system fulfills its goal of providing debt relief to 
        needy individuals and families.

        b.
           LThe financial impact of reaffirming a debt should be 
        absolutely clear. Debtors need to know the principal amount of 
        the debt, the interest rate, and the liquidation value of the 
        collateral; and, most importantly, they need to know the 
        bottom-line cost. Debtors need the same kinds of disclosures 
        that Congress requires in the Truth-in-Lending law.

        c.
           LSometimes a debtor reaffirms an unsecured debt in the 
        mistaken belief that it will permit him to obtain a line of 
        credit in the future and that, otherwise, it will be difficult 
        or impossible for him to obtain credit. This belief is 
        inconsistent with my experience. Debtors' attorneys tell me 
        that their clients are obtaining credit post-bankruptcy quite 
        easily. And debtors can certainly use debit cards or secured 
        credit cards if they need a card.

        d.
           LSometimes a debtor reaffirms a debt in response to a 
        complaint by the creditor that the debt is nondischargeable on 
        account of fraud. The best place for the Court to evaluate the 
        merits of the reaffirmation agreement is in the context of an 
        adversary proceeding to determine the dischargeability of the 
        debt.

        e.
           LThe treatment of secured debt requires careful thought. A 
        debtor who wants to keep household goods or his car needs to 
        understand what his options are. Most don't appreciate that one 
        of the options is redeeming the collateral. But, realistically 
        can a debtor redeem the collateral, such as a car, by paying 
        the creditor the current value of the car in cash, in one lump 
        sum payment? Most debtors I hear from can't do so. They would 
        have great difficulty in making lump sum payments--they live 
        from hand to mouth, paycheck to paycheck. They could perhaps 
        redeem over time--perhaps 6 months--but they simply cannot do 
        so in a lump sum without taking food off the table for the 
        family.

        f.
           LSometimes a debtor reaffirms a debt where the collateral is 
        a household item such as a mattress or a crib. In those cases, 
        there is rarely a market for such used goods and, as a 
        practical matter, the likelihood that the creditor will 
        foreclose is remote. I have trouble understanding why the 
        creditor should be permitted to repossess the mattress and then 
        merely cart it to the city dump.

        g.
           LProposed section 125 of H.R. 833 (formerly H.R. 3150) is 
        problematic because it defines the value as the price a retail 
        merchant would charge for property of that age and condition--
        but in fact there is rarely a market for such used household 
        goods.

        h.
           LThe debtor needs to be given a copy of the executed 
        reaffirmation agreement in order to better enable him or her 
        (1) to reconsider the agreement and (2) to know of the option 
        to rescind.

        i.
           LIf the debtor is reaffirming a debt that is entirely 
        unsecured, the debtor should state why he or she is doing so.
        j.
           LSometimes a debtor reaffirms a debt in response to a 
        creditor's threat to bring a nondischargeability action. In 
        some cases there is little or no basis for such a suit. In 
        order to evaluate whether that reaffirmation agreement is 
        reasonable, the Court needs information from the parties. Many 
        families in bankruptcy simply cannot afford to defend against 
        claims of nondischargeability.

        k.
           LSometimes the debtor reaffirms an unsecured debt because 
        his mother-in-law co-signed the loan and he wants to protect 
        the guarantor. I can't understand why such a reaffirmation 
        would ever be in the debtor's interest: nothing prevents him 
        from voluntarily paying a debt that's been discharged in order 
        to keep peace in the family, but he need not legally bind 
        himself on the debt in order to do that.

    As you consider the Bankruptcy Code and the need for reform, these 
are the concerns I would have you address. Thank you for your 
consideration.

    Mr. Gekas. We thank the Judge and we'll return to her 
during the question and answer period.
    Mr. Nuss.

  STATEMENT OF LARRY NUSS, CEO, CEDAR FALLS COMMUNITY CREDIT 
UNION, CEDAR FALLS, IA, REPRESENTING THE CREDIT UNION NATIONAL 
                       ASSOCIATION, INC.

    Mr. Nuss. Good afternoon, Chairman Gekas and members of the 
subcommittees. I am Larry Nuss, CEO of Cedar Falls Credit Union 
in Cedar Falls, Iowa, and I very much appreciate the 
opportunity to be here to tell you about our concerns with the 
increasing number of bankruptcies and how this is impacting 
credit unions. I am speaking on behalf of the Credit Union 
National Association, CUNA, which represents over 11,000 State 
and Federal credit unions nationwide. Our credit union is a $33 
million State-chartered, Federally insured credit union.
    Along with other creditors, credit unions are experiencing 
an increase in bankruptcy filings with almost half of all 
credit union losses due to bankruptcy. Cedar Falls Community 
has seen a significant increase in chapter 7 bankruptcy filings 
which cause the greatest loss to the credit union. I refer you 
to my full written statement for the statistics.
    Credit unions clearly recognize the value of financial 
counseling for their members, such as a consumer credit 
counseling service. However, even with financial counseling, we 
certainly recognize that there are some instances in which 
bankruptcy may be the only alternative for members, the way for 
them to get the needed fresh start.
    Credit unions want to help their members avoid financial 
difficulty through learning to manage their credit. More 
emphasis should be placed on consumer financial education so 
people can learn how to manage credit and what the alternatives 
to bankruptcy are. Therefore, CUNA strongly supports the 
provision in H. R. 833 requiring the debtor to receive credit 
counseling prior to filing for bankruptcy and prohibits the 
chapter 7 or 13 debtor from receiving a discharge if the debtor 
does not complete a course in personal financial 
responsibility.
    We also support the provision in the bill that requires a 
consumer debtor to be given a notice about bankruptcy and a 
description of credit counseling services. Any sensible 
bankruptcy reform should include education provisions so 
debtors have the tools to make wise decisions about filing for 
bankruptcy and to succeed financially after bankruptcy. 
Therefore, we support the sense of Congress in H.R. 833 that 
each of the States should develop curriculum on personal 
finance for elementary and secondary schools.
    Credit unions are currently going into their local schools 
and teaching students about money management. For example, in 
the 1997, 1998 school year through the National Youth 
Involvement Board, which is a network of credit union volunteer 
professionals, they visited classrooms across the country to 
educate students about the wise use of credit, savings options, 
budgeting, and careers.
    I have provided the committee members with a copy of a CUNA 
publication, savingteen, which highlights financial literacy in 
youth and I would ask that this publication be submitted for 
the record.
    Mr. Gekas. Without objection, it will be entered into the 
record.
    [The information referred to follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mr. Nuss. Thank you, Mr. Chairman. Through various new 
initiatives, CUNA is developing an even more aggressive 
strategy to promote consumer financial education.
    Because we are a nonprofit, cooperative financial 
institution, losses to the credit union have a direct impact on 
the entire membership due to a potential increase to loan rates 
or a decrease in interest on savings.
    Credit unions believe that reaffirmations are a benefit 
both to the credit union and to the member who by reaffirming 
with the credit union continues to have access to financial 
services and to reasonably priced credit. We are also aware of 
concerns with cases of abusive creditor practices, but the 
current Bankruptcy Code caught the violators and the size of 
the penalties imposed will act as a deterrent to others. The 
ability of credit unions to enter into reaffirmation agreements 
with their members is so important that if reaffirmations were 
severely limited or made not usable, CUNA would strongly oppose 
bankruptcy reform legislation regardless of what the rest of 
the bill might contain.
    Reaffirmations can be vital to credit union members. We 
recently had a case where a young couple with three children 
accumulated too much debt. We attempted to work out a debt 
consolidation loan for that family, but all creditors were not 
willing to cooperate. The young mother was working part-time, 
going to school to obtain a degree to try to increase her 
earnings. Unfortunately, a medical problem arose last year 
which pushed the limits of the family budget and they filed a 
chapter 7. This couple did not want to cause a loss to their 
credit union because we had worked closely with them to respond 
to their financial crisis and, more importantly, they wanted to 
preserve the needed access to financial services and reasonable 
credit. So they did reaffirm with the credit union.
    Credit unions are very anxious to see Congress enact 
meaningful bankruptcy reform and believe that needs-based 
bankruptcy presents the best opportunity to achieve this 
important public policy goal. Credit unions believe that 
consumers who have the ability to repay all or some part of 
their debts should be required to file a chapter 13 rather than 
have all their debt erased in chapter 7. Therefore, CUNA 
supports the needs-based provision that is contained in H. R. 
833.
    My full written statement contains the credit union's 
bankruptcy statistics and in looking over some of the cases we 
have experienced over the past few years, I honestly believe 
there are cases in there where the debtor could have paid at 
least part of that debt under a chapter 13 filing.
    In conclusion, let me say that I am very pleased you are 
holding this hearing today. The 105th Congress strongly 
supported needs-based bankruptcy and this hearing today shows 
that the 106th Congress is continuing to move toward passage of 
bankruptcy reform legislation. We encourage Congress to push 
for passage of such bills before Congress' fall recess.
    Thank you.
    [The prepared statement of Mr. Nuss follows:]
  Prepared Statement of Larry Nuss, CEO, Cedar Falls Community Credit 
    Union, Cedar Falls, IA, representing the Credit Union National 
                           Association, Inc.
    Good afternoon, Chairman Grassley and Chairman Gekas, and members 
of the Senate and House Judiciary Subcommittees. I am Larry Nuss, CEO 
of Cedar Falls Community Credit Union in Cedar Falls, Iowa, and I very 
much appreciate the opportunity to be here to tell you about our 
concerns with the increasing number of bankruptcies and how this is 
impacting credit unions. I particularly want to tell you what affect it 
is having on my credit union. I am speaking on behalf of the Credit 
Union National Association (CUNA), which represents over 11,000 state 
and federal credit unions nationwide. We are very pleased that this 
joint hearing is being held today on the important issue of consumer 
bankruptcy reform and that we have this forum to lend our support of 
meaningful bankruptcy reform legislation.
    Cedar Falls Community is a $33 million state-chartered, federally 
insured credit union. We were first chartered in 1958 as an employee-
based credit union. Due to expansion and mergers, the credit union now 
has a community charter and currently serves 8,300 members who reside 
in or work for a business located in the Iowa countries of Bremer and 
Black Hawk and the employees of Beatrice Cheese in Fredericksburg, 
Iowa. Family members are also eligible for membership.
    We invest in our members who clearly use the credit that we offer. 
Currently, we have over $25.5 million in loans to our members: $13.1 
million in auto loans; $1.2 million in mortgages; $5.5 million in home 
equity loans; $1.5 million in other real estate loans; $1.3 million in 
other secured loans; $1 million in unsecured loans; and $2.2 million in 
credit card accounts.
    We do offer credit cards to students, but the line-of-credit is 
dependent on the member's monthly gross income. In some cases we 
require the credit card to be secured by deposits in the credit union 
or be co-signed by the parent. We recently approved a $2,000 line of 
credit for a student when the parent agreed to co-sign because the 
student applicant only qualified for a $500 line of credit. The reason 
we did this was the student wanted our credit card so he could pay off 
an existing credit card with a much higher interest rate.
    Nationwide bankruptcy filings exceeded 1.4 million in 1998, which 
was a 2.7 percent increase from the 1997 filings. In fact, bankruptcy 
filings have set records in 1996, 1997, and 1998. And it is not 
anticipated that there will be a decrease to these high numbers for 
1999. Consumer bankruptcy filings made up 96.9 percent of those 1998 
filings. Credit unions are quite concerned about this steady increase 
in bankruptcy filings nationwide in the last few years because they 
have seen a similar increase in the number of credit union members who 
file. Preliminary data from credit union call reports to the National 
Credit Union Administration show that credit unions had approximately 
253,000 filings in 1998, which is an increase to the 250,000 filings in 
1997. The 1997 figures were an increase of 20% over 1996 levels, and 
the 1996 filings were 35% higher than the 1995 figures. CUNA estimates 
that almost half of all credit union losses in 1998 were bankruptcy-
related and that those losses reached $684 million. In Iowa, bankruptcy 
filings by credit union members remained near all-time highs in 1998 at 
2,169 filings. In each of the last three years Iowa credit unions 
reported bankruptcies per thousand members of 2.6 or higher.
    Similar to the national figures, but on smaller scale, Cedar Falls 
Community has seen a significant increase in chapter 7 bankruptcy 
filings, which cause the greatest loss to the credit union. In 1995 we 
had 17 chapter 7 filings; the number increased to 21 in 1996, to 24 in 
1997, but dropped somewhat to 18 in 1998. On the other hand, we have 
very few chapter 13 filings; zero in 1995; 4 in 1996; 2 in 1997; and 1 
in 1998, that converted to a chapter 7. Our losses due to bankruptcy 
have also increased--from almost $20,000 in 1995, doubling to just over 
$40,000 in 1997, and then dropping off some in 1998 to almost $35,000.
    As a cooperative not-for-profit credit union, a loss due to 
bankruptcy impacts the entire membership. Therefore, we are proactive 
in combating the number of bankruptcies with our careful lending 
policies. We require a written application for all loans, including 
credit card applications. Prior to making a decision to extend the 
credit, we review the member's credit report and carefully determine 
that the applicant has the ability to repay before extending credit. We 
verify income and see that a reasonable debt-to-income ratio would not 
be exceeded by a credit extension. We routinely monitor our credit 
cards, and we do not increase the credit limit unless a member 
specifically makes the request for an increase, and we do so only after 
a review of the member's current debt and ability to repay.
               credit unions support financial education
    Credit unions clearly recognize the value of financial counseling 
for their members. According to a recent CUNA bankruptcy survey, 70% of 
credit unions counsel financially troubled members at the credit union. 
A similar percentage of credit unions may also refer members to an 
outside financial counseling organization, such as the Consumer Credit 
Counseling Service (CCCS), and many do both. At Cedar Falls Community 
we refer those members who are experiencing financial difficulties to 
the local CCCS and have found that beneficial for the members and their 
families. A credit union staffer is beginning her second year as 
director of that local CCCS. In addition, we try to counsel our members 
when they are confronted with credit problems. Our loan officers are 
encouraged to work with members who are experiencing payment problems. 
We have 55 members who have established separate saving accounts which 
the credit union can access to pay designated creditors on a periodic 
basis. We encourage our members to contact their other creditors to 
negotiate reduced payments and and/or payoffs so the credit union can 
provide a consolidation loan and /or automatic repayment for the 
member. When we receive a credit application and discover the member 
has outstanding collections or judgments, we work with those members. 
We may suggest that they agree to a six-month payment plan to 
demonstrate an effort to satisfy those obligations. Or, we may suggest 
they consider a monthly deposit in an account at the credit union which 
can be used to pay off those obligations. Subsequently, we will review 
their credit request. Because of our belief that financial education is 
so important, we even reach out to our community schools--our credit 
union staff conducts classroom courses in credit at the local junior 
and senior high schools.
    However, even with financial counseling, we certainly recognize 
that there are some instances in which bankruptcy may be the only 
alternative for members, the way for them to get the needed ``fresh 
start.''
    Credit unions want to help their members avoid financial difficulty 
through learning to manage their credit. We believe that more emphasis 
should be placed on consumer financial education so people can learn 
how to manage credit and what the alternatives to bankruptcy are. The 
CUNA Bankruptcy Subcommittee recently reported that ``[e]ducation was 
found as one of the most promising strategies to consider in attempting 
to reverse the trends in bankruptcy.'' Credit unions have found that 
educating their members about credit and how to use it can be an 
effective deterrent to filing for bankruptcy.
    Therefore, CUNA strongly supports the provision in H.R. 833, the 
House bankruptcy reform legislation, that requires the debtor to 
receive credit counseling prior to filing for bankruptcy and prohibits 
the chapter 7 or 13 debtor from receiving a discharge if the debtor 
does not complete a course in personal financial responsibility. 
Recognizing that consumers need to know more about alternatives to 
bankruptcy so they can make a more informed decision, we also support 
the provision in the bill that requires a consumer debtor to be given a 
notice about bankruptcy and a description of services from trustee-
approved credit counseling services. Any sensible bankruptcy reform 
should include education provisions to give debtors the tools they need 
to make wise decisions about filing for bankruptcy and to succeed 
financially after bankruptcy.
    In addition, credit unions recognize that financial education needs 
to be made available early on and before consumers experience financial 
problems. Therefore, we support the sense of Congress that each of the 
states should develop curriculum on personal finance for elementary and 
secondary schools. Credit unions are currently going into their local 
schools and teaching students about money management. In addition, the 
National Youth Involvement Board (NYIB), a national network of credit 
union volunteer professionals, helps credit unions to educate young 
members. During the 1997-1998 school year more than 5,000 credit union 
speakers visited classrooms across the country, and as a result, more 
than 110,000 students heard about the wise use of credit, savings 
options, budgeting, and careers.
    Many credit unions also devote office space for consumer libraries 
that enable members to use a wide range of financial periodicials, 
manuals, and books to learn more about money management and to research 
buying decisions, retirement plans, and a host of other issues relating 
to personal finance. And, through various new initiatives, CUNA is 
developing an even more aggressive strategy to promote consumer 
financial education.
 credit unions support reaffirmations as a benefit both to the member 
                        and to the credit union
    Because we are a not-for-profit cooperative financial institution, 
losses to the credit union have a direct impact on the entire 
membership due to a potential increase to loan rates or decrease in 
interest on savings. Therefore, we have a policy that if a member 
causes a loss to the credit union, services to that member, aside from 
maintaining a share account, will be withheld. Our credit union members 
take this policy seriously and continue to reaffirm on their credit 
union loans.
    Credit unions believe that reaffirmations are a benefit both to the 
credit union, which does not suffer a loss, and to the member, who by 
reaffirming with the credit union continues to have access to financial 
services and to reasonably priced credit. We are aware of concerns of 
abusive creditor practices, recently highlighted in high profile press 
coverage, but note that the current Bankruptcy Code, in fact, caught 
the violators. The size of the penalties imposed will undoubtedly act 
as a deterrent to others. The ability of credit unions to enter into 
reaffirmation agreements with their members is so important that if 
reaffirmations were severely limited or made not usable, CUNA would 
strongly oppose bankruptcy reform legislation regardless of what the 
rest of the bill might contain.
    As I said, reaffirmations are very important to credit unions, and 
they can be vital to the credit union member. For example, a young 
couple, members of our credit union and parents of three children, had 
accumulated too much credit card debt. We first attempted to work out a 
debt consolidation loan for them, but not all the creditors were 
willing to cooperate. While working part-time, the mother went back to 
school to get a degree that would increase her earnings. Unfortunately, 
a medical problem pushed the limits of the family budget, and they 
filed a chapter 7. This couple did not want to cause a loss to their 
credit union, recognizing we had worked closely with them to try to 
respond to their financial crisis, and more importantly, they wanted to 
preserve the needed access to financial services and reasonable credit.
              credit unions support needs-based bankruptcy
    Credit unions are very anxious to see Congress enact meaningful 
bankruptcy reform and believe that ``needs-based bankruptcy'' presents 
the best opportunity to achieve this important public policy goal. 
Credit unions believe that consumers who have the ability to repay all 
or some part of their debts should be required to file a chapter 13, 
rather than have all their debt erased in chapter 7. Therefore, CUNA 
supports the needs-based provision that is contained in H.R. 833. This 
provision was a compromise developed out of the bankruptcy reform bills 
that received overwhelming support in the 105th Congress.
    Earlier, I cited my credit union bankruptcy statistics from the 
last four years. Out of 86 bankruptcies, only 6 were in chapter 13. 
And, looking over these I believe there are cases in which the member 
who filed a chapter 7 would have been able to pay back some of the 
debts in a chapter 13. For example, just last summer our attorney 
during examination at the 341 hearing got evasive answers from a debtor 
about the schedules he filed and the information he had provided on his 
financial statement to the credit union. It seemed pretty clear from 
our records that the debtor did have an ability to repay some of his 
debts. However, our lawyer advised us that the cost to pursue the issue 
would be more than we could recover, and so we did not do it. With its 
random audit requirement needs-based bankruptcy should ensure that 
debtors provide accurate schedules and documentation of income and 
thus, those who can repay some part of their debts would be required to 
do so.
    Again, let me say that I am pleased you are holding this hearing 
today. The 105th Congress strongly supported needs-based bankruptcy, 
and this hearing today shows that the 106th Congress is continuing to 
move toward passage of bankruptcy reform legislation. We encourage 
Congress to push for passage of such bills before Congress' fall 
recess.
    Again, let me say I appreciate the opportunity to testify today 
before this committee and would be happy to answer any questions.
                               fact sheet
                   cedar falls community credit union
                           cedar falls, iowa

Total assets:  $33 million
Number of members:  8,300
Total loans:  $25.5 million

Total charge-offs due to bankruptcy:

        1998:  $34,813
        1997:  $40,237
        1996:  $39,353
        1995:  $19,848

Number of filings:  Chapter 7      Chapter 13              Total

        1998:              18              1 (converted to 7)    18
        1997:              24              2                    26
        1996:              21              4                    25
        1995:              17              0                    17

    Mr. Gekas. We thank the gentleman, and we turn to Mr. Klein 
for the customary 5 minutes.

  STATEMENT OF GARY KLEIN, ESQUIRE, SENIOR ATTORNEY, NATIONAL 
                CONSUMER LAW CENTER, BOSTON, MA

    Mr. Klein. Mr. Chairman and distinguished members of the 
joint committee. Good afternoon, my name is Gary Klein. I'm a 
senior attorney with the National Consumer Law Center. 
Throughout my career, I have represented working families, the 
elderly, and other consumers with severe financial problems who 
have little alternative other than to turn to the bankruptcy 
system. It is the experiences of these families that has 
spurred me to work for balanced and fair bankruptcy 
legislation.
    Although the views I express to you today are mine, in the 
last several years, I have been joined by a wide range of 
organizations, including those representing consumers, women 
and children, working families, labor, the civil rights 
community, older Americans, and the guardians of the system, 
bankruptcy judges. These groups oppose, as do I, the kind of 
one-sided, radical, and unbalanced bankruptcy overhaul that was 
contained in last year's conference report and which has been 
re-introduced this year as H.R. 833.
    Earlier, H. R. 833 was represented to be a pro-consumer 
bill. I am here today as a consumer advocate to tell you that 
it is not so. I have a simple message. Last year's failed 
conference report should not serve as your starting point in 
developing legislation this year. You have a real opportunity 
in the spirit of bipartisanship and respect for the historical 
balance that has guided past bankruptcy legislation to move 
expeditiously and fairly to pass a bankruptcy reform bill.
    This lesson was driven home in the closing weeks of the 
105th Congress when the Senate passed bipartisan legislation, 
97 to 1, that required accountability from both debtors and 
creditors for conduct that contributes to bankruptcy. Though I 
don't agree with each and every provision in that bill, I 
commend its bipartisan and balanced approach.
    Unfortunately, the Senate approach was rejected in the 
closing hours of the 105th Congress. And not surprisingly that 
rejection, as embodied by the conference report, failed to be 
enacted into law.
    But there was a lesson to be learned from that experience. 
It was that legislation cannot be predicated on the myths that 
had permeated the debate during the first year and a half of 
the 105th Congress, and which have been repeated here today. I 
would like to examine a few of those myths.
    Myth No. 1 is that everyone can repay their debts because 
the economy is booming. The reality is that there have been 
extraordinary structural changes to the economy that have left 
millions of American families struggling.
    First, it often takes two wage-earners to make a middle-
income family's budget work. With an increase in divorces, 
single-parent households, and with the skyrocketing cost of 
childcare, many women are unable to manage their debts and to 
provide necessities for their children. For the first time this 
decade we see more women in the bankruptcy system than men.
    Second, we have millions of American families with no 
health insurance. An unforeseen medical emergency increasingly 
leads to bankruptcy for those families.
    Third, we have rising education costs. The average student 
loan debt burden for students leaving college increased from 
$8,200 to $18,800 between 1991 and 1997.
    Fourth, we have downsizing in many industries, and 
breadwinners are going back to work at lower-paying jobs with 
fewer benefits. We see those folks in the bankruptcy system as 
well, when they can't pay the debts they took before they were 
downsized out of their jobs.
    And, finally, piled on top of all of these changes, we have 
a massive increase in household debt for credit cards and home 
mortgages. In 1975, total household debt was 24 percent of 
aggregate household income. Today total household debt is a 
staggering 104 percent of aggregate income.
    Much of the recent increase in consumer debt is fueled by 
an explosion in credit card marketing. More than 3 billion 
credit card solicitations were sent out 1997 and again in 1998. 
As the Consumer Federation of America has pointed out, every 
American family was offered more than $1 million of credit in 
each of those years.
    Credit solicitations and other forms of marketing are 
designed to encourage consumers to rely on credit. Much of the 
marketing is done to people who once would have been considered 
unacceptably high risk. Due to high interest rates of 16, 18, 
20 percent or higher, the lending community has discovered that 
it profits when families get in over their heads. Those 
families cannot pay their credit card balance in full each 
month, and they pay a lot of interest, but they also are 
vulnerable even to small life problems, which can put them over 
the edge.
    Myth No. 2, there is widespread abuse of the bankruptcy 
system by debtors. The reality is that a recent study published 
by the American Bankruptcy Institute found that less than 3 
percent of debtors had used the bankruptcy system to avoid 
debts they could afford to repay. That is just 3 percent. 
Industry-funded studies purporting to show otherwise, and which 
show that only 15 percent can afford to pay, have been 
discredited by the General Accounting Office for lack of 
empirical rigor.
    Myth No. 3, it is the lax bankruptcy system which causes 
credit losses that are passed onto consumers in the form of 
higher interest rates. The number $400 was thrown around 
earlier in this hearing, and for the first time I heard a 
figure of $550 in extra interest costs associated with 
bankruptcy losses for each American family.
    The reality is that the lending community is scapegoating 
the bankruptcy system for losses associated with bad loans. If 
the bankruptcy system were totally eliminated tomorrow, the 
vast majority of debts which would have been discharged in 
bankruptcy would be written off by lenders anyway because the 
families involved simply can't afford to pay. Even the 
creditors' own studies acknowledge that. The only impact of 
bankruptcy is that it gives debtors a legally-enforceable fresh 
start, the same second chance which has been guaranteed since 
biblical times.
    To a large extent, Mr. Chairman, the bankruptcy problem is 
nothing but a bad loan problem. Industry analysts estimate that 
50 percent of bankruptcy losses could be eliminated if the 
industry instituted minimal underwriting guidelines. The 
lending community has chosen not to take this step because 
their current practices are quite profitable. However, as a 
consequence, the banking community must accept that it is 
reaching some borrowers who won't be able to pay.
    Mr. Chairman, never has 5 minutes seemed so short. I was 
wondering if I could have the indulgence of an additional 
minute or two to finish my statement.
    Mr. Gekas. You may proceed, without objection.
    Mr. Klein. Thank you very much.
    When we get to the fundamental truth here, after stripping 
away these myths, the reality is that in crafting balanced 
reform, the worst problems you need to confront are those of 
families losing their homes, facing wage garnishment, 
repossessions, and the hopelessness of crushing debt.
    I want to close with both an observation and an appeal. The 
observation is that in the last 5 years, as the American 
economy has roared and the stock market has soared, the number 
of people seeking assistance from consumer credit counseling 
has increased faster than the number of bankruptcies. More than 
2 million people sought and obtained credit counseling in 1998 
alone, and these included college students, single mothers, 
farmers, and the elderly. When you add that to the 1.4 million 
people who filed for bankruptcy, it should be clear that there 
are millions of Americans, millions of your honest 
constituents, people who are not deadbeats, who have run into 
real trouble with credit and keeping their families afloat. 
They do need to be accountable to their creditors to the extent 
possible, but bankruptcy, their only safety valve, should not 
be remade into an expensive and unworkable system designed to 
keep families yoked to debts they have no hope of ever 
repaying.
    The flip side of individual responsibility is corporate 
responsibility. I agree with Mr. Nuss; there needs to be credit 
education about the potential negative side of reliance on 
credit. To start that process, it is essential that credit card 
applications and credit card statements have prominent, plain 
English disclosures that truly tell consumers the real terms 
and consequences, as well as the real risks, associated with 
credit.
    [The prepared statement of Mr. Klein follows:]
 Prepared Statement of Gary Klein, Esquire, Senior Attorney, National 
                    Consumer Law Center, Boston, MA
                              introduction
    Mr. Chairmen and members of the Joint Committee, on behalf of our 
low-income clients, the National Consumer Law Center \1\ thanks you for 
inviting us to testify today regarding consumer bankruptcies and their 
impact on the banking system.
---------------------------------------------------------------------------
    \1\ The National Consumer Law Center is a nonprofit organization 
specializing in consumer credit issues on behalf of low-income people. 
We work with thousands of legal services, government and private 
attorneys around the country, representing low-income and elderly 
individuals who request our assistance with the analysis of credit 
transactions. The National Consumer Law Center also serves as an 
advocate for low-income consumers on consumer lending and bankruptcy. 
NCLC publishes materials for lawyers and consumers, including the 
nationally acclaimed book Surviving Debt: A Guide for Consumers. NCLC 
has trained lawyers and counselors nationwide on consumer protection 
issues relevant to low-income consumers.
    My experience includes 14 years as an attorney representing clients 
in bankruptcy, as an advocate for consumers on bankruptcy issues, as a 
teacher and trainer of other lawyers, and as an author of books on 
bankruptcy and consumer debt. My work also focuses on helping 
homeowners with financial problems avoid foreclosure. The bankruptcy 
system has always provided an important means to that end.
---------------------------------------------------------------------------
    There is a great deal of misinformation circulating about the 
increase in bankruptcy filings and purported abuses in the system. The 
reality is that more debtors use the bankruptcy system because more 
debtors are having serious financial problems. American families 
increasingly face foreclosure, repossession, utility shut-off, wage 
garnishment and extensive collection activity on unsecured credit card 
debt. In short, more American families are using the bankruptcy system, 
because more American families are having trouble paying their debts.
    My testimony will focus on four questions:

         Why more filings?

         LDoes the lending industry share responsibility for 
        consumer financial hardship and the increase in bankruptcy 
        filings?

         LAre substantial costs of bankruptcy passed on to non-
        bankrupt consumers?

         LAre the amendments captured last year in the 
        Conference Report (H.R. 3150) and reintroduced this year as 
        H.R. 833 fair and balanced?
              i. what has caused the increase in filings?
    The fact that more bankruptcies are being filed is not evidence, in 
itself, that debtors are abusing the system. The reality is that more 
cases are filed, because more American families are faced with crushing 
debt. There is much more consumer credit outstanding than ever before. 
With the additional extension of credit, comes additional risk. (See 
the Case Study in the Appendix for a typical example of an American 
family forced to file bankruptcy because of the convergence of consumer 
debt, job loss and divorce.)
    The increase in bankruptcy filings is an unfortunate consequence of 
several significant structural changes in the American economy. These 
changes have combined to create a rise not only in bankruptcy, but also 
in foreclosures,\2\ repossessions, utility disconnections \3\, credit 
card defaults \4\ and visits to consumer credit counseling agencies.\5\ 
Nevertheless banks continue to record profits, fueled in large part by 
credit card income.\6\
---------------------------------------------------------------------------
    \2\ Foreclosures have more than tripled since 1980. There were 
approximately half a million foreclosures in 1998.
    \3\ See National Consumer Law Center, ``The Energy Affordabilty 
Crisis of Older Americans'' p. 23 (August, 1995).
    \4\ Ausubel, ``Credit Card Defaults, Credit Card Profits and 
Bankruptcy'', 71 Am. Bankr. L.J. 250 (1997); See Consumer Federation of 
America, ``Recent Trends in Credit Card Marketing and Indebtedness'' 
(Report issued July, 1998) at p. 1.
    \5\ The number of consumers who have visited consumer credit 
counseling for help in the last 20 years has increased at a faster rate 
than bankruptcy filings. More than two million families sought such 
help in 1998.
    \6\ Commercial banks earned 14.8 billion in the third quarter of 
1997, the third consecutive quarter of record profits and the 19th 
consecutive quarter involving profits of more than 10 billion. See 
Ausubel, Credit Card Defaults, Credit Card Profits and Bankruptcy, 71 
Am. Bankr. L.J. 250 (1997) for a discussion of the role of credit card 
profits in the current boom in banking.
---------------------------------------------------------------------------
    These are the factors which have contributed to the increase in 
filings:

         LDownsizing, economic dislocation, income disruptions, 
        and underemployment. Families are increasingly impacted by 
        instability in employment income, particularly at the lower end 
        of the wage spectrum.\7\ Although unemployment remains low, 
        many workers file bankruptcy after being forced to shift to 
        lower paying jobs. A surprising statistic, based on data 
        compiled by Visa and MasterCard, is that no more than 29% of 
        bankruptcies are caused by overspending. The balance of filings 
        are caused by other life events over which consumers have 
        little or no control.\8\
---------------------------------------------------------------------------
    \7\ Even MasterCard recognizes this trend. In its recent report on 
debt and bankruptcy, its economist states: ``Stagnation in real wages 
during the last 20 years and the growing disparity in income and 
wealth, . . . have almost certainly contributed to the rise in personal 
bankruptcies. Declines in income caused by job loss make it more 
difficult for those affected to service previously accumulated debt.'' 
Chimerine, ``Americans in Debt: The Reality'', p.24 (MasterCard 
International 1997).
    \8\ Id. at p. 25. And even the 29% figure is acknowledged to 
overstate spending problems as a contributing cause of bankruptcy. Id.

         LRising debt to income ratios. More families have more 
        debt. Part of the reason for this is that the lending community 
        has aggressively marketed credit card debt,\9\ because it 
        profits from the very high interest rates. Another factor is 
        the unprecedented increase in the cost of education and the 
        corresponding increase in student loan debt.\10\ One family in 
        six below $25,000 in annual income, spends more than 40% of its 
        income on debt service.\11\
---------------------------------------------------------------------------
    \9\ More than three billion credit card solicitations were sent out 
in 1997 and 1998. Consumer Federation of America, ``Recent Trends in 
Credit Card Marketing and Indebtedness'' (Report issued July, 1998) at 
Table 2 (citing industry sources). See Hays, ``Banks Marketing Blitz 
Yields Rash of Defaults'' Wall Street Journal, p. B1 (September 25, 
1996). MBNA, one of the largest issuers, claims 30 million credit card 
solicitations each month in 1997 together with 6 million phone 
solicitations. Hansell, ``A Banking Powerhouse of Cards'', N.Y. Times, 
p. C1 (October 22, 1997).
    \10\ See Chacon, ``Debt Burden Soaring for U.S. Students'' Boston 
Globe, p. 1 (October 23, 1997). According to the Nellie Mae study on 
which the article is based, an average student's debt increased from 
$8,200 in 1991 to $18,800 in 1997.
    \11\ ``Family Finances in the United States: Recent Evidence from 
the Survey of Consumer Finances'' Federal Reserve Bulletin, p. 1, 21 at 
Table 14 (January, 1997). Overall, the rate is one family in nine.

         LReliance on two wage earners to make ends meet. This 
        change in a fundamental condition of the economy means that 
        every family has double the risk. With two wage earners 
        vulnerable to income instability, any change for either one 
        creates enormous pressure on the family budget. Child-bearing 
        and time off to raise children mean that a family which was 
---------------------------------------------------------------------------
        getting by on two incomes is forced to rely on only one.

         LRising divorce rates. A corollary of the latter 
        factor is that when a family splits up, the pressure of running 
        a household with less total income is impossible. Bankruptcy 
        debtors are disproportionately single parents.\12\
---------------------------------------------------------------------------
    \12\ See Sullivan, Warren, and Westbrook, As We Forgive Our 
Debtors, pp. 147-165 (Oxford University Press, 1989).

         LUninsured medical debt. At a time when a two day stay 
        in the hospital to deliver a baby can cost as much as $20,000, 
        the uninsured have virtually no options to manage medical 
        debts.\13\ Bankruptcy has played an increasing role as the only 
        way out.\14\
---------------------------------------------------------------------------
    \13\ See Hildebrandt and Thomas, ``The Rising Cost of Medical Care 
and Its Effect on Inflation'', Federal Reserve Bank of Kansas City, 
Econ. Rev. p. 47 (Sept./Oct. 1991).
    \14\ Domowitz & Sartrain, Determinants of the Consumer Bankruptcy 
Decision, p. 25 (1997).

         LAggressive Creditor Collection Action. Wage 
        garnishments, debt collection by aggressive telephone calling, 
        and pursuit of legal remedies push many families into 
        bankruptcy.\15\ Few debtors can afford to pay an attorney to 
        defend against a debt collection or wage garnishment action 
        even when they have valid legal defenses.\16\ Many bankruptcy 
        filers report that their attempts at non-bankruptcy payment 
        arrangements were rebuffed.
---------------------------------------------------------------------------
    \15\ See Dugas, ``Special Report: Going Broke, Wage Garnishments a 
Key Factor'' USA Today, p. 1A (June 10, 1997); Hansell, ``We Like You. 
We Care About You. Now Pay Up. Debt Collecting Gets a Perky Face and 
Longer Arms'', NY Times, F.1 (Jan. 26, 1997).
    \16\ Forrester, ``Constructing a New Theoretical Framework for Home 
Improvement Financing,'' 75 Ore. L.Rev. 1095 (Winter 1996); Sterling & 
Shrag, ``Default Judgments Against Consumers: Has the System Failed?'' 
67 Denv. U. L. R. 357, 384 (1990).

         LDeregulation. As rates and terms of credit have been 
        deregulated, an increasing number of American families have 
        gotten credit on bad terms.\17\ High rate home equity loans, 
        credit card interest rates exceeding 18%, and consumer fraud 
        tied to credit are frequent contributing causes of 
        bankruptcy.\18\ As some borrowers are increasingly pushed into 
        ``sub-prime'' loans at high rates, the bankruptcy system is at 
        the fulcrum of a ``chicken and egg'' problem. Are high risks 
        justifying high rates, or are the high rates causing defaults 
        which generate risk? \19\
---------------------------------------------------------------------------
    \17\ See, e.g, Adding Insult to Injury: Credit on the Fringe, 
Hearing before the Subcommittee on Consumer Credit and Insurance of the 
House Committee on Banking, 103rd Cong., 1st Sess. (1993). Rehm, In a 
First, FDIC Warns Banks About Dangers of Sub-Prime Lending, 162 Am. 
Banker 2 (May 13, 1997).
    \18\ See Forrester, ``Mortgaging the American Dream: A Critical 
Evaluation of the Federal Government's Promotion of Home Equity 
Financing'' 69 Tul. L. Rev. 373 (1994).
    \19\ Home mortgage loans with high loan-to-value ratios, 
particularly so-called 125% loans, are the major component of the 
recent surge in home equity lending, both in the prime and subprime 
markets. Recent growth in the volume of 125% loans has been 
unprecedented: 1995--$1 billion; 1996--$4 billion; 1997--$10 billion; 
1998--an estimated $20 billion. Although such loans are at least 
partially secured by the debtors' homes and can result in the loss of 
the home, they carry interest rates much closer to those of credit 
cards, in the 13-15% range. See ``A 125% Solution to Card Debt Stirs 
Worry,'' Wall Street Journal, Nov. 17, 1997

         LMore Credit Means More Bankruptcy. The clearest 
        correlation of bankruptcy cause and effect is between the 
        increase in the amount of credit outstanding and the number of 
        filings. The number of bankruptcies and the total amount of 
        consumer debt in our society have moved upward together in 
        lockstep.\20\ It is not surprising that as more Americans 
        borrow more money, more families have financial troubles.
---------------------------------------------------------------------------
    \20\ Three neutral academic studies show this remarkable 
correlation. Ausubel, Credit Card Defaults, Credit Card Profits and 
Bankruptcy, 71 Am. Bankr. L.J. 250 (1997); Bhandari & Weiss, The 
Increasing Bankruptcy Filing Rate: An Historical Analysis, 67 Am. 
Bankr. L.J. 1 (1993); Statement of Kim Kowalewski, Chief, Financial and 
General Macroeconomic Analysis Unit, Congressional Budget Office, 
before the Subcommittee on Administrative Oversight and the Courts, 
Committee on the Judiciary, United States Courts, (April 11, 1997). 
These studies stand is sharp contrast to credit industry funded studies 
which purport to show otherwise.
---------------------------------------------------------------------------
    ii. does the lending industry share responsibility for consumer 
       financial hardship and the increase in bankruptcy filings?
    The reasons for the increase in bankruptcy filings are complex. 
Although banks and other lenders are correct in pointing out that they 
are not entirely to blame, it is disingenuous of them to assert that 
they should not bear some responsibility, at least to the extent of 
their own conduct.
    Credit solicitations and other forms of marketing are designed to 
encourage consumers to rely on credit. Much of the marketing is done to 
people who once would have been considered unacceptably high risk. Due 
to high interest rates, the lending community has discovered that it 
profits when people get in over their heads so that they cannot pay 
their balance in full each month.\21\ This generates remarkable profits 
for banks. However, it also makes consumers vulnerable even to small 
life problems which can put them over the edge.
---------------------------------------------------------------------------
    \21\ Borrowers who maintain balances pay interest at rates which 
typically range from 14.5 to 19.8%.
---------------------------------------------------------------------------
    Every American family has a budget which represents a fixed pie. 
The 55 to 60 million households that carry a credit card balance from 
month-to-month have an average balance of $7,000 and pay more than 
$1,000 per year in interest and fees.\22\ And, of course, the families 
that wind up in bankruptcy are almost always on the high side of 
average in their debt-load and the low side of average in income.\23\
---------------------------------------------------------------------------
    \22\ See Consumer Federation of America, ``Recent Trends in Credit 
Card Marketing and Indebtedness'' (Report issued July, 1998) at p. 1.
    \23\ Research shows that the median after-tax income of debtors is 
under $20,000 annually. Id. $1,000 in annual debt service expenses can 
thus be a very meaningful proportion of a debtor's income.
---------------------------------------------------------------------------
    Are consumers at fault for using the credit which is marketed to 
them? Of course not. Millions of American families are not 
irresponsible. They are simply using the credit offered to them for the 
purposes for which it is offered. Families don't go out and borrow 
$7,000 on a credit card all at once. They make small purchases over a 
period of time, and make the minimum payments which the lender 
requests. Few consumers understand that making only the minimum 
payments means that their balance will grow and payments will take an 
ever larger piece out of their monthly budget (at 18% interest or 
higher) for debt service.\24\
---------------------------------------------------------------------------
    \24\ Industry analysts estimate that, using a typical minimum 
monthly payment rate on a credit card, it would take 34 years to pay 
off a $2,500 loan, and total payments would exceed 300% of the original 
principal. George M. Salem and Aaron C. Clark, GKM Banking Industry 
Report, Bank Credit Cards: Loan Loss Risks are Growing, p. 25 (June 11, 
1996). Credit card statements, unlike mortgage loans and car loans, do 
not disclose the amortization rates or the total interest that will be 
paid if the cardholder makes only the minimum monthly payment See 11 
U.S.C. Sec. 1637. A provision which would require new Truth in Lending 
disclosures on these issues was included in the bill passed by the 
Senate (Sec. 209), but deleted from the Conference Report.
---------------------------------------------------------------------------
    Congress should not enact legislation which undermines effective 
bankruptcy relief for struggling families. Some reform is necessary, 
but that reform should be balanced and should help consumers avoid the 
credit problems which contribute to bankruptcy.
    We do not advocate that creditors make less credit available to low 
and moderate income consumers, but rather that consumers have the tools 
and information they need to use credit wisely. Appropriate consumer 
protections designed to reinforce the lending community's obligation to 
employ responsible credit practices include:

         Lenhanced disclosure to consumers about the 
        consequences of making minimum payments,\25\
---------------------------------------------------------------------------
    \25\ Minimum payments on many credit cards will not amortize the 
loan, thus sucking people in over their heads. If minimum payment terms 
are offered which won't amortize the debt in two years, consumers 
should be told, in clear and conspicuous language, what they need to 
pay, if they make no further charges, in order to pay off the loan over 
a two year period.

         Lenhanced disclosures concerning teaser rates of 
        interest,\26\
---------------------------------------------------------------------------
    \26\ Low initial rates are designed to encourage consumers to use 
credit in the first months after credit is granted. Many consumers do 
not understand what the permanent rate will be or the impact of the 
rate change on a large unpaid balance.

         Lprotections against unilateral interest rate 
        increases which are unrelated to a change in the lender's cost 
        of funds,\27\
---------------------------------------------------------------------------
    \27\ Some lenders raise rates arbitrarily after consumer balances 
reach a certain level. Interest rate changes should be tied to an 
actual change in the interest rate environment so that consumers are 
not caught unawares. See, Hershey, ``Sales of Credit Card Accounts Are 
Hurting Many Consumers,'' NY Times, March 2, 1999, p.A1 (documenting 
the effect of unilateral interest rate changes.''

         Lprohibition of unilateral credit limit increases,\28\
---------------------------------------------------------------------------
    \28\ When a lender extends a consumer's credit limit unilaterally, 
in some cases after a consumer is already struggling with the existing 
balance, the message is that the lender believes that the consumer can 
afford to take on more credit. Consumers would not be hurt by having to 
ask for more credit, rather than having it offered unilaterally. Such a 
request should trigger at least minimal underwriting requirements.

         Lprohibition of security interests based in credit 
        card agreements,\29\
---------------------------------------------------------------------------
    \29\ These hidden security interests in items of property which 
have no resale value to the creditor provide inappropriate leverage to 
lenders in the collection process even though there is no potential 
that the lender could make money in the event of repossession.

         Lprotection against so called ``cashed check loans,'' 
        \30\
---------------------------------------------------------------------------
    \30\ Consumers receive checks from several major lenders in the 
mail for as much as $5,000. Not everyone understands that cashing these 
checks can lead to acceptance of high rate credit terms. In addition, 
providing preapproved credit through cashed checks eliminates the 
cooling off period which more common credit application processes 
provide.

         Lprohibition of credit card cash advance machines in 
        casinos,\31\
---------------------------------------------------------------------------
    \31\ With credit card cash advance machines prevalent in casinos, 
is it surprising that some gamblers get overextended on credit and file 
bankruptcy based on those credit card debts?

         Lprohibition against making credit cards available to 
        persons such as students who have no present ability to make 
        more than nominal payments,\32\ and
---------------------------------------------------------------------------
    \32\ Offering credit aggressively to college students who cannot 
afford to pay off their debts until they join the work force some years 
later is prevalent because interest mounts until the debt is paid. By 
lending aggressively to college students, at a time in life when money 
is scarce, our society runs the risk of saddling people early in life 
with an unmanageable problem which will later preclude more important 
uses of credit such as purchase of a home and car. See US PIRG, ``The 
Campus Credit Card Trap: Results of a PIRG Survey of College Student'' 
(September 1998).

         Lreregulation of interest rates.\33\
---------------------------------------------------------------------------
    \33\ Competition in the market has not worked to keep rates at 
reasonable levels. On a procedural level, the Supreme Court has held 
that credit card lenders can rely on the law in the state where they 
are incorporated in setting the interest rate and many of the other 
terms of credit for consumers nationwide. This has led to a ``race to 
the bottom''. States deregulate in order to create the best possible 
environment to encourage a credit card company to locate there in order 
to export terms of credit across the country. This helps certain states 
create jobs. However, it means that those other states that do want to 
regulate for the benefit of their citizens can no longer do so. Either 
states should be freed to create and enforce meaningful regulations or 
the federal government should step in with consumer protections.

    If lenders choose to resist legislation to address these problems 
for consumers, they ought not be heard to complain about the 
bankruptcies which are the inevitable result. Industry consultants 
estimate that credit card companies could cut their bankruptcy losses 
by more than 50% if they would institute minimal credit screening.\34\
---------------------------------------------------------------------------
    \34\ George M. Salem and Aaron C. Clark, GKM Banking Industry 
Report, Bank Credit Cards: Loan Loss Risks are Growing, p. 25 (June 11, 
1996).
---------------------------------------------------------------------------
  iii. are substantial costs of bankruptcy passed on to non-bankrupt 
                               consumers?
A. Is the system failing to recapture money which debtors can afford to 
        pay?
    Nobody likes to be owed a debt which is not paid back. Yet our 
society has a system of debt forgiveness which has roots in the 
Bible.\35\ Forgiveness and a fresh start have always been a part of 
that system.\36\
---------------------------------------------------------------------------
    \35\ Deuteronomy 15:1-2 (``At the end of every seven years thou 
shalt make a release. And this is the manner of the release: every 
creditor shall release that which he has lent unto his neighbor and his 
brother, because the Lord's release hath been proclaimed''.)
    \36\ Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). See Gross, 
Failure and Forgiveness, ch. 6 (Yale University Press 1997).
---------------------------------------------------------------------------
    A family's ability to repay its debts is limited by its income. 
Data shows that Americans in bankruptcy are far poorer than their non-
bankrupt counterparts. The median after-tax income of a family in 
chapter 7 bankruptcy is under $20,000, or approximately half the 
national median.\37\
---------------------------------------------------------------------------
    \37\ Consumer Federation of America, ``Recent Trends in Credit Card 
Marketing and Indebtedness'' (Report issued July, 1998) at p. 1; 
Warren, ``The Bankruptcy Crisis'' 73 Ind. L. J. 1081, 1102-1103 (Fall 
1998); Sullivan, Warren and Westbrook, ``Consumer Debtors Ten Years 
Later: A Financial Comparison of Consumer Bankrupts 1981-1991'', 68 Am 
Bankr. L. J. p. 121, 128 (1994).
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    The credit industry has focused substantial resources on attempting 
to show that despite this relative poverty, there are many families who 
are obtaining a bankruptcy fresh start even though they can afford to 
pay. Based on this assumption, they would set up a system in which some 
debtors are forced into payment plans.
    However, if such plans are not entered voluntarily by the debtor, 
they have little chance of success, absent extensive and impracticable 
coercive mechanisms. For this reason, forced participation in payment 
plans has consistently been rejected by Congress and the two most 
recent government-sponsored commissions which have studied 
bankruptcy.\38\
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    \38\ See Report of the Commission on the Bankruptcy Laws of the 
United States, Part I at 159 (1973); H.R. Rep. No. 595, 95th Cong., 
1st. Sess. 120-121 (1977); Report of the National Bankruptcy Review 
Commission, Vol. 1, at pp. 89-91 (October 20, 1997).
---------------------------------------------------------------------------
    Apart from this procedural difficulty, there is no empirical 
evidence which shows that debtors can afford to pay. In 1989, 
Professors Sullivan, Warren and Westbrook published the results of an 
evaluation of a substantial statistical database and concluded:

        The overwhelming majority of Chapter 7 debtors--90% by any 
        measure--could not pay their debts in Chapter 13 and maintain 
        even the barest standard of living. . . . A new bankruptcy 
        regime that invested more time to find and to investigate the 
        potential can-pay debtors would prompt only a small amount of 
        new repayment. This is the classic case in which a policy maker 
        asks if the game is worth the candle.\39\
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    \39\ Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence 
Westbrook, As We Forgive Our Debtors, pp. 205-206 (Oxford University 
Press, 1989). This seminal book and the empirical work which underlies 
it remains the single most authoritative published source for studying 
bankruptcy demographics. It has been updated more recently in an 
article by the same authors which concludes that debtors are now even 
poorer and less able to pay their debts than they were when the initial 
study was done. ``Consumer Debtors Ten Years Later: A Financial 
Comparison of Consumer Bankrupts 1981-1991'', 68 Am Bankr. L. J. 121 
(1994).

    The creditor industry's own study released last year,\40\ 
purporting to show the opposite, has been severely criticized by the 
General Accounting Office.\41\ Once the credit industry study's results 
are adjusted to take account of the GAO critique, it shows that only 
about 5% of debts could be repaid by debtors--if they undergo five year 
repayment plans.\42\ This means that the creditor's own study 
ultimately shows that bankruptcy debtors can afford to pay about a 
penny on the dollar per year. That result was supported recently by a 
study funded by the American Bankruptcy Institute showing that only 3% 
of chapter 7 debtors can afford to pay back their debts in a 
hypothetical chapter 13 plan.\43\
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    \40\ Barron and Staten, ``Personal Bankruptcy: A Report on 
Petitioners' Ability to Pay'', Monograph 33, Georgetown U. Credit 
Research Center (1997). This report is reprinted as Appendix G-2.b to 
the National Bankruptcy Review Commission Report.
    \41\ GAO Report, Personal Bankruptcy, The Credit Research Center 
Report on Debtors' Ability to Pay, GAO/GGD-98-47, p. 6 (Feb, 9, 1998) 
The GAO concluded that the study's ``fundamental assumptions were not 
validated''. In addition, the GAO review concluded that the credit 
industry's study: failed to assess the accuracy of the data collected; 
failed to account for major expenses which bankruptcy debtors have 
after filing including payments on non-housing secured debt and 
reaffirmed or non-discharged non-priority debts; failed to evaluate 
potential differences among the sites chosen for the study; and failed 
to use statistically valid research techniques.
    \42\ Warren, ``The Bankruptcy Crisis'' 73 Ind. L. J. 1081 (Fall 
1998); Klein, ``Means Tested Bankruptcy: What Would it Mean?'' 28 U. 
Mem. L. Rev. 711 (Spring, 1998).
    \43\ Culhane and White, ``Means Testing for Chapter 7 Debtors: 
Repayment Capacity Untapped?'' (American Bankruptcy Institute, 1998).
---------------------------------------------------------------------------
    Outside bankruptcy, no reasonable creditor would spend more than a 
penny to collect a penny. Proposals to require five year payment plans 
for many more debtors have a heavy price tag, including costs of 
administration and monitoring, costs to resolve disputes about capacity 
to repay, and costs of collecting and distributing payments.
    Either the taxpayer would have to fund these costs, or if they are 
debtor funded, they will reduce the receipts available to creditors in 
a repayment plan. If taxpayer funded, every American would be helping 
banks and other creditors collect their one cent per dollar per year. 
If debtor funded, the one cent per dollar per year repayment capacity 
of debtors is even further reduced.
    Finally, requiring five year repayment plans would have enormous 
social and human costs. People use the bankruptcy system for many 
legitimate reasons. If navigating the system is made more difficult, 
and if a meaningful fresh start is denied when some cases inevitably 
fail,\44\ more debtors would be left with the burden of unmanageable 
debts.\45\ Loss of homes, repossessions, wage garnishments, utility 
shut-off and family stress associated with unmanageable debts would be 
the inevitable result. While these social and human costs of denying 
chapter 7 relief to debtors may be difficult to quantify, they 
nevertheless remain an important part of the relevant equation.
---------------------------------------------------------------------------
    \44\ 67% of repayment plan cases fail under current law. There is 
every reason to think that if economically marginal debtors are forced 
into involuntary repayment plans, the failure rate would be higher.
    \45\ See D. Caplovitz, Consumers In Trouble: A Story of Debtors in 
Default pp. 280-285 (Free Press, 1974).
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B. Are losses associated with bankruptcy being passed on to other 
        better off consumers in the form of higher interest rates?
    The banking industry has claimed that it is losing 40 billion 
dollars each year to the bankruptcy system and that it is passing those 
costs on to consumers at the rate of $400 per family.\46\ These numbers 
are ridiculous. Families may be discharging debt in bankruptcy, but the 
creditor's own study, discussed above, shows that these are not debts 
which consumers can afford to pay.
---------------------------------------------------------------------------
    \46\ The unpublished credit industry-funded report which served as 
the basis for this claim has also been criticized by the GAO for lack 
of analytical rigor. GAO/GGD-98-116R ``The Financial Costs of Personal 
Bankruptcy'' Letter from Associate Director Richard Stana to the 
Honorable Martin T. Meehan.
---------------------------------------------------------------------------
    In reality, the lending community is scapegoating the bankruptcy 
system for losses associated with bad loans. The vast majority of debts 
which are discharged in bankruptcy would have been written off if no 
bankruptcy had intervened. The only impact of bankruptcy is that it 
gives debtors a legally enforceable fresh start--the same second chance 
which has been guaranteed since Biblical times.
    Equally important, there is no evidence that lenders would reduce 
rates on unsecured consumer lending if they could avoid bankruptcy 
losses. Between 1980 and 1992, the federal funds rate at which banks 
borrow fell from 13.4% to 3.5%. Nevertheless, credit card interest 
rates actually rose.\47\ How likely is it that other types of savings, 
if any could be realized, would be passed on to consumers rather than 
investors?
---------------------------------------------------------------------------
    \47\ Medoff and Harless, The Indebted Society, at pp. 12-13 
(Little, Brown & Co. 1996).
---------------------------------------------------------------------------
    To a large extent, the bankruptcy ``problem'' is nothing but a 
``bad loan'' problem. It could be fixed if lenders were more closely 
attentive to underwriting. For the most part, the lending community has 
chosen not to take this step. The present interest rate environment has 
taught lenders that substantial profits can be made from extending 
credit to risky borrowers, such as college students. However, in 
exchange, the banking community must accept that it is reaching some 
borrowers who cannot afford to pay.
  iv. are the amendments captured last year in the conference report 
 (h.r. 3150) and reintroduced this year as h.r. 833 fair and balanced?
    The bankruptcy system established in 1978 has been remarkably 
efficient. It provides critical relief to financially troubled American 
families at a low cost to taxpayers. Over the years, many open issues 
under the bankruptcy law have been resolved by court decisions and 
carefully crafted Congressional amendments.
    To the extent the increase in the number of bankruptcies suggests 
that there are problems in the consumer lending system, responsibility 
for fixing those problems must be shared between consumers and lenders. 
Congressional reform, if any, should be balanced and narrowly targeted 
at abuses by both debtors and creditors.
    It would be a mistake to enact reforms without addressing reckless 
lender conduct which pushes people into bankruptcy. Offering additional 
credit, for example, to families already struggling to pay their debts 
hurts not only borrowers, but also the borrowers' honest creditors if 
the new credit pushes the family over the edge. Similarly, failure by 
one creditor to seriously consider payment arrangements outside 
bankruptcy for families facing hardship may lead to a bankruptcy filing 
which affects all creditors.
    To the extent there has been a focus on debtor misconduct, the 
burden of proof remains on the credit industry. To date it has not been 
met. Simply saying that more people are using the system, is not proof 
that people are misusing the system.
    Some observers ignore the fact that the present system already has 
a variety of protections which are designed to effectively root out 
abuses by debtors. These include: Rule 9011,\48\ objections to 
discharge,\49\ complaints to determine dischargeability,\50\ good faith 
requirements,\51\ Rule 2004 examinations,\52\ creditors' meetings,\53\ 
dismissals for substantial abuse,\54\ and criminal sanctions.\55\ 
Indeed, it is unclear why the creditor community does not believe that 
the small number of cases where significant repayment appears possible 
are not resolvable under the ``substantial abuse'' test of 11 U.S.C. 
Sec. 707(b).\56\ Perhaps additional tightening of this provision would 
make it work better.
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    \48\ Fed. R. Bankr. P. 9011.
    \49\ See 11 U.S.C. Sec. 727.
    \50\ See 11 U.S.C. Sec. 523(a).
    \51\ See, e.g., In re Barrett, 964 F.2d 588 (6th Cir. 1992) 
(finding that debtor's second chapter 13 filing, when he had 
insufficient income to support plan, was in bad faith but that third 
chapter 13 case, after circumstances had changed was not in bad faith); 
In re Love, 957 F.2d 1350 (7th Cir. 1992).
    \52\ Fed. R. Bankr. P. 2004. It is hard to see why creditors 
concerned about abuses can't utilize the examination process to uncover 
them. If it is not financially feasible for a creditor to pursue an 
examination, why should taxpayers instead bear that burden for the 
creditor's benefit.
    \53\ 11 U.S.C. Sec. 341. Fed. R. Bankr. P. 2003.
    \54\ 11 U.S.C. Sec. 707(b).
    \55\ 18 U.S.C. Sec. Sec. 151-157. Bankruptcy fraud is punishable by 
fine and imprisonment for up to five years. 18 U.S.C. Sec. 157.
    \56\ That is the provision which Congress added to the Code in 1984 
and which has functioned to root out debtors who can afford to pay 
their creditors. See, e.g., In re Kelly, 841 B.R. 908 (9th Cir. 1988); 
In re Krohn, 886 F.3rd 123 (6th Cir. 1989) (substantial abuse found 
where debtors could pay back their debts with ``good, old fashioned 
belt tightening'').
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    An additional set of balanced reforms may be appropriate as long as 
they do no harm to the majority of honest debtors who urgently need 
help. Provisions should be narrowly targeted to address debtors who 
truly are abusing the system without affecting lower income debtors who 
would be hurt by having to litigate additional issues. Creditors should 
not be allowed to obtain leverage by forcing new litigation on 
consumers who cannot afford to pay the costs of defending.
    Appropriate reforms should also create incentives for debtors to 
use a repayment plan option in bankruptcy in order to repay their 
debts. Significant actions could be taken to make the costs of those 
plans more manageable and to enhance outcomes for debtors who complete 
plans.\57\ Provisions in H.R. 833 which limit stripdown related to 
automobiles and personal property and which require debtors in chapter 
13 to litigate many new dischargeability issues will undermine chapter 
13 rather than reinforce it.
---------------------------------------------------------------------------
    \57\ For example, efforts should be made to provide improved credit 
reporting for people who complete chapter 13 payment plans. In 
addition, the discharge available in chapter 13 should be as broad as 
possible in order to serve as incentive to choose that chapter. Costs 
can be lowered by encouraging secured lenders to accept modifications 
to their mortgages in exchange for more favorable treatment.
---------------------------------------------------------------------------
    Finally, the system should penalize dishonest creditors. These 
include creditors whose actions push people into bankruptcy and those 
who take advantage of debtors after they file by coercing inappropriate 
reaffirmation agreements.
    Honest and careful creditors should always be paid before abusive 
debt collectors, lenders that encourage gambling in casinos, predatory 
second mortgage lenders, and lenders who are unreasonable in refusing 
to accept non-bankruptcy payment plans. Lenders whose actions violate 
the bankruptcy laws should be subjected to meaningful and 
straightforward penalties.
                               conclusion
    The lending community should not be allowed to scapegoat the 
bankruptcy system for lending decisions which result in bad debt. The 
right to participate in the bankruptcy system should require honesty 
not just on the part of debtors, but also by creditors. No legislative 
action should ignore the significant hardships of the millions of 
American families who are overwhelmed by debt.
                                appendix
Case Study
    Mrs. M is a 39-year old mother of three children, two of whom are 
living at home. Her financial problems started in 1994 when her husband 
lost his job in construction. Since that time, he has been 
underemployed; his earnings have declined from an average of $52,000 
annually between 1990 and 1993 to an average of $26,000 between 1994 
and 1997. Starting in 1994, the family's primary income has been 
$30,000 which Mrs. M earns as an administrative assistant at an 
insurance company. Mr. and Mrs. M have struggled successfully to 
maintain payments on a home they bought in 1987 since their financial 
problems began in 1994.
    Mr. and Mrs. M have also had significant credit card bills since 
the late 1980's. Despite their financial problems, they avoided default 
on those debts by making minimum payments between 1994 and 1997. 
However, the total amount of their credit card debts increased from 
about $11,000 in 1994 to about $29,000 in 1997, largely due to the 
accumulation of interest at an average annual rate of 17.5%.
    In 1997, Mrs. M's financial problems worsened, because Mr. M moved 
out of the family home. An additional strain was created because Mrs. M 
attempted to provide financial help to her oldest daughter who began 
her first year of college. In family counseling, Mr. and Mrs. M 
acknowledged that their marriage was breaking up largely because of the 
constant pressure of financial problems and Mr. M's continuing 
inability to find steady work.
    Mrs. M attempted to make payment arrangements with her credit card 
lenders so that she could focus on her mortgage obligation. She was 
told that no payment arrangements were possible and that she should 
``borrow money to pay off the debts.'' Mrs. M went to consumer credit 
counseling where she was advised that her budget did not support any 
payments on credit cards. She was advised to consider chapter 7 
bankruptcy in order to eliminate the credit card debts so that she 
could maintain her payments on the mortgage.
    In September 1997, Mrs. M obtained advice from a bankruptcy lawyer 
and reluctantly filed bankruptcy. She will discharge approximately 
$35,000 in unsecured debts. She will reaffirm and continue to make 
payments on her mortgage and car loan--totaling $1,320 monthly.

    Mr. Gekas. We thank the gentleman.
    The Chair now yields to itself the 5 minutes allotted to 
each member for posing questions.
    Mr. Klein, you acknowledged in the last portion of your 
statement that there, indeed, are people who are in the 
bankruptcy system who can repay some of their debt. We have 
fought strenuously to make sure that those who cannot repay 
will automatically have a chapter 7 fresh start. If they can 
repay, and you acknowledge that there are some, even only 10 
out of the 270 million people in our country, shouldn't they be 
made accountable to repay or to be shown that they don't belong 
in bankruptcy?
    Mr. Klein. At some point, Mr. Chairman, you have to craft 
the tool to the particular need in the system. If it is a small 
number of people, as the American Bankruptcy Institute study 
showed, what we need is a very narrowly-targeted tool, a 
scalpel, to address the problem, something that can be 
administered fairly and evenly.
    The problem with the tool in H.R. 833 is that it is 
complicated; it tries to put everyone into a cookie cutter; it 
imposes unworkable spending limits on families----
    Mr. Gekas. With respect to your opinion, we suggest that it 
is not complicated, that we have parameters that determine who 
is poor and unable to repay, who is under the median income 
level that starts triggering the application of remedies. I 
respectfully submit to you that you can't assert, as you did 
before the American Bankruptcy Institute panel discussion that 
was televised last year that, of course, there are some people 
in bankruptcy who can repay, and then you pooh-poohed it as 
meaningless. That is a bit offensive to those of us who are 
trying to say that those who can repay some of their debt ought 
to be put in a mechanism whereby they can do so. That is all 
there is to that.
    Mr. Nuss----
    Mr. Klein. I'm sorry, go ahead.
    Mr. Gekas. I have limited time.
    Mr. Nuss, you and Judge Kenner are sitting propitiously 
next to each other with different views on reaffirmation--not 
different views, but you need to talk to each other after this 
panel on how you can accommodate each other.
    I, too, have always felt that reaffirmation is a good tool 
for people who in certain circumstances must utilize it. The 
Sears decision, Judge Kenner--we can do this back and forth, 
Mr. Nuss and Judge Kenner--that wouldn't, shouldn't prevent 
what Mr. Nuss is agreeing should be done with credit card 
customers who need reaffirmation, should it?
    Ms. Kenner. I agree with that--I am not saying, I am not 
suggesting that we should do away with reaffirmation 
agreements. I think they can be a good thing.
    Mr. Gekas. Yes.
    Ms. Kenner. I suspect that Mr. Nuss and I would disagree as 
to whether a debtor should ever be permitted to reaffirm an 
unsecured debt, a totally unsecured debt, in order to maintain 
or obtain a new line of credit post-bankruptcy. Because I think 
that what that might very well do is put the debtor back in the 
same untenable, debt-ridden position that he or she was in 
before bankruptcy.
    But I think reaffirmation agreements are absolutely 
appropriate in some instances, but, as the bankruptcy judge, I 
think I should take a look at all of them.
    Mr. Gekas. I want you to know--and this will be my last 
comment--I wanted to ask Mr. Sheaffer and Mr. Hammonds a 
question, but I want to restrict my own time, so that I can 
restrict everybody else's time. [Laughter.]
    This individual, the chairman, is vastly interested in 
straightening out the problems of reaffirmation, and we want to 
do the right thing. I want you to know that. So I will be 
consulting regularly with everyone who wants to on that 
subject.
    The gentleman from New York is allotted 5 minutes.
    Mr. Nadler. Thank you.
    Mr. Hammonds, you state in your testimony that only 1 
percent of all credit card accounts end up in bankruptcy, and 
then 96 percent of all accounts are paid as agreed. Now we have 
received testimony in the past that, thanks in large measure to 
the deregulation of interest rates and the decline in the cost 
of funds, the spread earned by credit card operations were 
three to five times more profitable than are other banking 
operations in the 1983-to-1993 period. In fact, MBNA's total 
return on shares from its initial public offering in January 
1991 through last quarter equaled 1,800 percent compared to the 
total return of the S&P 500 of just 284 percent, or about five 
times or six times more profitable.
    In fact, the cost of funds now stands at about 5.5 percent 
while the average credit card interest rate, not including all 
those new penalties my constituents keep complaining about, is 
not 5.5, but 15.7 percent. So my question to you is, how much 
of that profit spread goes to cover the cost of that minuscule 
1 percent of losses due to bankruptcy in your industry, and how 
much goes to your shareholders?
    Further, since deregulation and low interest rates have 
seemed to benefit your industry more than consumers, why should 
we expect any tightening of the bankruptcy rules to be passed 
along to consumers? You state in your testimony that bankruptcy 
costs consumers $400 a year. Since you are obviously pocketing 
the profits you earn on the spread, assuming you recovered some 
of that 1 percent, why would we expect you to pass it along to 
consumers as opposed to increasing your profit rate.
    Mr. Hammonds. Okay, I think you referred to some numbers 
from 1983 to 1991, if I recall.
    Mr. Nadler. 1993.
    Mr. Hammonds. To 1993. I think those numbers would have 
been right up until that period of time. I think if you look 
recently, particularly at the bank card industry, you would 
find that margins are down very significantly; that a 2 percent 
kind of return is something that would be an average probably 
for the credit card industry, where back in those days it was 
more like 4 percent. There are many bank card----
    Mr. Nadler. Well, wait a minute. From 1983 to 1993, you say 
those figures were more or less accurate.
    Mr. Hammonds. Right.
    Mr. Nadler. So there was an 1,800 percent----
    Mr. Hammonds. Well, you are speaking of our stock price 
now, not profits.
    Mr. Nadler. Well, which indicates the profits. I am talking 
about both. The spread earned by credit card operations was 
three to five more times profitable than other banking 
operations in that time period.
    Mr. Hammonds. I think prior to 1993, they were more 
profitable than other kinds of bank products; they are not 
today.
    Mr. Nadler. And prior to 1993, the credit card interest 
rates did not come down, did they?
    Mr. Hammonds. Yes, they have come down. They were----
    Mr. Nadler. Prior to 1993?
    Mr. Hammonds. Well, prior to 1993, average credit card 
rates were about between 18.9 and 19.8, and today they are 
about 16 percent, as you accurately stated.
    Many banks have exited the bank card business. There are 
many fewer issuers in the country today than there ever have 
been. There are many people in this business that are losing 
money, but many of the big banks are today exiting this 
business because, on the margin, it is a lot less profitable.
    A big part of that is credit losses. You are right about 
cost of funds are 5.5 percent. Credit losses have averaged 
about 6 percent over the last 2 years. About half of that----
    Mr. Nadler. I thought you said it was 1 percent?
    Mr. Hammonds. Only 1 percent of the customers charge off, 
but their balances tend to be two to three times as high as the 
average balance. So it accounts for about 3 percent of the 
average outstandings, but it is only 1 percent of the credit 
card customers that are causing that, and then there is another 
3 percent in credit losses from nonbankrupt. So your biggest 
cost in the credit card business today is credit losses and 
bankruptcy----
    Mr. Nadler. Very briefly, please tell me why we would 
expect any savings from this would be passed along to 
consumers, since, obviously, the spread has been huge and it 
has been obvious that credit card interest rates have not 
really come down when the cost of money has really come down.
    Mr. Hammonds. Well, I would not say a 1 to 2 percent spread 
is huge, but interest rates today on credit cards are higher 
than they should be with a 5.5 percent cost of funds because 
credit losses are higher, primarily driven by bankruptcies.
    Mr. Nadler. Judge Kenner, Mr. Hammonds states in his 
testimony that legislation we have before us will reduce 
litigation. In your experience, what would be the result of 
allowing creditors to bring new motions against debtors--for 
example, allowing the creditors to bring 707(b) motions?
    Ms. Kenner. Right now, as you know, 707(b) motions can only 
be, essentially, initiated by the bankruptcy court or the 
United States Trustee. I see a danger in expanding this--and I 
think this is the same danger that Congress recognized when it 
restricted section 707, the current law, to the U.S. Trustee 
and the judge. I think there is a danger that some debtors may 
become embroiled in litigation that they simply can't 
understand or defend against.
    Most of the debtors that I see before me on a day-to-day 
basis don't have lawyers. They are intimidated by the process. 
They are scared. A lot of times when creditors bring 
nondischargeability actions against them, they simply default. 
They just don't show up in court.
    Mr. Gekas. The time of the gentleman has expired. The 
gentleman from Tennessee is allotted the customary 5 minutes.
    Mr. Bryant. Thank you, Mr. Chairman, and I thank the very 
distinguished panel for being here. You certainly provide a 
variety of opinions on a very important issue.
    I was interested in Mr. Klein's statement that we really 
don't have a bankruptcy problem as much as we have a bad loan 
problem. I think that is an important statement. But I see 
people from the credit union here. Mr. Nuss, you represent the 
National Credit Union Association. I know they tend to be very 
conservative. I just wondered what your reaction would be, in 
terms of how you see the bankruptcy trends going, to Mr. 
Klein's statement that these are all bad loan problems, that 
you are not screening people enough and evaluating credit well.
    Mr. Nuss. Thank you, Congressman.
    We are conservative. If I may speak from the perspective of 
Cedar Falls community, we require written applications for any 
credit extension. We have a very conservative credit committee 
policy, if you will. Since 1998, we have had a Visa credit card 
program in our credit union. Essentially, we have evaluated, or 
our board of directors has evaluated, and considered the good 
payers, if you will, that on occasion we would automatically 
increase their line of credit. But our board, being 
conservative--and I go back to my statement of we are concerned 
about the members' financial welfare, and we thought, without 
individually underwriting each increase in a line of credit, we 
would be failing the member and failing our philosophy.
    Mr. Bryant. But you are still seeing bankruptcies files?
    Mr. Nuss. Right.
    Mr. Bryant. Because I think he makes a fair comment there. 
I want to hear it from the credit union perspective. You would 
respectfully disagree somewhat?
    Mr. Nuss. Yes.
    Mr. Bryant. At least as far as your credit union goes?
    Mr. Nuss. Right.
    Mr. Bryant. All right, let me go now, if I could, to Mr. 
Sheaffer. You represent the National Federation----
    Mr. Sheaffer. I do.
    Mr. Bryant [continuing]. Of Retailers.
    Mr. Sheaffer. Right.
    Mr. Bryant. Now, again, I assume your clients use credit 
cards, too. But are there other ways, the old-fashioned credit 
way, you know, people refinance--you finance through banks and 
recourse with the banks, and those kinds of loans, and so 
forth?
    Mr. Sheaffer. Some of the retailers do, in fact, do that.
    Mr. Bryant. Do you see people filing bankruptcies who have 
gone through that particular process as opposed to using a 
credit card?
    Mr. Sheaffer. Well, I can only speak for my own perspective 
at Boscov's directly. We do all of our own credit card 
application processing internally. In addition to that, we have 
a very aggressive program to monitor our existing customers. We 
find, much like the banks, that bankruptcy is coming not from 
brand-new customers that are establishing accounts, but, 
rather, from customers that have been on the books for years 
and years.
    So because of this huge increase in bankruptcy, we have had 
to actually tighten our credit standards quite significantly 
over the past few years. Unfortunately, that affects the blue-
collar worker that is looking to buy the washing machine to 
replace the one that they need, or it affects the older 
customer that may never revolve and may never pay us a finance 
charge on our card, but, instead, carries our card because they 
are afraid to carry cash. Those are the types of people that we 
are having to affect, people that are still our customers. 
Whether they buy with Mr. Hammonds' credit card, whether they 
purchase with my credit card, or whether they purchase with 
cash, they walk into my store to buy our merchandise. Those are 
the types of people we are having to affect because of this 
bankruptcy issue.
    Mr. Bryant. Okay. I have one other question, but I wanted 
each member to respond, and it would probably take too long.
    But, just a quick run down--one, two, three, four, five--
just why are people filing bankruptcy so much? Just very 
quickly.
    Mr. Sheaffer. Lack of stigma.
    Mr. Bryant. Lack of stigma.
    Mr. Hammonds?
    Mr. Hammonds. Well, I think there is some percentage of 
people that lack of stigma affects. I think the majority of 
people who file bankruptcy, in fact, need bankruptcy. If we 
make a bad loan, nobody is asking for relief from that. If we 
have made a bad loan, and the customer doesn't have the 
capacity to repay, and they ought to be discharged to chapter 
7. But it is that small percentage of people that file that 
have the ability to repay that we are asking to not impact our 
underwriting system and to put those into chapter 13.
    Mr. Bryant. Okay. Judge Kenner. I know there are a lot of 
reasons, but just the best----
    Ms. Kenner. There are a lot of reasons. I am surprised; I 
agree with Mr. Hammonds. The people who file bankruptcy--the 
1.4 million, or whatever it is, those are people who need to be 
there, by and large. I see scoundrels in bankruptcy court, but 
the number of scoundrels is very small. So I don't see that the 
system is being grossly abused by debtors.
    Mr. Bryant. Okay. Mr. Nuss, very quickly.
    Mr. Nuss. Thank you. We see a number of issues, some of 
them divorce, unemployment, but late last year I ran across an 
interesting comment by a presenter at a multi-state seminar 
that said that some research that he had participated in said 
that the actions and the activity and the approach of 
collection people sometimes drove people to the brink, rather 
than being able to negotiate a compromising position, where a 
member in our case, debt rating could be preserved by making 
some other arrangements.
    Mr. Bryant. Mr. Klein, you have the last word.
    Mr. Klein. Congressman, I think the simplest way I can say 
it is that the family budget is a fixed pie, and everybody 
wants a bigger and bigger piece out of that pie. If a family 
gets three credit cards, the interest on those cards takes a 
bigger and bigger piece out of that budget, and eventually, if 
there is a continuing pressure on that family and more 
marketing of additional credit, the budget is going to bust. 
That is what I see going on over and over again.
    Mr. Bryant. Could I have one quick final question to Mr. 
Klein?
    Mr. Gekas. Without objection.
    Mr. Bryant. Thank you, Mr. Chairman.
    Mr. Klein, you were here when Mr. Moran testified about 
apparently a new provision in this bill that would give more of 
a disclosure as to what you would be paying in a credit card if 
you paid minimum payments. Would you agree that that is a good 
first step or step in the right direction?
    Mr. Klein. Congressman, the provision that passed the 
Senate was a good provision on that issue. It was a very 
powerful provision which would have actually given people 
information they need to make responsible credit decisions.
    The provision in H.R. 833 actually would mislead people 
because it is based on a $500 balance and a set of assumptions 
that wouldn't prove accurate for those people that are going to 
be in the bankruptcy system because they have a $7,000 or a 
$10,000 or a $20,000 balance on their credit cards as a whole. 
So it has to be based on the actual circumstances that apply to 
that individual's debt.
    Mr. Gekas. We will change that provision and ask you for 
support of the bill. [Laughter.]
    Mr. Klein. I would suppose we would be supporting that if 
you do.
    Mr. Gekas. The time of the gentleman has expired. The Chair 
recognizes the lady from Wisconsin for 5 minutes.
    Ms. Baldwin. Thank you, Mr. Chairman.
    I am one of the newcomers to this subcommittee who did not 
go through this debate last session, being a newcomer to the 
Congress, too.
    Judge Kenner, I was amazed to think that you had presided 
over 35,000 bankruptcy cases.
    Ms. Kenner. I am actually much younger than I look. 
[Laughter.]
    Ms. Baldwin. I practiced law briefly and assisted a client 
with one bankruptcy in my career.
    Your testimony focused mostly on reaffirmations. It would 
help me if I could have your perspective as a judge on the 
likely success of the means test that is part of the bill that 
we are considering.
    Ms. Kenner. Well, Congresswoman Baldwin, I am not really 
familiar with the intricacies of how it works, but if you set a 
threshold of $51,000 annual income for a family of four, I 
predict that that will not affect my caseload one iota. If that 
is what you choose, I don't think it is going to make a 
difference. The reason is that my perception is that my chapter 
7 debtors simply can't pay. I agree with Chairman Gekas that 
people who can pay should pay. I think that is fundamental. But 
my experience in the bankruptcy court tells me that, by and 
large, these debtors can't pay. My chapter 13 cases are failing 
at an amazing rate. So I just don't see that the ability is 
there.
    Ms. Baldwin. I wanted to follow up on one of the last 
questions, the reasons for the increase in numbers of filings. 
One of the things I heard in your testimony, or various 
testimony, is there some difference in perception of, say, the 
percentage of ``scoundrels'' among all, as they were termed.
    For example, Mr. Sheaffer, in your testimony I thought I 
heard a little dissonance in your saying at one point that very 
few of those people who actually file for bankruptcy are doing 
so with a lack of real crisis in their life. Yet, in some of 
your other testimony, I think you were indicating that half of 
your filers, as you reviewed the files last year, were not 
seriously delinquent in their cards. I don't know if I should 
take the jump to say that you are doubting that there is a 
serious financial crisis in their life or not, but I wonder if 
you would explain that inconsistency.
    Mr. Sheaffer. No, I don't think it is an inconsistency. 
What we see, as a very local retailer that is very involved in 
our communities, is that our customers tend to make an extra 
effort to pay us, and we are very fortunate in that. Don't get 
me wrong; I absolutely agree with my fellow panelists. The huge 
majority of those who file bankruptcy absolutely need relief 
and should get that relief. The number, depending on who you 
talk to, the number goes from 3 percent to 15 percent. But even 
if the number is 3 percent, you are talking about not 10, but 
30,000 people that can repay some or all of their unsecured 
debt. All that we are really asking is that they are compelled 
to repay what they can repay.
    When I say that half of our customers that file bankruptcy 
were not seriously delinquent, I mean with us. I don't mean 
with anybody else. In our particular case, we are very 
fortunate in that our customers are very loyal to us.
    Ms. Baldwin. And you would not, from your paper records, 
have any ability to see if there is a health crisis or some 
other crisis?
    Mr. Sheaffer. No, no, we see health crises; we see divorce; 
we see automobile accidents; we see lack of insurance as the 
primary driver into bankruptcy. But there is still a group of 
people for whom the billboards that say, ``Question: Money 
problems?'', ``Answer: Bankruptcy,'' those types of messages 
that are being conveyed to them are compelling them to use 
bankruptcy not as the safety net that it was initially intended 
to be, but, rather, as a financial planning tool. Rather than 
trying to work with the creditors or trying to work with 
consumer credit counseling services, they see an easy way out, 
and they are using this as a financial planning tool. But it is 
a very small segment of the customers.
    Mr. Nadler. Mr. Chairman?
    Mr. Gekas. The time of the lady has expired. For what 
purpose does the gentleman----
    Mr. Nadler. I ask unanimous consent for 1 minute to ask one 
question.
    Mr. Gekas. Without objection.
    Mr. Nadler. Thank you.
    I would just like to ask Mr. Klein to reply to the question 
that Ms. Baldwin asked about the effect of the means test in 
this bill.
    Mr. Klein. The means test is two pages of a 302-page bill, 
Congresswoman, and I agree with the rest of the panelists that, 
if there are people in the system who can pay, they should pay. 
I think we can make the means test better and make it workable. 
But on the 302 pages of this bill there is something on almost 
every page that advantages lenders and disadvantages debtors. 
The sum total of those provisions will be to raise the cost of 
filing because debtors will have to pay more to their 
attorneys; they will have to pay more to use the system, 
because creditors will have more weapons to get them, force 
them, or coerce them to pay back their debt. That just hurts 
the people at the bottom. The people who have the most need to 
be in the system are going to be the ones who are least able to 
afford the more complicated and expensive relief that will be 
required.
    Mr. Gekas. The time of the gentleman has expired.
    We want to thank the panel. You got us off to a rousing 
start with some controversy and with some humor. We expect that 
it will serve as a foundation for future debate on this issue. 
Thank you very much.
    This is a propitious time for us to recess to accord the 
members the privilege of voting on a pending measure on the 
House floor. We expect to return to this chamber at 20 after 4. 
We are recessed until that time.
    [Recess.]
    Mr. Gekas. The time of 4:20 having arrived, the recess has 
expired, but we are unable to proceed until one other member 
should arrive, pending which time we enter into another recess.
    [Recess.]
    Mr. Gekas. The subcommittee will reconvene. The lady from 
Wisconsin has joined us to constitute the hearing quorum.
    We welcome the panel. Judge Edith Hollan Jones was 
appointed to the United States Court of Appeals for the Fifth 
Circuit in 1985. She played an active role in studying our 
Nation's bankruptcy laws as a member of the National Bankruptcy 
Review Commission. She has also served on the Advisory 
Committee on Bankruptcy Rules to the Standing Rules Committee 
of the Judicial Conference of the United States. Judge Jones 
has testified on bankruptcy issues before the Senate, as well 
as before the House, on several occasions.
    Judge Jones received her B.A. in economics in 1971 from 
Cornell University. She then went on to study at the University 
of Texas School of Law, where she was the editor of the Texas 
Law Review and graduated with honors in 1974. Prior to joining 
the Federal bench, Judge Jones was a partner at the Houston 
office of Andrews and Kurth. Her areas of practice included 
bankruptcy law. Judge Jones is a member of the Texas Bar 
Foundation and the American Law Institute.
    She is joined by Judith Greenstone Miller, Esquire, of 
Birmingham, Michigan, who is here on behalf of the Commercial 
Law League of America. Ms. Miller received her juris doctor 
degree cum laude from Wayne State University of Law in 1978. 
Prior to that, she attended the University of Michigan, where 
she received her bachelor of arts degree, also cum laude, in 
1975.
    Ms. Miller's practice focuses on bankruptcy and insolvency 
matters, creditors' rights, and commercial litigation. Her 
practice involves the representation of secured and unsecured 
creditors, debtors, bankruptcy trustees, and chapter 11 
reorganizations. She is a member of the Commercial Law League 
of America, its bankruptcy and insolvency section and its 
creditors' rights section. Founded in 1895, the Commercial Law 
League is the Nation's oldest organization of professionals 
engaged in the credit and finance industry. Its current 
membership exceeds 4,600 individuals.
    Professor Todd Zywicki teaches bankruptcy and contracts at 
George Mason University School of Law, where he has been an 
assistant professor of law since 1998. Prior to joining the 
faculty at George Mason, he was an assistant professor of law 
at Mississippi College School of Law from 1996 to 1998. 
Professor Zywicki began his legal career as a law clerk for 
Judge Jerry E. Smith of the Fifth Circuit Court of Appeals.
    Professor Zywicki received his juris doctor degree from the 
University of Virginia in 1993. He received a masters degree in 
economics from Clemson University in 1990, and his 
undergraduate degree cum laude from Dartmouth College in 1988. 
He has written extensively on the subject of bankruptcy, 
environmental law, constitutional law and history, among other 
areas. Most recently, he has co-authored with Judge Jones a Law 
Review article entitled, ``It's Time for Means Testing.''
    I should make that required reading for everybody in the 
room. [Laughter.]
    Professor Elizabeth Warren holds the Leo Gottlieb chair at 
Harvard Law School. She has authored several books and articles 
on consumer and business bankruptcy issues. She has taught 
bankruptcy law and other business law topics at Harvard 
University, the University of Pennsylvania, the University of 
Michigan, and the University of Texas, among other 
institutions.
    She was appointed by Chief Justice Rehnquist as a member of 
the Federal Judicial Center's Committee on Bankruptcy 
Education, where she planned and implemented educational 
programs for bankruptcy judges. Professor Warren served as the 
reporter to the National Bankruptcy Review Commission. In 
addition, she is active in several organizations, including the 
National Bankruptcy Conference, the American Law Institute, and 
the American Bankruptcy Institute. She is currently working on 
an empirical study of 3,500 business bankruptcy cases as a part 
of a study sponsored by the National Conference of Bankruptcy 
Judges.
    I might add that Professor Warren is here, whether she 
realizes it or not, at my personal invitation; thus, indicating 
my masochism in that in the past I felt that some of your 
criticisms were aimed right at me, but that is just me. Don't 
worry about that. But you do have a lot to add to this 
critique, and that is why you are here.
    Judge Jones, please begin with a 5-minute limitation.

 STATEMENT OF EDITH HOLLAN JONES, JUDGE, U.S. COURT OF APPEALS 
 FOR THE FIFTH CIRCUIT, AND MEMBER OF THE NATIONAL BANKRUPTCY 
                 REVIEW COMMISSION, HOUSTON, TX

    Ms. Jones. Yes, sir, it is a great privilege and honor to 
be invited to speak to this joint session, even though some of 
the members are in absentia at the moment. You know I have very 
strong feelings on the subject of bankruptcy, and I am a very 
strong proponent of bankruptcy reform.
    I would like to address four things briefly in my time 
here. First, an introductory statement about the importance of 
restoring personal responsibility and public accountability to 
our national bankruptcy system, and then on the specific 
subject of means testing: Why should we have it? How does it 
work? And what are the objections to it, or are they well-
founded?
    On the introductory matter, as earlier witnesses have told, 
our bankruptcy system today seems to be wildly out of control. 
I don't see how one can justify the filing of 1.4 million 
bankruptcies during a period of unprecedented economic 
prosperity and low unemployment. The answers, the reasons for 
these filings are very difficult to fathom in many instances, 
but a lot of them, in my view, deal with personal inability or 
lack of desire to control one's finances and with the lack of 
social stigma that is currently attached to bankruptcy.
    The people who disagree with this view are the defenders of 
the status quo. They talk about reform. They have been very 
short on proposing reforms that do anything other than limit 
the activities that creditors engage in, but they never face 
the consequences of two things. One of them is that unnecessary 
bankruptcy or manipulation of bankruptcy are not victimless 
events. They impose costs, not simply on the creditors, but 
also on the wives and children. Ex-husbands are prime users and 
abusers of the bankruptcy system today because they get an 
automatic stay, so they do not have to pay child support from 
the time they file. There is an entire volume of law review 
published by the family law section of the ABA devoted to 
advising how wives can find their way into the bankruptcy 
courts to save themselves. This bill (H.R. 833) dispenses with 
those problems and solves them.
    There are also other problems of abuse that I don't have 
time to cover that are accounted for and largely remedied in 
this bill.
    But the other burden that the defenders of the status quo 
don't bear is that they don't acknowledge that a system that 
runs with 1.4 million cases a year, and approximately 400 
judges, is not a system in which discretion exercised by the 
judge means anything. They say, well, the judge ought to be 
able to decide in individual cases whether a certain person is 
abusing the law. I say, look at the way the law operates right 
now. You have mass hearings. You have dozens of debtors present 
at one hearing. Many debtors never even see the judge. It is a 
system in which there simply is not public accountability.
    The telling proof of this is that no one in the bankruptcy 
system believes in the veracity of the debtors' statements of 
their assets and liabilities. Those are documents filed under 
penalty of perjury. If our tax system were that inaccurate, we 
would have no Federal Government. But nobody in the bankruptcy 
system and before our Commission defended the accuracy of the 
debtors' filings.
    Why means testing? The short of it is--I have put several 
reasons down in my paper--the short of it is, means testing, as 
proposed by Congress, is a modest way to identify the small 
percentage of filers who are the most well off in American 
society, relatively speaking. They are all in the upper half of 
the American median family income, and therefore, they are the 
most able to determine and control their finances, the most 
able to live within their means, and the most likely to be 
abusing the system. One thinks of the profligate doctor or the 
bad real estate investor, for example.
    How does means testing work? Major objections raised are 
that it is very difficult; that we can't understand it; that 
the judges are going to be overburdened. These are nonsense. 
This is a formula. The formula is income less expenses. 
Expenses are based on all secured debts that exist with that 
debtor and all living expenses, according to a formula that the 
IRS uses every day to negotiate repayment plans. There is 
computer software already in a test model that puts the 
information in the right places and automatically tells whether 
a debtor is going to qualify or not.
    No more than 20 percent of Americans who file bankruptcy 
will even be eligible for consideration under the means test. 
It is easily administrable. It will not impose a burden, an 
undue burden, on judges because the issues will be well-framed 
for them to decide.
    Among the objections, the other objections to means testing 
are that nobody can really afford to pay. Well, again, how can 
it be that Americans who are in the top half of the median of 
all Americans cannot afford to repay a single dime to unsecured 
nonpriority creditors? That doesn't make sense on the face of 
it.
    But the bill has a hardship provision. So it doe have a 
form of clemency that can be exercised.
    I see that my time is up. I have a lot more to say later 
on.
    [The prepared statement of Judge Jones follows:]
Prepared Statement of Edith Hollan Jones, Judge, U.S. Court of Appeals 
  for the Fifth Circuit, and Member of the National Bankruptcy Review 
                        Commission, Houston, TX
    Distinguished Senators and Representatives, it is an honor to 
testify before you today on a subject dear to my heart, that of 
bankruptcy reform. These remarks support H.R. 833, captioned ``The 
Bankruptcy Reform Act of 1999''. As you are aware, I served for two 
years on the National Bankruptcy Review Commission, which studied the 
status of the 1978 Bankruptcy Code and the system it has engendered. 
When I was in private law practice, I was a specialist in bankruptcy 
law. Among the articles I have published is one with Professor Todd 
Zywicki called ``It's Time for Means-Testing,'' forthcoming in ____ 
B.Y.U. Law Review (Feb. 1999) (copy attached).\1\
---------------------------------------------------------------------------
    \1\ Any earlier testimony in Congress, on which some of these 
remarks are based, may be found in Symposium on Bankruptcy Reform, 52 
Consumer Fin. Law Quarterly Report, Spring 1998.
---------------------------------------------------------------------------
    The major theme of my presentation is simple: I strongly favor 
means-testing bankruptcy relief for well-off, income-earning debtors, 
as I believe such a device is necessary both to restore personal 
accountability to bankruptcy and to instill public confidence in the 
system. In addition, as a subsidiary theme concerning judicial 
administration, I strongly urge Congress to allocate the function of 
collecting data in bankruptcy cases to the United States Trustees' 
office, and I advocate streamlining bankruptcy appeals to the United 
States Courts of Appeals.
                   i. the need for bankruptcy reform
    The enormous support demonstrated by both Houses of Congress for 
bankruptcy reform legislation in 1998 evidences your awareness of the 
problems in the bankruptcy system. Only a few vivid reminders of the 
need for reform will serve as a preface to my defense of means-testing. 
In 1998, over 1.4 million people filed personal bankruptcy cases, 
representing approximately one in each 70 American households. To put 
this number in perspective, in six months in 1998, many more people 
filed for bankruptcy than during the entire decade of the Great 
Depression of the 1930's. The number of filings has risen well over 50% 
in the 1990's alone despite unprecedented economic prosperity and low 
unemployment.
    The current system of bankruptcy law permits any person to seek 
relief without demonstrating financial necessity. At one time in our 
history, filing bankruptcy was regarded as shameful, and filers 
suffered social stigma and permanently ruined credit. The shame and 
stigma are no longer compelling, and creditors cater to the 
euphemistically named ``sub-prime'' market. According to testimony 
before the National Bankruptcy Review Commission, many filers now 
commence cases without ever having been in default on their debts. This 
suggests that bankruptcy is, to them, not a last resort but a first 
resort. Many debtors are well-off and continue to be fully employed 
before and after filing bankruptcy. Lawyer advertising, do-it-yourself 
kits, and bankruptcy mills expand the pool of potential filers. Well-
publicized celebrity bankruptcies, plus ``water cooler'' gossip about 
increasing filings, have tended to reduce bankruptcy to an acceptable 
alternative for personal financial management.
    The integrity of the bankruptcy system has suffered from the 
increased filings, because bankruptcy professionals are no longer able 
to devote individual attention to the cases. Administrative oversight 
is ineffective. Most debtors never see a judge. Only very recently has 
the Justice Department begun to prosecute bankruptcy fraud vigorously, 
and egregious cases are being discovered. But even when there is not 
outright fraud, there is frequent abuse and manipulation. Debtors 
routinely shade the descriptions of assets and liabilities on their 
schedules and statements of affairs so that no one in the bankruptcy 
system believes their filings are trustworthy. This is true, 
notwithstanding that debtors' disclosures are made under penalty of 
perjury. Other types of abuses include filing multiple bankruptcies; 
filing to forestall eviction or foreclosure; purchasing new vehicles 
just before bankruptcy; pre-bankruptcy loading-up on consumer 
purchases; and moving to jurisdictions with favorable homestead and 
personal exemptions. Other common abuses include filings by husbands 
who wish to delay making their child support and alimony payments; by 
tortfeasors who wish to discharge liability, e.g. medical malpractice, 
verdicts; and by perpetrators of fraud who seek to ``reorganize'' their 
liabilities through Chapter 13 cases.
    Although lenders' practices do not always fulfill our ethical 
expectations, I am convinced that consumer lending practices, 
especially by credit card issuers, are not the cause of the 
inordinately high bankruptcy filing rates. That argument is a red 
herring, designed to divert attention from the fraud and abuses that 
are occurring and from the problems of personal responsibility that lie 
at the heart of many bankruptcies. I would be happy to delve into this 
mischievous argument at greater length, as it is addressed in my 
article with Professor Zywicki, but it should not distract us from the 
means-testing debate.
    Now is the optimum time to reform bankruptcy laws. If and when our 
economy turns down, I fear that the number of bankruptcies could spiral 
rapidly and could suddenly multiply business losses, devastating our 
consumer credit system. The impact of bankruptcy on our economic system 
as a whole should never be underestimated.
                           ii. means-testing
A. Why Means-Testing?
    The theory behind means-testing is simple: well-off, income-earning 
debtors ought to repay some of their unsecured, non-priority debts in 
exchange for the privilege of obtaining a fresh start. Ability-to-pay 
should be just as relevant to the availability of bankruptcy relief as 
to one's income tax bracket or eligibility for social welfare programs 
of all kinds. Opponents of means-testing never explain why ability to 
pay is uniquely irrelevant to bankruptcy, especially where, as here, 
Congress has carefully limited the group to which means-testing will 
apply.
    Means-testing is justified for several other reasons. First, 
bankruptcy relief should be tailored to the honest but unfortunate 
debtor. It is neither moral nor economically sound for our society to 
permit the breaking of contracts willy-nilly for the sheer convenience 
of the individual. Second, when bankruptcy is abused by those who are 
able to repay part of their debts, the costs are passed on not only to 
the particular creditors, but also to the rest of the public in the 
form of higher costs for goods and services and consumer credit. 
Bankruptcy is not a victimless act. Third, lower-income people and 
minorities are particularly harmed by unnecessary bankruptcies. They 
bear the brunt of the higher credit costs that result. And while they 
are struggling to live within their means and pay off their debts, 
others are taking advantage of debt relief through bankruptcy. 
Bankruptcy serves its laudable social goal when it is reserved for 
those who truly deserve and need debt relief.
    Fundamental social goals will be served by inaugurating Congress's 
modest means-test for bankruptcy relief proposed in The Bankruptcy 
Reform Act of 1999. Public confidence in the bankruptcy system as a 
refuge for the needy, rather than a haven for the crafty, will be 
restored. Personal responsibility will be reinforced for those who, 
because they are relatively well off, should repay some of their debts.
B. How Means-Testing Works
    H.R. 833 is the same as last year's Conference Committee bill. 
Under this bill, panel trustees will review Chapter 7 liquidation 
petitions as they are filed. If a debtor's family income exceeds the 
median American income for a family of comparable size (about $51,000 
for a family of four), the debtor may be eligible for means-testing. 
The trustee will next review the debtor's living expenses. The living 
expenses will include actual monthly payment obligations on secured 
debt, other standardized expenses determined according to criteria 
utilized by the Internal Revenue Service, and priority expenses such as 
child support and alimony payments. If, after deducting the living 
expenses from the debtor's income, there is enough monthly income 
remaining to pay at least $5,000 or 25% of the debtor's unsecured, non-
priority debts over five years, then and only then is the debtor 
subject to means-testing. At that point, the trustee will file a 
Sec. 707(b) motion with the court seeking to dismiss the Chapter 7 
liquidation case. The debtor then has the options of proceeding in 
Chapter 13 or 11 or not pursuing bankruptcy.
    The test set out in H.R. 833 creates a rebuttable presumption, 
which the debtor may defeat ``only by demonstrating extraordinary 
circumstances that require additional expenses or adjustment of current 
monthly total income.''
    The means-testing formula, in short, is largely mathematical, lends 
itself to information processing techniques, covers only a few of the 
debtors who file bankruptcy each year, and has an escape hatch for 
truly deserving filers.
C. Objections to Means-Testing
    Critics of means-testing are inexplicably hostile to the philosophy 
behind it, which I have tried to explain in a preceding section. Worse, 
they seem ill-informed about the operation and impact of the new law. 
In this section, I hope to clarify some of the misconceptions.
    First, the means-testing proposal contained in H.R. 833 carefully 
targets only those debtors who are in the top half of comparable 
American families. It has been objected that means-testing will not be 
fruitful, because ``no one'' who files bankruptcy can afford to repay 
debts. Studies have accumulated which demonstrate contrary 
propositions. A VISA survey of bankruptcy filers between 1988 and 1996 
revealed that people who earned over $45,000 annually increased from 9% 
to 23% of the filers. The WEFA group, analyzing a stiffer means-testing 
formula introduced in the House of Representatives last year, estimated 
that between 3.6 dnd 7.4 billion dollars of debt could be repaid if the 
covered debtors proceeded in Chapter 13 reorganization cases. Other 
studies are described in our attached article. The amount of debt 
likely to be repaid under H.R. 833 will be smaller, because of its 
narrower scope, than studies based on different proposals. 
Nevertheless, the returns should be substantial.
    Second, if it were correct that ``no one'' who files bankruptcy has 
the ability to repay debts, that would probably mean that ``no one'' 
would qualify for means-testing under H.R. 833. It is contrary to human 
nature, however, to suppose that when the government offers a ``free'' 
discharge from debt, no one will take undue advantage of the system. 
The real question is how best to identify those who are misusing 
bankruptcy and to make them pay for the privilege.
    Third, is means-testing ``unfair''? I think not, because it is a 
progressive reform in the same sense that our income tax system is 
progressive. The more one has the ability to repay, the more he ought 
to repay his debts while obtaining bankruptcy relief. It is not 
``unfair'' to impose a price on higher income-earning debtors for the 
benefits they receive from filing bankruptcy.
    Fourth, the modest means-test incorporated as an amendment to 
Sec. 707(b) of the Bankruptcy Code will not impose undue costs and 
burdens on the judiciary, on trustees or on attorneys. Last year, 
Professor Carl Felsenfeld of Fordham Law School and attorney William 
Perlstein of Washington, DC, created a software program that, given 
proper information about a debtor's affairs, would automatically 
calculate the debtor's eligibility for Chapter 7 liquidation or a 
Chapter 13 payment plan. Such software is easily usable by all 
professionals in the bankruptcy system. The initial responsibility for 
complying with the means-test will fall upon debtors' attorneys, as 
they have an ethical duty to advise their clients how to file cases 
properly. Although H.R. 833 states that the panel trustee or bankruptcy 
administrator must review petitions for their amenability to means-
testing, forms can be promulgated which incorporate the available 
software and yield the correct answer at a glance. Trustees ought to be 
able to rely on the data gleaned from the attorneys' official work 
sheets. Finally, judges will not have to reconstruct the debtors' 
financial condition themselves. By the time a motion for Sec. 707(b) 
relief is litigated, the precise contested issues will be framed for 
the court. The court will be able to review the underlying summaries of 
relevant financial information.
    Some short-term costs will be incurred while the details for 
administering the law are worked out and initial ambiguities are 
resolved by judicial decisions, but similar costs accompany any new 
statutory system. Moreover, means-testing will be relevant for at most 
perhaps ten to twenty percent of consumer filers, since the vast 
majority of petitions on their face will not qualify. If increased 
costs are significant, they can be defrayed by higher filing fees or 
trustee fees for eligible debtors.
    Fifth, some argue that means-testing ``can't work'' because 
debtors' schedules are unreliable. This objection essentially admits 
that the present system lacks effective oversight. If debtors are smart 
enough to ``game'' the system, they must be understating their assets 
and ability to pay. H.R. 833 enhances the reliability of debtors' 
filings by requiring pay stubs, tax returns and other documents to be 
furnished timely to the trustee and by requiring random audits.
    Sixth, some critics of means-testing target as ``inequitable'' the 
use of standardized levels of living expenses. These schedules of 
expenses are already used by government agencies, and they are adjusted 
geographically. In the present bankruptcy system, each court must 
determine for itself whether a debtor's ``lifestyle'' expenses, such as 
private school, club memberships, or cellular telephones, are too 
extravagant. In fact, bankruptcy judges routinely complain about making 
these judgment calls. Substituting rough consistency for the discretion 
and preference of each bankruptcy judge does not seem unfair.
    Seventh, it is said that means-testing will be manipulated and that 
debtors will increase their expenses or secured debt or reduce their 
income in order to avoid the test. To the extent this criticism is 
correct, it indicts the current system as well by admitting that 
gamesmanship can and does occur. But the criticism is misplaced. If 
debtors flagrantly evade the means-test formula, they and their 
attorneys should be held to account and sanctioned. Even more 
important, there will only be disputes about means-testing in a small 
proportion of cases, and there is correspondingly little room for 
evasion. Further, debtors' efforts to evade means-testing would be 
self-defeating.
    Eighth, a final objection is that means-testing will not work 
because Chapter 13 ``doesn't work,'' inasmuch as most debtors never 
complete their payment plans and receive a discharge. This criticism 
overlooks the differences between current Chapter 13 debtors and those 
who would be covered by means-testing. The well-off, income-earning 
debtors have a lot more to lose if they fail to receive a discharge, 
and their incentives to complete their Chapter 13 payments are greater. 
As. H.R. 833 imposes limits on repeat filings, well-off debtors would 
have to exercise care in their affairs.
                    iii. bankruptcy data collection
    H.R. 833 directs the federal courts to compile data and statistics 
concerning bankruptcy cases that will be generally useful for 
researchers and policy makers. This responsibility should, however, be 
placed in the hands of the U.S. Trustees, not the courts. The federal 
courts' mission is to administer justice and decide cases. It is not 
the courts' proper function to assist or participate in social science 
data-gathering. The courts have never been asked to assemble such data 
before. Consequently, as a matter of principle, the Judicial Conference 
of the United States has decided that the collection of such data, if 
desired by Congress, should be assigned to the United States Trustee 
system instead. As a matter of practicality, the U.S. Trustees are 
better equipped to collect the data that are of interest to Congress 
and policy researchers, and they are in a better position to address 
privacy concerns.
                           iv. direct appeals
    Bankruptcy law is unduly vague and complex because there is no 
effective system of precedent in place. Bankruptcy decisions must be 
appealed first to federal district court and then to the courts of 
appeals. The delays and costs of this pilgrimage are more than most 
parties can afford. As a result, it is extremely difficult to pursue 
cases that will yield circuit-wide precedent. The bankruptcy courts 
routinely operate on conflicting legal premises.
    The only solution to this problem is to facilitate appeals to the 
courts of appeals. Several proposals have come forward. I personally 
favor avoiding district court review wherever possible and utilizing a 
model based on appeals from magistrate judge decisions. Others have 
favored optional retention of bankruptcy appellate panels, with review 
available by the circuit courts. Yet others favor placing a time limit 
on district court handling of bankruptcy appeals. None of these 
proposals should be discarded out of hand. This issue is vital to 
achieving coherence in bankruptcy law. Every interested party and 
constituency in bankruptcy of which I am aware has advocated direct 
appeals.

    Mr. Gekas. The Chair now turns to Ms. Miller.

    STATEMENT OF JUDITH GREENSTONE MILLER, REPRESENTING THE 
        COMMERCIAL LAW LEAGUE OF AMERICA, BIRMINGHAM, MI

    Ms. Miller. Thank you. I am honored to appear before the 
committee today on behalf of the Commercial Law League of 
America. There are a number of comments I would like to make 
regarding the proposed needs-based testing.
    Creditor standing under the proposed amended section 707(b) 
is limited. The size of the case should not impact creditors' 
standing to bring such motions. Abuse under the statute is 
defined by a specific rigid needs-based formula. No formula, 
however well-considered or crafted, can be flexible enough to 
encompass the endless combinations or circumstances which 
debtors bring to the bankruptcy court. While intended to 
provide a very objective standard, such formulas have proven 
historically to be the source of much litigation focused at 
interpreting and defining all of the parameters.
    The bill does not grant the court any discretion to 
determine whether a debtor with sufficient income under the 
needs-based formula should, nevertheless, be allowed to remain 
in the chapter 7 proceeding. The 5-year period for calculation 
of the debts is longer and inconsistent with the 3-year period 
currently provided for repayment of obligations under a chapter 
13 plan. The standard to rebut the presumption, extraordinary 
circumstances, is rigid, onerous, and likely to lead to 
increased litigation.
    The National Bankruptcy Review Commission conducted an 
extensive study and analysis of consumer bankruptcies. 
Ultimately, though, they did not recommend the adoption of a 
needs-based formula denying individuals in financial distress 
access to the court. Although bankruptcy filings have increased 
threefold during the last 20 years, one cannot necessarily 
conclude it is solely on account of debtor abuse, unwillingness 
of individual debtors to honor a promise to pay, or lack of 
social stigma.
    A number of the empirical studies have indicated that the 
financial crises being experienced today are similar to those 
of families 20 years ago. These people have no hope of repaying 
their debts.
    There are many factors that contribute to the filing of a 
bankruptcy, which have been alluded to today by other 
witnesses, whether it be layoffs, downsizing, medical bills, 
failed businesses, or having to take care of aged parents. The 
League concedes there is no agreement on the statistics or the 
reason for the increase. However, if you take the highs and the 
lows of the percentages being bantered about, anywhere from 3 
percent to 6 percent that will be affected by the means test, 
you have to question the legitimacy of applying it across the 
board on a mandatory basis to 100 percent of the cases that are 
filed.
    Trustees are being asked to review each case and apply the 
means test. This will unnecessarily burden the system, 
particularly when they are vested with substantial 
responsibility and paid a minimal fee.
    If you only affect 6 percent of the cases, why require the 
trustees to perform work in 100 percent of the cases? Moreover, 
you require the calculations be done 5 days before the first 
meeting of creditors. If, in fact, as everybody concedes, the 
schedules are not accurate, wait until the first meeting of 
creditors take place. Let the trustees do their job, to ask the 
questions that they need to find out about the true essence of 
the estate, and then determine whether or not there is abuse 
that justifies the means application.
    The means test further operates to the exclusion of the 
trustee's significant avoidance powers. If the trustee finds 
that there have been avoidable transfers that could be brought 
into the estate, if the person doesn't qualify under the means 
test to be in chapter 7, then they can't go after those assets 
and bring them back into the estate.
    The proposed means test also invites manipulation by 
debtors to fit within the standard. Individuals with secured 
debt are allowed deductions for secured obligations prior to 
calculating their debt. Also, they could go out and get a 
second mortgage or a new car and finance it before filing in 
order to reduce the income available so they don't qualify. 
Also, they could make contributions to charities, 15 percent of 
their income, which wouldn't be calculated as part of the 
income.
    The League is sensitive to the concerns of sanctity of 
contract and moral obligation to honor promises raised by Judge 
Jones, but the means test does not remedy the problem and will 
preclude too many honest debtors and first-time debtors from 
obtaining redress.
    Congress is operating from the premise that filing 
bankruptcy is per se abusive. Rather, the focus of Congress 
should be on debtors who abuse the system by serial filings and 
those provisions of the Code which encourage abuse of the 
system, such as unlimited exemptions. Ultimately, the courts 
should be given the tools, the totality of circumstances, 
including consideration of a discretionary, flexible means 
test, and the express authority to determine when abuses are 
present and how such abuse should be remedied.
    The concept of a fresh start and maintenance of the 
delicate balance between the debtor's rights and creditors' 
remedies must be preserved. Under the current Code, the courts 
do not have the authority to affirmatively look for abuse or 
fashion an appropriate remedy except in the most egregious 
circumstances. Adoption of the totality of circumstances test, 
in conjunction with the discretionary means test, would 
represent a major change and a vehicle by which abuse could be 
addressed and remedied.
    Although we do oppose the means test as currently drafted, 
we recognize there is abuse in the system that has to be 
addressed; we also recognize that there are a number of 
provisions that are proposed as part of the Bill that are fair 
and will help to maintain a balanced system. We are committed 
to continuing to work with Congress in that regard.
    Thank you.
    [The prepared statement of Ms. Miller follows:]
   Prepared Statement of Judith Greenstone Miller, representing the 
            Commercial Law League of America, Birmingham, MI
                            i. introduction
    The Commercial Law League of America (the ``League''), founded in 
1895, is the nation's oldest organization of attorneys and other 
experts in credit and finance actively engaged in the fields of 
commercial law, bankruptcy and reorganization. Its membership exceeds 
4,600 individuals. The League has long been associated with the 
representation of creditor interests, while at the same time seeking 
fair, equitable and efficient administration of bankruptcy cases for 
all parties involved.
    The Bankruptcy and Insolvency Section of the League (``B&I'') is 
made up of approximately 1,600 bankruptcy lawyers and bankruptcy judges 
from virtually every state in the United States. Its members include 
practitioners with both small and large practices, who represent 
divergent interests in bankruptcy cases. The League has testified on 
numerous occasions before Congress as experts in the bankruptcy and 
reorganization fields.
    The League, its B&I Section and its Legislative Committee have 
analyzed the ``needs based'' provisions of H.R. 833, the Bankruptcy 
Reform Act of 1999 (the ``Bill''). The League supports changes to the 
Bankruptcy Code (the ``Code'') to limit possible abuses by debtors and 
credit grantors. Any proposed change will have consequences on the 
system. It is the goal of the League to help Congress carefully 
consider the practical implications of each change in order to maintain 
the delicate balance between the debtors' rights and creditors' 
remedies and to effectuate fair treatment for all parties involved in 
the process.
   ii. analysis of section 102--dismissal or conversion; the ``needs 
                     based'' provision of the bill
    This section of the Bill provides the circumstances under which a 
Chapter 7 proceeding can be dismissed or converted by the Court. 
Congress has proposed to substantially modify Section 707(b) of the 
Code as follows:

         LCreditor standing to bring motions under Section 
        707(b) is limited under the proposed legislation. While the 
        League recognizes that the limit is reasonable as drafted, 
        nevertheless, the League believes that the size of the case 
        should not impact creditor standing to bring such motions.

         LA case may not be converted to Chapter 13 without the 
        debtor's consent. The League believes that it is appropriate to 
        grant the Court discretion to convert a Chapter 7 proceeding 
        irrespective of the debtor's wishes if the debtor falls within 
        the parameters of the ``needs based'' provisions, particularly 
        when the debtor has received the benefit of the automatic stay 
        during the interim period. The League recommends that after 
        conversion to Chapter 13, the debtor should be given the right 
        to dismiss the case during a 20-day period from the date of the 
        conversion. The right to dismiss should not be subject to the 
        discretion of the Court.

         L``Substantial abuse,'' as the standard for dismissal 
        has been changed simply to require ``abuse.'' The League 
        believes that the standard should remain ``substantial abuse.''

         L``Abuse'' is defined by reference to specific, rigid 
        ``needs based'' formula, when, in reality, as recognized by 
        Congress, ``abuse'' may be found to exist based upon a review 
        of the totality of circumstances surrounding the filing. See 
        e.g., subsections 3(A) and (B). No formula, however well 
        considered or crafted, can be flexible enough to encompass the 
        endless combinations of circumstances which debtors bring to 
        the bankruptcy court. While intended to provide a very 
        objective standard, such formulas have proven historically to 
        be the source of much litigation focused at interpreting and 
        defining all of the parameters of the standards. A better 
        approach would be to draft general standards or a more 
        expansive definition of ``abuse,'' which would include, but not 
        be limited to, a finding of ``abuse,'' based on a needs based 
        formula, bad faith or specific behavior or activity. 
        Ultimately, the Court would be required to make a finding after 
        a review of all of the facts and the totality of circumstances 
        surrounding the filing of the petition.

         LThe Bill does not grant the Court any discretion to 
        determine, based on a totality of the facts and circumstances, 
        whether a debtor who has sufficient income under the needs 
        based formula should, nevertheless, be allowed to remain in a 
        Chapter 7 proceeding. The League believes that courts do a good 
        job generally of exercising discretion in individual cases, and 
        therefore, such discretion should continue to be vested in the 
        courts.

         LThe 5-year period required for calculation and 
        determination of whether a debtor falls within the needs based 
        formula is too long and inconsistent with the 3-year period 
        currently provided in the Code for repayment of obligations 
        under a Chapter 13 plan.

         LThe standard to rebut the presumption, e.g., 
        ``extraordinary circumstances,'' is rigid, onerous, and likely 
        to result in increased litigation over the evidence necessary 
        to prove compliance with this standard. Moreover, subsection 
        2(B) requires the ``extraordinary circumstances'' to be 
        evidenced by an itemized, detailed explanation, proving that 
        such adjustment is both necessary and reasonable, and the 
        accuracy of the information provided in the explanation must be 
        attested under oath by both the debtor and its attorney. This 
        verification requirement by the debtor's attorney is 
        inappropriate, unreasonable and appears to go beyond the 
        parameters of Federal Rule of Bankruptcy Procedure 9011 and 
        Federal Rule of Civil Procedure 11.

         LThe needs based formula requires that ``current 
        monthly income'' be calculated on the basis of all income, from 
        all sources, regardless of whether taxable, received within 
        180-days from the commencement of the proceeding. The 180-day 
        period may be too short to obtain an accurate review of the 
        debtor's available sources of income, and may also be 
        susceptible to manipulation. The League, therefore, recommends 
        that the assessment period be redrafted to be one year from the 
        date of the commencement of the bankruptcy proceeding.

         LCongress has created a new and different standard for 
        the award of fees and costs associated with the bringing of a 
        motion to dismiss or convert under Section 707(b). There is no 
        need to create a new standard, e.g., ``substantially 
        justified,'' when sufficient standards for such relief already 
        exist under Federal Rule of Bankruptcy Procedure 9011 and 
        Federal Rule of Civil Procedure 11. Appropriate sanctions are 
        already available when it can be demonstrated that a creditor 
        has filed a Section 707(b) motion solely for the purpose of 
        coercing the debtor into waiving a right guaranteed under the 
        Code. Moreover, the potential imposition of penalties on the 
        attorney for the debtor if the case is deemed abusive will 
        likely translate into increased costs and fees attendant to 
        preparation and filing of a bankruptcy petition. Lastly, 
        subsection 4(B) exempts a creditor with a claim of less than 
        $1,000 from the imposition of costs and fees. The amount of 
        one's claim should not be a consideration in the award of fees 
        and costs by the Court.
 iii. the proposed ``needs based'' changes do not work, will not cure 
 the perceived abuses to the bankruptcy system and will overburden and 
                             tax the system
    The National Bankruptcy Review Commission (the ``Commission'') 
conducted an exhaustive study and analysis of consumer bankruptcies 
over the period it was created by Congress. While the Commission 
recognized the import of a promise to pay, it also acknowledged the 
need for appropriate relief for those in financial trouble and 
equitable treatment for creditors within a balanced system. Bankruptcy, 
in most cases, is the ``last stop'' for financially troubled individual 
consumer debtors. The Commission also conceded that there were abuses 
in the system, but did not ultimately recommend the adoption of a needs 
based formula or otherwise denying individuals in financial distress 
access to the courts.
    Although bankruptcy filings have increased three-fold during the 
last 20 years, one cannot conclude that the reason for this increase is 
solely on account of debtor abuse, unwillingness of individual debtors 
to honor a promise to repay under a contract and the lack of social 
stigma associated with bankruptcy--the key factors, on which the needs 
based formula is erroneously premised. The Commission, bankruptcy 
organizations, practitioners, academicians and judges have dismissed 
each of these factors on the basis of the following substantial 
empirical data:

         LThe statistical evidence shows that consumers who 
        file for bankruptcy relief today as a group are experiencing 
        financial crises similar to families of 20 years ago.

         LMost families who file bankruptcy are seeking relief 
        from debts they have no hope of repaying. In fact, an empirical 
        study commissioned by the American Bankruptcy Institute from 
        Creighton University concluded that the means testing formula 
        would only affect 3% of the Chapter 7 filers because the 
        remaining 97% had too little income to repay even 20% of their 
        unsecured debts over five years. The Purdue Study, funded by 
        the credit card industry, which supported a means based test 
        because it contended that a substantial number of debtors who 
        file could repay their debts, has been criticized as unreliable 
        and misleading by, among others, the Government Accounting 
        Office. This is not the first time that the means testing has 
        been considered--Congress has resisted this attempt over the 
        last thirty years and should decline to endorse this proposal 
        without the demonstration of reliable, cognizable benefits that 
        do not otherwise burden and impair the system.

         LThe triggering events for filing bankruptcy by 
        individuals depend on individual circumstances, such as 
        layoffs, downsizing, moving from employee to independent 
        contractor status, uninsured medical bills, car accidents, 
        institutionalized gambling, failed businesses, job transfers, 
        caring for elderly parents or children of siblings, divorce, 
        etc.

         LAt the same time that individual consumer 
        bankruptcies have increased, there has been an increase in 
        available credit and massive marketing campaigns. According to 
        the Consumer Federation of America, from 1992 through 1998, 
        credit card mailings have increased 255%, unused credit lines 
        have increased 250%, while debt has increased only 137%. With 
        increased credit, the littlest financial change in a family can 
        have devastating consequences.

         LKim Kowalewski, Chief, Financial and General 
        Macroeconomic Analysis Unit, Congressional Budget Office, 
        concluded that a study conducted and funded by Visa, USA was 
        ``unscientific,'' ``invalid'' and ``unfounded.'' The study had 
        suggested that the increase in personal bankruptcies was 
        directly attributable to the decreased social stigma of filing 
        bankruptcy and increased advertising of legal assistance for 
        filing bankruptcy. While the League recognizes that decreased 
        social stigma and increased advertising are contributing 
        factors, that is only the beginning of the analysis and does 
        not constitute the sole bases accountable for the tremendous 
        increase in bankruptcies. Mr. Kowalewski concluded that the 
        increase in bankruptcies was more a function of increased debt 
        rather than a sudden willingness to take advantage of the 
        system. Is it, for example, any less embarrassing for an 
        individual to file a petition in bankruptcy than to have his 
        home foreclosed, his car repossessed or his neighbors contacted 
        by debt collectors?

         LRequiring trustees to review each case and apply the 
        means test and forcing debtors into Chapter 13 will overburden 
        the system. Application of the standards and pursuit of a 
        motion is an unreasonable burden for the panel trustees. The 
        trustees are paid only a minimal fee (e.g., $60) for 
        substantial responsibility in no asset cases. The means testing 
        will involve not only analysis in each case, but also numerous 
        motions, many of which are likely to be contested by debtors. 
        If there are no nonexempt assets, which is generally the case 
        in most Chapter 7 cases, how is the trustee to be compensated? 
        Moreover, pursuing a Rule 9011 action against a debtor's 
        attorney is not likely to produce an immediately available and 
        certain source of recovery for the trustee. The trustee could 
        be required ultimately to spend a potentially huge amount of 
        time with little or no assurance of any repayment for such 
        services. This represents a tremendous burden on the system, 
        when according to the National Association of Bankruptcy 
        Trustees, only one in every ten cases subject to the means 
        testing and with apparent ability to propose a Chapter 13 plan 
        are able to actually confirm or complete the plan.

         LThe establishment of the means test creates a number 
        of anomalies. For example, if a debtor files a Chapter 13 
        initially, the means formula does not apply, and in a number of 
        jurisdiction, the debtor could propose a zero percent plan and 
        discharge the same debt he would have in a Chapter 7 
        proceeding. This is not what Congress intended to create under 
        the means test.

         LThe means test further operates to the exclusion of 
        the trustee's significant avoidance powers. For example, the 
        schedules may reveal a significant preferential payment that, 
        if recovered, would result in a distribution to creditors in 
        excess of what they would receive upon application of the means 
        test. Dismissal of the proceeding under such circumstances is 
        hardly the remedy in the best interest of either the debtor or 
        its creditors.

         LThe proposed means test invites manipulation by the 
        debtor to fit within the standard. Individuals with secured 
        debt are allowed deductions for such obligations prior to 
        calculating available disposable net income. A debtor with too 
        much income could trade in an old car for a new one, deduct the 
        payment from the means formula and thereby become eligible for 
        Chapter 7 relief. Another option is for debtors with too much 
        income to make use of The Religious Liberty and Charitable 
        Donation Protection Act of 1998, which allows debtors to 
        contribute up to 15% of their gross income to charities. Such 
        contributions are not considered in making the calculation 
        under Section 707(b). A debtor with income of $60,000 could 
        thereby remove $750 per month in disposable income by making 
        the maximum allowable charitable contribution.

         LIf a debtor does not qualify for Chapter 7 or Chapter 
        13, the only alternative is Chapter 11--a costly and unfeasible 
        alternative for most individual debtors.

         LJudge Edith Holland Jones, in her Dissent to the 
        Final Report of the Commission, has suggested that the sanctity 
        of contract and one's moral obligation to honor promises to 
        repay necessitates establishment of a means test, absent which 
        bankruptcy as a social welfare program will be subsidized by 
        creditors and the vast majority of Americans who struggle and 
        succeed to make ends meet financially. The League is 
        sympathetic to the issues raised by Judge Jones, however, the 
        means test, as proposed, does not remedy the perceived abuse. 
        Determining eligibility merely on the basis of net disposable 
        available income, without consideration of the myriad of 
        factors contributing to the financial problem and without court 
        discretion, would preclude too many honest first time debtors 
        from obtaining redress from the court of last resort.

         LCongress is operating from the premise that filing 
        bankruptcy is per se abusive. Rather, the focus of Congress 
        should be on debtors who abuse the system by serial filings and 
        those provisions of the Code which encourage abuse of the 
        system (e.g., unlimited exemptions). Ultimately, the courts 
        should be given the tools (e.g., the totality of the 
        circumstances, including consideration of a discretionary, 
        flexible means test) and the express authority to determine 
        when abuse is present and how such abuse should be remedied--
        the concept of a fresh start and maintenance of the delicate 
        balance between debtors' rights and creditors' remedies must be 
        preserved. Under the current Code, the courts do not have the 
        authority to affirmatively look for abuse or fashion an 
        appropriate remedy except in the most egregious circumstances. 
        Adoption of a ``totality of circumstances'' test, in 
        conjunction with a discretionary means test, would represent a 
        major change and a vehicle by which abuse could be addressed 
        and remedied.
                             iv. conclusion
    Maintaining and enhancing a fair, balanced and effective bankruptcy 
system requires consideration and debate of all the issues. Any 
individual change has an impact on the entire system, and cannot and 
must not be evaluated in a vacuum. The League takes seriously its role 
in this process, and believes that other options beyond the current 
mandatory needs based formula should be explored that would address the 
real abuses and preserve the bankruptcy system which Congress 
acknowledged it was generally satisfied with in 1994 when this process 
began and that the system was not in need of radical reform. Adoption 
of a fixed, rigid needs based formula, as contained in the Bill, 
represents ``radical reform,'' which has not been justified and will 
impair the delicate balance inherent in the system; nor is it likely to 
rid the bankruptcy system of the perceived abuses.
            Respectfully submitted,
                                  Jay L. Welford, Co-Chair,
                                      Legislative Committee
                                  Judith Greenstone Miller,
                           Co-Chair, Legislative Committee.

    Mr. Gekas. We thank Ms. Miller, and turn to Professor 
Zywicki for 5 minutes.

 STATEMENT OF TODD ZYWICKI, PROFESSOR, GEORGE MASON UNIVERSITY 
                  SCHOOL OF LAW, ARLINGTON, VA

    Mr. Zywicki. Thank you, Congressman Gekas. It is an honor 
to come before you today to testify on this historic occasion. 
As Congressman Gekas mentioned earlier today, it has been over 
60 years since there has been a joint hearing of the House and 
Senate on bankruptcy, and 60 years ago we were in the midst of 
the Great Depression--25 percent unemployment, rampant farm 
failures, rampant bank failures, rampant business failures, 
unparalleled suffering in America, and 50,000 to 100,000 
bankruptcy filings was considered a massive number, 
unprecedented numbers.
    Today, of course, we have 5 percent unemployment, 6 percent 
growth rates. The farm crisis of the 1980's is past. Business 
bankruptcies are at an incredibly low level. And we had 1.4 
million bankruptcy filings last year. We had more bankruptcy 
filings in the first half of 1997 than in the entire decade of 
the Great Depression combined.
    Means testing is one of the anecdotes to this problem. 
Means testing can be summed up in one basic question: Should 
high-income debtors, who can repay a substantial portion of 
their debts without significant financial or other hardship, be 
required to do so? That's it: Should high-income debtors, who 
can repay a significant portion of their debts without 
significant financial or other hardship, be required to do so?
    Bankruptcy should be for poor unemployed, divorced people, 
basically down on their luck. As my co-panelist, Professor 
Warren, said in her great book from a while back, the generous 
willingness of Americans to help those in trouble is balanced 
by a demand that only the truly needy be helped. I think that 
is the attitude that we should have toward bankruptcy. Keep in 
mind, means testing does not interfere with high-income debtors 
being able to file bankruptcy. It simply says, if you file, and 
can repay a certain amount of your debts, you must do so. It 
does not affect low-income earners at all.
    Estimates are that 80 percent of people who file bankruptcy 
are below the national median income by this test. Eighty 
percent of people won't even be affected. Estimates range from, 
say, 3 to 5 to 10 percent--more likely, somewhere between 6 to 
10 percent--of those who file bankruptcy would be affected by 
means testing.
    But the payoff is significant. Those same studies show that 
60 to 70 percent of their debts could be repaid, approximately 
$4 billion, if they were forced into chapter 13 rather than 
chapter 7. Compare that to chapter 7 rates, where 95 percent of 
chapter 7's make no distribution at all, and most of those who 
make a distribution make only a trivial distribution.
    People ask me, why do you care about bankruptcy? I think 
the answer is that an analogy is to shoplifting. Nobody in this 
room is a shopkeeper; none of us own a retail store, but we are 
all opposed to shoplifting. Why is that? Well, first, because 
we all know that the losses, when some people engage in theft 
and shoplifting, the losses get passed onto other consumers. We 
subsidize those losses, at least some of them.
    Secondly, it is simply unfair should get benefits that they 
don't have to pay for. I seem to recall a phrase a few years 
ago that, those who work hard and play by the rules should be 
protected in America. Those who work hard and play by the rules 
should be protected in the bankruptcy system, but those who do 
not should not.
    Third, creditors are providing valuable goods and valuable 
services, whether it is goods, credit, whatever it may be. They 
deserve to be paid for that. We all deserve to be paid for the 
goods that we provide.
    Finally, shoplifting and bankruptcy--shoplifting is wrong; 
bankruptcy is also a moral act. Bankruptcy is a moral as well 
as an economic act. There is a conscious decision not to keep 
one's promises. It is a decision not to reciprocate a benefit 
received, a good deed done on the promise that you will 
reciprocate. Promise-keeping and reciprocity are the foundation 
of an economy and healthy civil society.
    Do we have charity? Yes. When Jean Valjean shoplifts a loaf 
of bread to feed his children, that is different from a rich 
guy who shoplifts a Rolex watch. The bankruptcy system and 
means testing recognize that. It protects the Jean Valjeans of 
the bankruptcy system, but not the fellow who is stealing the 
Rolex watch.
    In law we have the doctrine of necessity. If you in a boat 
at sea and a raging storm comes up, you are allowed to tie up 
at the first dock that you come to. But if you are out at sea 
and it is a sunny day, you are not allowed to just tie up at 
the dock for a mere matter of convenience. The bankruptcy 
system should be tailored to those who have the storms of their 
life, but it shouldn't be the people who simply are sailing 
around on a sunny day and decide to cut corners and file 
bankruptcy for a mere matter of convenience.
    Thank you.
    [The prepared statement of Professor Zywicki follows:]
Prepared Statement of Todd Zywicki, Professor, George Mason University 
                      School of Law, Arlington, VA
                                  bio
    Professor Todd J. Zywicki teaches Bankruptcy, Contracts, and 
Commercial Law courses at George Mason University School of Law in 
Arlington, VA, where he has been an Assistant Professor of Law since 
1998. Prior to joining the faculty at George Mason, he was an Assistant 
Professor of Law at Mississippi College School of Law in Jackson, MS 
from 1996-1998. Prior to that, Professor Zywicki clerked for the 
Honorable Judge Jerry E. Smith on the United States Court of Appeals 
for the Fifth Circuit, and practiced bankruptcy law with Alston & Bird 
in Atlanta, GA. He received his J.D. from the University of Virginia in 
1993, a Master's Degree in Economics from Clemson University in 1990, 
and his undergraduate degree cum laude with distinction in his major 
from Dartmouth College in 1988. Professor Zywicki is the author of over 
20 published articles, essays, and book reviews in both law reviews and 
economics journals. He has written widely in the areas of bankruptcy, 
environmental law, constitutional law, constitutional history, and 
economic analysis of law. Professor Zywicki is also a Contributing 
Editor to the Norton Bankruptcy Treatise and Co-Chair of the Bankruptcy 
Subcommittee of the Federalist Society's Financial Institutions 
Practice Group. He has previously testified on bankruptcy issues before 
the United States Senate, Judiciary Committee, Subcommittee on 
Administrative Oversight and the Courts. Recent publications on 
bankruptcy law include, ``It's Time for Means-Testing'' (co-authored 
with Judge Edith H. Jones), 1999 BYU L. Rev. (forthcoming 1999); 
``Rewrite the Bankruptcy Laws, Not the Scriptures: Protecting a 
Bankruptcy Debtor's Right to Tithe,'' 1998 Wisconsin L. Rev. 1223; 
``Mend It, Don't End It: The Case for Retaining the Disinterestedness 
Requirement for Debtor in Possession's Professionals,'' 18 Mississippi 
College L. Rev. 291 (1998).
                               statement
    Distinguished Senators and Representatives, it is a distinct honor 
to testify before you today on the subject of consumer bankruptcy 
reform. I have practiced, taught, and published articles on the subject 
of consumer bankruptcy. Most recently I am a co-author with Judge Edith 
H. Jones of the forthcoming article, ``It's Time for Means-Testing,'' 
which will be published in the B.Y.U. Law Review, a copy of which Judge 
Jones and I have inserted into the record, and the author of a working 
paper on ``Credit Cards in Bankruptcy.''
    The debate over means-testing boils down to a simple question: 
Should high-income debtors, who can repay a substantial portion of 
their debts without significant financial or other hardship, be 
required to do so? To this question, I believe the answer must be 
``yes.''
    Bankruptcy has traditionally been intended as a last resort for 
those who are poor, unemployed, suffering from health problems, or 
otherwise down on their luck. Bankruptcy should not be a first resort 
for those who simply and consciously choose not to live within their 
means. Nor should bankruptcy be a mechanism for people to strategically 
take advantage of the system for financial gain. Means-testing will 
improve the administration of the bankruptcy system, increase the 
recovery from high-income debtors, protect low-income debtors, and 
increase public confidence in the fairness and efficiency of the 
bankruptcy system. At the same time, it will protect the poor and 
unfortunate debtors for whom bankruptcy is intended.
    Opponents of means-testing have engaged in a high degree of 
hyperbolic rhetoric designed to obscure the central issue of whether 
high-income debtors should be required to repay their debts if they 
can. But an inspection of the goals and practical effect of means-
testing shows these concerns to be without merit. Means-testing does 
exactly what its name suggests; it requires those who have the 
``means'' to repay their debts to do so. By definition, means-testing 
does not apply at all to the great bulk of bankruptcy filers, the 
roughly 80% of Chapter 7 filers whose incomes are below the median 
national income. Studies repeatedly indicate that means-testing would 
affect a maximum of 10% of all bankruptcy filers, all of whom, by 
definition, earn incomes that exceed the median national income, 
adjusted for family size.
    Although means-testing would cover a relatively modest number of 
bankruptcy filers, its financial impact would be substantial. It 
targets an extremely well-defined group of bankruptcy filers who could 
pay all or substantially all of their outstanding debt with minimal 
hardship. Studies repeatedly conclude that those affected by means-
testing could pay approximately 60%-70% of their unsecured debts if 
they filed under Chapter 13, which amounts to a total of over $4 
billion. By contrast, 95% of Chapter 7 bankruptcy filings make no 
distribution at all to unsecured creditors, and those that do rarely 
pay out more than a trivial amount. Despite the much larger payout made 
to creditors in a Chapter 13, debtors usually are advantaged by filing 
under Chapter 7. As a result, 72% of individual cases are filed under 
Chapter 7. More detailed summaries of the findings of the relevant 
studies and the mechanics of how means-testing would work in practice 
are provided in the article authored by Judge Jones and myself. But one 
thing is clear, even though the reach of means-testing is small in 
terms of the number of filers impacted, its impact would be large in 
terms of the amount of money collected. Moreover, it is likely that the 
economic and other benefits of means-testing, such as uniformity, 
fairness, and confidence in the operation of the bankruptcy system, 
would more than offset any increases in administrative costs--if any--
that might result from its adoption.
    Consider, for instance, the recent case of Dr. Robert N. Kornfield. 
See In re Kornfield, 164 F.3d 778 (2d Cir. 1999). Dr. Kornfield is a 
gastroenterologist in New York who earned $472,445 in 1994, and 
$404,593 in 1995, before his income ``plummeted'' to a ``mere'' 
$276,000 in 1996. He had an additional amount of $390,216 in pension or 
profit-sharing plans. As for debt, he had $508,664.85 in two mortgages, 
and additional debt of $76,029.15. He also was spending $53,640 per 
year in private schools for his children, despite a specific finding by 
the bankruptcy court that appropriate public schools were available for 
educating Dr. Kornfield's children. In sum, the bankruptcy court 
``found that the debtors had incurred substantial debts largely because 
of an extravagant lifestyle that they declined to alter in the face of 
lowered income,'' Kornfield, 164 F.3d at 783, and the Second Circuit 
concluded that the debtor was ``enjoying a substantial income but 
seeking to transfer the cost of an unnecessarily extravagant lifestyle 
to creditors,'' id. at 784.
    Is Dr. Kornfield representative of the vast bulk of individual 
debtors in the bankruptcy system? No, he is not. But is he 
representative of a certain class of debtors in the bankruptcy system--
those who file bankruptcy not as the result of financial hardship as 
conventionally understood, but merely as a convenience to maintain ``an 
unnecessarily extravagant lifestyle'' and to transfer the cost to 
creditors? Yes, he is. And this class of opportunistic debtors grows 
larger every day. In the end, Dr. Kornfield's Chapter 7 case was 
dismissed for ``substantial abuse'' under '707(b), but his case 
provides an illustration of the problems with the current regime for 
policing opportunistic debtors such as Dr. Kornfield and why means-
testing is a necessary antidote.
    Before Dr. Kornfield's case was finally resolved, he had contested 
the issue in the bankruptcy court, district court, and all the way to 
the court of appeals. At that point the Second Circuit adopted a 
``totality of circumstances'' test to determine whether a particular 
case should be dismissed for ``substantial abuse.'' Under this 
approach, in every case the court will be required to consider all of 
the factors that might be relevant as to whether a case should be 
dismissed for ``substantial abuse,'' of which ability to pay is perhaps 
the most important factor, but not the only factor for the court to 
consider. The adoption of a ``totality of circumstances'' test means 
that in every case where dismissal is sought under '707(b), courts will 
have to engage in detailed fact-finding and sifting and weighing of 
evidence with little guidance as to the proper legal standard to apply. 
As a result, the outcome in any given case will be highly dependent on 
the judge's inclinations and the debtor's ability to find and fund 
talented counsel. Moreover, the case was dismissed, but only after a 
lengthy and expensive process that involved an initial hearing, 
followed by two layers of appeals. Thus, the lack of clear rule of 
decision spawns delay, expensive hearings, and repeated appeals that 
impose a significant financial cost on the bankruptcy system and the 
court system generally.
    Dr. Kornfield's case also illustrates the unfairness and non-
uniformity of results under the current system. Egregious cases pass by 
unnoticed every day in bankruptcy courtrooms throughout America. Dr. 
Kornfield had the misfortune to draw a particular U.S. Trustee and 
particular Bankruptcy Judge who would not let his case pass without 
objection. Similarly-situated debtors who file in other districts or 
even those who file in front of other judges in the same district may 
receive very different treatment. Given the rule-less inquiry 
established by the current law, the outcome in any given case is quite 
unpredictable and may be expensive to litigate. This phenomenon of 
similarly-situated debtors receiving disparate treatment has created 
both a reality and a perception of unfairness and non-uniformity.
    Finally, Dr. Kornfield's case reflects a disturbing trend in modern 
bankruptcy law--the seemingly cavalier attitude of some towards filing 
bankruptcy and repudiating one's debts. As the bankruptcy court noted, 
Dr. Kornfield's bankruptcy resulted from a conscious decision to try to 
maintain his ``extravagant lifestyle'' in the face of lowered income. 
Rather than moving into a more modest house or sending some of his 
children to public school, he chose to file bankruptcy and force his 
creditors to subsidize his decisions. Dr. Kornfield hardly fits the 
image of the poor and/or unfortunate debtor looking for a fresh start 
to get back on his feet. Instead of tightening his belt, he filed 
bankruptcy and repudiated his obligations.
    Means-testing will mitigate many of the problems illustrated by Dr. 
Kornfield's case. By establishing a clear, bright-line rule for Chapter 
7 eligibility, means-testing will reduce the high administrative costs 
associated with the current system. Debtors and creditors will know 
with a very high degree of predictability whether the debtor will be 
eligible for Chapter 7. As a result, there will be less uncertainty 
involved in the decision whether to bring an action or for a debtor to 
contest an action. Eligibility challenges will be limited to an 
extremely small set of cases. Most cases will either plainly qualify 
under the test or not qualify, and there will be only a small number of 
cases where the debtor's eligibility under the ability-to-pay test will 
be in doubt. Under the current approach, by contrast, there is little 
predictability or justice in who might be the subject of a challenge. 
Extremely high-income debtors will often avoid eligibility challenges, 
while many debtors of relatively modest means will suffer challenges. 
Moreover, means-testing will ensure that those who can repay all or 
substantially all of their debts under Chapter 13 will be required to 
do so, thereby eliminating the incentive to file bankruptcy and 
encouraging those debtors to work out voluntary repayment arrangements. 
Thus, these cases will not even be filed in the first place, 
eliminating the administrative costs of dealing with them. Moreover, as 
illustrated by Dr. Kornfield's case, many of these cases will be those 
with high administrative costs, with multiple and complex evidentiary 
hearings and appeals, thus the savings on these cases will be 
substantial.
    Means-testing will also provide much-needed guidance to courts and 
trustees seeking to prevent abuse of the bankruptcy process. Rather 
than a free-ranging ``totality of circumstances'' test and the cost and 
uncertainty associated with interpreting and applying it, means-testing 
will channel the court's discretion into a much more narrow and 
predictable range of inquiry, thereby limiting strategic challenges by 
both creditors and debtors. Forcing all judges to focus on the same 
factors and weigh them consistently, will also make decisions more 
predictable and uniform. This will increase public confidence in the 
bankruptcy system by reducing the real and perceived unfairness 
associated with the current regime where who gets caught and who does 
not appears to be mere happenstance.
    Finally, means-testing will have non-quantifiable intangible 
benefits associated with reasserting the moral premise that people 
should be required to repay their debts to the extent that they can, 
especially if doing so would impose minimal hardship on them and their 
standard of living. This, moral signal must be weighed as one of the 
benefits of means-testing.
    Although an extreme example, Dr. Kornfield's case is all too 
typical of the modern bankruptcy system. Bankruptcy filings have 
exploded in recent years, despite low unemployment and robust economic 
growth. There are two explanations for this surge in filing rates: a 
change in the relative economic costs and benefits of filing 
bankruptcy, and a decline in the personal shame and social stigma 
traditionally associated with filing bankruptcy. See generally Edith H. 
Jones and Todd J. Zywicki, ``It's Time for Means-Testing,'' 1999 BYU L. 
Rev. (forthcoming).
    Beginning most noticeably with the liberalization of bankruptcy 
laws ushered in with the 1978 Code, there has been a predictable upward 
trend in bankruptcy filing rates. The 1978 Code significantly reduced 
the economic costs and increased the economic benefits of filing 
bankruptcy. Indeed, economist Michelle White estimates that 15%-20% of 
American households would financially benefit from filing bankruptcy, 
especially if they engaged in some planning prior to filing.
    This increase in the financial benefits of filing bankruptcy has 
been accompanied by an offsetting decrease in the associated costs. In 
particular, there has been a substantial reduction in the ``search 
costs'' associated with learning about bankruptcy. The spread of 
attorney advertising in the 1980s made it easier to inform individuals 
about the availability of bankruptcy as a financial planning tool. 
Daytime and late-night television, as well as newspapers, magazines, 
and telephone books, are now awash in bankruptcy advertisements by 
lawyers. Equally important is the ``water cooler'' effect: a huge 
number of people learn about bankruptcy from friends and family who 
have been through the process and report that it was cheap, easy, and 
put an end to creditors' collection efforts.
    As performer Toni Braxton memorably told a reporter after filing 
bankruptcy in 1998, ``I'm going to go out and enjoy myself.'' At the 
time of her bankruptcy, Braxton's albums had earned $170 million in 
sales and she owned a baby grand piano, a Porshe, and a Lexus. Most 
private companies have to pay celebrities large sums of money to 
endorse their products in advertisements; the ease with which Braxton, 
Kim Basinger, Burt Reynolds, John Connolly, M.C. Hammer, and others 
have sailed through bankruptcy is equivalent to free advertising for 
the bankruptcy system. Nor is Braxton's attitude limited to the very 
well-to-do. Consider the sentiment expressed by a middle-class filer 
from New York who used the bankruptcy system to maintain their 
unrealistic standard of living, ``We're not doing the pauper thing. . . 
. We have a nice house. We go to Foxwoods. We have his and her cars. It 
took us a long time to go from Brooklyn to Queens. We can't go back.'' 
Finally, the sheer volume of bankruptcy cases has spawned a cottage 
industry in ``do-it-yourself'' bankruptcy kits and so-called bankruptcy 
``mills'' that represent debtors in high-volume, repetitive cases. 
These too have further reduced the costs associated with learning about 
and filing bankruptcy.
    There has also been a reduction in the shame and stigma associated 
with filing bankruptcy. Bankruptcy represents a repudiation of one's 
promises, a decision not to pay someone back for a benefit that they 
have bestowed upon you. This ethic of reciprocity and promise-keeping 
is the foundation of a free economy and a healthy civil society. We 
teach our children from a very young age to keep their promises and to 
reciprocate benefits bestowed upon them. We also internalize these 
lessons through our consciences and often feel personal shame when we 
fail to keep our promises; when we take without giving back. As a 
result, filing bankruptcy traditionally has been treated as a socially 
and personally shameful act. Part of Harry Truman's lore was his 
decision to voluntarily repay the debts of his failed haberdashery. It 
took him 15 years to do so, but in the end he did and was applauded for 
it.
    But this ethic of paying one's promises now seems old fashioned and 
out of vogue. In short, there are too many Robert Kornfields and too 
few Harry Trumans on the current bankruptcy landscape. To paraphrase 
Senator Moynihan, we have ``defined bankruptcy deviancy downward'' to 
the point where many see it as simply an alternative financial planning 
device. Moreover, because the financial benefits of filing bankruptcy 
are greatest for upper-income debtors, the role of personal shame and 
social stigma has had its greatest marginal impact in restraining those 
individuals from filing bankruptcy opportunistically. The underlying 
dynamics driving the surge in personal bankruptcies predicts an ever-
growing influx of high-income debtors into the bankruptcy system in 
coming years and thereby reinforces the urgency of means-testing.
    Who are the beneficiaries of means-testing? We all are. To see why, 
consider that although few of us actually own retail shopping stores, 
all of us oppose shoplifting and believe that it should be forbidden. 
The reasons why we support laws against shoplifting are analogous to 
the justifications for means-testing. First, when people shoplift or 
don't pay their bills, we all suffer in the form of higher prices for 
goods and for credit, as at least some of those losses are necessarily 
passed on to us as fellow consumers. Second, allowing some people to 
obtain goods, services, or credit without paying for it is simply 
unfair to those who do act responsibly and pay for the benefits they 
receive. Third, retail sellers and those who extend credit are selling 
a useful product or providing a socially-beneficial service for which 
they are entitled to be paid. We all have to work for a living and we 
are all entitled to be paid for the goods and services that we provide. 
Finally, shoplifting simply is wrong; it violates trust and it breaks 
promises. You shouldn't take it if you aren't going to pay for it. Just 
as one need not be a shopkeeper to be opposed to shoplifting, one 
similarly need not be a banker to be in favor of means-testing.
    Rather than facing up to the existence of abuse in the bankruptcy 
system by some unscrupulous high-income debtors, critics of means-
testing have chosen to point fingers at creditors for causing 
bankruptcy, with credit card issuers identified as the primary 
villains. As an explanation for the massive rise in bankruptcy filing 
rates in recent years, this ``blame the creditors'' mentality has 
tremendous popular appeal. But it also has little credibility as an 
explanation for spiraling bankruptcy filing rates.
    Several commentators have argued that increases in overall consumer 
debt and debt-to-income ratios explain the recent surge in bankruptcy 
filing rates. There are several problems with this thesis. First, it 
incorrectly treats debt levels as an exogenous variable, unaffected by 
the relative ability of borrowers to discharge those debts in 
bankruptcy. But a borrower's willingness to take on debt clearly will 
be related to the ease with which he can later discharge those debt 
obligations if he chooses to do so. Hence, debt levels are an 
endogenous variable as well, and will be a function of the overall 
bankruptcy system. Second, those who have postulated a link between 
debt and bankruptcy have failed to provide a persuasive explanation as 
to how debt could ``cause'' bankruptcy for individuals, as opposed to 
businesses. Significantly more important would be the relationship 
between current debt--the amount that a debtor is required to pay each 
month--and bankruptcy. Individual bankruptcy would seem to be the 
result of an inability to meet one's obligations as they come due, not 
insolvency in some type of balance-sheet accounting. Because of the 
extremely low interest rates of recent years, current debt levels have 
fallen even as overall debt levels have risen. As a result of these low 
interest rates, borrowers should be able to carry the same or even 
marginally greater debt levels at greater ease than before, thereby 
contradicting the ``debt causes bankruptcy'' thesis. Third, debt does 
not exist in a vacuum, it accumulates through the decisions of 
consumers to purchase goods and services. Thus, ``too much debt'' in 
many cases could simply be recharacterized as ``too much spending,'' as 
was the case with Dr. Kornfield. It is not debt that causes bankruptcy 
for many people, it is a conscious choice not to live within one's 
means and to finance an extravagant lifestyle through borrowing rather 
than belt-tightening. Finally, statistics on debt simply do not provide 
an explanation for the rapid run-up in bankruptcy filing rates of 
recent years. As one commentator has observed, even if debt-to-income 
ratios have worsened, they have done so gradually: ``They did not get 
worse by 29% in 1996 over 1995, but bankruptcies did. They did not 
worsen again by 20% in 1997 over 1996, but bankruptcies did.''
    Nor will it do to blame credit card issuers. Because of their 
visibility, credit card issuers have become easy villains for those 
seeking to blame creditors. As Judge Jones and I wrote, ``[C]redit card 
issuers have become the modern equivalent to William Jennings Bryan's 
'Cross of Gold,' crucifying consumers in the pursuit of ever-greater 
profits.'' But blaming credit card issuers for the bankruptcy boom is 
implausible on its face. First, the total credit card debt burden of 
$529 billion pales in comparison to overall housing debt of $4 
trillion, and housing debt has been increasing much faster than 
revolving debt in recent years. Second, most Americans are 
``convenience'' users of credit cards who pay off their balances each 
month and therefore accrue no interest fees or service charges. 
Focusing on those who revolve balances from month-to-month ignores the 
reality that few Americans fit this profile.
    Those who would vilify credit card issuers also misunderstand the 
role that they play in the modern American economy. Entire segments of 
our economy, such as internet and catalogue shopping, would not exist 
without consumer access to credit cards. Credit cards enable 
individuals to deal with short-term emergencies like car and home 
repairs, without having to hoard large amounts of cash in non-interest 
bearing checking accounts, not to mention all the fringe benefits of 
frequent flyer miles, rental car insurance, purchase price protection, 
and even cash back bonuses. Moreover, the credit card industry has 
revealed itself to be ferociously competitive. In a market with 6,000 
issuers and millions of consumers it is hard to imagine it being 
otherwise. And, indeed, after an early period of high profitability 
following deregulation, profits on credit card issuers have decreased 
substantially in recent years.
    Access to credit cards are especially important for low-income 
borrowers, as they lack the options of more wealthy borrowers. For 
instance, low-income borrowers obviously will have less access to home 
equity loans than the rich. Absent credit cards, low-income borrowers 
faced with a short-term need for cash, such as the need for a new 
transmission for a car, will face an array of unfavorable options: 
selling personal assets, taking them to a pawn shop, or trying to get a 
short term loan from a bank that will probably charge them fees and an 
interest rate that substantially exceed that available on credit cards. 
Dagobert Brito and Peter Hartley, economists at Rice University, 
observe that there are few substitutes for the low transaction cost 
access to short-term credit offered by credit cards. As a result, 
despite the seemingly high rates of interest charged by credit cards, 
it is actually quite rational for many people to revolve balances on 
credit cards. See Dagobert L. Brito & Peter R. Hartley, ``Consumer 
Rationality and Credit Cards,'' 103 J. Pol. Econ. 400 (1995). Access to 
credit cards have democratized credit, making its advantages available 
to all when it previously was available only to the elite.
    Means-testing is an idea whose time has come. Courts are already 
applying a variation of means-testing, but with highly unpredictable 
and unfair results. Means-testing will improve the administration of 
the bankruptcy system, increase the recovery from high-income debtors, 
protect low-income debtors, and increase public confidence in the 
fairness and efficiency of the bankruptcy system.

    Mr. Gekas. I thank the witness and turn to our final 
panelist, Professor Warren, for 5 minutes.

 STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW, 
                 HARVARD LAW SCHOOL, BOSTON, MA

    Ms. Warren. Thank you, Chairman Gekas. I also say, as 
others have, it is an honor to be here, and particularly a an 
honor to be here at your personal invitation.
    I will start as Judge Kenner did. She caused me to do a 
calculation, and that is, I have now been teaching bankruptcy 
and business law for 20 years, and I think that means that I 
have now seen the coming of age of about 4,600 lawyers, a much 
scarier concept, isn't it?
    I thought I would start today by talking just a little bit 
about who is in the bankruptcy system. We have heard from 
creditors; we have heard from judges; we have heard from 
academics. The people we haven't heard from are the debtors, 
the people who are affected by this system. I just want to give 
a sketch of a few things that we know about these people.
    We know that two out of every three debtors who file for 
bankruptcy have suffered a significant period of unemployment 
or job interruption in the 2 years before they have filed. 
These are people who have been downsized, outsized into jobs or 
into smaller jobs, lesser jobs, unemployment, independent 
contractor status that carries no benefit and many weeks 
carries no income.
    We know about divorce. We know that the people who file for 
divorce are more likely also to file for bankruptcy. If I know 
nothing more about the women in this room other than the fact 
that their current marital status is that they are divorced, I 
know that they have a 300 percent greater likelihood of being 
in bankruptcy this year alone than their cohorts who are single 
or who are married.
    Medical debts. About one in five of the debtors who file 
for bankruptcy identify themselves as having significant 
medical debts before they filed for bankruptcy and identify 
this as the source of their problems. Lack of insurance is felt 
in the bankruptcy courts. This is the only place to deal with 
it.
    Homeowners some of the most trying stories in bankruptcy. 
About half of the people who file for bankruptcy are homeowning 
folks, people who have passed the most rigorous credit 
standards at some point in their life. And why are they in 
bankruptcy? They are in bankruptcy because they are trying to 
save their homes. What we know about these people, 
particularly, is that they are the most fragile homeowners. 
African-American homeowners and Hispanic-American homeowners 
have a much increased percentage of bankruptcy relative to 
white homeowners. These are people who have suffered from 
discrimination both in housing and in the workplace, and those 
forms of discrimination make their way into the bankruptcy 
courts.
    We know that the elderly are also in bankruptcy. About 
280,000 people filed for bankruptcy last year who are older 
than 50. We know that about 50,000 of the filers are older than 
65. What is one of the principal reasons that they file for 
bankruptcy? They file for bankruptcy because they are 
disproportionately the victims of the scams in the credit 
industry. They file to try to deal with aggressive creditors. 
They say, quite simply, they can't cope with the phone calls 
anymore; they can't cope with the people visiting them. These 
are people who use bankruptcy as a way to stop abusive 
collection practices.
    Small business owners. Those are also among the people we 
haven't heard about today. One in five Americans who files for 
bankruptcy is a failed entrepreneur. If you start your own 
business you have a three times greater likelihood of ending up 
in bankruptcy court than anybody else in America. Entrepreneurs 
are about 7 percent of our population, but they are 20 percent 
of those who are in bankruptcy. Why are they in bankruptcy? 
They are in bankruptcy because little businesses are fragile, 
and they have had to guarantee personally all of the debts. 
Even if they are not trying to keep their businesses afloat, if 
they have given up on the notion that they can keep the store 
open or keep working as an independent person, the idea of 
going back to a wage-earning job no longer works for them 
because they are $50,000, $75,000, $100,000 in debt from their 
failed businesses.
    These are the people who are not represented in this room 
today, but we have to think about when we think about 
bankruptcy reform.
    What does this bill do? This bill is more than 300 pages 
long. The consumer provisions go on for a long, long time--and 
I say that as an academic who is used to reading lots and lots 
of statutes.
    I want to make a global point. This debate isn't about 
means testing or at least not means testing alone. That has 
been a flash point. That has been the lightning rod, and it is 
important to hear. But this is about a thousand traps that have 
been set for debtors in this bill. Means testing is there to 
push debtors out of chapter 7.
    Increasing nondischargeability of credit card debts claps 
them on the other side. It says, you went through bankruptcy, 
but you didn't get much help from it, because many of your 
creditors will still be there on the other side.
    Reducing eligibility for chapter 13 means these people 
can't move from chapter 7 over to chapter 13 to repay. It just 
means they move back out of the system, so that their creditors 
can pick them apart however they want.
    Allowing creditors' motions under 707(b) means that 
creditors who have much more money and much more leverage can 
just squeeze debtors harder. That is the key point.
    What is this bill about? This isn't about whether or not we 
get a few people to pay more. It is whether or not we can 
squeeze people to pay outside bankruptcy, often by signing more 
reaffirmations. This is where the major scandal in this system 
is. What this bill does is it lets the creditors increase the 
size of their club, at the same time that it says you can as 
many reaffirmations as you want. There is no effective control 
over reaffirmation.
    Let me make this clear: The Sears case, under this bill, 
could no longer be brought. Any attempt of debtors to get 
together and bring a class action for any of the abuses of the 
system would be gone.
    I would like to close, if I could, by just reading from one 
debtor in the Sears litigation. She says about her Sears 
reaffirmation, ``I truthfully wasn't paying attention when the 
Sears lady asked me for the reaffirmation because I was crying 
and so upset that I had failed to be able to pay my debts in 
the first place. Otherwise, I wouldn't be in a bankruptcy 
court. Well, I worked two full-time jobs for almost 7 years 
after my divorce with my seven children. The two full-time jobs 
affected my health, and I couldn't work them anymore. That is 
when I stopped paying Sears $150 a month.''
    She goes on to say that she lost her home. Let me make it 
clear: This was a legal reaffirmation. This one was denied 
under the Sears settlement.
    [The prepared statement of Professor Warren follows:]
Prepared Statement of Elizabeth Warren, Leo Gottlieb Professor of Law, 
                     Harvard Law School, Boston, MA
                          the need for reform
    All legal systems benefit from periodic adjustment to account for 
changed circumstances, to address unforeseen consequences, and to 
reconcile divergent court interpretations. The bankruptcy system is no 
different. For one hundred years, Congress has periodically adjusted 
the Bankruptcy Code to reflect these kinds of adjustments. This is a 
healthy process that helps insure efficiency, effectiveness and, most 
importantly, public confidence in the system.
    No one doubts that the bankruptcy system could be improved by 
amending the Bankruptcy Code to address identified and documented 
ambiguities and problems. But any reform must be balanced. The 
bankruptcy community--judges, lawyers, accountants, academics, 
trustees, and others--has been engaged in a continuing dialogue.
    I favor reform. But not all change is reform.
    The key to bankruptcy reform, like other types of real reform, is 
to make changes in a narrowly targeted and carefully crafted fashion so 
that the cost of these changes does not outweigh the anticipated 
benefit for parties in these cases and for the public at large.
    A good example of the failure of the cost-benefit analysis is 
evident in the proposed means test. The credit industry for forty years 
has pressed for a means test of the kind proposed in H.R. 833. Twenty 
years ago, they claimed that without means testing consumer credit 
would dry up. They claim today that without these reforms bankruptcy 
costs every American family $550. The accuracy of that statement has 
been challenged by research supported by the American Bankruptcy 
Institute, an independent organization of professionals representing 
both debtors and creditors. That research, conducted by Professors 
Marianne Culhane and Michaela White, suggests that the means test in 
H.R. 833 would produce very little benefit. If even the most optimistic 
estimates of the debtors' capacity to repay come true (what Culhane and 
White deem ``the impossible dream'') and even if many of the 
administrative costs of implementing and enforcing a means test were 
ignored, the independent study shows that the proposed change would 
increase recoveries for creditors by a total of about 90 cents each 
year for each household. \1\ This is not narrowly tailored, cost-
effective reform.
---------------------------------------------------------------------------
    \1\ Marianne B. Culhane and Michaela M. White, Taking the New 
Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 
7 Debtors, American Bankruptcy Law Review (forthcoming 1999).
---------------------------------------------------------------------------
    When dealing with the bankruptcy system, it is especially important 
to take a careful cost-benefit approach. Bankruptcy is a collective 
proceeding involving a limited pool of resources. If the law gives more 
benefits to one creditor, other creditors suffer. Bankruptcy is the 
ultimate zero-sum system. Creditors compete for the limited dollars of 
the people who have declared themselves bankrupt. More to one creditor 
is necessarily less for another.
    Who are these creditors? Creditors are not just car lenders, credit 
unions, and credit card companies--the people we hear from today. Some 
creditors are women and children collecting support. In addition, they 
are utilities, landlords, doctors, hairdressers, plumbers, the paper 
girl, neighbors, federal state and local taxing authorities, and many 
others. These creditors have interests that, by definition, are adverse 
to each other--not just to the debtor. More money for retailers issuers 
means less money for car lenders; more money for banks is less money 
for landlords; more money for credit card issuers is less money for 
mothers collecting child support. And more money for administrative 
costs means less money for everyone. Bankruptcy does not create money; 
it creates only collection priorities among creditors for the very 
limited dollars of the debtors.
                         h.r. 833 is not reform
    Almost every day, someone asks me about this bill. And, almost 
every day, I respond that I am deeply, deeply concerned about this 
bill.

          Am I concerned because I oppose reform?
          Am I concerned because I think that some people should get a 
        free ride at the expense of everyone else because I do not care 
        whether I pay a hidden bankruptcy tax?
          Am I concerned because I do not care if people exercise 
        personal responsibility?

Of course, the answer to all of these questions is no, a loud and 
resounding no.
    Then why does this bill worry me so much? Because change does not 
equal reform. The definition of reform is ``to improve by correction of 
error or removal of defects.'' A secondary meaning is ``to abolish 
abuse.'' This bill does neither.
    Instead, the bill will cause chaos. It is loaded with complicated 
and conflicting policy choices added to try to satisfy competing 
special interests. It is rife with sloppy technical work that will 
create ambiguities to be litigated for twenty years or more.
    Moreover, the bill is one-sided. It has more than 120 pages of 
amendments affecting consumer cases, and they all head in the same 
direction: They give a few creditor interests more opportunities to try 
to recover from their debtors while they reduce the protection for 
other creditors and for debtors. Although the bill contains a few 
provisions bearing labels that suggest they provide needed protections 
for consumer or address creditor abuse, a careful reading of those 
provisions reveals that they will do little in practice.

        Among the most objectionable features of the current proposals 
        are:

        The failure to introduce real reform for debtor abuses by 
        limiting property exemptions

        Provisions to increase the number of nondischargeable debts for 
        every family in bankruptcy, including the very poorest

        Changes that will permit fewer debtors to qualify for repayment 
        plans, thereby reducing--not increasing--the number of Chapter 
        13s

        Conflicts among provisions that push debtors out of Chapter 7 
        (means testing) but restrict access to Chapter 13 (increasing 
        payments to secured creditors required to confirm a plan)

        A means tests that is impossible to administer, that will swamp 
        the bankruptcy courts, and that invites creditors to use their 
        superior resources to leverage debtors into making improvident 
        repayment agreements

        No review of reaffirmation agreements despite the scandals in 
        the bankruptcy courts in the last two years

Let me be clear. Although I believe that this bill can be improved from 
its current state, I fear that it is flawed to its core. It is flawed 
because its underlying structure is not designed to stop abuse or to 
increase personal responsibility. Whatever the intent of the drafters, 
the bill will make the system dysfunctional. This is why bankruptcy 
professionals in organized groups (such as the National Bankruptcy 
Conference), on their own (such as the bankruptcy judges and the 
bankruptcy law professors), and as representatives of responsible 
creditors (such as the Commercial Law League) have opposed this 
approach to reform.
    As lawmakers, you are entitled to make the policy decision to shut 
down the bankruptcy system. If this is your goal, however, it would be 
more efficient to simply repeal parts or all of Title 11.
                   elements of real bankruptcy reform
    Real reform is within your reach. Among the provisions that would 
improve the system for everyone--both debtors and creditors--are:

        Restrict repeat filings

        Limit property exemptions that are too high

        Deny bankruptcy distributions to creditors who do not play by 
        the rules, particularly creditors who violate rules on 
        predatory lending practices

        Implement systematic audits in combination with data 
        collection, making it possible to develop a more accurate 
        picture of what is happening in the system

        Reduce creditor overreaching by restricting access to 
        reaffirmations

        Improve credit disclosures so that borrowers can know their 
        actual balances, amortization rates, and effective interest 
        rates

        Require that advertisements and applications for home equity 
        loans and lines of credit disclose limits on the tax 
        deductibility of such loans

        Restrict the use of teaser rates, hidden fees, shortened 
        payment periods, and other practices that are designed to take 
        advantage of unsuspecting consumers

        Give courts wider latitude to dismiss Chapter 7 cases for 
        debtors who do not need bankruptcy relief, while avoiding 
        arbitrary guidelines that are easy for abusers to evade
                         why do all this work?
    Meaningful bankruptcy reform is a lot of work. Twenty-six disparate 
groups ranging from the Family Law Section of the American Bar 
Association to the Leadership Conference on Civil Rights to Mothers 
Against Drunk Driving have told you that this bill is not a good 
approach and that it is in fact counter-productive.
    The effort is worthwhile. The people who rely on this system are 
the people who are not here today.

        They are the owners of small businesses who struggle to get 
        back on their feet after their businesses have failed

        They are divorced women trying to raise families and stabilize 
        their financial lives

        They are elderly Americans who are disproportionately victims 
        of creditor scams and fraud

        They are families in which one or both parents have lost a job 
        or been downsized or outsourced into a job that pays less and 
        provides fewer benefits

        They are African American and Hispanic American homeowners who, 
        facing every form of housing, mortgage and insurance 
        discrimination, are making a last ditch effort to hang on to 
        their homes

        They are students, beginning their adult lives already so 
        deeply in debt with credit cards that they will never be able 
        to buy a home or support a family

        They are families without insurance and families with too 
        little insurance for the medical catastrophes that have come 
        their way

These people don't see themselves as debtors. They see themselves for 
what they are: nurses and construction workers, factory workers and 
shopkeepers, retired people and college students, teachers and 
cabinetmakers. They could be anyone in this room.
    The people who rely on this system are the people who live in your 
districts. On average, about one out of every 72 of the households in 
your districts will file for bankruptcy this year. Since 1994, about 
one in 20 of the households in your hometowns has declared bankruptcy. 
\2\ These are your constituents. They vote, use our public schools and 
libraries, go to our churches or other religious services, pay taxes. 
Most of them, as even the most aggressive proponents of the bill have 
conceded, find themselves in bankruptcy due to a catastrophic event 
that they could not weather. Some are profligate; most are not. All of 
them are overwhelmed by debt.
---------------------------------------------------------------------------
    \2\ Calculated from data provided by the Administrative Office of 
the United States Courts, March 1, 1999.
---------------------------------------------------------------------------
    Bankruptcy law is the last safety net of the middle class. A change 
that unbalances the system is not reform--it is wholesale revision that 
substitutes complex special interest legislation for a carefully 
balanced system that has worked for more than a hundred years. 
Bankruptcy is the last hope for the small businessman, the divorced 
woman, the African-American homeowner, the displaced executive, and the 
elderly couple facing a sharp slide out of the middle class into the 
lower class. It is a system worth saving.

    Mr. Gekas. Well, we thank Professor Warren.
    The Chair will allot itself 5 minutes for questions and 
answers.
    Professor Warren, reaffirmation is possible under current 
law, isn't that correct?
    Ms. Warren. Yes.
    Mr. Gekas. And so the evils that you attach to 
reaffirmation are not made worse by the provisions that we have 
in our bill, especially since they try to follow the Sears case 
guidelines. Don't you agree?
    Ms. Warren. No, Congressman, I don't. What you are doing 
with this bill is at every turn you are increasing the leverage 
of creditors to secure reaffirmations from debtors than you are 
doing----
    Mr. Gekas. What leverage do they now have in reaffirmation?
    Ms. Warren. I'm sorry?
    Mr. Gekas. What leverage do they now have in reaffirmation?
    Ms. Warren. They can threaten to bring lawsuits.
    Mr. Gekas. I'm saying, under the current law.
    Ms. Warren. They can threaten to bring lawsuits. They can 
say----
    Mr. Gekas. So reaffirmation under the current law is a tool 
of the creditors, you are saying?
    Ms. Warren. Yes, and you are increasing the power of that 
tool by giving them more reaffirmation--more 
nondischargeability provisions, by giving them the ability to 
bring an action under 707(b), and by cutting off their access 
to chapter 13, where they could deal with their debts in a 
repayment plan.
    Mr. Gekas. You mean separate from reaffirmation?
    Ms. Warren. That is right. All the other things----
    Mr. Gekas. What I am saying to you is that reaffirmation in 
our bill is not that distant from reaffirmation under the 
current law. If you can consider it as an evil tool of 
creditors to crush the debtor, it exists now, and what reform 
measures do you have for reaffirmation as of now?
    Ms. Warren. I believe that what we should do is we should 
restrict reaffirmation. If what we are going to try to do is 
find that 3 percent that----
    Mr. Gekas. Until this reform measure came up, had you 
offered----
    Ms. Warren. Yes, sir, I have.
    Mr. Gekas. To whom?
    Ms. Warren. To the National Bankruptcy Review Commission.
    Mr. Gekas. Did they adopt those?
    Ms. Warren. I am trying to remember. There were so many 
provisions----
    Mr. Gekas. I think not. I think not. But the point is, that 
is just one set of problems.
    Another set: You state in your written statement, and you 
made mention of it in your oral statement, that the people who 
are the debtors, the ones who are not witnessed here, I believe 
that we are taking into account their plight by setting the 
median income as a test pattern that puts most of them in full 
fresh-start status in chapter 7. We believe that. You may 
disagree with that, but the very litany of groups of people 
that you talk about we protect. African-Americans and Hispanic-
American homeowners we protect if they need protection. 
Students, families without insurance and families with too 
little insurance, all the catastrophes that you outline in your 
written statement, and which you reiterate in your oral 
statement, are protected in our bill. Do you dispute that?
    Ms. Warren. Yes, Congressman, I dispute it, and I dispute 
it vigorously.
    Mr. Gekas. Well, then we will have to continue the dispute 
and see----
    Ms. Warren. Well, would you like me to say why?
    Mr. Gekas [continuing]. Who can foster----
    Ms. Warren. Do you want me to say why?
    Mr. Gekas. Yes, of course.
    Ms. Warren. Good. I dispute it because the 
nondischargeability provisions have no income floor. They will 
apply to people who make $10,000. They will apply to people who 
make $8,000 a year. They will apply to everyone. There is no 
income floor on that.
    Mr. Gekas. What is the nondischargeability status today?
    Ms. Warren. There is some nondischargeability. You are 
increasing it, and you are making it worse for various 
debtors----
    Mr. Gekas. Even without our reform?
    Ms. Warren. If you are asking me, is the system bad today, 
I would say, yes, I think there are some tough parts in the 
system, but you are making it much worse.
    Mr. Gekas. It is bad, you are saying, the system today?
    Ms. Warren. Some parts of it. Yes, I think there are some 
of the nondischargeability provisions today that make no sense. 
But you are not making it better; you are making it worse; you 
are adding to them.
    Mr. Gekas. In a large sense, the criticisms that you visit 
against our reform measure exist in your criticism of the 
current system?
    Ms. Warren. No, Congressman. What I am saying is, you are 
taking a system that has balanced the power between debtor and 
creditor. Is it perfect at every point? No. I think there are 
some places where creditors have the advantage; I think there 
are some places where debtors have the advantage. And what you 
are doing, Congressman, is that you are adding 300 pages of 
provisions that do nothing but add leverage to the hands of the 
creditors.
    Mr. Gekas. Judge Jones, you mention in your Law Review 
article, and Professor Zywicki, that the critics of the means 
test, for instance, seem to put the blame on the credit card 
issuers, no matter what the cause of bankruptcy is. What do you 
say to that?
    Ms. Jones. Well, I think we demonstrated that the 
conventional wisdom in the bankruptcy community, which is 
precisely that argument against credit card issuers, is not 
just well-founded, for a number of reasons. A couple of them 
were stated by the MBNA fellow earlier here. But among those 
are we have seen a sea change in the way in which credit cards 
are used by the American people, and the terms and conditions 
of those credit cards--he referred to competition; that the 
card industry has gotten so much more competitive, that 
interest rates are going down; fees are being waived; a lot of 
other benefits are being given to customers. Most customers 
roll over their accounts every 30 days. Most customers never 
even incur a finance charge. So that whole argument is a house 
of cards and a red herring.
    May I make an observation about Professor Warren's comments 
on reaffirmation?
    Mr. Gekas. Yes, without objection.
    Ms. Jones. I was on the Commission. Professor Warren was 
the advisor to the Commission. I wrote 250 pages of dissents to 
the Commission report. Precisely what the Commission, the five-
member majority recommended was essentially to do away with 
reaffirmations altogether, because there is that paternalistic 
element in the bankruptcy academic community which says the 
debtors are too stupid to decide when they should take on more 
debt.
    The real problem in reaffirmations is twofold. One is that 
attorneys are not fulfilling their ethical responsibility to 
counsel their clients about whether a reaffirmation is a good 
deal or not. The Sears case is entirely separate because that 
was illegal activity taking place totally outside the 
supervision of the bankruptcy court. If the debtors' attorneys 
were doing their job, and even Mr. Klein I think recognized 
before the Commission, as did many, many practitioners and 
judges, the debtors' attorneys do not represent their clients 
well here. Furthermore, many courts do not take their 
responsibility seriously enough to oversee the reaffirmation 
agreements, as they required to do. So that problem could be 
cured today.
    Mr. Gekas. Yes. Thank you, Judge Jones.
    The gentleman from New York is recognized for 5 minutes.
    Mr. Nadler. Thank you.
    I would point out, of course, that Judge Jones' comments 
are a little in-apropos since most debtors do not have lawyers 
because they are representing themselves; they are pro se. So 
it isn't a question----
    Ms. Jones. That is not true, sir.
    Mr. Nadler. Well, it is true.
    Ms. Miller, you represent the Commercial Law League, which 
represents creditors as well as debtors, correct?
    Ms. Miller. That is correct, sir.
    Mr. Nadler. Now Mr. Hammonds from MBNA said in his 
testimony that this legislation would reduce litigation. Do you 
agree? And what would be the impact on commercial cases if we 
flood the bankruptcy courts with this sort of consumer 
litigation? How would that impact business liability, the 
payment of commercial debts, and jobs?
    Ms. Miller. Let me suggest the following: No. 1, I don't 
agree with his observation. If anything, the means test opens 
up the door to loads of litigation, not only in terms of 
whether or not you fall within or outside the standard, but 
also under the IRS standard--there is all sorts of litigation 
regularly over whether or not you fall within the standard. 
That same litigation is going to take place in this context.
    Once a trustee determines that a debtor doesn't meet the 
standards, he files a motion to have the case dismissed. The 
debtor is not going to necessarily roll over and not appear at 
that hearing. After that takes place, then he is going to--the 
next motion is going to be, nevertheless, I fall within the 
extraordinary circumstances to justify being here. That is 
going to be an intense factual determination. Then, provided 
you get past that, then you are going to have the trustee's 
motion filed against debtor's counsel for abuse.
    Now with all of these matters being brought before the 
court, it has to clog the docket and increase the cost and 
expense of administering these cases. And who is going to pay 
for that? Who is going to pay for the trustee's time to do 
that? Who is going to pay for the court's time?
    Mr. Nadler. How would this impact on commercial cases?
    Ms. Miller. With regard to commercial cases, it is not just 
the needs-based testing, but you have to look, as Professor 
Warren has indicated, and some of the other proposals that are 
in the Bill, the presumed nondischargeable in many cases pits 
the nondischargeable creditors against the trade creditors, the 
unsecured creditors who are looking for the same dollars. By 
increasing the nondischargeable class of creditors in a chapter 
13, and not considering classification issues at the same time, 
you are not making a chapter 13 plan feasible anymore.
    Another provision where you have an anti-lien-stripping 
provision for 5 years, if, in fact, you require that all of 
these claims be paid the full amount, whether or not it would 
be a secured claim under applicable State law, or would 
otherwise fit within section 506(a), again, there won't be 
anything left for the unsecured creditors. This is not a Bill 
that helps unsecured creditors get paid. It really is special 
interest in many, many ways.
    Mr. Nadler. Thank you. Let me ask one other question 
quickly, because I want to turn to Professor Warren.
    The Small Business Administration has criticized the 
inflexibility and the burdensome nature of the requirements on 
small business reorganizations. Do you believe that this 
section would needlessly force many small businesses into 
liquidation instead of survival?
    Ms. Miller. The Commercial Law League of America and the 
National Bankruptcy Conference have sponsored a joint small 
business proposal which differs in a number of important 
respects from the current small business proposal that is 
contained in Title 4 of H.R. 833. Let me see if I can tell 
you--and I do think that, without the changes that are 
contained in our joint proposal, the ability of a small 
business to succeed and successfully reorganize is going to be 
hampered significantly.
    Mr. Nadler. So don't go into details, except to say right 
now that, under this bill as written, you think it true that 
businesses that could survive now through reorganization would, 
in fact, be forced into liquidation?
    Ms. Miller. Particularly with the stringent deadlines and 
the lack of flexibility and the amount of small businesses, 85 
percent of them would fall within the debt limits that are 
currently----
    Mr. Nadler. Thank you. Thank you.
    Professor Warren, the National Bankruptcy Review Commission 
overwhelmingly rejected the type of means test in this bill, 
correct?
    Ms. Warren. That is correct.
    Ms. Jones. That is not correct. We didn't consider it.
    Mr. Nadler. Excuse me.
    Ms. Jones. I'm sorry.
    Mr. Nadler. Oh, I am sorry. Can I ask unanimous consent for 
additional time, so that Judge Jones can continue her 
interruption?
    Ms. Warren. Why don't you let her do that?
    Mr. Nadler. Seriously. Without taking off my time, I would 
like to hear from her.
    Mr. Gekas. I might take it off your time.
    Mr. Nadler. Well, then I don't want to hear from her. 
[Laughter.]
    Mr. Gekas. Then we will do it on my time.
    Mr. Nadler. That is fine. By all means.
    Mr. Gekas. What is the official action or non-action taken 
by the Commission relative to means testing?
    Ms. Jones. There was no action. We did not discuss or vote 
on means testing. Two Commissioners, myself and Jim Shepherd, 
alluded to it in our dissent with no specifics.
    Ms. Warren. I think we might want to add that it was a 
proposal that was in front of the Commission, and it was 
withdrawn by Judge Jones.
    Mr. Nadler. Okay. Now I was going to ask you, Professor 
Warren--thank you--I was going to ask you, I think in your 
dialog or your colloquy a moment ago, a few minutes ago, with 
the chairman, I think you were talking past each other, 
frankly. Forget the means test. We are not now talking about 
the means test. Is it your testimony that other provisions in 
this bill, in addition to the means test, such as the 
nondischargeability, various increases will greatly burden low-
income people, people who would never pass a means test?
    Ms. Warren. Congressman, I don't support this version of 
the means test.
    Mr. Nadler. I understand that.
    Ms. Warren. But if this Congress passed just this means 
test, and not another word that is in this bill, it would have 
this much [indicating] impact on debtors----
    Mr. Nadler. Very modest?
    Ms. Warren. If it turns out that they passed all of the 
other provisions and left out means testing, the effect on the 
very poorest debtors, the effect on the most stressed debtors, 
the effect on the debtors who can least afford to go into court 
and litigate it would be the same.
    Mr. Nadler. Thank you. I have one further question. I was 
talking last night to a legislative affairs representative of 
one of the major credit card companies, who specifically told 
me I was wrong in one aspect of my understanding of this bill. 
I won't tell you what I said. So let me just ask you the 
question. The question is----
    Ms. Warren. We will see if I can guess.
    Mr. Nadler [continuing]. Is it correct or not--does this 
bill operate in such a way that the bill provides that in 
chapter 13, you cannot confirm a plan unless the debtor can 
make certain payments? Now is it correct that some debtors, 
could be faced with a Catch-22 situation that they failed the 
means test because they are too rich for chapter 7; they are 
pushed into chapter 13, but, because they don't have enough 
income, they don't have enough actual disposable income, they 
cannot make the minimum payments; therefore, a plan cannot be 
confirmed? So they are too rich for chapter 7 and too poor for 
chapter 13, and can't get any relief at all?
    Ms. Warren. Yes, Congressman, that will happen.
    Mr. Nadler. Could you explain that, how that could happen?
    Ms. Warren. We are driving them out of 7 with the means 
test, but at the same time we are making it much more difficult 
to confirm a plan in chapter 13. We make it more difficult 
through eligibility. We make it more difficult through the 
requirements of what must be paid, how secured creditors must 
now be paid their entire debt under this bill, and interest. We 
make it more difficult for them to get into chapter 13. So that 
leaves, or will leave, a significant portion of people with is 
the ultimate Catch-22. They will be, as you quite rightly 
state, too rich for chapter 7 and too poor for chapter 13, 
which means their creditors can continue to collect from them 
forever.
    Mr. Nadler. Can I ask the Chair if we can continue for two 
more minutes? I have one question of Professor Warren and one 
of Ms. Miller, please.
    Mr. Gekas. We will compromise: 1 minute and 48 seconds, not 
a second more.
    Mr. Nadler. Thank you.
    Ms. Miller, could you just comment on what Professor Warren 
has just said? Do you agree with that?
    Ms. Miller. I agree with it, but I also would like to 
elaborate on the following: You also could have someone that 
doesn't meet the qualifications of 7 because they are too rich 
and, based upon their amount of debt limit, may not fit within 
chapter 13, and may be forced into an 11, which is completely 
unfeasible for individuals; it is very costly, extremely 
costly.
    Mr. Nadler. Thank you.
    And my last question is for Professor Warren. It is a 
different question. It is just for clarification. Now assuming 
that I had a job at which I was making $75,000 a year, and I 
was laid off from that job. I made $75,000 a year for the last 
6 years, and now I have very little or no income. I am making 
$15,000 or $20,000 a year for the last month since I got a job. 
Do I pass the means test because it looks backward? In other 
words, is the means test backward-looking, which may not 
reflect my current status? Second, is a chapter 13 repayment 
schedule supposed to be based on my presumed prospective 
ability to repay, so I assume that the means test and the 
repayment plan could look at completely different things?
    Ms. Warren. Yes, Congressman, I think that is exactly 
right. Not only is it backward-looking, which means you can 
pull in a period of high income, but it has a particularly 
pernicious effect on an area like bankruptcy, where the one 
thing we know about debtors in bankruptcy is they have highly 
erratic work schedules. These are people who have fallen off 
the high-income ladder and are on their way down.
    Many of the debtors in bankruptcy who have high annual 
incomes--I say, ``high''; this is all relative--$30,000, 
$40,000, $50,000 a year--have them because of earnings in the 
first part of the year. They have much lower earnings by the 
time of the filing, and will have much lower earnings in the 
future.
    Mr. Nadler. Because they got laid off or something?
    Ms. Warren. That is right. We have to remember that these 
debtors not only will fall into the means test screen, but they 
are not disaster-proofed because they filed for bankruptcy. The 
same problems that caused them to have trouble with their jobs 
beforehand are likely to continue to be there post-bankruptcy.
    Mr. Gekas. The time of the gentleman has expired.
    Mr. Nadler. Let me thank the chairman for his indulgence.
    Mr. Gekas. Seizing the gavel for a moment, Ms. Miller, in 
response to some of the questions, you felt that the means test 
would cause additional litigation and more cases going to 
appeal and for fact-finding, and all of that. Is that correct?
    Ms. Miller. Absolutely, sir.
    Mr. Gekas. Do you recall the testimony of Judge Kenner in 
which she was worried about reaffirmations, and that she felt 
that what should be done in any reform is to compel every 
reaffirmation to have judicial review. Do you agree with that?
    Ms. Miller. I am not prepared today, on behalf of the 
League----
    Mr. Gekas. Oh, you are not prepared?
    Ms. Miller [continuing]. To tell you whether or not I do or 
I don't----
    Mr. Gekas. I ask you to prepare for it.
    Ms. Miller [continuing]. But I will be happy to get you a 
position on that.
    [The information referred to follows:]

                              Commercial Law League
                                                of America,
                                       Chicago, IL, March 17, 1999.
Hon. George W. Gekas, Chairman,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Representative Gekas: During the Joint Hearing of the 
Subcommittee on Commercial and Administrative Law of the Committee on 
the Judiciary of the United States House of Representatives and the 
Subcommittee on Administrative Oversight and the Courts of the 
Committee on the Judiciary of the United States Senate held on March 
11, 1999, Judge Carol J. Kenner from the United States Bankruptcy Court 
for the District of Massachusetts, Boston, Massachusetts, recommended 
that all reaffirmation agreements be subject to court approval. During 
my subsequent testimony at the Joint Hearing you asked whether the 
Commercial Law League of America (the ``League'') supported this 
recommendation and whether it would result in ``clogging the courts,'' 
a criticism advanced by the League with respect to adoption of the 
``needs based'' provisions of the Bankruptcy Reform Act of 1999, H.R. 
833 (the ``Bill'').
    Prior to the Joint Hearing, the League had not yet considered 
whether all reaffirmation agreements should be subject to approval, and 
therefore, I was unable to respond to your question. Since the 
conclusion of the Joint Hearing the League has considered Judge 
Kenner's suggestion. While the League has supported the standards for 
reaffirmations contained in Section 110 of the Bill, it does not 
believe that it is necessary for the court to oversee and approve 
whenever a debtor seeks to reaffirm a debt.
    Prior to the 1994 amendments, Section 524 of the Bankruptcy Code 
(the ``Code'') required the court to approve reaffirmation agreements. 
In many cases, the courts did not conduct hearings, and the requirement 
of court approval was merely a procedural formality. That section of 
the Code was amended in 1994 to provide that the reaffirmation 
agreement be accompanied with a declaration or affidavit of the 
attorney that represented the debtor during the course of negotiating 
such an agreement. The declaration or affidavit must state that such 
agreement represents a fully informed and voluntary agreement, such 
agreement does not impose an undue hardship on the debtor or a 
dependent of the debtor, and the attorney full advised the debtor of 
the legal effect and consequences of the agreement and a default under 
the agreement. The court is only required to approve the reaffirmation 
if the debtor is not represented by counsel. See, 11 U.S.C. 
Sec. 524(c)(3)(A), (B) & (C). To return to the prior procedure is 
unnecessary and would clog the courts. Moreover, Judge Kenner believed 
that amendment of the procedure would address some of the abuses 
recently publicized in the Sears litigation. That litigation, however, 
was not the result of the standards for reaffirmations set forth in the 
Code, but rather creditors' failure to comply with these standards. 
Requiring all reaffirmations to be subject to court approval would not 
remedy that abuse.
    The League was honored to testify at the Joint Hearing last week, 
and would be pleased to comment on any additional concerns or queries 
regarding the pending bill or other matters of concern to your office.
            Very truly yours,
                                  Judith Greenstone Miller,
                           Co-Chair, Legislative Committee,
                       the Commercial Law League of America
                   and its Bankruptcy & Insolvency Section.

cc:
        Louis A. LeLaurin III, President of the League
        Mary K. Whitmer, Chair B&I Section
        Jay L. Welford, Co-Chair, Legislative Committee
        Max G. Moses, Executive Vice President
        David P. Goch

    Mr. Gekas. Because those two positions are a little bit 
opposite. On the one hand, if you agree with Judge Kenner, you 
are increasing caseload, number of cases, number of reviews, et 
cetera. In rejecting our means test, which you say is 
overloaded with the possibility of more cases, you have to 
bring that into balance for me.
    Ms. Miller. Let me suggest the following: You need to make 
a distinction----
    Mr. Gekas. I have already.
    Ms. Miller. No, no, no, no. There is a different 
distinction that I wanted to bring to bear. You need to make a 
distinction between a mandatory means test that must be applied 
in 100 percent of the cases, so that it potentially triggers 
more litigation before the court, versus a discretionary means 
test that gets applied when there is evidence that it needs to 
be applied.
    Mr. Gekas. But Judge Kenner's proposal doesn't account for 
any discretion at all. Her position is that every case should 
be reviewed in reaffirmation.
    Ms. Miller. But I am talking----
    Mr. Gekas. That is what she said.
    Ms. Miller. My discretion is not--my discretionary, 
flexible totality of circumstances test is with regard to the 
application of a means test----
    Mr. Gekas. I understand that.
    Ms. Miller [continuing]. And abuse, not with respect to 
reaffirmation.
    Mr. Gekas. But I am saying to you, it is possible that you 
don't mind, because you haven't made that clear yet, the 
prospect of having every single affirmation become the subject 
of a judicial review, but you do worry about the extension of 
the----
    Ms. Miller. I am not prepared to say that, although----
    Mr. Gekas. Yes, that is what I say.
    Ms. Miller.--I will say that this:
    Mr. Gekas. Thank you.
    Ms. Miller. The one thing I can say is we have been on 
record that sections 116 and 117 of the Bill that attempt to 
preclude remedies for abusive reaffirmation practices by 
precluding class actions, and, ultimately, what would have 
precluded the Sears litigation, is inappropriate, and, rather, 
you have to define your abuses more carefully.
    Mr. Nadler. You say inappropriate----
    Ms. Miller. Inappropriate to take a remedy away from those 
who don't have any other feasible remedy in order to remedy the 
abuse.
    Mr. Gekas. The time of the gavel has expired. The lady from 
Wisconsin is recognized for 5 minutes.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Had my time not expired in the questioning of the last 
panel, I had intended to ask a question concerning the role 
that consumer education, might play in responding to the crisis 
being articulated today. I recognize that much of that can't be 
reached through the bankruptcy code, although there are 
provisions certainly that can reach that. I am interested in 
the impact of real prevention in terms of consumer education in 
public schools all the way through counseling in the context of 
avoiding a bankruptcy at the other end.
    I am intrigued, Professor Warren, after hearing your 
research about the typical debtor, and the circumstances that 
they have experienced that might have led them to file 
bankruptcy. I am concerned that that might have diminishing 
effects of consumer education, if, in fact, the crisis is, for 
example, a healthcare crisis. I am actually surprised by how 
low the figure is, one in five. I know last October when the 
Census Bureau indicated 43.4 million uninsured Americans, and 
the number is going up. I am sure many of those people filing 
bankruptcy are healthy; yet, I am surprised that there isn't a 
greater crisis with regard to a healthcare origin.
    What do you think the role of education can be in 
responding to some of the tremendous increases we have seen in 
bankruptcy filings?
    Ms. Warren. Congresswoman, you ask a very thoughtful 
question. I can only give this answer: These are people, by and 
large, who just had problems. They stumbled in the road, that 
is the right way to think of them. For some of them, it would 
make no difference how educated they are. If a child develops 
leukemia and the expenses far exceed their medical coverage, 
this is a family that will end up in bankruptcy. A million 
dollars' worth of medical debt will do that to virtually 
anyone.
    But there is a factor that matters here: how much consumer 
debt these people take on during times that are not the 
troubled times. If we look at the data over this century, 
consumer debt and consumer bankruptcies move almost in perfect 
track. So that when Professor Zywicki wants to talk about 
whether there was a time when there was a lot less bankruptcy--
yes, and there was also a time when there was a whole lot less 
consumer debt. This data comes from Congressional Budget Office 
research and other research, Professor Ausubel, economist, 
independent economists, Professor Moss at the Harvard Business 
School. But when you look at it, consumer debt and bankruptcy 
are moving together.
    Where education can make a difference is to warn people, in 
effect, about the dangers of ever having taken on that much 
debt. A family that divorced in 1970 statistically had about 
$250 worth of consumer debt when they divorced. A divorce was 
still tough economically. You had to get two places to live, 
and you had to divide an income or two incomes that had 
supported one household, and break it into enough to support 
two households. That same family today, when it divorces, as we 
have seen them picked up in bankruptcy, is often carrying 
$15,000, $20,000, $30,000 worth of credit card debt. They 
simply cannot survive. They have spent so much of their future 
income, so much of their marginal income, they can't divide 
into two households and still manage to survive.
    The real point here, if you really want to talk about 
education, is in disclosures; it is in getting information to 
people to understand the risk they take on when they take on 
this kind of consumer debt. I fear, Congresswoman, that the 
world that we are living in is a world in which the financially 
sophisticated are learning how to prey on the financially 
unsophisticated. If we don't find ways to balance that, then we 
are in a lot bigger trouble than what is happening in this 
bankruptcy system.
    Ms. Baldwin. I would be happy to yield the rest of my time 
to the gentleman from New York.
    Mr. Nadler. Thank you.
    I would just ask, Professor Warren, you said you fear that 
the world we are living in is a world in which the financially 
sophisticated are learning new ways to prey upon the 
financially unsophisticated. Would it be a fair 
characterization of this bill to say that this bill, at best, 
would be a new way for the financially sophisticated to prey on 
the financially unsophisticated, as drafted?
    Ms. Warren. Yes, Congressman Nadler, I would say that.
    Mr. Nadler. Thank you.
    Mr. Gekas. That is on the verge of being insulting, but I 
will accept the insult as being the last note of the day.
    This hearing is now adjourned, with the thanks to the 
members of the panel who presented views that will get us 
thinking, I am sure. Thank you very much.
    [Whereupon, at 5:24 p.m., the subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of Hon. Russ Feingold, a U.S. Senator from the State 
                              of Wisconsin
    I want to thank Mr. Chairman Gekas for hosting this joint hearing 
with the Senate Subcommittee on Administrative Oversight and the 
Courts. I appreciate his hospitality and willingness to accommodate the 
schedules of those of us from the Senate.
    I also want to thank Mr. Chairman Grassley for the work he has done 
on the bankruptcy issue, and the courtesy that he and his staff have 
extended to those of us who have different views of what needs to be 
reformed in this bankruptcy system. I sincerely hope that once again we 
can work together to develop a product that will win a near unanimous 
vote in the Senate as last year's bill did.
    Bankruptcy legislation is obviously a challenging issue for all of 
us. The stakes are high and the different viewpoints are passionately 
expressed by all of the players involved, from the different types of 
creditors to bankruptcy judges, trustees, and practitioners, to 
consumers and debtors. My view is that the legislation that came out of 
conference last year and that is now embodied in this year's House bill 
is not a balanced piece of legislation. It tilts the scales too far in 
favor of creditors, creating a new special status for certain credit 
card debts to the detriment of women and families in this country 
seeking to collect alimony and child support and state and local 
governments seeking to collect tax liabilities.
    The bill contains some provisions that in my view are almost 
indefensible, such as the requirement that debtor's attorneys bear 
personal responsibility for the trustee's costs and fees if the debtor 
loses a motion to convert a Chapter 7 filing to Chapter 13. That 
provision will have the result of denying many debtors adequate legal 
representation, making them even more subject to abusive and predatory 
practices by creditors.
    I am very concerned that we are moving too quickly on this issue, 
and that if reform such as that contained in this year's House bill 
becomes law its unintended consequences may be even worse for consumers 
than the consequences we know about now. In light of that fear, Mr. 
Chairman, I cannot leave you without commenting on what to me is a very 
troubling aspect of this debate.
    More and more the sense I get from talking to both experts in the 
field and average folks is that while there are some helpful and 
discrete reforms that could be made to our bankruptcy system, it is not 
in need of the wholesale revision contemplated by many in this room. 
And yet, there has been a massive lobbying push by creditor interests 
for this legislation. New analysis of reports recently filed under the 
Lobbying Disclosure Act shows that banks and other financial services 
firms spent more than even the tobacco industry on lobbying in the last 
six months of 1998.
    And reports from good government organizations have noted that this 
lobbying is accompanied by substantial and highly targeted campaign 
contributions. I'm informed for example that one company gave a total 
of $25,000 in soft money to my party within days of the House passage 
of the bill last June. And another company gave $200,000 to the 
Republican party just two days after the conference report was issued 
last year, the very day that the report passed the House. Soft money 
giving by the consumer credit industry to our political parties 
increased from $1.2 million in the 1992 election cycle to more than 
$5.5 million in the 1996 cycle.
    Mr. Chairman, I ask that studies by Common Cause and the Center for 
Responsive Politics on campaign contributions by the consumer credit 
industry be placed in the record of this hearing.
    We need to be cognizant as we proceed here of the extent to which 
bankruptcy reform has come to be seen as a gift to certain special 
interests. We bear a heavy burden, I believe, to make sure that we are 
serving the public interest with this land of far reaching legislation. 
We cannot meet that burden unless we slow down and open our minds to 
the recommendations of nonpartisan experts in this field and try to 
make sure we don't make some very big mistakes with this bill.
                               __________
   Prepared Statement of Hon. John Conyers, Jr., a Representative in 
                  Congress from the State of Michigan
    The legislation introduced by Rep. Gekas being considered by the 
House and Senate is an extreme and one-sided bill. Although the 
legislation is good for the credit card industry, it is bad for low 
income people, bad for women and children, bad for minorities and 
seniors and bad for working Americans. I plan to do everything in my 
power to fight this legislation and see that it is either defeated or 
vetoed.
    First off, the bill's means test is fatally flawed--The legislation 
attempts to impose a one-size fits all income and expense test based on 
IRS standards to determine who is eligible for bankruptcy relief and 
how much they are required to pay their creditors. The problem is that 
the formula fails to take specific account of such important items as 
child care payments, health care costs, the costs of taking care of ill 
parents, and educational expenses, to name but a few glaring loopholes.
    Secondly, the bill grants creditors unfettered new rights to file 
threatening new discharge motions against persons with income well 
below the median. These motions intimidate poor debtors into 
reaffirming their credit care and other unsecured debt, often at the 
expense of being able to pay their mortgage and other priority 
obligations.
                               __________
             Questions from Senator Grassley for Panelists
                        questions for panel one:
Larry Nuss
    1) How much has the Cedar Falls Credit Union lost due to bankruptcy 
filings?
    2) Could you comment on how many chapter 7 cases you encounter 
versus the number of chapter 13 cases you encounter?
Bruce L. Hammonds
    1) How do you respond to criticism that the credit card industry is 
largely responsible for the explosion of bankruptcy filings by passing 
out credit too easily?
    2) Your industry has experienced high losses recently due to 
bankruptcy. If we don't do bankruptcy reform, in your view, will we see 
a rise in interest rates for loans to consumers?
Dean Sheaffer--National Retail Federation
    1) In light of the Sears case, is the Retail Federation currently 
developing guidelines for its members on how to lawfully seek 
reaffirmations?
Judge Kenner
    1) I am very sympathetic to idea that there's a problem with 
debtors being coerced into reaffirmations by abusive or deceptive 
creditor practices. However, it seems to me that there are already 
harsh sanctions in place to punish improper creditor conduct. Just look 
at the Sears case where post-discharge injunction combined with State 
and Federal deceptive practices law resulted in Sears paying over 160 
million dollars to settle class action settlements, and penalties. 
Given what happened to Sears, why shouldn't conclude that what we need 
is better law enforcement of existing laws, not new laws?
    2) As you know, the judicial conference uses a formula that 
assesses the workload of bankruptcy judges in order to figure out when 
to request new bankruptcy judges. In your written statement, you 
suggest that we need more court hearings and judicial review of 
reaffirmation. Of course, those proposals are likely to cause the 
formula to show that we need more and more bankruptcy judges. Have you 
considered how your proposal to require court approval for all 
reaffirmations affect the staffing formulas? Have you run your 
proposals by the relevant committees of the judicial conference?
                        questions for panel two:
Judge Jones
    1) You are a Federal Appeals Court judge who hears bankruptcy 
appeals. Do you think a bright-line rule with respect to means-testing 
helps judges make clear and consistent decisions?
    2) During your tenure on the Bankruptcy Review Commission, did you 
propose a means-testing provision?
Professor Zywicki
    1) You mentioned that means-testing would affect a maximum of all 
bankruptcy filers, do you know what percentage of filers are reported 
to be repeat users of their ``fresh start'', and can you comment on 
what this number suggests about the current remedies in the consumer 
bankruptcy system?
    2) How will means-testing improve the consistency and objectivity 
in the application of the bankruptcy code?
                               __________
               Followup Questions from Senator Torricelli
                               for mbna:
    In the Senate bill that passed 97 to 1 last year, there was a 
provision requiring that credit card monthly statements disclose 
additional information about the cost of that credit, most of which I 
imagine you already have in your computers. That provision did not 
survive in the Conference Report and is not in the new Gekas bill. In 
its place appeared a provision that gives more standard information, 
but that most people believe will not be very helpful, and some people 
believe may be misleading. Do you support the idea of giving consumers 
more information about the cost of their credit?
    If we are going to overhaul the bankruptcy system in response to 
concerns about credit industry losses, we are going to need to evaluate 
the actual loss data. Can you provide us with that information?
    It generally is reported that credit card lending may be the most 
profitable lending activity, notwithstanding all of these bankruptcies. 
Except for teaser rates (or ``permanent introductory rates'') the 
average interest rate on credit cards remains pretty high, particularly 
for many middle class and the working poor, even though your cost of 
funds is low. How can I be sure that if we make the changes you want, 
that this time you are going to pass along the savings to my 
constituents?
    It is all well and good to encourage people to file for chapter 13 
to pay more of their debts. However, the current success rate in 
chapter 13 is not so good--\2/3\ of confirmed plans fail, many before 
paying any unsecured debt. Do you have any data on how you fare in 
chapter 13 today?
    How would the proposed change to the valuation of secured claims 
(e.g., the elimination of the stripdown and adding to the value any 
past interest and penalties) affect the goal of the means test to 
increase the return of unsecured creditors?
                           for judge kenner:
    Based on your experience over the past several years, if you had to 
choose between the bankruptcy laws as of 1983 (mandatory court 
reaffirmation review) and the bankruptcy law of today (no mandatory 
court reaffirmation review), which do you think best fulfills our 
intent to provide meaningful debt relief in chapter 7 for honest, 
hardworking, middle class American families?
    You mentioned in your testimony that some debtors reaffirm debts 
after being accused by a credit card company of committing an act that 
makes those debts nondischargeable, whether or not they are guilty, 
because they cannot afford to defend themselves in a court hearing. 
What will be the effect of adding more exceptions to discharge that 
make it easier for credit card companies to argue that their debts are 
nondischargeable?
    Some creditor representatives have dismissed suggestions that 
widespread illegal reaffirmation practices demonstrate that 
reaffirmation review not necessary because ``the system works.'' Are 
they right?
                            for gary klein:
    We have been told in the past that there is a difference between 
provisions that are ``debtor friendly'' and those that are ``consumer 
friendly''. For example, some people have argued that provisions 
protecting the fresh start for honest families work hardship on other 
consumers who never file for bankruptcy. And, on the flip side, we have 
been told that by restricting debtors' rights, we will make the price 
of credit, goods and services cheaper for nonbankrupt consumers. As an 
advocate of both debtors and of consumers, can you comment on whether 
this distinction is real? Are the interests of bankrupt debtors and 
middle class consumers conflicting?
                    for credit union representative:
    Credit unions tend to be very careful lenders, leading to far lower 
loss rates than other types of creditors. Some of your members/
borrowers find in their mailboxes solicitations for more credit. 
Certainly no one is forcing them to accept it, but some of them 
underestimate their financial vulnerability and are attracted by the 
``teaser'' interest rates. With this extra debt burden, they cannot 
weather hard times and default on their obligations. Does it bother you 
that the lending practices of large for profit lenders are increasing 
your losses? Do you think you deserve better treatment in bankruptcy 
because you at least are trying to lend only to those people who are 
more likely to be able to repay?
                      for bon ton representative:
    In light of the problems retailers have had with their 
reaffirmation practices, how can one justify banning class actions for 
illegal reaffirmation practices when class actions often are the only 
way that middle class people have a remedy for wrongdoing against them?
    In light of the problems retailers have had with their 
reaffirmation practices, do you agree that more should be done in this 
bill to respond to creditor overreaching? What is the justification for 
focusing almost exclusively on debtor abuse?
    Do you offer shoppers one time incentives to sign up for a Bon Ton 
charge card? Are obligations on Bon Ton charge cards secured or 
unsecured by the items your customers purchase in your store? If they 
are secured, how do you make your clients aware that their purchases 
are secured? If they are secured, does this mean that you offer an 
interest rate that is lower than the interest rate on the average 
unsecured credit card?
    Let's say I am a Bon Ton customer. I buy a variety of reasonably 
priced items at your store and have carried a balance on my charge card 
over the past several years, making only the minimum payment each 
month. If I file for bankruptcy today, is my debt to your store secured 
by all of these items? Can you come and take them away if I do not pay 
after bankruptcy?
                         for professor warren:
    Although there has been a lot of focus on the means test, can you 
explain the practical effect on families and children of making it 
easier for credit card companies to claim that their debts are 
nondischargeable and survive bankruptcy? The First Lady, women and 
children advocates, and others have expressed a lot of concern about 
those provisions.
    In the prior panel, Judge Kenner explained how current 
reaffirmation law was not fulfilling our Congressional intent to 
prevent certain more aggressive creditors from nullifying the 
discharge, to the detriment of other creditors and the debtor's family. 
Why shouldn't the debtor be free to agree to pay debts if he so 
chooses?
    You have told us that changes to one provision can have unintended 
effects on other provisions. Can you close the link for us? What is the 
connection between imposing a means test, increasing the exceptions to 
discharge for credit card debts, and failing to reform reaffirmation 
practice?
    You and others have linked the bankruptcy filing rate to consumer 
debt such as credit cards and the like. Yet, the consumer credit 
industry has told us that this explanation cannot be correct because 
the percentage of credit card debt in bankruptcy cases is under 20% and 
therefore is too small as compared to the total debt in bankruptcy to 
be the culprit for the filings. How do you respond to this?
    No one can refute that the filing rate is very high. Can you 
explain why your research and research being done at the Harvard 
Business School suggests that the increase is not attributable to a 
decline in stigma?
                for judy miller (commercial law league):
    Some people have argued that individuals and groups voicing 
opposition or concerns about the bill are simply trying to block reform 
and believe that abuses should not be addressed. If this is the case, 
why is a creditor oriented group like the Commercial Law League of 
America voicing objections about the bill?
    You seem to have some serious concerns about the means test in this 
bill and its ability to identify debtors who can pay back their 
unsecured debts. As a representative of many unsecured creditors, your 
opinion on this is obviously significant. Are you saying that unsecured 
creditors are unlikely to benefit from this means test? If so, how 
should we fix this problem?
                            for judge jones:
    You have commended Congress for rejecting findings of the National 
Bankruptcy Review Commission, of which you were a member. However, 7 
out of 9 Commissioners chose not to recommend to Congress that it 
consider a formal means testing system. Now we have heard that the only 
recent independent study on this subject, sponsored by the American 
Bankruptcy Institute, found that even if we did turn the system upside 
down, only a small portion of chapter 7 debtors could pay even 20% of 
their debts. In addition, we have a witness here who often represents 
unsecured creditors and who is telling us that she thinks the means 
test does not work. In light of these factors, why should we move to a 
formulaic means testing system?
    Supporting the concept of needs based bankruptcy is one thing; 
supporting the details of this bill's means testing approach is 
another. Even if you support a ``means based'' system in theory, aren't 
you concerned by the logistical problems that have been identified 
regarding this means test by the Commercial Law League, trustees, 
judges, and the National Bankruptcy Conference?
    As a judge, do you think it is appropriate to make debtors' lawyers 
personally and financially responsible if their clients are found to 
have filed under the wrong chapter?
    Even if we make it less ``easy'' to file for bankruptcy so that the 
filing rate goes down, it seems to me that we have looked at only one 
half of the problem because some people are going to default on their 
obligations whether or not they ``discharge'' their debts in 
bankruptcy. Can you comment on this? Do you think that more needs to be 
done to help prevent people from incurring so much debt in the first 
place?
    Using conservative economic theories, some researchers believe that 
restricting bankruptcy laws will increase defaults and ultimately 
increase bankruptcy filings. Do you disagree with those conservative 
economists?
                         for professor zywicki:
    The means test in this bill relies heavily on the IRS collection 
allowances. We have heard lots of concerns about these allowances, even 
from those who take no position on the bill generally. One problem is 
the ``other necessary expense'' category. Since it clearly was not 
designed for this purpose, the items that fall into the category are 
totally discretionary with the IRS and are approved on a case by case 
basis (see IRS regulations 5323.434). Thus, we have no guarantee that 
these expenses may be deducted from the means testing formula. This is 
not simply a minor inconvenience; families in bankruptcy will need to 
use this category for such things as health care, child care, 
disability insurance, union dues, and court-ordered payments (such as 
support), because the IRS collection allowances do not cover these 
critical expenses anywhere else. How is this supposed to work?
    The means test in this bill requires a trustee to do a complete 
ability to pay analysis under the means test in every single chapter 7 
consumer case at the very beginning of the case, 10 days before the 341 
meeting, before the trustee has even met any of the debtors. People who 
actually work in the bankruptcy system say that this simply is not 
feasible. In addition, the trustees would not even be compensated for 
this extraordinary expenditure of time. Don't you think that there are 
serious feasibility requirements with the means test?
    As a law professor who has studied the bankruptcy system, do you 
believe that it is appropriate to give lawyers a financial disincentive 
to file chapter 7s for their clients if they believe that doing so is 
in the best interest of their clients? Are you concerned that creating 
such financial disincentives for lawyers to act in their clients' best 
interests will run afoul of other ethical requirements?
                               __________
             Followup Questions from Senator Russ Feingold
                           to bruce hammond:
    1. You testified that the number of consumer bankruptcy filings in 
1998 represents an increase of nearly 400% since 1980.

          A) Please provide comparative information on the amount of 
        credit card debt issued by MBNA in 1980 and 1998.

          B) Please provide comparative information on MBNA's non-
        bankruptcy losses in 1980 and 1998.

          C) Please provide comparative information on MBNA's 
        bankruptcy losses as a fraction of total credit card debt 
        outstanding in 1980 and 1998.

          D) Please provide the same information for the industry 
        generally.

    2. You testified that it is ``estimated that more than $40 billion 
in consumer debt--approximately $400 for each American family--was 
erased as a result of bankruptcy in 1998.'' Putting it another way, you 
later testified that the ``Federal consumer bankruptcy system provided 
an estimated $40 billion of relief to debtors without either objective 
standards or systematic procedures for determining the actual relief 
needed by debtors.'' We also heard in the hearing that the ``hidden 
bankruptcy tax'' is now up to $550 a year per family, leading to the 
suggestion that bankruptcy legislation will result in a $550/year 
rebate to the American people. Please respond to the following 
questions:

          A) Do you have a source for the $400/$550 a year figures 
        other than the last year's WEFA Group study, which the General 
        Accounting Office determined was not reliable? See ``The 
        Financial Costs of Personal Bankruptcy'' Letter from Associate 
        Director Richard Stana to the Honorable Martin T. Meehan, GAO/
        GGD-98-116R.

          B) Can you explain why the bankruptcy loss figure grew by 35% 
        (from $400 to $550 in a single year) when the growth in 
        bankruptcy filings for the same period was about 1%?

          C) Does the $40 billion figure account for debts that were 
        found to be nondischargeable or that were reaffirmed?

          D) Does the $40 billion figure account for the fact that more 
        than half of all chapter 13 debtors never discharge any debt?

          E) Does the $40 billion figure account for losses that you 
        would have experienced even if the borrowers never filed for 
        bankruptcy?

    3. You testified: ``Inevitably, these losses are passed on to all 
consumers in the form of higher rates and higher prices for goods and 
services.'' However, over the past decades there has not been a 
correlation between the cost of credit and the cost of funds or the 
number of bankruptcy filings; indeed, interest rates have remained 
remarkably constant over the past 18 or so years, even though the 
bankruptcy rate was not. If one argument for reforming the bankruptcy 
laws in the ways that you support is that it will lower interest rates 
and prices for our constituents, can you provide us with data showing 
how losses from bankruptcy have affected the price of credit offered by 
MBNA in the past?

    4. You testified: ``Consumers also are harmed by increased 
bankruptcies when creditors, in an effort to reduce losses, tighten 
their credit standards and thereby decrease credit availability.'' 
Similar testimony has been submitted throughout the 20th century in 
connection with requests for changes to the bankruptcy system, 
particularly in the early 1980s when Finn Casperson of Beneficial 
Finance and other representatives of the credit industry warned that 
consumer credit would grow scarce if the bankruptcy system was not 
reformed--and specifically if means testing were not adopted.

          A) What happened to the industry prediction of the 1980s? 
        Hasn't credit grown in the intervening years, not contracted?

          B) If credit restriction is the predicted result of high 
        bankruptcy filings and losses, have you restricted credit to 
        reduce your losses following the big jump in bankruptcy filings 
        in 1996? If so, how?

    5. What are MNBA's policies on extending credit to families that 
have filed for bankruptcy?

          A) Does MBNA offer credit to individuals within 2 years after 
        they receive a chapter 7 discharge? If so, on what terms?

          B) What are the industry practices on offering credit to 
        individuals who have filed for bankruptcy?

    6. With respect to Chapter 7 cases involving debt owed on and MBNA 
credit card:

          A) In what percentage of such cases does MBNA challenge the 
        dischargeability of the debtor's debt to MBNA?

          B) Of those cases where dischargeability is challenged, how 
        many cases are actually litigated?

          C) What percentage of debtors do not contest your charge and 
        either admit nondischargeability or reaffirm the debt without 
        any specific findings of fraudulent behavior?

    7. I understand that some 3.5 billion credit card solicitations and 
offers go out each year. Do you think that the credit industry bears 
any of the responsibility for the increase in personal bankruptcies in 
this country?

    8. You testified that the current bankruptcy system's lack of means 
testing ``undermines not only the integrity of the U.S. bankruptcy 
system, but also traditional obligations of individual 
responsibility.''

          A) Do you believe that MBNA and the consumer credit industry 
        generally has a corporate responsibility to verify the ability 
        to pay of the consumers to whom you offer credit cards?

          B) Please explain how many bankrupt consumers with relatively 
        low incomes who end up in bankruptcy have so many credit cards.

    9. You testified that ``the current bankruptcy system also fails 
the debtors it is intended to help, because it provides short-term 
relief without helping debtors avoid the same financial failure in the 
future.''

          A) Please explain how the means test in H.R. 833 helps 
        debtors avoid the same financial failure in the future, 
        particularly when the means test benefits those debtors who 
        take on larger debts and declare higher expenses.

          B) Do you agree that including additional disclosures on 
        monthly credit card statements that help borrowers understand 
        the cost of credit they are incurring by advising them of their 
        amortization rate and the long term financial effect of making 
        only the minimum monthly payment would help borrowers avoid 
        financial failure in the future?

    10. You testified that the implementation of means testing would 
introduce enormous efficiencies into the bankruptcy system.

          A) Section 102 of H.R. 833 requires that trustees conduct a 
        means test review of every single chapter 7 debtor, even those 
        with incomes far below the national median, or even below the 
        poverty level. Do you believe it is efficient to test all 
        chapter 7 debtors, regardless of their income?

          B) If an individual with income below the poverty level can 
        pay 20% of her debts because her debts are not large in an 
        absolute sense although they may be overwhelming as compared to 
        her disposable income, do you think such an individual should 
        be denied chapter 7 debt relief and instead should be required 
        to obtain relief only after completing a 3 to 5 year payment 
        plan?

          C) The means test in H.R. 833 relies on the Internal Revenue 
        Service collection allowances. However, many expenses do not 
        fit the categories of expenses that are automatically permitted 
        under the IRS allowances. Instead, according to IRS regulation 
        5323.434, such expenses as health care, child care, dependent 
        care for elderly invalid or disabled, or disability insurance 
        are permissible only on a case by case basis by the IRS. Since 
        the bill requires trustees to scrutinize all chapter 7 filers 
        for ability to pay, how would an elderly person filing for 
        chapter 7 obtain the necessary permission to include her 
        expenses for health care and dependent care?

    11. You testified that those debtors who were found to be able to 
pay the requisite portion of their debts under the means test ``would 
automatically enter a Chapter 13 repayment plan.'' However, the means 
test as currently constituted in the House bill does not account for 
several significant factors, e.g., amounts in default on secured debts 
and chapter 13 administrative expenses.

          A) Isn't it the case that some debtors who are ejected from 
        chapter 7 under the means test in fact will not be able to pay 
        20%--or any--of their unsecured debts once sent to chapter 13?

          B) If so, is it cost-justified to send such debtors to 
        chapter 13 when the annual costs of administering a chapter 13 
        case (approximately $1,200 per year per case under the current 
        system) outweigh the distributions made to unsecured creditors?

    12. Do you disagree with the testimony of Judith Greenstone Miller 
of the Commercial Law League of America, who cited the finding of the 
National Association of Bankruptcy Trustees (chapter 7 trustees) that 
no more than 1 in 10 cases converted under the proposed means test will 
actually be able to confirm or complete a repayment plan? If you do 
disagree, please provide any studies or data that support your view.

    13. You stated in your testimony that ``bankcard debt represents 
less than 16% of total debt on the average bankruptcy petition.''

          A) Please provide us with the source of this statistic and 
        the underlying data supporting it.

          B) Since the 16% figure presumably includes secured debt, 
        what percentage of unsecured debt on the average bankruptcy 
        petition that is bank card debt?

          C) What percentage is credit card debt, including non-bank 
        card debt?

    14. You mentioned in your testimony that credit cards cannot be the 
cause of the high bankruptcy filing rate because credit cards accounted 
for a mere 3.7% of consumer debt in 1997 according to the Federal 
Reserve Board. However, you also have told us that in bankruptcy, 
bankcard debt alone (presumably a subset of all credit card debt that 
would include cards of retailers and other types of credit card 
issuers) is 16% of all debt, including secured debt--meaning that 
bankcard debt and total credit card debt are a far higher percentage of 
total unsecured debt in bankruptcy than outside of bankruptcy. Doesn't 
the disproportionately high amount of credit card debt in bankruptcy, 
as compared with the population generally, indicate that credit card 
debt is a serious problem for those individuals who ultimately file for 
bankruptcy?

    15. Your testimony indicates that more than 96% of credit card 
accounts pay as agreed, and only about 1% end up in bankruptcy, leaving 
the other 2 or 3% of credit card accounts to be in default without 
resorting to bankruptcy. This suggests that more credit card accounts 
default without bankruptcy than with bankruptcy.

          A) Even if we restrict the bankruptcy laws as you recommend, 
        what makes you think that this 1% will be collectible when 2 or 
        3% of your accounts default without discharging their debts 
        under the bankruptcy system?

          B) What are MBNA's losses, in dollars, from nonbankruptcy 
        defaults?

          C) How do you address the 2 to 3% of accounts that default 
        without bankruptcy? What types of collection or enforcement 
        procedures do you typically use?

    16. Most discussions of bankruptcy reform have focused on the means 
test, which was the subject of the panel on March 11. However, as Gary 
Klein pointed out at the hearing at which you testified, the bankruptcy 
bill spans 300 pages and contains hundreds of amendments affecting 
consumer bankruptcy, many of which we have had little or no opportunity 
to debate, but we know are quite significant. Since your testimony 
indicates that means testing is extremely important to you, does this 
mean that you would be willing to accept a means testing amendment and 
forgo the remainder of the other consumer bankruptcy amendments, such 
as the various provisions expanding the nondischargeability of credit 
card debt?

    17. I am interested in your view of the appropriate public policy 
to be served by a bankruptcy system. Please rank the following 
potential creditors in a hypothetical bankruptcy case. Who should be 
paid first, second, etc. from the limited pool of funds available in a 
bankruptcy case?

        Credit card company.
        Secured lender on a purchase of an automobile.
        Other secured creditor.
        Taxing authorities.
        Spouse who is owed child support and/or alimony.

    18. Please compare two hypothetical cases. (1) Suppose someone 
takes out a cash advance of $500 on one of your credit cards to go 
gambling. She loses every penny. A month later she declares bankruptcy. 
(2) Suppose another person takes out a cash advance of $500 to pay for 
food for her children and an unexpectedly high heating oil bill. A 
month later, she files for bankruptcy. Should those two debts to you be 
treated the same way in bankruptcy?

    19. On October 9, 1998, two days after the conference report was 
filed and the very day that the House passed the conference report, 
MBNA contributed $200,000 to the National Republican Senatorial 
Committee.

          A) As CEO, are you involved generally in the decisions to 
        make soft money contributions to the political parties?

          B) Were you involved in the decision to make this particular 
        donation?

          C) How are decisions on soft money contributions made in your 
        company? Who participates in such decisions? What criteria are 
        followed in making such decisions?

          D) Why did MBNA make a $200,000 donation to the NRSC on 
        October 9, 1998?

    20. Do you believe there are any creditor abuses in the bankruptcy 
system that should be addressed in bankruptcy reform legislation? If 
so, what are they?
                             to larry nuss:

    1. You report in your testimony that National Credit Union 
Administration data show that credit unions had approximately 253,000 
members file for bankruptcy in 1998, an increase over the 250,000 
filings in 1997.

          A) What was the total number of members in the credit unions 
        that were the subject of the NCUA statistic in 1998 and 1997, 
        and the percentage of credit union accounts in bankruptcy in 
        those two years?

          B) Unless credit union membership declined significantly in 
        1998, a 3,000 increase in credit union member bankruptcy 
        filings in 1998 (just over a 1% increase from the previous 
        year) is probably far below the nationwide filing rate 
        increase. Do you attribute this lower increase to self-
        correction in lending and/or the high standard of care 
        generally used by credit unions when lending to their members?

    2. You report that the Credit Union National Association estimates 
that almost half of all credit union losses in 1998 were bankruptcy-
related and that those losses reached $684 million.

          A) Does this mean that the bankruptcy losses are $684 million 
        or the total losses are $684 million?

          B) To enable us to determine the overall credit union default 
        rate and bankruptcy default rate, what was the aggregate loan 
        portfolio of all credit unions included in these statistics?

    3. According to your testimony, your credit union currently has 
8,300 members. In 1998, 18 of your members (approximately .02%) filed 
for bankruptcy. The filing rate among your membership is far lower than 
the national filing rate. Although the national nonbankruptcy filing 
rate has increased substantially since 1995, your filing rate in 1998 
(approximately .02%) is the same as in 1995 (assuming you had 8,300 
members then as well).

          A) To verify that your filing rate was approximately the same 
        in 1995 as it is in 1998, how many members did you have in 
        1995?

          B) Do you think that if other lenders were as careful as you 
        are, that the market would fix the current ``bankruptcy 
        crisis'' without the proposed government intervention?

          C) Although your filing rate is nearly identical in 1998 to 
        your 1995 rate (assuming that the number of members has not 
        changed substantially), your losses appear to have increased 
        from $19,848 in 1995 to $34,813 in 1998. If you adjusted your 
        numbers for inflation and reported your 1995 losses in 1998 
        dollars, how would your losses compare in those two years? If 
        there still is a substantial difference, what accounts for that 
        difference in losses?

    4. The losses in dollars that you experienced in 1998 that you have 
attributed to bankruptcy are only .014% of your loan portfolio. Does 
this extremely low dollar loss rate, along with your low filing rate, 
provide further evidence that bankruptcy losses can be contained by the 
market without unduly restricting credit availability overall?

    5. You testified that reaffirmation agreements have been a 
significant factor in reducing your losses.

          A) How many of your bankrupt members reaffirmed one or more 
        debts to your credit union in 1997 and 1998?

          B) What proportion of those reaffirmations was for partially 
        secured car loans?

          C) What proportion was for credit cards or other unsecured 
        debts?

          D) What was the total dollar amount of debt that your members 
        reaffirmed in 1997 and 1998?

    6. Your testimony indicates that you believe that your 
reaffirmation agreements confer a benefit on the debtors who reaffirm 
those debts. As you know, you may be one of several lenders asking a 
debtor to reaffirm her debts, and it may be financially infeasible for 
that debtor to honor all of those commitments. Reaffirmation of other 
debts may interfere with the debtor's ability to repay your credit 
union, and other lenders might use more aggressive collection practices 
and higher fees to encourage the debtor to pay them first.

          A) If debtors were not allowed to reaffirm any unsecured 
        debt, would most of your members continue to pay you 
        voluntarily?

          B) Do you believe that the benefits your members receive from 
        reaffirming debts to you would make them more likely to pay you 
        than some of their other creditors?

          C) Would you support court review of reaffirmation agreements 
        if it did not necessarily require a hearing and could be done 
        inexpensively?

          D) Do you believe that reaffirmation agreements should 
        clearly state the terms of the agreement so that debtors can 
        understand the financial consequences of the reaffirmation, 
        similar to the Truth in Lending Act requirements? If not, why 
        not?

    7. You testified that you support needs based bankruptcy, in part 
because you believe that more of your members could repay some of their 
debt in chapter 13. However, the national statistics on chapter 13 plan 
completion are low, and many do not distribute much, if any, payments 
to unsecured creditors.

          A) Of the chapter 13 cases your members have filed since 
        1995, how many were completed or still in payment?

          B) How many dollars of unsecured debt have been collected 
        from in the chapter 13 cases of your members since 1995?

          C) If one of your members files for bankruptcy, are you 
        better off financially if the member files for chapter 7 and 
        reaffirms her debt to you in full rather than filing for 
        chapter 13 and paying all of her debts pro rata over several 
        years?

    8. Most discussions have focused on the importance of the means 
test, which was the subject of the panel on March 11. However, as Gary 
Klein pointed out at the hearing at which you testified, the bankruptcy 
bill spans 300 pages and contains hundreds of amendments affecting 
consumer bankruptcy that have received little or no attention. Would 
you be willing to accept a means testing amendment and forgo the 
remainder of the other significant consumer bankruptcy amendments, such 
as the various provisions expanding the nondischargeability of credit 
card and retail charge card debt and the provisions inflating the value 
of nominally secured debt?

    9. In recognition of the lower loss rates and sometimes more 
responsible consumer lending practices of credit unions, should there 
be special provisions in this legislation that apply only to credit 
unions? Should credit unions be treated differently with respect to 
reaffirmation?

    10. Do you believe there are any creditor abuses in the bankruptcy 
system that should be addressed in bankruptcy reform legislation? If 
so, what are they?
                           to dean scheaffer:
    1. Your testimony on behalf of the National Retail Federation 
focuses exclusively on abuse of the bankruptcy system by debtors and 
does not make any mention of the fact that quite a few retailers have 
admitted to committing bankruptcy fraud on a widespread basis.

          A) Has Boscov's engaged in any post-bankruptcy collection 
        activity without filing reaffirmation agreements?

          B) Does Boscov's think that the current laws supervising 
        reaffirmation agreements have been adequate?

          C) Does Boscov's support the provisions in the House bill 
        that eliminate class actions to pursue creditors who have 
        systematically violated bankruptcy law to the detriment of 
        consumer debtors? If so, why?

    2. Do you believe there are any creditor abuses in the bankruptcy 
system that should be addressed in bankruptcy reform legislation? If 
so, what are they?

    3. How many of your bankrupt customers reaffirmed their debts to 
Boscov's in 1997 and 1998? What was the average amount of the debt?

    4. How many dollars owed to Boscov's were reaffirmed in bankruptcy 
cases in 1997 and 1998?

    5. How many dollars has Boscov's received in chapter 13 cases filed 
by its customers since 1995?

    6. Do you believe that reaffirmations are a preferable method of 
reducing Boscov's bankruptcy losses as opposed to chapter 13 plans, in 
which Boscovs might only receive, as you testified, 30 cents on the 
dollar or even less?

    7. You testified that ``it is estimated that over $40 billion was 
written off in bankruptcy losses last year, which amounts to the 
discharge of at least $110 million every day. . . . The nation's 100 
million households ultimately pay that $40 to 50 billion.''

          A) Do you have a source for this data other than the WEFA 
        Group study that has been called into question by the General 
        Accounting Office? See ``The Financial Costs of Personal 
        Bankruptcy'' Letter from Associate Director Richard Stana to 
        the Honorable Martin T. Meehan, GAO/GGD-98-116R. If so, can you 
        provide us with the supporting data?

          B) Assuming that the $40 to $50 billion figure is correct, 
        producing a ``hidden tax'' on every American family of $400 or 
        $550 a year, can you estimate what portion of that amount 
        actually could be recouped by the Bankruptcy Reform Act of 
        1999?

          C) Have the interest rates on Boscov's charge cards 
        increased/decreased in the past in step with bankruptcy filings 
        and losses that you have attributed to bankruptcy? If so, 
        please document these changes.

          D) Has the cost of merchandise at Boscov's increased/
        decreased in the past in step with bankruptcy filings? If so, 
        please document these changes.

    8. You testified that ``everyone's credit is tighter'' when people 
use the bankruptcy system as a means of walking away from their debts. 
Can you document that you restricted your lending, or that the industry 
generally restricted its lending as a result of the increase in 
bankruptcy filings?

    9. Representing the National Retail Federation, you testified that 
the emergence of a new phenomenon, surprise bankruptcy filings, is an 
indication that bankruptcy is becoming a first step rather than a last 
resort. You said: ``Today, we see a very different picture. Often the 
first indication we receive that an individual is experiencing 
financial difficulty is when we receive notice of his bankruptcy 
petition. . . . The first indication of a problem is the notice that 
they have filed for bankruptcy.'' In 1983, a representative of the 
National Retail Merchant's Association and American Retail Federation 
similarly testified that ``a new and substantial class of debtors--one 
different from the traditional debtor--was also found. These persons 
were current on their required monthly payments, had little or no 
previous history of delinquency, and some even had additional credit 
available on the account at the time the bankruptcy notice was received 
by the creditor.'' See Statement of Raymond W. Klein, H.R. Macy & Co., 
Inc., representing the National Retail Merchants' Association and the 
American Retail Federation before the Senate Judiciary Committee 
Subcommittee on Courts (January 24, 1983). Are you identifying the same 
``new'' phenomenon as Mr. Klein did in 1983? If not, how are they 
different?

    10. You testified that the system should be changed to incorporate 
means testing regardless of what percentage of individuals currently 
choosing chapter 7 actually could pay any of their debts. However, 
legislators need to have a better sense of how many chapter 7 debtors 
are solvent because it is relevant in determining whether the 
substantial change would be cost-justified. We first heard that 
industry funded studies predicted that one third of chapter 7 debtors 
could pay some or all of their debts. Later industry funded studies 
predicted lower and lower numbers, the latest being 11%. A recent non-
industry study sponsored by the American Bankruptcy Institute found 
that the most optimistic number of chapter 7 debtors able to pay even 
\1/5\ of their debts over 5 years is under 4%, and that the amount of 
dollars the credit industry will recoup directly from this change is 
likely to be a fraction of the industry's estimate.

          A) Approximately what percentage of chapter 7 debtors do you 
        believe can repay a substantial portion of their debts.

          B) How many dollars you believe you will recoup from that 
        system so that we can compare that to the cost to the taxpayers 
        of the change.

    11. Most discussion has focused on the importance of the means 
test, which was the subject of the panel on March 11. However, various 
versions of the bankruptcy bill span 300 pages and contain hundreds of 
amendments affecting consumer bankruptcy. Would you be willing to 
accept a means testing amendment and forego the remainder of the other 
significant consumer bankruptcy amendments, such as the various 
provisions expanding the nondischargeability of credit card and retail 
charge card debt and the provisions inflating the value of nominally 
secured debt?
                       to professor todd zywicki:
    1. You testified that ``studies repeatedly conclude that those 
affected by means-testing could pay approximately 60%-70% of their 
unsecured debts if they filed under Chapter 13, which amounts to a 
total of over $4 billion.'' Do you have a source for this $4 billion 
number, other than the report of the WEFA Group study that did not 
provide sufficient information for the General Accounting Office to be 
able to assess the reliability of the data, the reasonableness of the 
report's assumptions, and the accuracy of the report's estimates of 
creditor losses and the bankruptcy system's costs in 1997? See ``The 
Financial Costs of Personal Bankruptcy'' Letter from Associate Director 
Richard Stana to the Honorable Martin T. Meehan, GAO/GGD-98-116R.

    2. You testified that ``95% of Chapter 7 bankruptcy filings make no 
distribution at all to unsecured creditors, and those that do rarely 
pay out more than a trivial amount'' and went onto suggest that 
creditors receive a much larger payout in chapter 13 cases. However, 
VISA U.S.A. studies and the Creighton University reaffirmation study 
both indicate that a substantial portion of chapter 7 debtors reaffirm 
their debts and thus continue to pay one or more of their unsecured 
debts, notwithstanding the fact that they have no nonexempt property to 
be liquidated in the course of the bankruptcy case. The chapter 13 plan 
completion rate is low, and many times plans are terminated before 
payments to unsecured creditors are commenced. Moreover, some plans are 
0% plans and never intend to pay unsecured creditors at all.

          A) Do these factors affect your comparison of the benefits of 
        the two chapters?

          B) Do you have any data to make a more complete comparison 
        between the payouts from chapter 7 and chapter 13 debtors?

    3. You testified that the reach of means-testing is small in terms 
of the number of filers impacted but that its impact would be large in 
terms of the amount of money collected. In light of this view, do you 
believe that it is necessary or efficient to review all cases for 
ability to pay under the means test, even cases of debtors with income 
below the poverty level, as section 102 of H.R. 833 currently requires?

    4. Your testimony suggests that a means test should identify those 
debtors with high incomes who could repay creditors, such as the doctor 
in the case of In re Kornfield, 164 F.3d 778 (2d Cir. 1999). Your 
testimony also suggests that although the current system has been 
successful in denying relief to debtors such as Dr. Kornfield, current 
law permits those debtors to continue to contest the denial of relief 
by filing and litigating appeals. You probably would get little or no 
argument from debtor advocates that individuals like Dr. Kornfield may 
not be deserving of chapter 7 relief. However, some observers have 
questioned whether the means test in H.R. 833 will actually be able to 
catch someone like Dr. Kornfield; after all, an individual with his 
sophistication and legal resources will be able to inflate and shape 
his debts and expenses to escape the means test.

          A) Do you agree that the means test in H.R. 833 provides 
        leeway for wealthy and savvy individuals, the Dr. Kornfields of 
        the world, to escape the means test?

          B) How would H.R. 833 prevent Dr. Kornfield from taking 
        several appeals as he did under current law? After all, with 
        his legal resources, he could contest the ``other necessary 
        expense'' category of the IRS collection allowances, which are 
        determined on a case by case basis, and he also could contest 
        any determination of whether he had ``extraordinary expenses.''

    5. You testified that the 1978 Code significantly reduced the 
economic costs and increased the economic benefits of filing 
bankruptcy. However, the Code was tightened with amendments proposed by 
the credit industry in 1984, only to be followed by a sharp increase in 
filings notwithstanding decreased debt relief. How do you explain this 
trend?

    6. You testified that economist Michelle White estimates that 15%-
20% of American households would financially benefit from filing 
bankruptcy, especially if they engaged in some planning prior to 
filing. Since a far smaller percentage of American households file for 
chapter 7 bankruptcy, doesn't this mean that bankruptcy still carries 
stigma sufficient to deter the vast majority of families who would 
benefit from filing?

    7. Your testimony indicates that you believe that every individual 
who borrows money or purchases an item should be required to repay it. 
Drawing the analogy between bankruptcy and shoplifting, you state that 
``you shouldn't take it if you aren't going to pay for it.''

          A) If this is the case, do you think that Congress is wrong 
        to provide a discharge in bankruptcy at all?

          B) Should society recognize that changed economic 
        circumstances caused, for example, by illness, disability, 
        divorce, or loss of employment might make it impossible for 
        consumers to satisfy debts they had every intention of paying 
        when they incurred them?

          C) Are you concerned that the lack of a bankruptcy safety 
        valve will hamper entrepreneurs, who currently comprise one in 
        five consumer bankruptcy filings, from engaging in the 
        appropriate level of risk-taking activity?

    8. You state in your testimony that ``a borrower's willingness to 
take on debt clearly will be related to the ease with which he can 
later discharge those debt obligations if he chooses to do so.'' This 
statement assumes that consumers incur obligations with the 
understanding of their true costs. Some economists believe that many 
consumers systematically underestimate the extent of their borrowing 
and the cost of repayment and therefore make sub-optimal borrowing 
decisions. If this is the case, changing the bankruptcy law will not 
affect the borrowing decisions of many consumers. To enable consumers 
to make more rational borrowing decisions that will be less likely to 
lead them into financial distress, particularly if the bankruptcy laws 
are going to be tightened and consumer credit remains freely flowing, 
do you believe that open end credit should be accompanied by additional 
disclosures that reveal to the potential borrower the actual costs of 
credit?

    9. You testified that consumer credit is not to blame for the 
bankruptcy filing rate. The credit industry witnesses agreed with you, 
noting that credit card debt is only 3.7 of consumer credit overall and 
bank card debt (presumably a subset of all card debt) is only 16% of 
all debt (including secured debt) in bankruptcy. However, don't these 
numbers alone indicate that the individuals and families who ultimately 
resort to bankruptcy have inordinately high credit card debts as 
compared to the population as a whole?

    10. You testified that ``the credit card industry has revealed 
itself to be ferociously competitive.''

          A) If that is the case, why have average interest rates on 
        credit card hardly varied over the past 2 decades since the 
        industry was functionally deregulated by the Marquette Supreme 
        Court case, even though the cost of funds declined dramatically 
        in this period?

          B) Why have profits in the consumer credit consistently 
        exceeded profits for all other lending activities?

    12. As further support for the proposition that the time has come 
for means testing, you testified: ``Access to credit cards are 
especially important for low-income borrowers, as they lack the options 
of more wealthy borrowers.'' However, the means testing provision is 
one of dozens of changes to the consumer bankruptcy system in the 
pending legislation. Some of the provisions in the bill will decrease 
the amount of the debtor's income available for payment of unsecured 
debt in chapter 13, and in fact may further suppress the chapter 13 
plan completion rate. How will these provisions affect the cost of 
unsecured credit and its availability for low income borrowers?

    13. As a professor who has argued vigorously in favor of retaining 
disinterestedness requirements on chapter 11 debtors' lawyers to ensure 
that they act in their clients' best interests, do you believe it is 
appropriate for the bill to impose financial disincentives on lawyers 
to help their debtor clients file for chapter 7 if those lawyers 
believe that the debtor is an eligible candidate for chapter 7 and that 
it is in the best interest of the debtor to seek that relief?

    14. As a professor who has studied the bankruptcy system closely, 
do you see any creditor abuses in the system that should be addressed 
in bankruptcy reform legislation? If so, what are they?
                               __________
           Question from Senator Kohl for Judge Edith Jones:
    The National Bankruptcy Review Commission, which you served on, 
recommended a $100,000 cap on homestead exemptions. I have introduced 
legislation that would establish such a cap. We have heard from some of 
the states with unlimited homestead exemptions that a $100,000 cap 
would unfairly infringe on states' rights. Cap supporters argue that 
debtors are using federal courts and federal laws to get bankruptcy 
relief, and it is fair to make them subject to federal limits in order 
curb egregious abuses, like the recent example of long-time Florida 
resident Burt Reynolds who wrote off over $8 million in debt through 
bankruptcy while still holding onto his $2.5 million estate. Do you 
agree with this recommendation of the NBRC? Please explain your 
response, including your reaction to arguments from both sides.
                               __________
                      Dean E. Sheaffer's Responses
                   Boscov's Department Store, Inc.,
                                       Reading, PA, March 25, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Hyde: Thank you for allowing me to testify before the 
Joint Hearing of the House Subcommittee on Commercial and 
Administrative Law and the Senate Subcommittee on Administrative 
Oversight and the Courts on Bankruptcy on March 11, 1999.
    The following are responses to the additional written questions 
attached to your letter of March 15, 1999.
                         senator chuck grassley
    1) In light of the Sears case, is the Retail Federation currently 
developing guidelines for its members on how to lawfully seek 
reaffirmations?

    NRF's members are keenly aware of the requirements of the law, 
especially in light of the recent cases involving retailers and other 
companies that were required to pay huge penalties. The NRF also has 
held educational meeting for its members emphasizing reaffirmation 
requirements.
                           senator torricelli
    1) In light of the problems retailers have had with their 
reaffirmation practices, how can one justify banning class actions for 
illegal reaffirmation practices when class actions often are the only 
way that middle class people have a remedy for wrongdoing against them?

    There is no need for individual class actions; state and federal 
authorities have more than adequate authority to enforce the law and to 
recover substantial consumer remedies, as was seen in the Sears case.

    2)  In light of the problems retailers have had with their 
reaffirmation practices, do you agree that more should be done in this 
bill to respond to creditor overreaching? What is the justification for 
focusing almost exclusively on debtor abuse?

    The issue in the Sears case was not overreaching, rather it was a 
failure on the part of the Company to follow proper procedures 
requiring them to file with the court records of reaffirmations. These 
creditor requirements are already in the law. We believe fair 
procedures should be established both for creditors and for debtors and 
they should be followed.

    3) Do you offer shoppers one-time incentives to sign up for a 
Boscov's charge card? Are obligations on Boscov's charge cards secured 
or unsecured by the items your customers purchase in your store? If 
they are secured, how do you make your clients aware that their 
purchases are secured? If they are secured, does this mean that you 
offer an interest rate that is lower than the interest rate on the 
average unsecured credit card?

    Boscov's does offer an incentive for customers to sign up for our 
charge card, usually in the form of a discount on their first charge 
transaction. While Boscov's asserts a ``purchase money security 
interest'' in all states except New York, this is a much lower level of 
security interest than that taken by a traditional secured lender. Our 
credit card is priced competitively in this market.

    4) Let's say I am a Boscov's customer. I buy a variety of 
reasonably priced items at your store and have carried a balance on my 
charge card over the past several years, making only the minimum 
payment each month. If I file for bankruptcy today, is my debt to your 
store secured by all of these items? Can you come and take them away if 
I do not pay after bankruptcy?

    If you file for Bankruptcy, in general, Boscov's would not take 
away any items purchased on our card prior to a bankruptcy. The only 
possible exception is that we legally could recover items obtained 
fraudulently or items which are determined by law to be non-
dischargeable.
                            senator feingold
    1) Your testimony on behalf of the National Retail Federation 
focuses exclusively on abuse of the bankruptcy system by debtors and 
does not make any mention of the fact that quite a few retailers have 
admitted to committing bankruptcy fraud on a widespread basis.

          A) Has Boscov's engaged in any post-bankruptcy collection 
        activity without filing reaffirmation agreements?

          Boscov's does not engage in post-bankruptcy collection 
        activity without filing reaffirmation agreements as required.

          B) Does Boscov's think that the current laws supervising 
        reaffirmation agreements have been adequate?

          Boscov's believes current law supervising reaffirmation 
        agreements are adequate.

          C) Does Boscov's support the provisions in the House bill 
        that eliminate class actions to pursue creditors who have 
        systematically violated bankruptcy law to the detriment of 
        consumer debtors? If so, why?

          For the reasons mentioned above, compliance with 
        reaffirmation procedures is not a major problem for Boscov's. 
        However, we believe the existing governmental authority to curb 
        reaffirmation abuses is adequate and has been quite effective.

    2) Do you believe there are any creditor abuses in the bankruptcy 
system that should be addressed in bankruptcy reform legislation? If 
so, what are they?

    The bankruptcy abuse that have been brought to my attention, such 
as a failure to file affirmations, are already addressed severely under 
current law.

    3) How many of your bankrupt customers reaffirmed their debts to 
Boscov's in 1997 and 1998? What was the average amount of the debt?

    Sixty-five (65) customers reaffirmed their debts with Boscov's in 
1997 and 1998 combined. The average amount of the debt was $621.25.

    4) How many dollars owed to Boscov's were reaffirmed in bankruptcy 
cases in 1997 and 1998?

    A total of $40, 381.53 was reaffirmed in 1997 and 1998 combined.

    5) How many dollars has Boscov's received in chapter 13 cases filed 
by its customers since 1995?

    Boscov's received $160,473 in Chapter 13 cases from 1995 through 
1998 inclusive.

    6) Do you believe that reaffirmations are a preferable method of 
reducing Boscov's bankruptcy losses as opposed to chapter 13 plans, in 
which Boscov's might only receive, as you testified, 30 cents on the 
dollar or even less?

    Both Chapter 13 plans and reaffirmations, in Chapter 7 cases, may 
be necessary for customers to honor those payments they can, while 
affecting a true ``fresh start''. If a customer seeks to preserve, 
post-bankruptcy, a small line of credit from a local merchant to 
purchase necessary items such as school clothes, a reaffirmation may be 
most appropriate. On the other hand, if an upper-income customer is 
able to repay 30 cents on the dollar through a Chapter 13 plan, they 
should be required to do so.

    7) You testified that ``it is estimated that over $40 billion was 
written off in bankruptcy losses last year, which amounts to the 
discharge of at least $110 million every day. . . . The nation's 100 
million households ultimately pay that $40 to 50 billion. ``

          A) Do you have a source for this data other than the WEFA 
        Group study that has been called into question by the General 
        Accounting Office? See"The Financial Costs of Personal 
        Bankruptcy'' Letter from Associate Director Richard Stana to 
        the Honorable Martin T. Meehan, GAO/GGD-98-116R. If so, can you 
        provide us with the supporting data?

          Although I do not have specific citations, I believe the 
        Administrative Office of the Courts has reported the level of 
        bankruptcy discharges has exceeded $40 billion per year. It is 
        commonly reported that there are approximately 100 million 
        households in the U.S.

          B) Assuming that the $40 to $50 billion figure is correct, 
        producing a ``hidden tax'' on every American family of $400 or 
        $550 a year, can you estimate what portion of that amount 
        actually could be recouped by the Bankruptcy Reform Act of 
        1999?

          I believe that a nationally representative Ernst and Young 
        Study, presented to the House Judiciary Committee last year, 
        estimated that approximately 10 % of the dollars now lost to 
        bankruptcy could be recouped.

          C) Have the interest rates on Boscov's charge cards 
        increased/decreased in the past in step with bankruptcy filings 
        and losses that you have attributed to bankruptcy? If so, 
        please document these changes.

          Boscov's credit finance charge rates were raised in early 
        1997. The increase was in response to increases in credit 
        losses (primarily attributable to increases in bankruptcy 
        losses). The percentage of Boscov's charge sales to total 
        Boscov's sales has decreased every year for at least the last 
        five years. This is partially attributable to the tighter 
        lending practices we have been forced to pursue.

          D) Has the cost of merchandise at Boscov's increased/
        decreased in the past in step with bankruptcy filings? If so, 
        please document these changes.

          The cost of merchandise at Boscov's is related to a 
        tremendous number of variables (e.g. the cost of goods, the 
        cost of money, shipping, labor, utilities and rent) including 
        changes in bankruptcy losses. It is not possible to directly 
        determine the net effect bankruptcy has on consumer prices.

    8) You testified that ``everyone's credit is tighter'' when people 
use the bankruptcy system as a means of walking away from their debts. 
Can you document that you restricted your lending, or that the industry 
generally restricted its lending as a result of the increase in 
bankruptcy filings?

    Boscov's implemented an on-going portfolio monitoring program in 
1995 in direct response to increasing credit losses (primarily 
attributable to increases in bankruptcy losses). Through this program, 
Boscov's has closed or reduced the credit limit on tens of thousands of 
accounts, including accounts, which were not delinquent at Boscov's. 
This is the most aggressive limit management program Boscov's has ever 
implemented.

    9) Representing the National Retail Federation, you testified that 
the emergence of a new phenomenon, surprise bankruptcy filings, is an 
indication that bankruptcy is becoming a first step rather than a last 
resort. You said: ``Today, we see a very different picture. Often the 
first indication we receive that an individual is experiencing 
financial difficulty is when we receive notice of his bankruptcy 
petition. . . . The first indication of a problem is the notice that 
they have filed for bankruptcy.'' In 1983, a representative of the 
National Retail Merchant's Association and American Retail Federation 
similarly testified that ``a new and substantial class of debtors--one 
different from the traditional debtor--was also found. These persons 
were current on their required monthly payments, had little or no 
previous history of delinquency, and some even had additional credit 
available on the account at the time the bankruptcy notice was received 
by the creditor.'' See Statement of Raymond W. Klein, H.R. Macy & Co., 
Inc., representing the National Retail Merchants' Association and the 
American Retail Federation before the Senate Judiciary Committee 
Subcommittee on Courts (January 24, 1983). Are you identifying the same 
``new'' phenomenon as Mr. Klein did in 1983? If not, how are they 
different?

    Although I do not have direct knowledge of the 1983 statement, I 
believe Mr. Klein saw the beginnings of the problem. What is new, in my 
experience, is the dramatic increase in the numbers of customers making 
the decision to file without being seriously delinquent with Boscov's.

    10) You testified that the system should be changed to incorporate 
means testing regardless of what percentage of individuals currently 
choosing chapter 7 actually could pay any of their debts. However, 
legislators need to have a better sense of how many chapter 7 debtors 
are solvent because it is relevant in determining whether the 
substantial change would be cost-justified. We first heard that 
industry funded studies predicted that one third of chapter 7 debtors 
could pay some or all of their debts. Later industry funded studies 
predicted lower and lower numbers, the latest being 11%. A recent non-
industry study sponsored by the American Bankruptcy Institute found 
that the most optimistic number of chapter 7 debtors able to pay even 
\1/5\ of their debts over 5 years is under 4%, and that the amount of 
dollars the credit industry will recoup directly from this change is 
likely to be a fraction of the industry's estimate.

    The number of persons who it is estimated can repay their debts 
keeps changing because Congress keeps changing the standards in the 
proposed needs based system. Earlier versions of bankruptcy reform 
proposals were directed at bankruptcy filers earning more than 75% of 
the median income and who could repay 20% or more of their debts, thus 
a higher percentage of repayment capacity was properly reported. More 
recent reform proposals have restricted the needs based formula to 
those filers who are at or above the national median income and who 
could repay more than 25% of their debt. Accordingly, a smaller 
repayment capacity was reported. (As to the 4% figure contained in the 
American Bankruptcy Institute study, I also understand that ABI used 
old data.)

          A) Approximately what percentage of chapter 7 debtors do you 
        believe can repay a substantial portion of their debts?

          Under the current needs based reform proposal (H.R. 833), we 
        believe approximately 10% of Chapter 7 debtors could repay a 
        substantial portion of their debt.

          B) How many dollars you believe you will recoup from that 
        system so that we can compare that to the cost to the taxpayers 
        of the change?

          We believe repayment ability is approximately $4 billion per 
        year.

    11) Most discussion has focused on the importance of the means 
test, which was the subject of the panel on March 11. However, various 
versions of the bankruptcy bill span 300 pages and contain hundreds of 
amendments affecting consumer bankruptcy. Would you be willing to 
accept a means testing amendment and forego the remainder of the other 
significant consumer bankruptcy amendments, such as the various 
provisions expanding the nondischargeability of credit card and retail 
charge card debt and the provisions inflating the value of nominally 
secured debt?

    Many of the provisions in the bill are inter-related. Provision 
such as consumer education, auditing, and changes designed to improve 
the system's operations and to diminish cheating and other abuses are 
all important to the proper operation of the bankruptcy system.
            Sincerely,
                                          Dean E. Sheaffer,
                        Vice-President--Director of Credit.

cc: Honorable George W. Gekas
                               __________
                       Bruce Hammonds' Responses
                     senator torricelli's questions
Question 1.
    We strongly support providing customers information that 
facilitates their wise use of consumer credit. Through account-opening 
documents, cardholder credit agreements, monthly account statements and 
annual transaction reports, bankcard customers are provided with an 
immense variety of account-related information presented in precise 
detail.
    The Conference Report on H.R. 3150 of the 105th Congress did 
provide for new disclosure requirements related to minimum payments on 
account balances, which are different in form and detail to those in an 
amendment offered by Senator Durbin and contained in the Senate's bill. 
Our experienced judgement is that the Conference Report's format very 
effectively informs consumers of the implications of repaying a credit 
balance solely through minimum payments. It does so at considerably 
less cost than the Durbin approach, which we assume is an important and 
valid consideration.
    The Conference Report also directed the Federal Reserve Board to 
conduct a highly comprehensive study of consumer use and understanding 
of minimum payments, to report its findings to the Congress, and to use 
its extensive regulatory authority under the Truth In Lending Act to 
promulgate such additional disclosure requirements as the study may 
deem useful.
    Three decades of experience with the Truth In Lending Act has 
proven the wisdom and utility of using Federal Reserve studies 
(typically involving rigorous consumer testing) as the fact-finding 
foundation for new disclosure requirements. It would be ill-advised for 
Congress to statutorily impose a costly and burdensome scheme without 
allowing the Federal Reserve to fully evaluate it's impact on the 
industry and on consumer behavior.
Question 2.
    There is no national data base reporting the annual credit losses 
attributable to the discharge of loan obligation by Federal Bankruptcy 
Courts in proceedings under Chapters 7 and 13. However, studies by 
nationally-recognized research organizations present findings which we 
believe have been carefully and soundly formulated.
    SMR Research published a 1997 study estimating consumer bankruptcy 
system losses at $40 billion for 1996. The WEFA Group presented a 
report to the Senate Banking Committee in February of 1998 estimating 
losses for 1997 at approximately $44 billion. Also in 1998, Ernst and 
Young reached a similar (somewhat higher) estimate of total Chapter 7 
bankruptcy debt to WEFA's estimate for 1997. The Ernst & Young analysis 
is based upon a statistically reliable national data base using 1997 
bankruptcy petition data. Adjusting these very consistent findings for 
the growth in consumer bankruptcy filings in 1998 and the projections 
for 1999, it is reasonable to assume that losses from the consumer 
bankruptcy system for 1999 will approach $50 billion.
Question 3.
    With over 7,000 financial institution competing in the credit card 
industry, it remains one of the most competitive industries in the U.S. 
As a result of that competition, profits from credit card portfolios 
across the industry have declined over the past 5 years.
    As is true generally for the financial services industry, 
technology has fostered changes leading to greatly intensified 
competition among issuers of bankcards and credit cards. In the 90's, 
interest rates on card offerings have declined some 200 basis points, 
annual fees are nearly non-existent, reward and purchase-discount 
programs are widely available, and customer service has been 
dramatically improved. In this competitive environment, it is a 
certainty that a reduction in losses will translate into a variety of 
consumer benefits, including price reductions or improved product 
quality.
Question 4.
    Using generalized historical experience in Chapter 13 under the 
existing provisions of the Code is not a reliable basis for predicting 
future performance under the system which will develop with the reforms 
proposed in H.R. 833 and S. 625. In a reformed system, the vast 
majority of the cases in Chapter 13 will be there because Chapter 7 
will no longer be a legally-available alternative for relief.
    The reasons for failures in Chapter 13 have not received sufficient 
systematic and statistically-valid analysis to justify broad 
generalizations. There is, however, extensive anecdotal experience to 
justify a conclusion that in many Chapter 13 cases a primary motivation 
is to preserve use of a secured asset (home or car) by curing 
arrearages and bringing cash flows into balance. Once that goal is 
accomplished, the economic incentive of remaining in Chapter 13 is 
significantly reduced. Some, at least, then proceed to Chapter 7 to 
eliminate unsecured obligations. Reform cuts off that option.
    There are a few bankruptcy court districts in which the judge-
created culture of many years has educated lawyers and debtors that 
Chapter 13 is a preferred alternative. In these districts the plan-
completion success rate has been well above the national norms.
Question 5.
    Members of Congress have the best ``hands-on'' understanding of the 
essentiality of compromise in accomplishing worthwhile reform. In 
today's setting, secured lenders enjoy generally satisfactory outcomes 
under Chapter 7. Both lender and debtor have incentives to reach 
reaffirmation agreement thus permitting the debtor's continued use of a 
valuable asset such as a car. Unsecured lenders more often than not get 
nothing. If a reformed system is to require debtors with demonstrated 
repayment capacity to seek relief in Chapter 13, where plans will 
require repayment of some portion of unsecured obligations, that 
reformed system must deal in a balanced manner with secured creditors. 
Providing reasonable protection from cram down is a practical 
accommodation to the achievement of major improvements in the consumer 
bankruptcy system.
                      senator grassley's questions
Question 1.
    I categorically reject the notion that credit card lending is 
responsible for the dramatic rise in consumer bankruptcy filings!
    The Federal Reserve's most recent Survey of Consumer Finance, 
released in January, 1997, reports that the total household debt held 
by all families credit card debt represents 3.7 percent of total 
indebtedness. To allege that this small segment of total consumer debt 
bears a principal responsibility for the rise in consumer bankruptcies 
makes no sense.
    Unquestionably, the availability of credit to American households 
has expanded dramatically throughout the last half of this century. 
However, according to recent information from the Federal Reserve, the 
absolute level of consumer debt as a percentage of assets has remained 
at 5% since 1970. In short, debt, as a percentage of assets, has not 
increased over the past 29 years, which directly refutes the 
``explosion'' of credit theory. Indeed, for the past thirty years this 
trend has been steadily intensified through the powerful influence of 
Federal statutory and regulatory mandates.
    Moreover, public attitudes concerning the use of credit have 
undergone immense change. Certainly the use of credit by a steadily-
growing segment of our population means the incidence of consumer 
bankruptcy will likely rise in some parallel relationship. But making 
consumer and other forms of credit more broadly available to the 
general public, and particularly to discrete segments of our population 
previously denied credit, does not represent irresponsible, imprudent, 
or predatory lending. Legislation of the past twenty-five years has 
evidenced the desire of Congress that all segments of the public be 
served fairly and adequately. Restrictive legislation will cause denial 
of credit to those otherwise creditworthy borrowers who most benefit 
from the flexibility consumer credit provides. For example, the rate of 
bankruptcy filing in Memphis, TN is 33% higher than the national 
average. For credit cards to be the sole link to bankruptcy, resident 
of Memphis would have to have 33% more credit than the national 
average--and that simply is not the case.
    Holding needs-based reform of our consumer bankruptcy system 
hostage to a debate over whether all consumer lenders behave prudently 
and responsibly simply misunderstands the purpose and the methodology 
of the proposed reforms. Needs-based limitations on bankruptcy relief 
will not bail our bad loans. Where basic cashflow analysis demonstrates 
no reasonable capacity to repay the bankruptcy system will continue to 
discharge the debtors and the lenders will continue to bear the full 
responsibility for a bad loan. But, where repayment capacity exists to 
some considerable degree (25 percent OR $5,000, seems fair), then our 
Federal bankruptcy system should not randomly ignore and undermine 
sound credit underwriting practice. Bankruptcy system discharge policy 
cannot be at odds with consumer credit underwriting if we want our 
national economy optimally served by the lending industry.
Question 2.
    Our concerns are for the trends of behavior and practice and the 
long-term impact on future outcomes. Throughout the consumer lending 
industry (including retailers) we are encountering growing numbers of 
cases where customers with no history of repayment problems file for 
bankruptcy relief without notice.
    Ernst & Young, using a nationally-valid database of 1997 bankruptcy 
petition data and the income-expense guidelines of H.R. 833 and S. 625, 
concluded that 10 percent of all filers had incomes at or above the 
national median family income and could have repaid a significant 
portion of their unsecured obligations. This amounts to roughly 100,000 
filers. In our information-driven society of today, it would be naive 
for us to conclude that the bankruptcy system's treatment of 100,000 
debtors or more annually is going unnoticed by the remainder of our 
national society. Clearly if we establish no reasonable standards for 
bankruptcy relief, if our courts ignore capacity to repay--a treatment 
at odds with rational loan underwriting--we should expect growing 
numbers to avail themselves of such relief. At some point that upward 
trending development must be accounted for by lenders--probably first 
by pricing and/or diminished service, but ultimately by more 
restrictive availability. To protect against that future dilemma by 
directing the Federal bankruptcy system to adopt orderly procedures 
employing objective standards for determining the nature and extent of 
relief granted petitioner would seem to be both reasonable and 
responsible.
                      senator feingold's questions
Question 1.
    Note: Since bankruptcy losses were not available for 1980, 1989 was 
used for comparison purpose.

          1 (A) Ending outstanding for calendar year 1989 and 1990 were 
        $5.1 billion and $48.7 billion, respectively, and average 
        outstanding for 1989 and 1998 were $4.5 billion and $45.3 
        billion, respectively.

          1 (B) In 1998, non-bankruptcy losses were $1.1 billion as 
        compared to 1989 non-bankruptcy losses of $46 million.

          1 (C) MBNA's bankruptcy losses as a percent of credit card 
        debt outstanding in 1989 and 1998 were 1.02% and 2.61%.

          1 (D)


------------------------------------------------------------------------
                                     1980                1998
------------------------------------------------------------------------
A. Average Balance per Active       $1,058   $2,339
 Account
  (1998 Dollars)
B.                                    n.a.   2.9% of outstandings
C.                                    n.a.   2.9% of outstandings
------------------------------------------------------------------------


Question 2 A.
    The Federal bankruptcy system does not maintain an annual 
accounting of the aggregate amount of consumer debt discharged. The 
WEFA Group, a highly regarded national economic consulting firm, used 
established econometric and evaluating methods to produce it loss 
estimate from bankruptcy petition data. Two other outstanding economic 
research organizations, SMR Research and Ernst & Young, conducting 
independent studies using different data bases, produced conclusions of 
aggregate consumer bankruptcy debt and losses comparable to WEFA's 
results.
    GAO did not characterize WEFA's figures as ``unreliable''. With 
respect to the GAO's comments on the WEFA study, I respectfully 
recommend a careful review of WEFA's response, dated April 29, 1998. 
Acknowledging that all bankruptcy studies to date have used unaudited 
petitioner data (since neither the courts nor the U.S. trustees conduct 
audits), I believe WEFA carried out its evaluation with great 
professional integrity and utilized established methodologies in 
arriving at its quantitative conclusions.
Question 2 B.
    While I did not use a $550 per household average for 1999, the 
estimate of projected losses for this year in a general magnitude of 
$50 billion does not seem unreasonable.
Questions 2 C and 2 D.
    My understanding of the WEFA, Ernst & Young, and SMR loss estimates 
is that each endeavored to calculate aggregate losses arising from 
discharge. If my understanding is correct, the estimates do not take 
account of reaffirmations, non-discharged obligations, and ``failed 
plans'' in Chapter 13, which means that the estimates are conservative.
    Keep in mind that most filers choose Chapter 7 and unsecured 
lenders typically collect nothing in a Chapter 7 filings. In 1997, 
according to Ernst & Young, using the only statistically valid 
bankruptcy petition database in existence, total unsecured debt in 
Chapter 7 approached $35 billion.
Question 2 E.
    The estimate o floss does not include so-called contract charge-
offs that occur outside of the bankruptcy process and which are largely 
governed by the financial regulatory agencies' guidelines.
Question 3.
    In fact, the intensified competition within the bankcard industry 
over the last few years has materially influenced pricing and product 
content. Interest rates are down some 200 basis points, annual fees are 
essentially non-existent, and product enhancement (rewards, discounts, 
24-hour customer service) continues to expand.
    Among traditional bank loan products, funding cost are least 
influential for pricing purposes in unsecured bankcard lending. Among 
the large issuers, funding costs are typically 40 percent or less of 
total expenses. The remaining 60 to 70 percent is comprised of 
servicing, general administration, marketing, and loan losses. 
Currently in our expense base, funding and loan losses each represent 
about one-third. Over traditional economic cycles, there is usually a 
strong reciprocal dynamic relationship between funding costs and loss-
related cost:--when one factor is up the other is down. This offsetting 
relationship makes it hard to predict pricing practice based on the 
level of market interest rates.
    While I'm reluctant to be highly specific in publicly sharing 
proprietary data, I will state that the percentage of our annual credit 
losses attributable to bankruptcy discharges has risen very 
substantially in the last few years. Moreover, as I indicated in my 
testimony at the Senate-House hearing, a majority of our bankruptcy 
charge-offs occur in accounts that have been with us for three or more 
years. These are accounts that were carefully underwritten at their 
inception and for which we have extensive experience data for account 
administration.
    Since the increase in bankruptcy has driven loss rates to 
unprecedented levels. MBNA has implemented strategies which increase 
APRs on accounts bases on risk. This strategy, while necessary to 
maintain profitability, has resulted in customers receiving APRs of at 
least 23.9% in some circumstances. Previously, APR increases on the 
portfolio were typically associated with changes in cost of funds.
Question 4.
    Of course bankruptcy-related losses (like other losses) impact the 
behavior of individual lending institutions. Because the aggregate 
volume of consumer credit in our national economy has grown since 1980, 
it does not follow that this result was unaffected by the bankruptcy 
losses sustained over this two-decade period. The varying experience of 
individual institutions and the multiplicity of other economic, 
regulatory, technological, cultural, and other factors which have 
shaped lending decisions make it impossible to isolate the precise 
impact of bankruptcy losses. But have no doubt that all major cost 
components directly influence each lender's decisions on the key 
considerations of price, availability, product content, service, and 
marketing.
    Restriction of credit is one way to maintain profitability in the 
face of rising losses. MBNA Has not yet restricted credit, because we 
have been able to offset higher losses through more targeted pricing 
strategies. However, deteriorating credit quality of applicants has led 
to lower approval rates. If losses continue to increase, ti will be 
difficult to maintain profitability by increasing the interest rate 
charged to the consumer. If revenue cannot be increased through 
repricing, restriction of credit would be necessary to reduce losses.
Question 5 A.
    MBNA doe s not approve credit for recent bankrupts. In select 
circumstances, MBNA may approve credit for a former bankrupt, if we are 
able to establish that the consumer has resolved the situation that led 
to the bankruptcy and has also established a track record of repayment 
with other creditors.
Question 5 B.
    Most major bankcard issuers evaluate applications based on an 
overall risk profile that is designed to yield loss rates that track at 
or below the industry average. Because most former bankrupts would not 
fit this profile, they would be declined for an account if they 
responded to a mass-market solicitation. However, some issuers do 
target riskier prospects and compensate for the increased risk through 
security deposits, higher interest rates, and fees. Certainly if the 
concept of ``fresh start'' has practical meaning, it is to be expected 
that many individuals and households will need access to credit and the 
opportunity to rebuild their credit records through responsible 
management of their financial affairs.
Question 6.
    6(A) In 1998, MBNA challenged the dischargeability of the debtor's 
debt on less than 1% of the total Chapter 7 petitions filed, almost all 
of the basis of fraud.
    6(B) Of the cases where dischargeability was challenged, 6% (of the 
1% described above) were litigated. However, response is still pending 
on 71%, so the litigation percentage could potentially increase.
    6(C) 93% of debtors either admitted non-dischargeability or 
reaffirmed their debt. This is the case because MBNA rarely challenges 
any petition except for fraud. When confronted with their attempt to 
propitiate a fraud on the court, the overwhelming majority decide to 
choose another option, i.e., repayment.
Question 7.
    Over the past thirty years there has been a tremendous broadening 
of the availability of consumer credit within our national society. 
Federally mandated statutory and regulatory policy has been a powerful 
force in support of this development. This so-called democratization of 
credit availability is strongly favored by the public. There has been 
corresponding cultural change in terms of public acceptance of credit 
use. Lenders have responded to these dynamics of public policy and 
public attitudes. To state the obvious, if many more individuals and 
many more households have access to credit (which they do), it follows 
that within that expanded population of credit users there will be, at 
least, a normal incidence of bankruptcies, which will increase the 
absolute numbers overall. Lenders share in the responsibility for that 
increase to the extent that underwriting makes bad choices and 
individuals cannot meet their credit obligations. In that circumstance 
lenders bear the loss, as they properly should. Losses stemming from a 
debtor's cashflow incapacity to pay are the assumed risks of consumer 
lending. Proposed bankruptcy reform initiatives are not designed to and 
WILL NOT provide relief to institution for losses which are the result 
of underwriting errors.
    Solicitations, by mail or telephone, or credit card offerings are 
modes of marketing; no different in content or purpose than advertising 
in newspapers or on radio, TV, and the Internet. The volume of 
solicitations is a direct reflection of the intensity of the 
competition that exists within this sector of the financial services 
industry. While direct-mail solicitations may prove irritating to some, 
they certainly pose no threat to our economic health, and these 
solicitations bear no more responsibility for the frequency of 
bankruptcy than automobile advertising does for traffic deaths.
Question 8 A.
    Yes, and when we're wrong, we should (and will, even under proposed 
legislation) bear the resulting losses. But when our underwriting has 
correctly predicted ability to repay, as demonstrated by the 
petitioner's own bankruptcy petition calculations, the bankruptcy 
system should not discharge the obligation. If this practice continues, 
new assumptions will need to be built into our underwriting that will 
restrict credit to creditworthy consumers, with predictable 
consequences not only for many thousands of consumers, but also for the 
U.S. economy.
    In terms of all of those who look to us for responsible behavior 
(customers, shareholders, employees, and regulators), we have no higher 
obligation than to make our best efforts in underwriting credit 
extensions, which entails identifying individuals who will use credit 
prudently and who will fulfill their contractual repayment obligations. 
While technology is expanding and improving our underwriting 
capabilities, it is in no sense a perfect science. In our own 
procedures we continue to place heavy reliance on the direct review of 
credit applications by experienced underwriters.
Question 8 B.
    An overwhelming majority of those who file for bankruptcy--almost 
75%--have a serious disruption in income in the year prior to filing. 
As a result, a large number of filers who were prudently granted 
credit--and who prudently used credit--turn to credit cards in an 
economic crisis, in an effort to maintain a lifestyle or to get back on 
their feet. Most are successful, with credit cards providing 
assistance. Those who are not successful show up in bankruptcy court 
with higher than average credit card debts. To the extent that they 
cannot repay their debts, they should be entitled to a discharge.
    In consumer credit underwriting there is a mutual dependency of all 
credit grantors on knowledge of the activities of other grantors. We 
look to credit reporting agencies for information concerning the credit 
history of individual applicants. These national agencies are making 
great strides in perfecting the accuracy, currency, and 
comprehensiveness of their data. Nonetheless, these systems, which are 
likewise dependent upon periodic inputs from hundreds of thousands of 
entities, are not an absolute guarantee of accurate and up-to-date 
information. As a practical matter, there are simply too many variables 
to achieve systems that are error-free. Lack of currently reliable 
information is certainly one factor in the multiple card cases. Low-
limit cards to individuals with limited credit history is another 
factor. And although we wish it were otherwise, consumer lending still 
suffers from some isolated cases of mediocre underwriting. However, 
given that as an industry 96% of our accounts meet their contractual 
obligations, I personally take great pride in the professionalism and 
responsibility of the American bankcard industry.
Question 9 A.
    This quoted observation is not directed at the bankruptcy system's 
current lack of standards and systematized procedures for determining 
the relief needed by petitioners. It refers to the fact that the system 
does not provide training in the fundamentals of household financial 
management for individuals who have been through bankruptcy. We applaud 
the fact that last year's conference report, as well as legislation 
introduced this year, authorize pilot programs for this purpose. We in 
the financial services industry are working at consumer education, and 
we will continue to expand and improve those efforts.
Question 9 B.
    We believe that the new disclosure requirements relating to the use 
of minimum payments contained in the Conference Report on H.R. 3150 
would do an effective job of alerting consumers to the financial 
disadvantages of using minimum payments as the principal means of 
repaying indebtedness. However, for those who believe more detail is 
necessary, the Conference Report directs the Federal Reserve Board to 
make a detailed study, to report its findings to the Congress, and to 
promulgate such additional disclosures as it deems beneficial. Thirty 
years of experience under the Truth In Lending Act has richly 
demonstrated the wisdom of using the Federal Reserve as the fact-
finding instrument in the development of comprehensible disclosures 
that can be provided in a cost-effective manner.
Question 10 A.
    Organizing the procedures of the Federal bankruptcy system to 
receive and review petitioner income and expense data and to apply the 
statutory expense guidelines represents a very straightforward 
information systems project involving routine systems applications. 
Once that systems structure is installed, its operation should prove 
both time and cost efficient to the entire process. Clearly it will be 
more orderly, efficient, auditable (and thus accountable) than existing 
arrangements.
Question 10 B.
    If to repay 20% of a petitioner's outstanding unsecured debts over 
a five-year period required the petitioner to make monthly payments 
which were ``overwhelming as compared to her disposable income'', it is 
highly improbable that such a petitioner will be impacted by the needs-
based test. The provisions have been crafted to protect against the 
very outcome suggested in this question. While it may be possible to 
construct a hypothetical example of a debtor with income at the poverty 
level being required to make repayment, in practice such a debtor will 
be unaffected by the needs-based reforms.
Question 10 C.
    The IRS expense categories appear to cover most, if not all, of the 
expenses you inquired about. Specifically, the ``other necessary 
expense'' categories identified by the IRS cover health care, child 
care, and dependent care for the elderly invalid or handicapped. Thus, 
an elderly person filing under Chapter 7 would not need permission to 
include such expenses, but would be granted such expenses 
automatically.
Question 11 A.
    My understanding is that there was technical mistake in H.R. 3150 
which might have produced the result you suggest. However, I'm advised 
that error was corrected in the text of the Conference Report. In the 
unlikely circumstance that a required monthly repayment was too small 
to justify the administrative fee of the Chapter 13 trustee, that can 
be cured with some type of de minimus rule.
Question 11 B.
    It is my understanding that trustees apply an approved overhead 
percentage to the administration of their entire caseload, rather than 
a monthly dollar amount. Accordingly, the larger repayment plans do and 
will continue to subsidize the administration of smaller plans.
Question 12.
    Yes, I disagree with Ms. Miller's view. The Ernst & Young study of 
last year and its recent update (responding to legislative changes) 
demonstrate that there is a small but significant percentage of filers 
who have debt repayment capacity and should be obtaining their 
bankruptcy relief in Chapter 13.
Question 13 A.
    The 16% figure was presented in the 1997 study of Professors 
Michael Staten and John Barron, published by the Credit Research 
Center, affiliated with Georgetown University.
Question 13 B.
    The 16% figure includes only bankcard debt, which is all unsecured.
Question 13 C.
    The Staten-Barron study estimated all credit card debt (including 
bankcard debt) in the total credit obligations of Chapter 7 and Chapter 
13 debtors to be 28% of the total.
Question 14.
    Since bankcard debt represents roughly one-sixth of the total 
credit indebted ness of debtors in Chapter 7 and Chapter 13 (according 
to estimates of Staten and Barron), it is a little difficult for me to 
understand how bankcard debt becomes a ``disproportionate'' part of the 
overall debt problems of these petitioners.
Question 15 A.
    According to the study conducted by Ernst & Young, it concluded 
that for 1997, under the needs-based system in last year's Conference 
Report, debtors could have repaid some $3 billion over five years.
Question 15 B.
    In 1998, contractual losses were $1.1 billion.
Question 15 C.
    Most charged-off loans are sold at discount to firms that 
specialize in the collection of defaulted obligations.
    For accounts in delinquency, MBNA utilizes telephone calls, 
statement messages, and direct mail to open communications with 
delinquent customers. Once a customer is contracted, a variety of 
payment options are available, for example, electronic debiting of 
customer deposit accounts, fixed payment options, reduced interest (in 
conjunction with CCCS referrals), and offers of settlement for less 
than the full amount of principal.
Question 16.
    No! Both the House and Senate bills in the 106th Congress include 
many provisions that have the potential for significantly improving our 
bankruptcy system, and, hopefully, over time creating conditions in 
which consumers who suffer life events producing financial disruption 
will look to credit counseling and other alternatives short of 
bankruptcy. It would be unfortunate not to begin putting in place all 
of these reforms, many of which will be most effective when working as 
part of an integrated whole.
Question 17.
    My own prioritizing would be as follows : (1) custodial parents, 
(2) obligations to governmental entities, (3) secured creditors, (4) 
unsecured creditors including card issuers.
Question 18.
    The two debts should not and are not treated the same under either 
current law or proposed reform. Non-dischargeability in such cases is 
only a presumption which may be overcome by demonstrating a legitimate 
reason for obtaining the credit. I am not aware of any court which 
would not view the purchase of food and fuel as legitimate. By the same 
token, I would hold that the law would not condone the obtaining of 
credit without an intent to repay for luxury good and services or 
frivolous activity such as gambling.
    On a purely personal basis, the mother's case is clearly the most 
appealing. In fashioning public laws and implementing regulations one 
must, of course, be attentive to the practical problems of enforcement 
and the associate requirements of proof. With cash advances, money 
being fungible, it is difficult (perhaps impossible) to determine the 
precise use of any particular cash advance. Therefore, for cash 
advances the practical approach is to establish limits on discharge 
based on timing and amount. I believe this is the approach in existing 
law.
Question 19.
    I find the premise for this question troubling. I hope there is no 
intention to place bankruptcy reform in a partisan political context. 
All of us who have worked in support of these legislative reforms have 
been pleased by the support, cooperation and encouragement we have 
received on both sides of the political aisle. It has been particularly 
pleasing to note that in this Congress both the House and Senate bills 
have had as their original co-sponsors prominent and respected Members 
of Congress from both political parties.
Question 20.
    Last year's Conference Report includes a number of new creditor 
obligations. Even though some are not necessarily relevant to consumer 
bankruptcy, it does seem to me that a sound balance was achieved, which 
I accept as fair and necessary.
                               __________
                   Judge Carol J. Kenner's Responses
                             U.S. Bankruptcy Court,
                                 District of Massachusetts,
                                        Boston, MA, March 23, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.

Re: Followup Questions to the Senate and House Joint Hearing on 
Bankruptcy Reform

    Dear Chairman Hyde: Thank you for forwarding to me the followup 
questions of Senators Torricelli and Grassley. Their questions and my 
answers are as follows:
                          senator torricelli:
    1. Senator Torricelli first asked whether, based on my experience, 
Congress's intention of providing meaningful debt relief in Chapter 7 
for honest, hard-working, middle class American families was best 
served by the current policy of not requiring bankruptcy courts to 
review reaffirmation agreements (except where the agreement is not 
accompanied by a statement from the debtor's attorney) or by the 
earlier policy, contained in the Bankruptcy Code as it existed in 1983, 
mandating court review of all reaffirmation agreements.

    Based on my experience, I believe that Congress's intention is 
better served by the earlier version of the law, which required court 
review of every reaffirmation agreement. This is the only means by 
which raffirmation agreements can uniformly get the independent review 
that the Bankrtupcy Code now attempts to obtain (in most instances) 
from the debtor's attorney, with extremely mixed results. The 
importance of independent review may be heightened if additional 
provisions are added to the Bankruptcy Code that increase the leverage 
of some creditors to obtain reaffirmation agreements. (See response to 
Question 2.)

    2. Senator Torricelli's next question was this: in view of my 
testimony--that some debtors reaffirm debts after being accused by 
credit card companies of having committed acts that make those debts 
nondischargeable, whether or not they are guilty, because they cannot 
afford to defend themselves in a court proceeding--what will be the 
effect of adding more execeptions to discharge that make it 3easier for 
credit card companies to argue that their debts are nondischargeable?

    The likely effect would be to increase the leverage of credit card 
companies to obtain reaffirmations agreements, even from honest 
debtors. Credit card companies presently rely heavily on the ecxception 
from discharge for fraud and misrepresentation, 11 U.S.C. section 523 
(a)(2)(A). Their complaints typically allege that the debtor incurred 
credit card debt without truly intending to repy the debt: a fraudulent 
misrepresentation of intent to repay. These cases almost always boil 
down to subjective judgments of intent, made on the basis of 
circumstantial evidence: we rarely have direct evidence of what the 
debtor was thinking when he or she incurred debt. Because the 
applicability of the exception turns on a judgment call, (1) the 
creditor can plausibly allege that exception applies without carefully 
looking into the cirmsumstances of the case, (2) resolution of the 
complaint is more costly because it requires litigating a disput of 
fact, and (3) even the honest debtor cannot be certain that the Court 
will ultimately read the circumstantial evident in the Debtor's favor. 
Thus, the uncertainty of the standard gives the creditor easy leverage 
over honest and dishonest debtors alike, leading many honest debtors to 
concede nondischargeability or to reaffirm the debt. The proposed 
amendment to section 523 (a)(2), set forth in section 310 of S. 625, 
would expand the presumption of nondischargeability for certain credit 
card debts. The presumption would further strengthen the hand of credit 
card companies.

    3. Senator Torricelli's final question is whether I would agree 
with the suggestion that the recent successful prosecution of certain 
consumer creditors for widespread illegal reeaffirmation practices 
demonstrates that ``the system works,'' such that review of the 
reaffirmation process is not necessary.

    I disagree with this position for reasons I set forth in response 
to Senator Grassley's first question below.
                           senator grassley:
    1. Senator Grassley's first question concerns the problem of 
debtors being coerced into reaffirmation agreements by abusive or 
deceptive creditor practices: given the laws and harshsanctions that 
are already in place for dealing with such conduct, why shouldn't we 
conclude that what we need is betyter encofrcement of existing laws, 
not new laws?

    Senator Grassley's concern about the probelm of illegal practices 
is valid. His empahisis on enforcement of existing laws is also well-
warranted. My own experience with illegal creditor practices, however, 
is limited to the recent Sears case, to which the Senator's question 
makes reference; and, as a matter of judicial ethics, I am not at 
liberty to comment upon that case. Nonetheless, I can and would like to 
clarify that the subject of my tesitmony before the joint committees 
did not concern conduct that is illegal. Rather, my concern was and is 
with tactics that, though they fall within the bounds of the current 
law, nonetheless may intimidate debtors into uniformed and ill-
considered decisions to reaffirm.
    The Bankruptcy Code deals with the problem by mandating a third-
party review to protect debtors from the imprudent decisions they make, 
often (but not always) under pressure from overbearing creditors. As I 
explained in my intiial statement, because this review is most often 
performed by the debtors' counsel, who have something of a conflict of 
interest when asked to be independent judges of what their clients 
propose, ti oftem doesn't result in a meaingurl review at all. Out of 
loyalty to their client, many attorneys simply facilictate the client's 
decision to reaffirm by providing the necessary declaration.
    In essence, this is a case where the policy--the requirement of an 
independent review--is correct but the enforcement inadequate. To 
provide the necessary enforcement, the Code should be changed to 
require that a mandatory, non-waivable review be performed by the 
bankruptcy judge in every instance.

    2. Senator Grassley's last question concerns the effect on the 
Bankruptcy Court's workload of my proposal for court review of all 
reaffirmation agreements. He asks (1) whether I have considered how my 
proposal would affect the staffing formula used by the Judicial 
Conference to determine whether to request the creation of additional 
bankruptcy judgeships and (2) whether I have run my proposals by the 
relevant committees of the Judicial Conference.

    I have not considered how the proposals would affect the staffing 
formula, whether independently or in the context of the other 
amendments in H.R. 833. Nor have I run my proposal by any committee of 
the Judicial Conference. The increase in the workload would vary from 
judge to judge and would depend on the procedures and mechanisms 
developed--in the Code and Bankruptcy Rules, in the local rules of the 
various districts, and by individual judges--to facilitate the review. 
I believe the additional work that would be required to carry the 
proposal into effect is well-justified by the need to ensure to debtors 
the full benefit of their discharge. The additional work can be 
minimized by a requirement (along the lines of those in the Truth in 
Lending Act) that reaffirmation agreements clearly state to debtors the 
full cost over time, in principal and finance charges, of their 
reaffirmation, so that debtors and the court can more readily balance 
the costs and benefits of each agreement.

    If I can be of any further assistance, please do not hesitate to 
contact me.
            Sincerely,
                                           Carol J. Kenner,
                                     U.S. Bankruptcy Court,
                                 District of Massachusetts.
                               __________
                         Larry Nuss' Responses

                              Credit Union National
                                         Association, Inc.,
                                    Washington, DC, March 30, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Chairman Hyde: I am responding on behalf of Larry Nuss of the 
Cedar Fall Community Credit Union, who appeared before the Joint 
Hearing of the House Subcommittee on Commercial and Administrative Law 
and the Senate Subcommittee on Administrative Oversight and the Courts 
to testify on bankruptcy reform on March 11. I wish to extend our 
thanks for agreeing to keep the hearing record open an additional week 
to provide the opportunity to answer the additional questions provided 
to Mr. Nuss. His answers, as the witness for the Credit Union National 
Association (CUNA), are attached.
            Sincerely,
                             Gary J. Kohn, Vice President &
                                Senior Legislative Counsel.

Enclosure
          answers to senator torricelli's followup questions:
    Does it bother you that the lending practices of large for profit 
lenders are increasing your losses? Do you think you deserve better 
treatment in bankruptcy because you at least are trying to lend only to 
those people who are more likely to be able to repay?

    In most case situations where our member files for bankruptcy 
relief, we find that the member has taken on more credit than they are 
able to repay on a systematic regular basis. We will attempt to work 
out a repayment schedule that will assist the member in making regular 
payments on their debt. We will analyze the annual percentage rates to 
determine what debt we can consolidate in order to reduce the member's 
total finance charge. If the member has equity in a home we will 
counsel the member emphasizing that they are pledging their home to 
consolidate debt before finalizing a consolidation loan. In many cases 
we are able to reduce their interest rate to half of the rate they are 
paying on unsecured debt. We also determine if they have equity in an 
automobile and consolidate debt into the auto loan, again reminding 
them that an auto will require replacement some time in the future. 
When we are able to consolidate members' debt, we request that they not 
respond to any other offers that they may receive in the mail or by 
telephone. Our philosophy is to evaluate each member's request on its 
own merits. A member must request an increase in secured and unsecured 
debt. We do no automatically increase a members line-of-credit like so 
many creditors practice. We feel that members have a tendency to 
reaffirm with the credit union because of our member-owned cooperative 
structure. They also recognize that they will continue to have a need 
for financial services. For many years our credit union has maintained 
a low net charge-off ratio in spite of a delinquency ratio that was 
above peer group comparisons, we feel these ratios exemplify the fact 
that we attempt to ``work out'' a satisfactory repayment of debt that 
not only helps the credit union but also restores the self-esteem most 
members have and we think this is very important for the members, if 
the credit union did not receive reaffirmations, it would have a major 
impact upon the credit union's capital structure.
           answers to senator grassley's followup questions:
    How much has the Cedar Falls Community Credit Union lost due to 
bankruptcy filings?



                                                   Percentage of total
                                     Amount            charge-offs

1998:                               $34,813 =   51.8%
1997:                               $40,237 =   38.5%
1996:                               $39,353 =   58.6%
1995:                               $19,848 =   35.0%


    Could you comment on how many Chapter 7 cases you encounter versus 
the number of Chapter 13 cases you encounter?



                                                                     Number of filings

                                                   Chapter 7                          Chapter 13

1998:                                                           18       1 converted to Chapter 7
1997:                                                           24       2
1996:                                                           21       4
1995:                                                           17       0


        senator russ feingold's followup questions and answers:
    1. You report in your testimony that National Credit Union 
Administration data show that credit unions had approximately 253,000 
members file for bankruptcy in 1998, an increase over the 250,000 
filings in 1997.

          A) What was the total number of members in the credit unions 
        that were the subject of the NCUA statistic in 1998 and 1997, 
        and the percentage of credit union accounts in bankruptcy in 
        those two years?

          Before answering the question, let me first correct the 
        record. The testimony indicated that the number of member 
        bankruptcy filings were according to the NCUA. These estimates 
        are, in fact, from CUNA's own research department. The estimate 
        is, however, based on NCUA data, but because privately insured 
        credit unions do not report to the NCUA, the agency's data is 
        incomplete.
          In 1998, CUNA estimates that the total number of credit union 
        member was 76.1 million, while in 1997 the estimate is 73.5 
        million. We do not have statistics for the percentage of credit 
        union accounts in bankruptcy. We do know that the dollar amount 
        of loan balances subject to bankruptcy, as a percent of total 
        balances was 0.40 percent in 1998 and 0.48 percent in 1997.

          B) Unless credit union membership declined significantly in 
        1998, a 3,000 increase in credit union member bankruptcy 
        filings in 1998 (just over a 1% increase from the previous 
        year) is probably far below the nationwide filing rate 
        increase. Do you attribute this lower increase to self-
        correction in lending and/or the high standard of care 
        generally used by credit unions when lending to their members?

          The credit union percent increase in bankruptcy filings is 
        lower than the national percent increase. The lower rate of 
        credit union increase could be attributable to many things. For 
        instance, compared to national averages, credit union 
        households are more likely to be two-income households and thus 
        may be less exposed to shocks related to job loss, etc. 
        Likewise, credit union field of membership policies may keep 
        increase in check. Also, in 1997, the growth rate in revolving 
        credit nationally was 5.5 percent. In contrast, the growth rate 
        in credit union personal unsecured loans was -3.5 percent and 
        +1.6 percent for credit card balances. There is a strong 
        correlation, as indicated in other testimony, between growth in 
        unsecured credit and bankruptcy filings. The slower growth in 
        credit union unsecured credit may have something to do with 
        stricter underwriting, but it is difficult to substantiate.

    2. You report that the Credit Union National Association estimates 
that almost half of all credit union losses in 1998 were bankruptcy-
related and that those losses reached $684 million.

          A) Does this mean that the bankruptcy losses are $684 million 
        or the total losses are $684 million?

          The $684 million figure is for bankruptcy losses, not total 
        losses. The calculation is based on the following: dollar 
        amount of total loans (CUNA estimate)  x  net chargeoffs as a 
        percent of total loans (preliminary call report data from NCUA) 
         x  percent of net chargeoffs due to bankruptcy (preliminary 
        call report data from NCUA). That is: $254.2 billion  x  .0057 
        x  .472 = $684 million.

          B) To enable us to determine the overall credit union default 
        rate and bankruptcy default rate, what was the aggregate loan 
        portfolio of all credit unions included in these statistics?

          As of year-end 1998, total loans were $254 billion, while 
        total loans at year-end 1997 were $238 billion.

    3. According to your testimony, your credit union currently has 
8,300 members. In 1998, 18 of your members (approximately .02%) filed 
for bankruptcy. The filing rate among your membership is far lower than 
the national filing rate. Although the national nonbankruptcy filing 
rate has increased substantially since 1995, your filing rate in 1998 
(approximately .02%) is the same as in 1995 (assuming you had 8,300 
members then as well).

          A) To verify that your filing rate was approximately the same 
        in 1995 as it is in 1998, how many members did you have in 
        1995?

          Our credit union had 6.031 members on December 31, 1995. On 
        December 1, 1995, we had a single employee group credit union 
        merge with Cedar Falls Community Credit Union with the merging 
        credit union increasing our membership total by 840 members. 
        The merging credit unions's sponsor had announced that they 
        were going to be closing their Waterloo manufacturing site and 
        moving their members would be better served by merging with 
        another area credit union rather than attempting to convert to 
        a community charter on their own.

          B) Do you think that if other lenders were as careful as you 
        are, that the market would fix the current ``bankruptcy 
        crisis'' without the proposed government intervention?

          Probably not. We are concerned that conservative lending 
        practices may not the entire answer to increasing bankruptcy 
        filings. While credit union growth in bankruptcy filings was 
        slower than the growth observed nationally, the level of 
        bankruptcy filings amongst credit union members remains near 
        all time highs. Over the past 10 years, total borrower-
        bankruptcies at credit unions have increased 82 percent. In 
        that same period, credit union membership increased by only 26 
        percent. But the nation has experienced a positive economy for 
        an extended period of time and what will be the rate of filings 
        may very likely increase further. Credit unions may be more 
        ``careful'' lenders than others, but many factors contribute to 
        the growth in credit union borrower-bankruptcies, and more 
        often than not they are factors out of credit union's control. 
        Certainly, increased consumer financial education could be a 
        great help; thus CUNA's increased efforts in this area.

          C) Although your filing rate is nearly identical in 1998 to 
        your 1995 rate (assuming that the number of members has not 
        changed substantially), your losses appear to have increased 
        from $19,848 in 1995 to $34,813 in 1998. If you adjusted your 
        numbers for inflation and reported your 1995 losses in 1998 
        dollars, how would your losses compare in those two years? If 
        there still is a substantial difference, what accounts for that 
        difference in losses?

          In comparing the 1995 loss total to 1998 losses after 
        allowing for inflationary adjustments, the loss comparison 
        would seem to indicate an increase in the amount being charged-
        off. If some of the members filing for bankruptcy under Chapter 
        7 did not reaffirm their debt, the losses would be 
        substantially increased. For those members that filed Chapter 
        7, the ease of avoiding debt contributed to the increase in 
        adjusted charge-offs.

    4. The losses in dollars that you experienced in 1998 that you have 
attributed to bankruptcy are only .014% of your loan portfolio. Does 
this extremely low dollar loss rate, along with your low filing rate, 
provide further evidence that bankruptcy losses can be contained by the 
market without unduly restricting credit availability overall?

          The bankruptcy ratio experienced in 1998 and the low 
        percentage to our entire loan portfolio is indicative of a 
        conservative lending philosophy established by our Board of 
        Directors and lending staff.

    5. You testified that reaffirmation agreements have been a 
significant factor in reducing your losses.

          A) How many of your bankrupt members reaffirmed one or more 
        debts to your credit union in 1997 and 1998?

          We had nine member reaffirm in 1997 and another ten 
        reaffirmed debt in 1998.

          B) What proportion of those reaffirmations was for partially 
        secured car loans?

          1997--Six reaffirmed auto loans
          1998--Eight reaffirmed auto loans
          1997--Two reaffirmed a combination of auto and unsecured
          1998--Two affirmed a combination of auto and other
                One did not reaffirm but continued to repay on an auto

          C) What proportion was for credit cards or other unsecured 
        debts?

          1997--Two reaffirmed a credit card
          1998--One reaffirmed a credit card

          D) What was the total dollar amount of debt that your members 
        reaffirmed in 1997 and 1998?

          1997--$121,581.83
          1998--$70,114.60

    6. Your testimony indicates that you believe that your 
reaffirmation agreements confer a benefit on the debtors who reaffirm 
those debts. As you know, you may be one of several lenders asking a 
debtor to reaffirm her debts, and it may be financially infeasible for 
that debtor to honor all of those commitments. Reaffirmation of other 
debts may interfere with the debtor's ability to repay your credit 
union, and other lenders might use more aggressive collection practices 
and higher fees to encourage the debtor to pay them first.

        A) If debtors were not allowed to reaffirm any unsecured debt, 
        would most of your members continue to pay you voluntarily?

          A very small percentage of member filing for bankruptcy do 
        not complete a reaffirmation agreement but continue to pay. Our 
        current policy regarding members causing a loss to the credit 
        union simply states that the only service allowed is a basic 
        share account allowing the member deposits and withdrawals. 
        They are no permitted to have any other services being provided 
        to the general membership but they can attend and vote at 
        regular membership meetings. A reaffirmation agreement is 
        identified as a commitment to repay which allows the credit 
        union to extend other services to the member that has not yet 
        cause a loss to the credit union and its membership. The lack 
        of formal reaffirmation agreements would tend to lesson the 
        debtors' commitment to repay some or all of the unsecured debt. 
        Voluntary payment is fine, but we no recourse if they stop 
        paying except to go after the collateral. We are prohibited 
        from getting any deficiencies, otherwise known as a ride-
        through.

          B) Do you believe that the benefits your members receive from 
        reaffirming debts to you would make them more likely to pay you 
        than some of their other creditors?

          Again, the ability to have access to other financial services 
        is a viable option many members feel is important. In addition, 
        most members realize the commitment the credit union has to 
        helping the member rebuild their credit status is recognized as 
        a member benefit.

          C) Would you support court review of reaffirmation agreements 
        if it did not necessarily require a hearing and could be done 
        inexpensively?

          We would like to review any proposed structure of a court 
        review of affirmation agreements but it is possible a viable 
        program could be instituted. The caseload of the bankruptcy 
        court system would be a challenge to this concept but we would 
        be receptive to pursing the idea.

          D) Do you believe that reaffirmation agreements should 
        clearly state the terms of the agreement so that debtors can 
        understand the financial consequences of the reaffirmation, 
        similar to the Truth in Lending Act requirements? If not, why 
        not?

          When we discuss loans with our members we currently review 
        all terms of the loan as required by the Truth-In-Lending Act. 
        We certainly feel that debtors should get good information 
        about their legal obligations and protections. But just as 
        importantly, we feel that financial education and the 
        understanding of finance is lacking. Education and counseling 
        should be key factors to be considered when helping debtors 
        understand the financial consequences to reaffirmation.

    7. You testified that you support needs based bankruptcy, in part 
because you believe that more of your members could repay some of their 
debt in Chapter 13. However, the national statistics on Chapter 13 plan 
completion are low, and many do not distribute much, if any, payments 
to unsecured creditors.

          A) Of the Chapter 13 cases your members have filed since 
        1995, how many were completed or still in payment?

          Two Chapter 13's remain in payment.

          B) How many dollars of unsecured debt have been collected 
        from in the Chapter 13 cases of your members since 1995?

          $8,854.49 of a total of $27, 479.71.

          C) If one of your members files for bankruptcy, are you 
        better off financially if the member files for Chapter 7 and 
        reaffirms her debt to you in full rather than filing for 
        Chapter 13 and paying all of her debts pro rata over several 
        years?

          The Chapter 13 experience has been with secured loans in 
        almost all cases. One member remained in Chapter 13 for several 
        months with the case being terminated. We were unable to 
        consolidate the member's loans at the credit union and assist 
        them in purchasing a more reliable auto for family usage. 
        Another member converted a Chapter 13 to Chapter 7 but 
        reaffirmed with us. The loan has since been charged-off due to 
        the termination of her employment. Two Chapter 13 filings have 
        continued to pay full loan payments via payroll deduction and a 
        third has continued to pay contracted payments directly to the 
        credit union. Another Chapter 13 was charged-off because the 
        member moved to Texas and we have never received a payment on 
        the contracted loan. Based upon our experience, a Chapter 13 
        filing in cases where the member has the ability to pay at 
        lease some of the debt is more beneficial to the overall 
        membership than simply charging the balance against the 
        reserves.

    8. Most discussions have focused on the importance of the means 
test, which was the subject of the panel on March 11. However, as Gary 
Klein pointed out at the hearing at which you testified, the bankruptcy 
bill spans 300 pages and contains hundreds of amendments affecting 
consumer bankruptcy that have received little or no attention. Would 
you be willing to accept a means testing amendment and forgo the 
remainder of the other significant consumer bankruptcy amendments, such 
as the various provisions expanding the nondischargeability of credit 
card and retail charge card debt and the provisions inflating the value 
of nominally secured debt?

    Means testing is an important cornerstone of reform. Without 
knowing specifically what all the ``significant consumer bankruptcy'' 
amendments are, we are unable to comment on this proposal.

    9. In recognition of the lower loss rates and sometimes more 
responsible consumer lending practices of credit unions, should there 
be special provisions in this legislation that apply only to credit 
unions? Should credit unions be treated differently with respect to 
reaffirmation?

    Credit unions shouldn't be prevented from obtaining reaffirmations, 
since there is no indication that they have any problems in that area. 
Our members, as consumers, should retain the right to choose which 
debts, or whether, to reaffirm.

    10. Do you believe there are any creditor abuses in the bankruptcy 
system that should be addressed in bankruptcy reform legislation? If 
so, what are they?

    We are aware of the illegal practices in reaffirmations in the 
Sears and other cases. As mentioned in my testimony, they were punished 
under the current code and the size of the penalty should act as a 
deterrent for future abuses.
                               __________
    Gary Klein's Response to Senator Torricelli's Followup Questions
    Question: We have been told in the past that there is a difference 
between provisions that are ``debtor friendly'' and those that are 
``consumer friendly''. For example, some people have argued that 
provisions protecting the fresh start for honest families work hardship 
on other consumers who never file for bankruptcy. And, on the flip 
side, we have been told that by restricting debtors' rights, we will 
make the price of credit, goods and services cheaper for nonbankrupt 
consumers. As an advocate of both debtors and of consumers, can you 
comment on whether this distinction is real? Are the interests of 
bankrupt debtors and middle class consumers conflicting?
    Response: No. Organizations that represent consumers [National 
Consumer Law Center, Consumer's Union, and Consumer Federation of 
America] \1\ unanimously believe that proposed bankruptcy legislation 
is among the worst bills for consumers offered in the past 20 years. 
Only the credit industry call this bill ``consumer friendly''.
---------------------------------------------------------------------------
    \1\ Representatives of each organization have reviewed and agree 
with this response.
---------------------------------------------------------------------------
                              explanation:
Bankruptcy cannot appropriately be blamed for credit industry losses 
        that are passed on to consumers. All parties concede that the 
        vast majority of debts written off after bankruptcy couldn't 
        have been cost-effectively collected if bankruptcy had no 
        intervened. ``Bankruptcy losses'' are really just ``bad loan'' 
        losses. The problem for consumers is that the credit industry 
        is too aggressively marketing loans to consumers that can't 
        afford to pay their balance in full each month. The industry 
        does this because, in the aggregate, those loans are 
        profitable.
    The banking industry has claimed that it is losing 40 billion 
dollars each year to the bankruptcy system and that it is passing those 
costs on to consumers at the rate of $400 per family. The unpublished 
credit industry-funded report which served as the basis for this claim 
has been criticized by the GAO for lack of analytical rigor.\2\
---------------------------------------------------------------------------
    \2\ GAO/GGD-98-116R ``The Financial Costs of Personal Bankruptcy'' 
Letter from Associate Director Richard Stana to the Honorable Martin T. 
Meehan.
---------------------------------------------------------------------------
    Families may be discharging debt in bankruptcy, but all of the 
relevant empirical work, including the creditors' own studies, agrees 
that the debtors involved can not afford to repay those debts. Most 
recently, a study released by the American Bankruptcy Institute showed 
that only 3% of chapter 7 debtors can afford to pay back their 
debts.\3\ A recent Ernst & Young study (funded by Visa) concludes that 
bankruptcy debtors can afford to pay back 10 billion dollars in debt, 
but they reached that conclusion only by including secured debt, non-
dischargeable debt, and reaffirmed debt which is not discharged in 
bankruptcy and which must be repaid by chapter 7 debtors in any event.
---------------------------------------------------------------------------
    \3\ Culhane and White, ``Means Testing for Chapter 7 Debtors: 
Repayment Capacity Untapped?'' (American Bankruptcy Institute, 1998).
---------------------------------------------------------------------------
    In reality, the lending community is scapegoating the bankruptcy 
system for losses associated with its bad loans. If no bankruptcy 
system existed, it would likely cost the credit industry two dollars in 
collection costs for every additional dollar generated from the 
overwhelmed consumers that that now get relief in bankruptcy. The 
bankruptcy bill is, in part, an attempt to pass these collection costs 
on to taxpayers.
    The problem could be fixed if lenders were more closely attentive 
to underwriting. Industry consultants estimate that credit card 
companies could cut their bankruptcy losses by more than 50% if they 
would institute minimal credit screening.\4\ They choose not to make 
that effort because high-rate credit card lenders profit, in the 
aggregate, by finding borrowers that cannot afford to pay their 
balances in full each month. Since most of that debt is repaid at high 
rates, the industry profits despite increasing defaults and the 
attendant hardship to families.
---------------------------------------------------------------------------
    \4\ George M. Salem and Aaron C. Clark, GKM Banking Industry 
Report, Bank Credit Cards: Loan Loss Risks are Growing, p. 25 (June 11, 
1996).
---------------------------------------------------------------------------
There is no reason to think that any savings to lenders which would 
        result from tightening the bankruptcy laws would be passed on 
        to consumers.
    There is no evidence that lenders would reduce rates on unsecured 
consumer lending if they could avoid bankruptcy losses. Between 1980 
and 1992, the federal funds rate at which banks borrow fell from 13.4% 
to 3.5%. Nevertheless, credit card interest rates actually rose.\5\ How 
likely is it that savings realized from changes in the bankruptcy law, 
if any, would be passed on to consumers rather than investors? Bruce 
Hammond, Chief Operating Officer of MBNA Corporation conceded this 
point at the joint hearing in which I participated.
---------------------------------------------------------------------------
    \5\ Medoff and Harless, The Indebted Society, at pp. 12-13 (Little, 
Brown & Co. 1996).
---------------------------------------------------------------------------
There is evidence that excessive tightening of the bankruptcy laws 
        would actually increase credit card defaults and credit card 
        losses, because lenders would be able to make more loans to 
        risky borrowers.
    Ausubel, ``Credit Card Defaults, Credit Card Profits and 
Bankruptcy'', 71 Am. Bankr. L.J. 250 (1997). This work, by a University 
of Maryland economist, analyzes credit card lending trends and 
concludes that credit card interest rates cannot be explained by market 
forces. In addition, Professor Ausubel concludes that pressures related 
to risk are important to prevent lenders from making more unwise 
consumer loans leading to more defaults rather than less.
Non-bankrupt consumers benefit from having a viable, effective and 
        cost-efficient bankruptcy system in case something goes wrong 
        in their lives.
    Every American is vulnerable to financial problems related to job 
loss, illness, death of a bread winner and a myriad of other 
circumstances beyond their control. Even former Treasury Secretary John 
Connally was forced by circumstances to file bankruptcy.
    The fundamental reality is that the bankruptcy system serves as 
insurance when unexpected financial problems strike. Although there is 
no proof of a connection between the bankruptcy law and interest rates, 
(and some proof to the contrary), even if there were proof, American 
consumers can and should be willing to pay a small premium for the 
safety valve inherent in a court system designed to help them during 
times of financial distress.
     what would make these bankruptcy bills more consumer friendly?
Do not increase opportunities for creditors to pursue litigation 
        against indigent debtors in bankruptcy and avoid new 
        requirements that would raise the costs and burdens of filing.
    There is no dispute that debtors that can afford to pay back their 
creditors should be made to do so. However, the means test provision is 
only one of 70 provisions that would affect consumer bankruptcy. The 
net result of the means test and these other provisions is that they 
would greatly increase the cost of bankruptcy and reduce its 
effectiveness.
    If the proposed legislation passes, only relatively well-off 
debtors will be able to afford relief in the bankruptcy system. They 
can hire expensive lawyers to navigate the new minefields. Most non-
wealthy families will be unable to afford the system. Those few that 
can will be vulnerable to new creditor-initiated litigation that they 
cannot afford to defend.
Create a balanced bill which includes new consumer protections designed 
        to help consumers avoid over-extension on debt and bankruptcy.
    Credit card marketers go to great lengths to encourage people to 
generate big balances on their cards so that they pay more interest. 
Most even punish consumers facing legitimate financial problems by 
charging punitive late fees and by automatically doubling interest 
rates upon default.
    Any fair and balanced bankruptcy bill must include provisions 
designed to give consumer adequate information about the consequences 
of taking on on more debt. Some example of important protection are:

         Linformation sufficient for consumers to understand 
        how long and how much it would cost to pay off a credit card 
        loan by making only minimum payments;

         Linformation about the risk of repossession associated 
        with credit card security interests;

         La clear picture of what it means to accept a credit 
        card carrying an artificially low ``teaser rate'';

         Lbetter information for bankruptcy debtors about the 
        costs and risks associated with reaffirming a debt in 
        bankruptcy;

         Lprotections for debtors forced into bankruptcy by 
        high rate mortgage loans that violate federal law;

         Lprotections/incentives for consumers that are 
        responsible and pay their balances in full every month;

         Lsanction for overly aggressive collection efforts 
        which force people into bankruptcy (e.g. refusal to agree to a 
        reasonable debt management plan, or threatening to take an 
        action which is not legally permissible);

         Lbetter education when bankruptcy is filed to teach 
        people how to understand and manage credit; and

         La provision which insures that any profits generated 
        by tightening the bankruptcy laws is passed on to consumers.

    Including these provisions in the bill would not just benefit 
consumers. Honest and reasonable creditors that act responsibly in the 
market place would also benefit, because more money would be available 
for consumers to repay their debts.
    Thank you for the opportunity to respond on behalf of consumers to 
this important question.
                               __________
                       Edith H. Jones' Responses

                      U.S. States Court of Appeals,
                                             Fifth Circuit,
                                       Houston, TX, March 22, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.

Re: Joint Hearing of the House Subcommittee on Commercial and 
Administrative Law and the Senate Subcommittee on Administrative 
Oversight and the Courts on Bankruptcy Reform, March 11, 1999

    Dear Congressman Hyde: Attached you will find my answers to 
questions submitted in writing as a followup to the March 11 hearing on 
bankruptcy reform. Thank you for giving me the opportunity to respond 
to these questions.
            Very Truly Yours,
                                             Edith H. Jones

cc: Honorable George W. Gekas
            followup questions from senator chuck grassley:
    1. You are a Federal Appeals Court judge who hears bankruptcy 
appeals. Do you think a bright-line rule with respect to means-testing 
helps judges make clear and consistent decisions?

    Yes. Whenever clear standards are embedded in the law, the law is 
more easily applied by the court and more easily followed by the 
citizens. The desirability of uniformity cannot be over-emphasized.
    When the 1978 Bankruptcy Code was written, only approximately 
300,000 bankruptcies were filed annually. The Code conferred enormous 
discretion on bankruptcy judges with the thought that they could use 
that discretion to accomplish justice in each individual case, both to 
enhance the fresh start and to curb abuse. Virtually open access to 
bankruptcy relief was provided by the Code.
    As Congress is aware, the number of consumer bankruptcy filings has 
more than quadrupled in the last 20 years. Any thought of tailoring 
justice to the individual case is now a mirage. Cases are routinely 
processed en masse in the courts, and most debtors never even see a 
judge. The participants in the mass bankruptcy system--debtor's 
lawyers, Chapter 7 and Chapter 13 trustees, U.S. Trustees, and judges--
have neither the time, the resources, or the incentives thoroughly to 
police the system. For creditors, the costs of rooting out and curbing 
abuse and fraud through a litigation-oriented system are prohibitive. I 
hasten to add that I am not castigating any of the participants in the 
bankruptcy system, but I must observe how the sheer volume of filings 
has undermined the original ideal of dispensing individualized justice.
    The only practical, fair way to run a system as large as the 
current one is by means of objective standards that define when a 
debtor should be required to repay some debts in exchange for receiving 
a discharge and fresh start. Congress, as the people'' representatives, 
is best situated to articulate uniform standards.

    2. During your tenure on the Bankruptcy Review Commission, did you 
propose a means-testing provision?

    In a dissent to the Commission Report, Commissioners Shepard and I 
proposed five different means-testing provisions, several of whose 
features resemble H.R. 833.\1\ This and other dissents explain that the 
Commission's process with respect to consumer bankruptcy, flawed from 
the outset, prevented serious consideration of most meaningful reforms 
to counter abuse and fraud.\2\ Means-testing in particular never had a 
hearing in the Commission.
---------------------------------------------------------------------------
    \1\ See Additional Dissent of Commissioners Jones and Shepard from 
[NBRC] Recommendations for Reform of Consumer Bankruptcy Law.
    \2\ Recommendation for Reform of Consumer Bankruptcy Laws by Four 
Dissenting Commissioners; Dissent from the Process of Writing the NBRC 
Report by Commissioners Gose, Jones and Shepard.
---------------------------------------------------------------------------
    Since the Commission completed its tenure, however, the argument 
for means-testing has become increasingly compelling for two reasons. 
First, the number of personal bankruptcies continues to increase and 
remains at an incredibly high level. Second, more empirical studies are 
confirming the seminal work of Professors Barron and Staten; the 
studies all demonstrate that tens of thousands of well-off, employed 
people have filed bankruptcy despite their ability to repay (in total) 
billions of dollars to creditors. See, e.g., the new Ernst & Young 
study based on 1997 bankruptcy petitions; See also, Jones and Zywicki, 
It's Time for Means-Testing, 1999 B.Y.U.L.J.1 (attached to my testimony 
for this hearing). Such freeloading is an affront to the hardworking, 
lower-income citizens who bear the cost of bankruptcy losses, and it is 
fundamentally inconsistent with the means-testing rationale behind 
nearly all of the other programs in our government's social safety net.
              followup questions from senator torricelli:
    A. You have commended Congress for rejecting findings of the 
National Bankruptcy Review Commission, of which you were a member. 
However, 7 out of 9 Commissioners chose not to recommend to Congress 
that it consider a formal means testing system. Now we have heard that 
the only recent independent study on this subject, sponsored by the 
American Bankruptcy Institute, found that even if we did turn the 
system upside down, only a small portion of chapter 7 debtors could pay 
even 20% of their debts. In addition, we have a witness here who often 
represents unsecured creditors and who is telling us that she thinks 
the means test does not work. In light of these factors, why should we 
move to a formulaic means testing system?

    The reasons why we should move to a formulaic means-testing system, 
of the sort proposed by H.R. 833, are fully stated in the testimony I 
submitted previously for this hearing as well as the testimony of 
Professor Todd Zywicki for the same hearing. Rather than burden the 
record further, I refer you to those sets of remarks.
    I must, however, respectfully disagree that the ``factors'' to 
which you refer counsel against means-testing. First, it is incorrect 
that ``7 out of 9 Commissioners chose not to recommend to Congress'' a 
formal means-testing system. As my previous answer to Senator Grassley 
notes, the Commission never formally considered and debated means-
testing. Had it been given a fair hearing, I don't know what the 
Commission would have concluded.
    Second, I respectfully disagree that the only recent 
``independent'' study on means-testing is that sponsored by the 
American Bankruptcy Institute. Although I respect ABI, its membership 
consist of professionals who make their living from the bankruptcy 
system. If the mere source of a study constitutes bias, then surely ABI 
is not less immune to the charge than the creditor groups which have 
sponsored studies of other researchers.
    But to challenged ABI or the professors who conducted the ABI study 
on such a basis is as unfair to them as it is to the creditor groups 
and the studies conducted by Ernst & Young, The WEFA Group, and 
Professors Barron & Staten. In our recent article on means-testing, 
Professor Zywicki and I analyze all of these studies and conclude that 
they reflect a significant ability on the part of high income-earning 
Chapter 7 debtors to repay unsecured, non-priority debt. Please see our 
article, attached to my testimony, at pp. 10-24.
    Third, I respectfully disagree with the witness who thinks that the 
means-test does not work. No matter what the lawyers for unsecured 
creditors say about means-testing, it can be hardly doubted that the 
creditors themselves favor it. Significant advocates of H.R.833 include 
child support enforcement agencies, the National Governors' 
Association, and every major creditor group.
    Further, Professor Zywicki's and my article deals at length with 
objections that have been made to means-testing. In brief, such 
objections overlook several points. First, means-testing is easily 
amenable to information procession software. Second, if means-testing 
imposed more costs on trustees, the costs could be recovered by such 
devices as increasing filing fees for means-test-eligible debtors. 
Third, while there may be initial legal uncertainty surrounding some 
facets of a means test, the same is true whenever any change occurs in 
the law. The initial court decisions will resolve such uncertainties.

    B. Supporting the concept of needs based bankruptcy is one thing; 
supporting the details of this bill's means testing approach is 
another. Even if you support a ``means based'' system in theory, aren't 
you concerned by the logistical problems that have been identified 
regarding this means test by the Commercial Law League, trustees, 
judges, and the National Bankruptcy Conference?

    As you observe, interest groups in the bankruptcy community have 
opposed means-testing as embodied in H.R. 833. In my experience, 
however, these same interest groups have opposed any type of means-
testing in any form. While saying they are opposed to the details of 
specific proposals, their opposition is more to the details of specific 
proposals, their opposition is more philosophically rooted. These 
groups tend to believe that bankruptcy should operate on an open-door 
policy, where anyone--no matter how well off--can avail himself of the 
process without having to justify his need for relief. These groups 
also tend to deny the power of the growing evidence that shows many 
well-off income-earning individuals file bankruptcy notwithstanding 
their ability to repay some debt.
    When forced to confront the problem of debtors who are able to 
repay some of their debts, these interest groups advocate giving the 
bankruptcy judges discretion to week out undeserving cases. The judges 
have had this discretion for 20 years, and it has obviously not worked! 
The number of cases had exploded, while the integrity of the system has 
declined.
    The H.R. 833 proposal is about as fair as can be devised given its 
modest application, its reliance on established national guidelines for 
living standards, and an ``exceptional circumstances'' exclusion. 
Further logistical simplicity could be achieved, however, by going back 
to last year's ``up-front'' test contained in H.R. 3150. That proposal 
imposed less of a burden on Chapter 7 trustee, who, under H.R. 833, 
will probably have to litigate more cases under a section 707(b) test. 
Nevertheless, critics underestimate the clarity that will be achieved 
from having uniform national standards in this area. I am confident 
that, just as accountants and CPAs adjust to far mor complex 
modifications of our federal tax laws, so the bankruptcy community 
participants can adjust to this modest means test.

    C. As a judge, do you think it is appropriate to make debtors' 
lawyers personally and financially responsible if their clients are 
found to have filed under the wrong chapter?

    I believe you are referring to Sec. 101(b) (3) of H.R. 833, which 
imposes on debtors' lawyers (1) a responsibility similar to that in 
Fed. R. Civ. Proc. 11 for certifying the debtor's filings at court and 
(2) a provision for fee-shifting in cases where the means-test is 
egregiously evaded. I do not see why debtors' lawyers should be immune 
from the potential liability that any lawyer faces when filing a 
pleading in federal court: if the lawyer has no reasonable basis for 
believing in the accuracy of the pleading, he may be subject to 
sanctions. Such a device is necessary to maintain the integrity of 
conduct in federal courts and to avoid drowning our meritorious claims 
with those that have no real foundation. Further, all lawyers have an 
ethical responsibility to deal fairly with the court and with their 
opponents. Why should bankruptcy be any different?
    The fee-shifting provision is written in language similar to that 
of numerous federal statutes, which provide for an award of fees if the 
litigant's position was not ``substantially justified.'' The provision 
is discretionary, not mandatory. This provision is matched by an equal 
and opposite provision for fee-shifting if a motion to require 
conversion under the means-test is itself not ``substantially 
justified.''
    Scandalously, the entire bankruptcy community acknowledges that 
debtors' schedules and statements of affairs, which list their income 
and assets as well as liabilities, are neither accurate nor 
trustworthy. This is true although the documents are filed under 
penalty of perjury, and competent counsel should be advising their 
clients about the risks of filing inaccurate papers. Unfortunately, 
debtors' lawyers, whose offices often mass-process bankruptcy 
petitions, see no to be fulfilling their ethical responsibilities. 
Strong medicine like that in this bill is necessary to enhance the 
integrity of documents filed in bankruptcy court. No one has proposed 
any better device.

    D. Even if we make it less ``easy'' to file for bankruptcy so that 
the filing rate goes down, it seems to me that we have looked at only 
one half of the problem because some people are going to default on 
their obligations whether or not they ``discharge'' their debts in 
bankruptcy. Can you comment on this? Do you think that more needs to be 
done to help prevent people from incurring so much debt in the first 
place?

    This questions seems to indicate that no matter what changes are 
made to bankruptcy law, some people will default on their obligations, 
and maybe their defaults are due to excessive levels of personal debt. 
I agree that bankruptcy reform addresses one major problem--abuse of 
the bankruptcy laws. Insofar as law serves a teaching function for 
society, of course, tightening up the bankruptcy laws sends a message 
to society at large that it is better to keep contracts than to break 
them--especially if you are able to repay. I don't think we can 
quantify this teaching function of the law, however.
    Whether ``incurring so much debt'' is a social problem or not is a 
question beyond bankruptcy law and within the special capability of 
Congress. Logically, those who are afraid that people are incurring too 
much debt ought to be just as concerned about the non-bankrupt who is 
hard pressed by obligations as they are about the welfare of the 
bankrupt individual. If Congress thinks interest rates are too high, it 
can re-impose usury ceilings. If it thinks credit practices are too 
lax, it can institute additional truth-in-lending or credit controls. 
Congress should undertake such measures after full public debate, 
however, rather than indirectly through manipulation of bankruptcy 
laws. Such a debate would pit those who paternalistically fear consumer 
credit against those who believe that the wise use of ``democratized'' 
consumer credit, home loans and student loans has contributed 
enormously to increased personal welfare and our economic prosperity.

    E. Using conservative economic theories, some researchers believe 
that restricting bankruptcy laws will increase defaults and ultimately 
increase bankruptcy filings. Do you disagree with those conservative 
economists?

    This is a difficult question to answer for two reasons. First, I am 
unfamiliar with those ``conservative economists'' to whom the question 
refers. Second, the observation that ``restricting bankruptcy laws will 
increase defaults and ultimately increase bankruptcy filings'' is 
flatly inconsistent with the previous question, which assumed that 
bankruptcy filing rates will go down if access to bankruptcy 
restricted.
    On one level, I guess these contradictory assumptions symbolize 
that no one knows what will happen to bankruptcy filings if this reform 
bill is passed. The case for reform does not, however, depend on how it 
will affect the number of filings. Reform is justified to prevent 
patent abuses that are now occurring, such as misuse of bankruptcy by 
ex-husbands trying to avoid their marital obligations. Reform is 
justified to prevent people from ``loading up'' on consumer purchases 
just before filing bankruptcies to discourage them for from incurring 
new secured debt just before for filing Chapter 13; to prevent them 
from filing multiple bankruptcies; and to prevent other inarguable 
abuses. Reform is also justified to incorporate an ability-to-repay 
test into bankruptcy, at least for those Americans who are above the 
median family income and who are truly able to repay. If these abuses 
of the bankruptcy law and courts are rectified, it does not matter to 
me whether the filing rate goes up or down, because the public can be 
more confident that the law is being properly used to protect honest 
but unfortunate debtors.
                  followup question from senator kohl:
    The National Bankruptcy Review Commission, which you served on, 
recommended a $100,000 cap on homestead exemptions. I have introduced 
legislation that would establish such a cap. We have heard from some of 
the states with unlimited homestead exemptions that a $100,000 cap 
would unfairly infringe on states' rights. Cap supporters argue that 
debtors are using federal courts and federal laws to get bankruptcy 
relief, and it is fair to make them subject to federal limits in order 
curb egregious abuses, like the recent example of long-time Florida 
resident Burt Reynolds who wrote off over $8 million in debt through 
bankruptcy while still holding onto his $2.5 million estate. Do you 
agree with this recommendation of the NBRC? Please explain your 
response, including your reaction to arguments from both sides.

    In principle, I do not oppose a $100,000 cap on homestead 
exemptions, particularly if it were indexed to account for inflation.
    I agree with cap supporters that debtors have used liberal 
homestead laws, like that of my home state Texas, to shelter large 
amounts of wealth from their creditors. It is also true, however, that 
states have been firmly attached to requiring federal recognition of 
their exemption laws, including their homestead laws, in the federal 
bankruptcy courts.
    The question is how to prevent abuse of bankruptcy Section 126 of 
H.R. 833 would discourage a great deal of abuse by lengthening the 
residency required before a debtor can take advantage of a state's 
exemptions. Thus, a debtor would have to live in Texas for two years 
(rather than the current three months) in order to avail himself of 
Texas homestead protection. A more general reform would limit transfers 
of real or personal property from non-exempt to exempt status shortly 
before filing bankruptcy. In short, while I personally do no object to 
$100,000 cap, other kinds of limitations can reach the same goal.
                               __________
                  Judith Greenstone Miller's Responses
                              Commercial Law League
                                                of America,
                                       Chicago, IL, March 22, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Chairman Hyde: I understand that since the Joint Hearing of 
the House Subcommittee on Commercial and Administrative Law and the 
Senate Subcommittee on Administrative Oversight and the Courts on 
Bankruptcy Reform held on March 11, 1999 (the ``Joint Hearing''), 
additional written questions have been submitted for inclusion in the 
record. The Commercial Law League of American (the ``League''), its 
Bankruptcy and Insolvency Section (``B&I'') and its Legislative 
Committee appreciate the opportunity to have appeared and testified at 
the Joint Hearing about the Bankruptcy Reform Act of 1999, H.R. 833 
(the ``Bill'').
    The League, founded in 1895, is the nation's oldest organization of 
attorneys and other experts in credit and finance actively engaged in 
the fields of commercial law, bankruptcy and reorganization. Its 
membership exceeds 4,600 individuals. The League has long been 
associated with the representation of creditor interests, while at the 
same time seeking fair, equitable and efficient administration of 
bankruptcy cases for all parties involved.
    The B&I is made up of approximately 1,600 bankruptcy attorneys and 
bankruptcy judges from virtually every state in the United States. Its 
members include practioners with both small and large practices, who 
represent divergent interests in bankruptcy cases. The League has 
testified on numerous occasions before Congress as experts in the 
bankruptcy and reorganization fields.
    The League supports changes to the Bankruptcy Code (the ``Code'') 
to limit abuses by debtors and creditors. Any proposed change will have 
consequences on the system. It is the goals of the League to be a 
resource for Congress and to help Congress carefully consider the 
practical implications of each change in order to maintain and preserve 
the delicate balance between debtors' rights and creditors' remedies 
and to foster and effectuate fair treatment for all parties involved in 
the process. With that in mind, the League is pleased to respond to the 
two written followup questions submitted by Senator Torricelli.
Question 1:
    Some people have argued that individuals and groups voicing 
opposition or concerns about the bill are simply trying to block reform 
and believe that b buses should not be addressed. If this is the case, 
why is a creditor oriented group like the Commercial Law League of 
American voicing objections about the bill?
Response:
    There are those who are opposed to any change in the Code. On the 
other hand, many pursue specific agendas. Some feel that there should 
be no limits on relief for a debtor or remedies by a creditor. As 
indicated about, the League views itself as a resource to Congress to 
offer a practical, balanced analysis to proposed legislation. The 
League believes that it should do all it can to support Congressional 
efforts to maintain a Code which provides fair treatment to all 
participants in the system. While this position is sometimes not 
politically popular because it may not fall on the side of an issue 
favored by a proponent, nevertheless, it is a consistent position taken 
by the League. The fact that members of the League represent all types 
of creditors, as well as debtors, frees the organization from the need 
to advocate the interests of any particular creditor group or to pursue 
any specific agenda.
    The League has consistently articulated in its written position 
papers and statements and its testimony before Congress the need for 
reform to address and remedy abuses by debtors and creditors in order 
to improve the bankruptcy system. Although the Bill proposes many 
favorable changes to the Code that the League has endorsed, the Bill 
also proposes several modifications, which, if adopted, will negatively 
impact creditors, as well as other participants involved in the 
bankruptcy process. For example, the anti-strip down provisions of the 
Bill that seek to amend Section 506(a) of the Code, see e.g., Sections 
124 and 125, required a debtor to repay a secured creditor based on the 
full amount of the debt even though the value of the property securing 
the debt may be significantly less than the amount of the outstanding 
indebtedness. Under applicable state law, if the secured creditors 
foreclosed on the loan in order to recover their collateral, the 
creditors would not receive in excess of the fair market value 
attributable to the property, and then be left with an unsecured 
deficiency claim against the debtor. Why should the procedure be any 
different under the Code? Why does Congress believe it necessary to 
alter Section 506(a) of the Code, particularly when the result will be 
that less funds will be available to pay unsecured creditors of the 
estate and the ability of a debtor to formulate and successfully emerge 
from a Chapter 13 repayment plan will be significantly compromised?
    Another provision of the Bill, Section 205, seeks to extend the 
time for assumption or rejection of unexpired executory contracts of 
nonresidential real property from 60 days to 180 days. The only way 
that this time period may be extended is upon consent of the lessor. 
The League opposed this provision because it tips the delicate balance 
contained in the Code by placing landlords of nonresidential real 
property in the position of forcing assumption or rejection within the 
earlier of 180 days after the entry of the order for relief or the date 
of entry of the order confirming a plan. As long as landlords are 
receiving rental payments consistent with Section 365(d)(3), there is 
no reason to create an arbitrary, inflexible and unrealistic deadline, 
which will inure to the detriment of the debtor and its unsecured 
creditors. The debtor is likely to prematurely assume a lease in order 
to facilitate a reorganization, and thereby create a large 
administrative expense for the estate if subsequently it is unable to 
successfully reorganize. On the other hand, this proposed modification 
to Section 365 of the Code may force a debtor to prematurely reject a 
lease necessary and essential to facilitate a reorganization to negate 
the potential prospective administrative hit from failing to confirm a 
plan. In addition, the only way that the time period may be extended is 
upon motion of the lessor; the court would no longer have any 
discretion to determine whether justification existed to extend the 
time period or whether an extension was in the best interest of 
creditors and the estate. This provision gives too much bargaining 
power to the lessor, is likely to result in the extraction of 
additional benefits or concessions by the lessors, and impacts the 
debtor's ability to successfully reorganize, particularly in cases 
involving multiple shopping center locations. For example, take a 
debtor with multiple retail locations in shopping centers, who files 
bankruptcy in March. Under the proposal, the debtor will be forced to 
make a decision to assume or reject prior to the Christmas season, when 
sales at that time are so crucial in assessing the likelihood of its 
reorganization and new business plan.
    The League believed that this section of the Code, as currently 
drafted, appears to be working well, and is not in need of revision. 
If, however, Congress nevertheless believed that landlords are not 
adequately protected by the current safeguards contained in the Code 
(e.g., requirement that debtors timely pay postpetition rental charges, 
administrative priority treatment for nonpayment of postpetition rental 
charges, 60-day period to assume or reject that can be extended upon 
showing of ``cause''), the League suggested that Congress may wish to 
consider bolstering the current Code provisions to provide a better 
remedy for lessors when debtors fail to perform their obligations under 
lease postpetition. However, as long as lessors are receiving what they 
are entitled to under a lease, they are receiving the benefit of their 
bargain and should not be able to tip the delicate balance by 
suggesting that Congress establish a rigid and inflexible period by 
which assumption or rejection takes place, particularly when that 
decision ultimately affects the potential distribution made to 
unsecured debtors under a plan.
    The two examples cited above clearly evidence that the League is 
not attempting to block reform, but rather analyze the impact from 
implementation of such changes. It is important as part of the 
legislative process to focus on the result of such changes--in both of 
these instances, unsecured creditors and the debtor will be adversely 
impacted at the expense of secured creditors and commercial retail 
lessors. The League has always opposed special interest legislation 
that has no special policy justification--both of these examples 
represent special interest legislating that will negatively impact the 
delicate balance between debtors' right and creditors' remedies 
inherent within the Code. Remedying one perceived abuse does not 
improve the bankruptcy system if the result of such curative actions is 
merely to create another potential abuse.
Question 2:
    You seem to have some serious concerns about the means test in this 
bill and its ability to identify debtors who can pay back their 
unsecured debts. As a representative of many unsecured creditors, your 
opinion on this is obviously significant. Are you saying that unsecured 
creditors are unlikely to benefit from this means test? If so, how 
should we fix this problem?
Response 2:
    The League has expressed concerns about various provisions of the 
Bill and made suggestions on many changes that it feels would improve 
the Bill and would remedy and limit abuses by debtors and creditors. 
The means test as proposed has numerous problems and is not likely to 
improve the recovery to unsecured creditors. It is also likely to be 
the subject of creative avoidance efforts by counsel for debtors. 
Because individuals with secured debt are allowed deductions for such 
obligations prior to calculating available disposable net income, a 
debtor with too much income could trade in an old car for a new one, or 
take a second loan on a house, deduct the payments from the means 
formula, and thereby become eligible for Chapter 7 relief. If they do 
not meet the means test, and thus forced into Chapter 13, the result 
may very well be zero percent or small percentage Chapter 13 repayment 
plans. The means test also operates to the exclusion of the trustee's 
significant avoidance powers. The schedules may reveal a significant 
avoidance action (e.g., preferences or fraudulent conveyances), which 
if recovered could result in a distribution to unsecured creditors in 
excess of what they would receive upon application of the means test. 
However, under the means test, as proposed, if a debtor does not 
qualify for Chapter 7 treatment and the debtor does not elect to 
convert the case, the trustee does not have the ability to seek 
recovery through the avoidance action, a remedy that would clearly 
benefit unsecured creditors over dismissal of the proceeding.
    The League believes that debtors who have the ability to repay 
their debts should be compelled to undertake such action. The League, 
however, believes and has suggested that the best way to achieve that 
goal is by amending Section 707(b) to empower the Court on the motion 
of any party in interest to consider a debtor's means as a nonexclusive 
factor in dismissal or conversion--such a change is more likely to 
benefit the creditors than the mandatory tested currently set forth in 
the Bill. The Court is in the position to identify abuse and fashion 
relief appropriate to the circumstances. Under the current Doe, the 
courts do not have the authority to affirmatively look for abuse or 
fashion an appropriate remedy except in the most egregious 
circumstances. Adoption of a ``totality of circumstances'' test, in 
conjunction with a discretionary means test, would accomplish the goal 
for which Congress has proposed the means test, provide a guide for 
defining abuse by the courts, and represent a major change and a 
vehicle by which abuse could be addressed and remedied.
    The League would be pleased to comment on any additional concerns 
or queries regarding the pending Bill or other matters of concern to 
your office.
            Very truly yours,
                                  Judith Greenstone Miller,
                           Co-Chair, Legislative Committee,
                  on behalf of the Commercial Law League of
            America and its Bankruptcy & Insolvency Section

    cc: Hon. George W. Gekas (Hand Delivered)
         Hon.Robert J. Torricelli (Hand Delivered)
         Louis A. LeLaurin III, President of the League
         Mary K. Whitmer, Chair of the B&I Section
         Jay L. Welford, Co-Chair, Legislative Committee
         Max G. Moses, Executive Vice President
                               __________
                   Professor Todd Zywicki's Responses
      responses to followup questions from senator chuck grassley
    Question 1. You mentioned that means-testing would affect a maximum 
of all bankruptcy filers, do you know what percentage of filers are 
reported to be repeat users of their ``fresh start'', and can you 
comment on what this number suggests about the current remedies in the 
consumer bankruptcy system?

    The absolute number of repeat bankruptcy filers is difficult to 
ascertain with certainty. One study in the early 1980s found a repeat 
filing rate of about eight percent. Professor Lynn LoPucki has 
observed, ``The rate is probably higher today.'' But these figures 
almost certainly understate the overall number of ``functional repeat 
filings,'' the most common of which is the practice of conveying a 
``fractional'' interest in one's house to a relative or other cohort, 
who then files bankruptcy so as to bring the automatic stay back into 
effect. In some cases, debtors have conveyed as little as a 1/32 
interest to a relative or friend who then files bankruptcy so as to 
prevent foreclosure. There are even some businesses that have been 
established to conduct this activity.
    A number of reforms may be appropriate to prevent abusive repeat 
filings by bankruptcy debtors. Perhaps the most important reform would 
be the development of a national bankruptcy filing registry to deep 
track of filers and to prevent multiple and sometimes even 
contemporaneous filings. Because most repeat filings are animated by an 
attempt to delay and thwart house foreclosures, certain reforms 
designed to create in rem rights in property (as suggested by the 
National Bankruptcy Review Commission) and to expedite relief from the 
automatic stay for repeat filers are also appropriate. Stricter 
limitations on access to bankruptcy relief, such as a flat limit on the 
number of times a debtor could file bankruptcy in a given period, would 
also be appropriate. Finally, to prohibit the ``fractional interest'' 
problem, the automatic stay should be inapplicable for anyone who had 
filed within 180 days, or who are spouses, co-owners, or co-lessees of 
a person who filed in the previous 180 days.

    Question 2. How will means-testing improve the consistency and 
objectivity in the application of the bankruptcy code?

    One of the most important justifications for means-testing would be 
to increase the consistency, objectivity, and uniformity of the 
Bankruptcy Code. Article I, Sec. 8 of the United States Constitutions 
gives Congress the power to establish ``uniform Laws on the subject of 
Bankruptcies throughout the United States'' (emphasis added). Current 
law regulating eligibility for Chapter 7 of high-income debtors who can 
repay substantial portion of their debts is anything but uniform. Under 
current law, judges are to police abuse through the ``substantial 
abuse'' provision of Sec. 707(b). The attempt to develop coherent, 
fair, and rational standards under Sec. 707(b) has proven itself to be 
a failure. This chaos has resulted in both real and perceived 
unfairness in the treatment of debtors from district to district and 
courtroom to courtroom. The confusion spawned by Sec. 707(b) is 
summarized in In re Attanasio, 218 B.R. 180 (Bankr. N.D. Ala. 1998). 
Attanasio surveys hundreds of cases drawn from bankruptcy, district, 
and circuit courts throughout the country. As the discussion reveals, 
there is very little agreement in the legal definition of what 
constitutes ``substantial abuse'' and even less agreement on how the 
facts should be weighed in determining whether substantial abuse 
exists. Finally, there is a great degree of nonuniformity and 
unpredictability in predicting when a substantial abuse challenged will 
be brought under Sec. 707(b). This uncertainty and nonuniformity 
undermines public support for the bankruptcy system and makes it 
difficult to prevent abuse.
    Means-testing will streamline the system and limit the issues in a 
given case to narrow and discrete inquiries. By providing a rule of 
decision tying the applicability of means-testing to objective 
standards, it will eliminate the uncertainty and regional variations 
that plague the current system. It will insure that all high-income 
debtors are treated alike, thereby increasing uniformity and public 
confidence in the bankruptcy system.
        responses to followup questions from senator torricelli
    Question 1. The means test in this bill relies heavily on the IRS 
collection allowances. We have heard lots of concerns about these 
allowances, even from those who take no position on the bill generally. 
One problem is the ``other necessary expense'' category. Since it 
clearly was not designed for this purpose, the items that fall into the 
category are totally discretionary with the IRS and are approved on a 
case by case basis (see IRS regulations 5323.434). Thus, we have no 
guarantee that these expenses may be deducted from the means testing 
formula. This is not simply a minor inconvenience; families in 
bankruptcy will need to use this category for such things as health 
care, child care, disability insurance, union dues, and court-ordered 
payments (such as support), because the IRS collection allowances do 
not cover these critical expenses anywhere else. How is this supposed 
to work?

    Section 102 of H.R. 833 approves such expenditures by the debtor so 
long as they are actual necessary expenses. If they are actual 
necessary expenses, there would be no need for the debtor to prove that 
they are ``other necessary expense'' for purposes of the applicable IRS 
regulations. Unlike the IRS regulations, the debtor would be entitled 
to subtract these actual expenses without a case-by-case justification. 
All that is required is that they be actual expense.

    Question 2. The means test in this bill requires a trustee to do a 
complete ability to pay analysis under the means test in every single 
chapter 7 consumer case at the very beginning of the case, 10 days 
before the 341 meeting, before the trustee has even met any of the 
debtors. People who actually work in the bankruptcy system say that 
this simply is not feasible. In addition, the trustees would not even 
be compensated for this extraordinary expenditure of time. Don't you 
think that there are serious feasibility requirements with the means 
test?

    These concerns are not well-founded. The crucial information would 
be available directly from the debtor's bankruptcy schedules and forms. 
For instance, the trustee is required to bring a conversion motion only 
if the debtor's income exceeds the national median, in addition to 
meeting the other ability-to-pay criteria. Thus, in the approximately 
80% of cases where the debtor's income is less than the median national 
income, means-testing will impose no additional duties over present 
law. Moreover, the Act also specifically provides that the applicable 
bankruptcy forms should be revised to conform to the means-testing 
requirements, thereby making it easier for the trustee to determine the 
applicability of means-testing. This is merely a change in the format 
of the income and expense forms the debtor already is required to fill-
out under current law. Thus, means-testing should add little, if any, 
administrative burdens to the trustee's duties. Thus, it is doubtful 
that means-testing would be any less feasible than current law.

    Question 3. As a law professor who has studied the bankruptcy 
system, do you believe that it is appropriate to give lawyers a 
financial disincentive to file chapter 7s for their clients if they 
believe that doing so is in the best interest of their clients? Are you 
concerned that creating such financial disincentives for lawyers to act 
in their clients' best interests will run afoul of other ethical 
requirements?

    It is not fully clear to me what ``financial disincentive to file 
chapter 7s'' is referenced in this question. I will assume that the 
question refers to the provisions what would require the debtor's 
counsel to reimburse the trustee for all reasonable costs and 
attorney's fees if the debtor's filing was not ``substantially 
justified'' and provisions for enforcing Rule 9011. If that is the 
case, it seems strange to refer to these ethical requirements as a 
``financial disincentive.'' Clearly these rules provide a financial 
disincentive for a debtor's attorney to file frivolous chapter 7 cases 
and to file cases where the debtor's lawyer fails to perform even a 
modicum of investigation into the debtor's financial affairs. Rule 9011 
also gives a debtor's lawyer a financial disincentive to engage in 
fraudulent or other inappropriate activity, even if it is the client's 
best interests. The requirements of the proposed legislation require 
the debtor's lawyer to balance his ethical obligations to the debtor 
with his ethical obligations to the court and his fiduciary obligations 
to creditors. All lawyers balance these competing ethical obligations 
every day, and it is not clear why bankruptcy lawyers should be 
relieved of this obligation, or why it is useful to refer to ethical 
obligations as ``financial disincentives to file chapter 7s'' as 
opposed to ``financial incentives to ensure that chapter 7 filings are 
made in good-faith and after reasonable investigation by the debtor's 
counsel.''
       responses to followup questions from senator russ feingold
    Question 1. You testified that ``studies repeatedly conclude that 
those affected by means-testing could pay approximately 60%-70% of 
their unsecured debts if they filed under Chapter 13, which amounts to 
a total of over $4 billion.'' Do you have a source for this $4 billion 
number, other than the report of the WEFA Group study that did not 
provide sufficient information for the General Accounting Office to be 
able to assess the reliability of the data, the reasonableness of the 
report's assumptions, and the accuracy of the report's estimates of 
creditor losses and the bankruptcy system's costs in 1997? See ``The 
Financial Costs of Personal Bankruptcy'' Letter from Associate Director 
Richard Stana to the Honorable Martin T. Meehan, GAO/GGD-98-116R.

    $4 billion is an approximation that comes from a analysis of 
several studies that report similar conclusions. In addition to the 
WEFA study, the Ernst & Young study of nationwide sample of petitions 
drawn from 1997 filings concluded that those affected by means-testing 
would have had the ability to repay 64% of their unsecured nonpriority 
debts, which represented over $4 billion. See Tom Neubig & Fritz 
Scheuren, Ernst & Young, Chapter 7 Bankruptcy Petitioners' Ability to 
Repay: The National Perspective, 1997 (March 1998). That report further 
concludes that ``the WEFA estimates may have understated the amount of 
debt in the system, and consequently, may have underestimated the 
financial costs of the personal bankruptcy system.'' While other 
studies do not directly state the amount of money that would be 
captured by means-testing, it is a matter of simple mathematics to 
calculate the amount recoverable as a result of means-testing. These 
earlier conclusions were based on the provisions of last session's 
House bill, H.R. 3150. I am not aware of any studies of sufficient 
scope and credibility that would cast doubt on the conclusions drawn 
from a meta-analysis of these several studies.
    Subsequent to my testimony, Ernst & Young released a new study that 
applies the provisions of the current bill H.R. 833 and revises its 
conclusions to conclude that those affected by the means-testing 
provisions of H.R. 833 would be able to repay $3 billion of their 
unsecured nonpriority debts over five years.
    Upon reviewing these various studies, the Government Accounting 
Office concluded that the studies of the Credit Research Center and 
Ernst & Young ``[b]oth . . . represent a useful first step in 
addressing a major public policy issue--whether some proportion of 
those debtors who file for personal bankruptcy under chapter 7 of the 
bankruptcy code have sufficient income, after expenses, to pay a 
`substantial' portion of their outstanding debts.'' The GAO also notes 
that actual number of chapter 7 debtors who could repay at least a 
portion of their nonhousing debt ``could be more or less than the 
estimates of these two studies. Similarly, the amount of debt these 
debtors could potentially repay could also be more or less than the 
reports estimated'' (emphasis added). Thus, according to the GAO, the 
studies may underestimate the total number of filers who could repay a 
substantial amount of their debt. Given that the authors of those 
reports deliberately made conservative estimates of repayment ability, 
it is more likely that they understate rather than overstate their 
results. Not only that, but GAO's reasons for suggesting that the 
findings of repayments ability are overstated is implausible on its 
face. For further discussion of the problems with GAO's assumptions, 
see Edith H. Jones and Todd J. Zywicki, It's Time for Means-Testing, 
1999 BYU L. L. Rev. at n.67.

    Question 2. You testified that ``95% of Chapter 7 bankruptcy 
filings make no distribution at all to unsecured creditors, and those 
that do rarely pay out more than a trivial amount'' and went onto 
suggest that creditors receive a much larger payout in chapter 13 
cases. However, VISA U.S.A. studies the Creighton University 
reaffirmation study indicate that a substantial portion of chapter 7 
debtors reaffirm their debts and thus continue to pay one or more of 
their unsecured debts, notwithstanding the fact that they have no 
nonexempt property to be liquidated in the course of the bankruptcy 
case. The chapter 13 plan completion rate is low, and many times plans 
are terminated before payments to unsecured creditors are commenced. 
Moreover, some plans are 0% plans and never intend to pay unsecured 
creditors at all.

    Question (A) Do these factors affect your comparison of the 
benefits of the two chapters?

    As an initi matter, it is not clear to me why reaffirmed debt 
should be considered a ``distribution'' to unsecured creditors. It 
would seem more sensible to think of amounts paid due reaffirmations as 
exactly that, rather than as distribution in the chapter 7 case, which 
would relate to payments made on claims through the chapter 7 case.
    Otherwise, the overall chapter 13 failure rate and the existence of 
0% plans does not alter the conclusion that in general chapter 13 pays 
larger distributions to creditors than chapter 7 cases. It's a matter 
of common sense. In chapter 7, neither high-income nor low-income 
debtors make significant distributions to creditors. In chapter 13, by 
contrast, high-income debtors will make distributions even if low-
income debtors do not. Ceteris paribus, larger amounts will be 
distributed in chapter 13 because the distribution as a result of high-
income filers being forced to pay will be larger than the amounts these 
debtors would distribute in chapter 7. It follows that by forcing high-
income debtors to file chapter 13, means-testing will target exactly 
the class of debtors from which these larger payouts are available.
    The overall chapter 13 failure rate is irrelevant to a comparison 
of the benefits of the two chapters as they relate to those covered by 
means-testing, namely high-income debtors who have the ability to repay 
a substantial portion of their debts without significant economic or 
other hardship. Debtors currently file chapter 13 for a variety of 
reasons, most of which have nothing to do with their ability to repay 
in chapter 13. For instance, debtors often use chapter 13 to take 
advantage of the automatic stay and to repay mortgage arrearages. Once 
they do, the case is dismissed and the case is listed as a ``failure,'' 
even though there was not anticipation from the beginning that the plan 
would be completed. Other cases involve low-income or debtors with 
irregular income-earning patterns who mistakenly or ill-advisedly file 
chapter 13. It is unclear how many chapter 13 filers fit the profile of 
those subject to means-testing; high-income debtors with regular 
employment who are forced in chapter 13 specifically because of their 
ability to pay a substantial portion of their debts, and not for the 
various other reasons that often lead people to file chapter 13.

    Question (B) Do you have any data to make a more complete 
comparison between the payouts from chapter 7 and chapter 13 debtors?

    The basic conclusion that distributions to creditors in chapter 7 
are small is well-established. See Michelle J. White, Personal 
Bankruptcy Under the 1978 Bankruptcy Code: An Economic Analysis, 63 
Ind. L. J. 1 (1987); Michael J. Herbert & Dominic E. Pacitti, Down and 
Out in Richmond, Virginia: The Distribution of Assets in Chapter 7 
Bankruptcy Proceedings Closed in 1984-87, 22 U. Rich. L. Rev. 303 
(1988); Note, A Reformed Economic Model of Consumer Bankruptcy, 109 
Harv. L. Rev. 1338 (1996) (discussing several studies of distributions 
made in chapter 7 cases). Several studies in the past year or so have 
identified the substantial recoveries available as a result of forcing 
high-income debtors to file under chapter 13 rather than chapter 7.

    Question 3. You testified that the reach of means-testing is small 
in terms of the number of filers impacted but that its impact would be 
large in terms of the amount of money collected. In light of this view, 
do you believe that it is necessary or efficient to review all cases 
for ability to pay under the means test, even cases of debtors with 
income below the poverty level, as section 102 of H.R. 833 currently 
requires?

    This question appear to be based on confusion regarding the 
provision of section 102 of H.R. 833. Section 102(b)(2) of H.R. 833 
requires the trustee to bring a motion to dismiss or convert only if 
the debtor's income is above the national median income and the other 
means-testing criteria are met. If the debtor's income is below the 
national median income, then means-testing is irrelevant and the 
trustee would not be required to review for ability to pay under the 
means test.

    Question 4. Your testimony suggests that a means test should 
identify those debtors with high incomes who could repay creditors, 
such as the doctor in the case of In re Kornfield, 164 F.3d 778 (2d 
Cir. 1999). Your testimony also suggests that although the current 
system has been successful in denying relief to debtors such as Dr. 
Kornfield, current law permits those debtors to continue to contest the 
denial of relief by filing and litigating appeals. You probably would 
get little or no argument from debtor advocates that individuals like 
Dr. Kornfield may not be deserving of chapter 7 relief. However, some 
observers have questioned whether the means test in H.R. 833 will 
actually be able to catch someone like Dr. Kornfield; after all, an 
individual with his sophistication and legal resources will be able to 
inflate and shape his debts and expenses to escape the means test.

    I have not suggested that anyone should be ``denied [bankruptcy] 
relief.'' I have argued that bankruptcy relief should be conditioned in 
some cases on the repayment of one's debts to the best of one's 
ability, and that one such case is that of a high-income debtor who can 
repay a substantial portion of his debts with no significant financial 
or other hardship. H.R. 833 would not deny relief to any debtor, 
although it would limit access to chapter 7 by some debtors, and would 
force them to seek relief under chapter 13 instead of chapter 7.
    The current system has not been successful in systematically 
preventing abuse by debtors such as Dr. Kornfield. In Dr. Kornfield's 
particular case, the system worked to dismiss his case for substantial 
abuse, but only after great delay, expense, and litigation. This should 
not be read as an endorsement of the current system of policing abuse 
under Sec. 707(b), a system that is racked with nonuniformity, 
uncertainty, and real and perceived unfairness.

    Question (A). Do you agree that the means test in H.R. 833 provides 
leeway for wealthy and savvy individuals, the Dr. Kornfields of the 
world, to escape the means test?

    Clearly, some wealthy and savvy individuals will attempt to escape 
the means-test, just as they do under current law. Means-testing is not 
a panacea that will prevent all bankruptcy abuse by high-income 
debtors. But by replacing the wide-ranging discretionary standard of 
current Sec. 707(b) with a more objective rule of decision, means-
testing will certainly reduce the leeway for wealthy and savvy 
individuals to abuse the bankruptcy system. Thus, means-testing should 
not be expected to completely eliminate bankruptcy abuse, but it should 
significantly decrease it.
    Moreover, even if a strategic debtor is able to evade the means-
test, the benefit would be small; i.e., he would just get to file under 
chapter 7 rather than 13. Thus, ``benefit'' would be to put him right 
back where he is under current law, in chapter 7. Means-testing might 
be rendered irrelevant by bankruptcy planning, but it would not make 
matters worse. This question apparently does not take account of H.R. 
833, section 102(3)(B) which supplements the means-test with 
discretionary power to find abuse when the ``totality of 
circumstances'' requires. A strategic attempt to shape assets and 
liabilities in a manner designed to evade the means-test would plainly 
constitute abuse under this ``totality of circumstances'' test and the 
traditional Sec. 707(b) standards. This question also ignores the fact 
that if the debtor did succeed in getting himself into chapter 7 under 
such circumstances, he would still have to contend with the traditional 
nondischargeability objections associated with ``loading-up'' on debt, 
such as fraud and certain expenditures on luxury goods. Similarly, if 
he increased his secured debt in an attempt to evade discharge, he 
would be bound to the higher secured debt in chapter 7, so the strategy 
would be largely self-defeating.

    Question (B). How would H.R. 833 prevent Dr. Kornfield from taking 
several appeals as he did under current law? After all, with his legal 
resources, he could contest the ``other necessary expense'' category of 
the IRS collection allowances, which are determined on a case by case 
basis, and he could contest any determination of whether he had 
``extraordinary expenses.''

    H.R. 833 would not prevent Dr. Kornfield from taking several 
appeals. But it would significantly reduce the incentive for Dr. 
Kornfield to take appeals, as the legal rule would be far more well-
defined than the murky discretionary standard of the current law. Thus, 
the results of the appeals process would be much more predictable and 
uniform, thereby eliminating much of the incentive for appeal. H.R. 833 
would also reduce the costs associated with reviewing cases on appeal. 
As the question itself suggests, the issues raised by means-testing 
would be much more narrowly defined than under current law, and thus 
the factual inquiry would also be much more narrowly tailored and 
predictable than under current law. Unless the debtor could fit his 
desired expenses within one of the enumerated categories, he will be 
unable to prevail. Again, this is an improvement over the rule-less 
unlimited discretion of the current regime where almost anything goes 
in an evidentiary hearing. Finally, the question suggests that the IRS 
approach of determining and reviewing ``other necessary expenses'' on a 
case-by-case basis would also be the practice in bankruptcy. This does 
not appear to be the case with H.R. 833, as H.R. 833 only requires that 
the expenses be actual necessary expenses, it does not require them to 
be proven as ``other necessary expense'' as the IRS would require.

    Question 5. You testified that the 1978 Code significantly reduced 
the economic costs and increased the economic benefits of filing 
bankruptcy. However, the Code was tightened with amendments proposed by 
the credit industry in 1984, only to be followed by a sharp increase in 
filings notwithstanding decreased debt relief. How do you explain this 
trend?

    Multiple scientifically-controlled studies have concluded that the 
1978 Code reduced the economic costs and increased the economic 
benefits of filing bankruptcy, and that the result was an increase in 
bankruptcy filing rates. I am not aware of any scientifically-
controlled studies that have concluded that the 1984 amendments led to 
increased bankruptcy filing rates. Correlation is not causation; a 
``trend'' by itself proves nothing at all. It is impossible to draw any 
conclusion about the effects of the 1984 amendments unless we can 
establish with reasonable certainty what the filing rate would have 
been absent the 1984 amendments. For instance, filing rates may have 
increased absent the 1984 amendments for completely unrelated reasons, 
and the 1984 amendments may have caused this rate of increase to be 
lower that it would have been absent the 1984 amendments. I am aware of 
no credible study that has attempted to isolate the effects of the 1984 
amendments on bankruptcy filing rates.

    Question 6. You testified that economist Michelle White estimates 
that 15%-20% of American households would financially benefit from 
filing bankruptcy, especially if they engaged in some planning prior to 
filing. Since a far smaller percentage of American households file for 
chapter 7 bankruptcy, doesn't this mean that bankruptcy still carries 
stigma sufficient to deter the vast majority of families who would 
benefit from filing?

    Yes, absolutely. And well it should, as trust, promise-keeping, and 
reciprocity provide the foundations of a free economy and healthy civil 
society. Thus, a desire to keep promises and reciprocate are embedded 
in our consciousness and moral principles. We feel shame when we break 
promises and it is appropriate that there is a stigma associated with 
such an act, as it is a moral; as well as a legal and economic act. And 
it is almost certainly the case that the residual effect of these 
principles explains why so few people file bankruptcy even when it is 
to their financial benefit.
    But shame and stigma operate at the margin to constrain 
individuals, they are not absolute concepts. If the economic benefits 
of filing rise high enough, some people will consider filing bankruptcy 
who might not have done so previously. Similarly, if the social 
disapproval associated with bankruptcy falls, some people will consider 
filing who would not have filed when social approval was greater. Thus, 
it should not be surprising that a recent study concludes that the 
constraining effect of filing bankruptcy traditionally has been largest 
for the very high-income filers who can capture the greatest economic 
benefit from filing bankruptcy.
    Given this, it is not clear why the ``vast majority'' is the 
appropriate benchmark for determining the residual effect of stigma on 
restraining bankruptcy filings. Given the corrosive effect of 
opportunistic bankruptcy filings and the opportunistic promise-breaking 
that such filings represent on the economy and on civil society 
generally, it is not clear why we would tolerate more than the absolute 
minimum of such opportunistic behavior in society and in the economy.

    Question 7. Your testimony indicates that you believe that 
individual who borrow money or purchases an item should be required to 
repay it. Drawing the analogy between bankruptcy and shoplifting, you 
state that ``you shouldn't take it if you aren't going to pay for it.''

    This paragraph reflects a fundamental confusion about my testimony. 
My analogy is between unnecessary bankruptcy losses and shoplifting. I 
will repeat the relevant passage from my Statement of March 11, 1998 
(page 5): ``Who are the beneficiaries of means-testing? We all are. To 
see why, consider that although few of us actually own retail shopping 
stores, all of us oppose shoplifting and believe that it should be 
forbidden. The reason why we support laws against shoplifting are 
analogous to the justification for means-testing.'' The analogy is 
clearly between shoplifting and means-testing, not shoplifting and 
bankruptcy generally.

    Question (A). If this is the case, do you think that Congress is 
wrong to provide a discharge in bankruptcy at all?

    That is not the case. I am not opposed to a discharge. I am in 
favor of placing a condition of repayment to the best of one's ability 
for high-income debtors who can repay a substantial portion of their 
debts with no significant financial or other hardship.

    Question (B). Should society recognize that changed economic 
circumstances caused, for example, by illness, disability, divorce, or 
loss of employment might make it impossible for consumers to satisfy 
debts they had every intention of paying when they incurred them?

    Yes.

    Question (C). Are you concerned that the lack of a bankruptcy 
safety valve will hamper entrepreneurs, who currently comprise one in 
five consumer bankruptcy filings, from engaging in the appropriate 
level of risk-taking activity?
    I am unfamiliar with the claim that one in five consumer bankruptcy 
filing are failed entrepreneurs, and am very skeptical about that 
number. Clearly self-characterizations in interviews be self-proclaimed 
entrepreneurs would not provide a suitable basis for the conclusion. 
More fundamentally, I am confused as to the premise of the question. 
Eliminating a bankruptcy safety valve would undoubtedly reduce risk-
taking, just as eliminating limited liability for corporations would 
reduce risk-taking. I am not aware of any efforts to eliminate 
bankruptcy generally, nor am I aware of any efforts to eliminate the 
discharge or the fresh start. Thus, I am somewhat confused as to the 
premise and purpose of the question.

    Question 8: You state in your testimony that ``a borrower's 
willingness to take on debt clearly will be related to the ease with 
which he can later discharge those debt obligations if he chooses to do 
so.'' This statement assumes that consumers incur obligations with the 
understanding of their true costs. Some economists believe that many 
consumers systematically underestimate the extent of their borrowing 
and the cost of repayment and therefore make sub-optimal borrowing 
decisions. If this is the case, changing the bankruptcy law will not 
affect the borrowing decisions of many consumers. To enable consumers 
to make more rational borrowing decisions that will be less likely to 
lead them into financial distress, particularly if the bankruptcy laws 
are going to be tightened and consumer credit remains freely flowing, 
do you believe that open end credit should be accompanied by additional 
disclosures that reveal to the potential borrower the actual costs of 
credit?

    The assumption of this question appears to be the complete opposite 
of that in question 7. In question 7 it was assumed that if bankruptcy 
relief was restricted, then individuals would take fewer risks for fear 
of incurring nondischargeable losses. This question appears to assume 
that a borrower's willingness to incur debt and risk losses will be 
unaffected by its dischargeability in bankruptcy. Despite these changes 
in the factual predicate of the question, my answer remains the same; 
the willingness of individuals to incur debt will to some extent be a 
function of their ability to discharge that debt in bankruptcy.
    The belief among ``some economists'' that individuals 
systematically underestimate the extent of their borrowing and 
repayment obligations has been proven incorrect in recent years. The 
premise for this view seems to be rooted in the dubious and outdated 
research of economist Lawrence Ausbel's in his 1991 article in the 
American Economic Review. Virtually every element of Ausbel's research 
has been shown to be flawed, dated, or both. The basic methodology used 
to collect the data that underlies the so-called ``underestimation 
hypothesis'' has been criticized. See Thomas F. Cargill & Jeanne 
Wendel, Bank Credit Cards: Consumer Irrationality versus Market Forces, 
30 J. Consumer Aff. 373, 375-77 (1996). For instance, Ausubel 
dramatically overstates the number of consumers who revolve balances 
from month-to-month. The Survey of Consumer Finances indicates that 
approximately 68% of households report that they nearly always pay 
their credit card balances in full. Even where Ausubel's methodology 
for collecting data passes muster, the conclusion of chronic 
underestimation by consumers is simply not a plausible conclusion to 
draw from the data he collects. See Dagobert L. Brito & Peter R. 
Hartley, Consumer Rationality and Credit Cards, 103 J. Pol. Econ. 400 
(1995). For instance, Ausubel makes no attempt to distinguish so-called 
``irrational'' credit revolving from ``rational'' use of credit cards 
to finance short-term swings in consumption or as an attractive form of 
short-term borrowing (compared to alternative sources of low-
transaction cost short-term borrowing). I am not aware of any effort on 
Ausubel's part to respond to the criticisms of his research that have 
been launched by Cargill & Wendel or Brito & Hartley. I have personally 
contacted him to see if he intends to respond, but I have received no 
response. In short, at the current time, there is little reason to 
believe that the underestimation hypothesis has any validity 
whatsoever.
    Moreover, the proposition begs common sense. Short-term consumer 
credit seems like an unusual scenario for the underestimation 
hypothesis to arise, when compared to more plausible situations. For 
instance, student loans and mortgages would seem to raise the 
underestimation hypothesis more powerfully, as both forms of credit are 
for much longer repayment terms, sometimes as much as 15-30 years. 
Similarly, yearly tax obligations are also much larger than consumer 
debt burdens, yet we force individuals to anticipate their tax 
obligations and pay them. In all of these situations the complexity and 
size of the obligations, combined with the length of time for repayment 
suggests that the underestimation hypothesis would seem to be far more 
troublesome than on monthly consumer credit payments.
    Given that the underestimation hypothesis has little theoretical or 
empirical support, it is not clear what difference additional 
disclosures would make. Consumers appear to be well-aware of how much 
debt they are incurring and know exactly where they are spending it. If 
individuals are capable of anticipating and paying their student loans, 
mortgages and taxes they certainly are able to anticipate their monthly 
credit card bill. Credible empirical studies confirm this.

    Question 9. You testified that consumer credit is not to blame for 
the bankruptcy filing rate. The credit industry witnesses agreed with 
you, noting that credit card debt is only 3.7 percent of consumer 
credit overall and bank card debt (presumably a subset of all card 
debt) is only 16% of all debt (including secured debt) in bankruptcy. 
However, don't these numbers alone indicate that the individuals and 
families who ultimately resort to bankruptcy have inordinately high 
credit card debts as compared to the population as a whole?

    I am not sure what the term ``inordinately high'' means. I have a 
Master's degree in economics and have studies statistics and 
econometrics, and I am familiar with the term ``statistically 
significant'' which is a term that suggest certain statistical 
safeguards designed to make sure that the results of such a comparison 
have meaning. Given that the comparison stated does not appear to be 
the result of a study designed to elucidate ``statistical 
significance,'' I am wary of drawing any conclusion one way or the 
other from this data.
    Even if the data established that those in bankruptcy have higher 
credit card debts than those who are not, its not clear what that would 
prove. If it were true that credit card debt is correlated with 
bankruptcy filings, this would not prove that excessive credit card 
debt caused bankruptcy filings. For instance, high credit card debt 
might simply reflect reckless and irresponsible spending, in which case 
the spending would be a more plausible cause of bankruptcy than the 
credit cards. Obviously no conclusion could be drawn about the causal 
role of consumer debt in bankruptcy without adjusting for overall 
levels of home debt and multiple other factors. The theory is also 
lacking in a persuasive causal link between changes in the absolute 
level of credit card debt, as opposed to current debt levels that 
account for such variable and changes in the interest rate.

    Question 10. You testified that ``the credit card industry has 
revealed itself to be ferociously competitive.''

    Question (A). If that is the case, why have average interest rates 
on credit card hardly varied over the past 2 decades since the industry 
was functionally deregulated by the Marquette Supreme Court case, even 
though the cost of funds declined dramatically in this period?

    As an initial matter, it is unclear to me what the term ``hardly 
varied'' means. Does it include very low ``teaser'' rates that many 
cardholders avail themselves of when they change cards? Without more 
information as to what that term means, it is difficult for me to even 
conclude that the factual predicate to the question is correct.
    This question reflects several misunderstandings about the nature 
of the credit card market. As an initial matter, it is hard to imagine 
a market more competitive than the credit card market, which as of a 
recent count had 6,000 card issuers and millions of customers. The 
intense competition between card issuers to attract clients is probably 
best-evidenced by the massive volume of direct mail that card issuers 
send each year in an attempt to induce cardholders to shift from one 
card to another. As Brito and Hartley write, ``Several authors . . . 
have argued that even though the market for bank credit cards is 
unregulated, has thousands of independent firms, many of them recent 
entrants, and has millions of consumers, it nevertheless appears to be 
noncompetitive.'' Indeed, the intense competition in the 1990s due to 
the entry of new issuers such as AT&T, Household and First USA, 
generated a precipitous loss of market share for the incumbent card 
issuers such as Bank of America, Chase, and others. Consider the 
following discussion from Credit Card Management magazine: ``Issuers 
need look back no further than the onset of the 1990s for a textbook 
case of such an occurrence. At the time, money center banks were the 
dominant issuers, thanks to the resources brought on by their size. 
Despite their power, they have become lethargic, charging interest 
rates of 18.9% or 19.8% and $20 annual fees for plain-vanilla cards. 
When the speciality card issuers, such as Household, AT&T, and First 
USA, began shaking up the business with contrarian marketing strategies 
that eliminated annual fees, slashed interest rates, and offered 
cardholders rich rewards for using their cards, the money centers were 
not creative enough to counter the assault on their domain.'' Thus, it 
is evident from the basic market structure of the industry that the 
credit card market is highly competitive.
    Looking to changes in interest rates is not a sensible way to try 
to gauge the competitiveness of the market. Card issuers have added 
many benefits to their cards in the past decade, ranging from the 
spread of ``affinity'' cards, to co-branded cards that give frequent 
flyer miles, to cash back bonuses in some cases. Looking only at 
interest rates and ignoring the benefits that have arisen would be 
comparable to saying that the automobile industry is noncompetitive 
because sometimes automobile manufacturers improve the quality of their 
product rather than simply cutting the price. Such a conclusion would 
obviously be incorrect when applied to cars, and it is equally 
incorrect when applied to credit cards. Looking only at interest rates 
is also problematic in that ignore the serious adverse selection 
problems that would accompany a ``low interest rate'' marketing 
strategy; thus, issuers might be expected to increase benefits and 
decrease other fees rather than reducing interest rates in response to 
a fall in the cost of funds rate.
    The question also overstates the role of the Marquette decision in 
the development of the credit card market. Usery regulations have been 
on the books throughout world history, and they have been easily 
circumvented throughout world history. The American experience is no 
different. Prior to Marquette, credit card issuers charged annual fees 
of $20 or $30 that were implicit compensation for the interest caps 
placed on credit cards. Of course, all customers were forced to pay 
this fee, even those who paid their bills every month. Similarly, 
retailers such as Sears were able to ``hide'' their interest rate 
losses in the prices of the goods they sold. The effect of the 
Marquette decision simply converted these hidden interest charges into 
more direct charges and allowed card issuers to target interest fees 
toward those who revolved balances rather than imposing them on 
everyone in the form of an annual fee. Focusing on interest rates 
ignores the reality that the almost complete elimination of annual fees 
during the past decade was really a de facto fall in the interest rate 
on credit cards.
    There are other problems with looking at interest rates a proxy for 
competition in the credit card market. Because the vast majority of 
users are convenience users who pay their bills each month, they have 
little concern about credit card interest rates and would be willing to 
sacrifice the benefit of a lower interest rate in exchange for the 
elimination of an annual fee or the addition of an ancillary benefit 
such as frequent flyer miles. Thus, offering these benefits rather than 
an interest drop reflects competition. Focusing on the relationship 
between cost of funds and credit card interest rates is also misguided 
because it fails to account for the large ``fixed costs'' associated 
with credit cards, such as its much higher transaction costs due to the 
nature of credit cards as relatively small credit transactions. Finally 
focusing on interest rates reflects a fundamental misunderstanding of 
the consumer ``demand'' side of credit card transactions. I refer you 
to my article with Judge Jones for a further explanation of these 
issues, see Edith H. Jones and Todd J. Zywicki, It's Time for Means-
Testing, 1999 BYU L. Rev.

    Question (B). Why have profits in the consumer credit consistently 
exceeded profits for all other lending activities?

    This question is based on an incorrect factual predicate. Through 
the 1980s, returns for commercial credit were larger than for other 
sectors of banking activity. This was partly because returns to other 
sectors were artificially low due to passing problems such as a foreign 
debt crisis, energy sector borrowers, and commercial real estate 
markets, all of which struggled during the 1980s and early 1990s. It 
was also partly because the early issuers into the bank card market 
during the 1980s made unusually large profits that are typical in any 
major transitional period in an industry.
    As applied in recent years, however, the question is simply 
incorrect in its factual predicate. In recent years, profit returns for 
consumer credit have been comparable to other sectors of the banking 
industry. Moreover, risk-adjusted profits are significantly lower, as 
credit card loans are riskier than other forms of credit; as a result, 
issuers maintain significantly higher average equity to asset and loan 
loss reserves to total loan ratios than for other operations. Finally, 
studies that purport to show disproportionate returns to consumer 
credit operations usually draw on an artificially limited sample of 
issuers that tends to ignore those issuers who have been losing money 
during this period. Thus, while it is true that until the early 1990s, 
consumer credit operations may have been higher than other sectors, 
since then those supranormal returns consumer credit operations is a 
myth.

    Question 12. As further support for the proposition that the time 
has come for means testing, you testified: ``Access to credit cards are 
especially important for low-income borrowers, as they lack the options 
of more wealthy borrowers.'' However, the means testing provision is 
one of dozens of changes to the consumer bankruptcy system in the 
pending legislation. Some of the provisions in the bill will decrease 
the amount of the debtor's income available for payment of unsecured 
debt in chapter 13, and in fact may further suppress the chapter 13 
plan completion rate. How will these provisions affect the cost of 
unsecured credit and its availability for low income borrowers?

    To the extent that means-testing reduces the financial losses 
associated with bankruptcy, ti will also reduce the overall 
``bankruptcy tax'' paid by all Americans. Lower-income borrowers will 
benefit as well as everyone else.

    Question 13. As a professor who has argued vigorously in favor of 
retaining disinterestedness requirements on chapter 11 debtors' lawyers 
to ensure that they act in their clients' best interests, do you 
believe it is appropriate for the bill to impose financial 
disincentives on lawyers to help their debtor clients file for chapter 
7 if those lawyers believe that the debtor is an eligible candidate for 
chapter 7 and that it is in the best interest of the debtor to seek 
that relief?

    It is not fully clear to me what ``financial disincentive to file 
chapter 7s'' is referenced in this question. I will assume that the 
question refers to the provisions that would require the debtor's 
counsel to reimburse the trustee for all reasonable costs and 
attorney's fees if the debtor's filing was not ``substantially 
justified'' and provisions for enforcing Rule 9011. If that is the 
case, it seems strange to refer to these ethical requirements as a 
``financial disincentive.'' Clearly these rules provide a financial 
disincentive for a debtor's attorney to file frivolous chapter 7 cases 
and to file cases where the debtor's lawyer fails to perform even a 
modicum of investigation into the debtor's financial affairs. Rule 9011 
also gives a debtor's lawyer a financial disincentive to engage in 
fraudulent or other inappropriate activity, even if it is the client's 
best interests. The requirements of the proposed legislation require 
the debtor's lawyer to balance his ethical obligations to the debtor 
with his ethical obligations to the court and his fiduciary obligations 
to creditors. All lawyers balance these competing ethical obligations 
every day, and it is not clear why bankruptcy lawyers should be 
relieved of this obligation, or why it is useful to refer to ethical 
obligations as ``financial disincentives to file chapter 7s'' as 
opposed to ``financial incentives to ensure that chapter 7 filings are 
made in good-faith and after reasonable investigation by the debtor's 
counsel.''

    Question 14. As a professor who has studied the bankruptcy system 
closely, do you see any creditor abuses in the system that should be 
addressed in bankruptcy reform legislation? If so, what are they?

    To the extent there are creditor abuses in the system, they appear 
to have already been addressed or are addressed in H.R. 833. For 
instance, creditors who file false claims are already subject to 
punishment as are those who act illegally with respect to 
reaffirmations, as well-evidenced by the Sears case. Creditors are 
already subject to fee shifting for improper objections to discharge. 
There are additional debtor protections in the pending legislation. To 
the extent that creditors make ill-advised extension of credit to 
unworthy borrowers, the market will punish them through higher losses 
than their competitors. Finally, creditors that engage in abusive 
credit practices or overreach with their customers will find themselves 
disciplined through their customers switching to other credit issuers, 
different forms of credit, or substituting to non-credit alternatives, 
such as checks and cash.
                               __________
                 Professor Elizabeth Warren's Responses
                                Harvard Law School,
                                     Cambridge, MA, March 26, 1999.
Hon. Henry J. Hyde, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Congressman Hyde: Thank you for providing me with the 
opportunity to appear before the Joint Hearing of the House 
Subcommittee on Commercial and Administrative Law and the Senate 
Subcommittee on Administrative Oversight and the Courts on Bankruptcy 
Reform on March 11, 1999.
    Attached is my response to the questions posed by Senator 
Torricelli as followup questions to the Joint Hearing.
    If there is any way in which I can be of further assistance, please 
let me know.
            Very truly yours,
                                          Elizabeth Warren,
                             Leo Gottlieb Professor of Law.
          responses to senator torricelli's followup questions
Effects on Women and Children
    During 1997, an estimated 300,000 bankruptcy cases involved child 
support and alimony orders.\1\ In about half of these case, women were 
creditors trying to collect alimony and child support from their 
bankrupt ex-husbands and others. In about half, women filed for 
bankruptcies themselves as they tried to stabilize their post-divorce 
economic condition. In the past five years, well over a million women 
collecting alimony and child support have been involved in bankruptcy 
cases.
---------------------------------------------------------------------------
    \1\ The reported data are from Health and Human Services (support 
data) and the Consumer Bankruptcy Project, Phase II (bankruptcy data). 
Principal researchers for the bankruptcy data are Dr. Teresa Sullivan, 
Vice-President of the University of Texas, Professor Jay Westbrook, 
Benno Schmidt Chair in Business Law, University of Texas, and Elizabeth 
Warren, Leo Gottlieb Professor of Law, Harvard Law School. These 
estimates are based on data collected in 1991 in sixteen judicial 
districts around the country. For more details about the study, see 
Sullivan, Warren and Westbrook, Consumer Debtors Ten Years Later: A 
Financial Comparison of Consumer Bankrupts 1981-91, 68 American 
Bankruptcy Law Journal 121 (1994). For a more detailed discussion of 
the divorce data see Sullivan, Warren, Westbrook, Bankruptcy and the 
Family, 21 Marriage and Family Rev. 193 (Haworth Press 1995). The data 
reported here will be discussed in fuller detain in Sullivan, Warren 
and Westbrook, The Fragile Middle Class (Yale University Press 
forthcoming 1999).
---------------------------------------------------------------------------
    Current law helps support recipients collect their debts after 
bankruptcy. It makes alimony and support obligations nondischargeable 
and provides a discharge of most other debts as long as they were not 
incurred fraudulently. The support provider emerges from bankruptcy 
economically stabilized and more easily able to meet ongoing support 
obligations and make up prebankruptcy support obligations. The pending 
legislation, largely supported by the credit card companies, makes more 
credit card debt nondischargeable and creates greater leverage for 
reaffirmation of unsecured and nominally secured debt (e.g., retailer 
charge cards). There are only a limited number of dollars available for 
collection from ex-partners. These women face stiffer competition from 
credit card issuers who are trying to collect from the same people, 
whether or not the support recipients can rely on government agencies 
to help them enforce their rights.
    In addition, may divorced women file for bankruptcy themselves to 
deal with crushing debts. These debts may have been incurred only by 
the ex-husband but are legal obligations of the ex-wife as well. 
Provisions making more debt nondischargeable and making bankruptcy less 
accessible will hurt every one of these women who turns to bankruptcy 
for some economic stability and relief from debts she did not incur.
Reaffirmations
    Debtors should be free to repay debts if they so choose, whether or 
not those debts have been discharged, and they are free to do so under 
current bankruptcy law. However, the system currently permits debtors 
to bind themselves to repay those debts through reaffirmation 
agreements. Many reaffirmation agreements, even technically legal one, 
are the product of creditor coercion, are not voluntary, and are 
inconsistent with the purpose of chapter 7 debt relief. Currently, the 
law relies on attorney affidavits as evidence that debtors understand 
their rights and that the reaffirmation does not impose an undue 
hardship on the debtor and his family. The attorney affidavit approach 
has, for the most part, been a failure.
    I attach letters from the Sears case, which are a matter of public 
record. These reaffirmations were illegal because Sears failed to file 
the agreements with the court. The tactics used to obtain these 
``voluntary'' agreements that these debtors describe are not at issue. 
Every day, ``legal'' and ``voluntary'' reaffirmation agreements are 
filed with the court that will impose an undue hardship on the debtor 
and his family after bankruptcy.
    It is easy to understand why a creditor wants the debtor to be 
legally bound to pay debts after bankruptcy, and why an emotionally and 
financially vulnerable debtor is convinced to comply. Given the 
dynamics of the situation, self-policing has not worked.
    Pending bankruptcy legislation makes a bad situation worse. It is 
filled with provisions that give creditors additional leverage to 
pressure debtors to reaffirm debts and to increase the size of the 
reaffirmations to include more fees and charges. At the same time, it 
is devoid of provisions to offers meaningful protection for debtors 
pressed to make reaffirmations of unsecured and nominally secured 
debts.
The Effects of Credit Cards on Personal Failure
    The basic link between consumer debt (primarily short-term, high 
interest credit card debt) and bankruptcy has been demonstrated again 
and again. Studies by an economist at the Congressional Budget Office, 
the Federal Deposit Insurance Corporation, and independent economists 
link the rise in consumer bankruptcies directly to the rise in consumer 
debt.\2\ The growth of credit card loans has been faster than any other 
type of consumer loans since 1993. Credit card debt doubled in just 
four years: The amount of credit card loans outstanding at the end of 
1997 was $422 billion, twice as must as the amount in 1993.\3\ The 
credit industry's own statistics support the hypothesis that people in 
bankruptcy have credit card debts substantially higher than the 
population at large. An MBNA representative testified on March 11, 1999 
that bankcard debt alone is 16%of all debt in bankruptcy, including 
secured debt such as home mortgages. Assuming that this number is 
accurate, it is far higher than the percentage of credit card debt 
among total consumer credit outstanding--suggesting that credit card 
debt is an important trigger for bankruptcy.
---------------------------------------------------------------------------
    \2\ Diane Ellis, Division of Insurance, FDIC, The Effect of 
Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-
offs, and the Personal Bankruptcy Rate, Bank Trends 98-05 (March 1998); 
Lawrence Ausubel, Credit Card Default, Credit Card Profits, and 
Bankruptcy, 71 Am. Bankr. L.J. 249 (1997); Statement of Kim Kowalewski, 
Chief, Financial and General Macroeconomic Analysis Unit, Congressional 
Budge Office, before the Subcommittee on Administrative Oversight and 
the Courts, Committee on the Judiciary, United States Senate, p. 4 
(April 1997); Jagdeep S. Bhandari & Lawrence Weiss, The Increasing 
Bankruptcy Filing Rate: A Historical Analysis, 67 Am. Bankr. L.J. 1 
(1993).
    \3\ OCC Advisory Letter 96-7, September 26, 1996, (96-7.txt at 
www.occ.treas.gov); FDIC Quarterly Banking Profile Graph Book, Fourth 
Quarter 1997.
---------------------------------------------------------------------------
    Credit card usage has grown fastest in recent years among families 
with the lowest incomes. Since the early 1990s, Americans with incomes 
below the poverty level nearly doubled their credit card usage, and 
those in the $10,000-25,000 income bracket come in a close second in 
the rise in debt. The result is not surprising : 27% of the under-
$10,000 families have consumer debt this is more than 40% of their 
income. Nearly one in ten has at least one debt that is more than sixty 
days past due.\4\
---------------------------------------------------------------------------
    \4\ Federal Reserve Bulletin, Family Finances in the U.S.: Recent 
Evidence from the Survey of Consumer Finances, Table 14, Aggregate and 
median ratios of debt payments to family incomes, and shares of debtors 
with ratios above 40 percent and those with any payment sixty days or 
more past due, by selected family characteristics, 1989, 1992, and 
1995; Peter Yoo, Charging up a Mountain of Debt: Accounting for the 
Growth of Credit Card Debt, Review: Federal Reserve Bank of St. Louis, 
p. 4 (March/April 1997); David Wyss, DRI/McGraw-Hill, ``Surveillance 
Programs & Performance'' p. 8 (April 15, 1997).
---------------------------------------------------------------------------
    Subprime lending targets borrowers with poor credit records. Such 
lending has become the fastest growing, most profitable subset of 
consumer lending. Although losses are substantial, interest rates of 18 
to 40% on credit card debt make this lending lucrative. In the subprime 
automobile finance market, by charging interest rates of 15% to 25% on 
secured car loans, several lenders have reported profit margins ranging 
from 23% to 41%.\5\
---------------------------------------------------------------------------
    \5\ Dow Jones & Company, Inc. Capital Markets Report (Oct. 7, 1997) 
(noting an increase from $80 billion in subprime loans in 1992 to $150 
billion in 1996); Robyn Meredith, Will Ford Become the New Rep Man?, 
N.Y. Times, A1 (Dec. 15, 1996); Life After Mercury: How to Pick a 
`Safe' Used-Car Lender, Financial World, 40 (May 20, 1997).
---------------------------------------------------------------------------
    As card issuers target ever more vulnerable families, more people 
file for bankruptcy. Their path to bankruptcy is generally more complex 
than simply overspending on credit; when families' saving are being 
consumed by credit card debt, they are less able to withstand economic 
difficulties. A temporary job los, an uninsured medical bill, a divorce 
create financial stress; for the family already loaded with debt, the 
burden becomes unbearable.
    Identifying the ling between debt and bankruptcy is not intended to 
impart ``blame,'' but rather to show that lowering the bankruptcy 
filing rate and default rate, if these are Congress' goals, will not be 
accomplished by changing the bankruptcy laws. As long as the consumer 
credit industry continues to distribute large amount of credit to the 
most vulnerable sectors of the population and opposes requirements to 
disclose the true cost of open end credit, the bankruptcy filing rate 
and the default rate are not likely to decline.
Unintended Effects
    The means test in H.R. 833 is designed to channel more high income 
debtors toward chapter 13 if they can pay a portion of their debts. 
This alone sounds relatively harmless, but is problematic for at least 
two reason. First, the means test not only screens all debtors, but it 
favors higher income debtors by giving them larger expense and debt 
allowances, particularly if they have bought a new car on the eve of 
bankruptcy. Thus, the means test in operation does not live up to its 
image. Second, the bill decreases the likelihood that a debtor will be 
able to repay creditors and discharge debts through a chapter 13 plan. 
For example, debtors would be required to make ``adequate protection'' 
payments to lessors and secured creditors at the same time they are 
paying all of their disposable income to the trustee; a debtor cannot 
make the same payments twice, and will have to surrender the property 
that he was trying to save through chapter 13. More debts would be 
considered ``priority'' debts and thus must be paid in full in the 5 
year plan as a condition of confirmation, regardless of the size of 
those debts. Credit card debts would survive a five year repayment plan 
if declared nondischargeable, thus debtors would expend resources 
litigating nondischargeability that otherwise could be used to pay 
creditors. New treatment of undersecured debts would consume most 
debtors' disposable income and leave little or nothing for unsecured 
creditors. Making matters more complicated, the managers' amendment to 
H.R. 833 requires that chapter 13 payments be structured like the means 
test, even though the means test may still fail to take account of 
chapter 13 trustees' fees and back payments on secured debt. One is not 
even eligible for chapter 13 repayment plans unless she attempted 
consumer credit counseling within 90 days before filing.
    There are two explanations for the conflicting messages in this 
bill. One is that the bill is at war with itself due to inadvertence. 
The second explanation is that this bill is not designed to increase 
distributions in chapter 13 but rather to make bankruptcy unworkable 
and altogether too expensive to be used by overburdened middle class 
American families. If that is the goal, it should be stated and 
accomplished directly rather than through this expensive piecemeal 
approach.
    Other consequences, perhaps unintended, go far beyond the limits of 
the bankruptcy system. For example, some economists predict that making 
the consumer bankruptcy system more restrictive will increase risky 
lending and produce more defaults. In addition, one cannot 
underestimate the effect of business bankruptcy amendments. Many of the 
business provisions, such as those imposing absolute time limitations 
where there were once none, will have a tremendous effect on the out of 
court negotiations among various parties who bargained in contemplation 
of a different set of legal rules.
Stigma
    The consumer credit industry and others have blamed declining 
stigma for consumer failures for more than sixty years. In 1933, for 
example, it was the ``ease of the bankruptcy laws'' that attracted 
debtors who could pay said those who urged tightening the laws.\6\ 
Those who want to blame rising bankruptcy filings on a lack of stigma 
ask us to believe the worst about middle class families in deep 
financial trouble.
---------------------------------------------------------------------------
    \6\ Victor Sadd & Robert T. Williams, Causes of Bankruptcy Among 
Consumers p. 5, 8, 11 (Washington GPO 1933).
---------------------------------------------------------------------------
    If declining stigma were the reason for the increase in bankruptcy 
filings, we would expect the average family in bankruptcy to have an 
increasingly high income; more families in less trouble would say, 
``Why struggle so hard? Bankruptcy is an easy answer.'' However, the 
economic profile of debtors is not consistent with this theory. The 
median income of the debtors who have filed for Chapter 7 has been 
declining.\7\ In inflation adjusted dollars, the average family in 
Chapter 7 in 1981 had an income of $23,254. By 1997, the average family 
in Chapter 7 had an income of $17, 652. Moreover, their debt-to-income 
ratios have worsened, not improved. If bankruptcy were easy, why 
wouldn't it be attractive to people in better shape--rather than being 
something people evidently avoid more now than ever before?
---------------------------------------------------------------------------
    \7\ Elizabeth Warren, The Bankruptcy Crisis, 73 Ind. L.J. 1079 
(Harris Lecture) (1998).
---------------------------------------------------------------------------
    The data are collected in the table reproduced and attached to this 
answer.










































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